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A lot of big names will report third quarter earnings this week, and the results are expected to be worse than the same period in 2018.

The timing comes as the shale sector is facing somewhat of a reckoning. After years of price volatility – with more downs than ups – oil prices have failed to return even remotely close to pre-2014 levels. For several years, shale E&Ps took on debt and issued new equity, promising investors that they would profit both from a rebound in prices and from rapid production growth.

They delivered on gains to output, but not on profits. At some point in the last year, investors really began to lose faith. Oil stocks have been the worst performers in the S&P 500 this year.

The latest release of earnings will probably do little to quell unease from big investors. Oil and natural gas prices have dropped this year, by about 17 percent and 31 percent, respectively. Job cuts have returned and bankruptcies are on the rise again.

The oil majors are pressing forward with their aggressive shale development plans. That may prevent a noticeable decline in production. But their earnings – many of the majors report this week – are expected to be down roughly 40 percent from a year ago, which will raise some tough questions.

Some of the largest banks have slashed their credit lines to smaller shale E&Ps. According to Reuters, JPMorgan Chase, Wells Fargo and the Royal Bank of Canada are among some of the lenders that have reduced the amount of credit they are offering to drillers.

The so-called credit redetermination period happens twice a year, and banks tend to offer financing based on a company’s reserves. Lower prices lower that assessment because some reserves become uneconomic to produce. As a result, the ability to access financing becomes more restricted.

…click on the above link to read the rest of the article…

FedEx Is Talking As If A Global Recession Has Already Begun – And The Numbers Back That Up

March 20, 2019

FedEx Is Talking As If A Global Recession Has Already Begun – And The Numbers Back That Up

“Slowing international macroeconomic conditions” is just a fancy way to say that the global economy is in big trouble. For months, I have been warning that economic conditions are deteriorating, and we just keep getting more confirmation that we are facing the worst global downturn since the last financial crisis. For the second time in three months, FedEx has slashed its revenue forecast for this year. In an attempt to explain why revenue is declining, FedEx’s chief financial officer placed the blame squarely on the faltering global economy. The following comes from CNBC…

The multinational package delivery service reported declining international revenue as a result of unfavorable exchange rates and the negative effects of trade battles.
“Slowing international macroeconomic conditions and weaker global trade growth trends continue, as seen in the year-over-year decline in our FedEx Express international revenue,” Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer, said in statement.

The use of the word “trends” implies something that has been going on for an extended period of time, and obviously FedEx doesn’t expect things to get better any time soon if they have cut profit projections twice in just the last three months.

And FedEx certainly has a lot of company when it comes to having a gloomy outlook for the global economy. In one recent article, Bloomberg boldly declared that the global economy is in the worst shape it has been “since the financial crisis a decade ago”…

…click on the above link to read the rest of the article…

This Is What A Pre-Crash Market Looks Like

November 13, 2017

This Is What A Pre-Crash Market Looks Like

The only other times in our history when stock prices have been this high relative to earnings, a horrifying stock market crash has always followed. Will things be different for us this time? We shall see, but without a doubt this is what a pre-crash market looks like. This current bubble has been based on irrational euphoria that has been fueled by relentless central bank intervention, but now global central banks are removing the artificial life support in unison. Meanwhile, the real economy continues to stumble along very unevenly. This is the longest that the U.S. has ever gone without a year in which the economy grew by at least 3 percent, and many believe that the next recession is very close. Stock prices cannot stay completely disconnected from economic reality forever, and once the bubble bursts the pain is going to be unlike anything that we have ever seen before.

If you think that these ridiculously absurd stock prices are sustainable, there is something that I would like for you to consider. The only times in our history when the cyclically-adjusted return on stocks has been lower, a nightmarish stock market crash happened soon thereafter…

The Nobel-Laureate, Robert Shiller, developed the cyclically-adjusted price/earnings ratio, the so-called CAPE, to assess whether stocks are likely to be over- or under-valued. It is possible to invert this measure to obtain a cyclically-adjusted earnings yield which allows one to measure prospective real returns. If one does this, the answer for the US is that the cyclically-adjusted return is now down to 3.4 percent. The only times it has been still lower were in 1929 and between 1997 and 2001, the two biggest stock market bubbles since 1880. We know now what happened then. Is it going to be different this time?

…click on the above link to read the rest of the article…

The Curious Case of Missing the Market Boom

October 13, 2017

The Curious Case of Missing the Market Boom

Rembrandt Old man with a beard 1630“The Cost of Missing the Market Boom is Skyrocketing”, says a Bloomberg headline today. That must be the scariest headline I’ve seen in quite a while. For starters, it’s misleading, because people who ‘missed’ the boom haven’t lost anything other than virtual wealth, which is also the only thing those who haven’t ‘missed’ it, have acquired.

Well, sure, unless they sell their stocks. But a large majority of them won’t, because then they would ‘miss’ out on the market boom… Some aspects of psychology don’t require years of study. Is that what behavioral economics is all about?

And it’s not just the headline, the entire article is scary as all hell. It reads way more like a piece of pure and undiluted stockbroker propaganda that it does resemble actual objective journalism, which Bloomberg would like to tell you it delivers. And it makes its point using some pretty dubious claims to boot:

The Cost of Missing the Market Boom Is Skyrocketing

Skepticism in global equity markets is getting expensive. From Japan to Brazil and the U.S. as well as places like Greece and Ukraine, an epic year in equities is defying naysayers and rewarding anyone who staked a claim on corporate ownership. Records are falling, with about a quarter of national equity benchmarks at or within 2% of an all-time high.

If equity markets in places like Greece and Ukraine, ravaged by -in that order- financial and/or actual warfare, are booming, you don’t need to fire too many neurons to understand something’s amiss. Some of their companies may be doing okay, but not their entire economies. Their boom must be a warning sign, not some bullish signal. That makes no sense. Stocks in Aleppo may be thriving too, but…

…click on the above link to read the rest of the article…

A Murderous Complacency

February 4, 2017

A Murderous Complacency

Dark omens are circling everywhere in today’s markets

murder: a flock of crows

~ Miriam-Webster dictionary

Many view the appearance of crows as an omen of death because ravens and crows are scavengers and are generally associated with dead bodies, battlefields, and cemeteries, and they’re thought to circle in large numbers above sites where animals or people are expected to soon die.

~ “Nature”, PBS.org

Running PeakProsperity.com requires me to read and process a lot of data on a daily basis. As it’s hard to digest it all in real-time, I keep a running list of charts, tables and articles that catch my attention, to return to when I have the time to give them my full focus.

Lately, that list has been getting quite long. And it’s largely full of indicators that concern me; signals that the long era of “extend and pretend” in today’s markets may finally be at its terminus.

Like crows circling overhead, every day brings with it new worrisome statistics that portend an ill change ahead. Indeed, these omens are increasing so quickly now that it’s hard not to feel like Tippi Hedren in Hitchcock’s suspense classic The Birds:

So what are the data that make me think these crows will soon be feasting on the carcass of the great bull market that has powered stock, bonds, real estate and most other asset classes to record highs since 2009?

Rogue’s Gallery

Complacent Investors

Investors have enjoyed remarkably gentle treatment by the stock markets over the past half-decade. Retracements have occurred much less frequently than historical norms, and have been shallow and short-lived when they happened.

Tom Lee, head of research at Fundstrat and often referred to as “Wall Street’s biggest bull” notes that 2016 was the mildest year on record for the S&P 500, with only 7 days in which the index traded at less than 3% of its 52-week high.

…click on the above link to read the rest of the article…

Time to Get Real: Part I

September 10, 2016

Time to Get Real: Part I

In a world where fair value is a central bank veiled enigma it’s frankly a challenge to keep things real, but I’ll have a go at it in what will be a 3 part series covering central banks, the underlying fundamental picture, and a technical assessment of charts. In this part I’ll be covering central banks and putting their actions into context of the realities of a changing world and will aim to address some of the implications.

Part I: Central banks

After years of watching central bankers do their bidding I’ve come to the conclusion that they are the designers of the ultimate Pokemon Go game by leading investors to ever more extreme locations to find little yield nuggets on their screens.

My largest criticism of this game has been that free market price discovery is largely dead and nobody knows what is real any longer, producing a false sense of security as, at any signs of trouble, central banks feel compelled to intervene ever further removing markets from their natural balance. In short: Creating a bubble with devastating consequences we will all end up paying for in one form or another.

For now one may call it a market of pure multiple expansion as GAAP earnings and price have completely diverged in 2016:

Indeed, as earnings have declined since their peak in 2015 we have seen one central bank intervention after another. Just in 2016 alone we have witnessed dozens of new rate cuts, the ECB modified and added to its QE program with QE3 an almost forgone conclusion, Japan added stimulus with the BOJ on track to own 60% of all ETFs in Japan with more to come. China intervened repeatedly, the UK cut rates and re-launched QE as well, and central banks such as the SNB have been busy expanding their share purchases of US stocks.

…click on the above link to read the rest of the article…

Are We Entering an Earnings/Sales Recession?

January 12, 2016

Are We Entering an Earnings/Sales Recession?

Are corporate profits due for a retest of the lower channel line? If so, what happens to equity valuations when corporate profits plummet?

Is the U.S. economy in recession? Is it heading for recession? These questions can only be answered in hindsight, but it’s worth looking for clues to what might be just ahead.

Longtime correspondent B.C. recently submitted a chart of corporate earnings and one of real demand and time deposits (a measure of money) and real final sales.

(Explanation of demand deposits).

Unsurprisingly, all three of these metrics tank in recessions.

Corporate profits have been hugging the upper line of a long-term channel for years.

While real final sales have not yet plunged to recession levels, the annual change in real demand and time deposits has fallen into negative territory.

While the annual change in demand and time deposits has swung between positive and negative for decades, the annual change in real final sales only enters negative territory in recessions.

While the two series don’t align perfectly, there is a clear correlation between the expansion of money supply and sales.

For this reason, the recent decline in demand and time deposits might serve as an early warning of an impending drop in real sales to recession levels.

Corporate profits have remained in a rising channel for 85 years, with one exception: the Global Financial Meltdown of 2008-09.

Interestingly, all three recent equity bubbles–in 2000, 2007 and the current bubble–align with corporate profit peaks above the upper channel line.

Are corporate profits due for a retest of the lower channel line? If so, what happens to equity valuations when corporate profits plummet? These questions may be answered later in 2016.

…click on the above link to read the rest of the article…

“Risky Business”: Companies Are Now Funding Share Buybacks By Selling Bonds To Other Companies

September 26, 2015

“Risky Business”: Companies Are Now Funding Share Buybacks By Selling Bonds To Other Companies

One of this year’s key narratives has been the degree to which US stocks have benefited from a perpetual, price insensitive bid. By that we of course mean corporate buybacks, which one might fairly characterize as having replaced the monthly flow lost to the Fed taper.

The buyback bonanza shown above is of course sponsored by ZIRP. Put simply, when borrowing costs are close to zero and when the market has become completely myopic as it relates to assessing performance, it makes sense to issue debt and plow the proceeds into EPS-inflating share repurchases. Throw in the fact that the FED-induced hunt for yield has forced risk averse investors out of govies and into corporate credit and you have a kind of goldilocks scenario for corporate issuance and buybacks.

This all comes at cost. That is, you can’t simply keep leveraging the balance sheet to artificially inflate earnings. Eventually, some of the proceeds from debt sales need to go towards capex or wage growth or something that’s conducive to boosting productivity, long-term growth, and competitiveness. However, that simply won’t happen in a world governed by what Hillary Clinton correctly (yes, she has managed to get at least something right believe it or not) calls the “tyranny of the next earnings report.”

Once you understand all of the above, you can begin to see why a lack of market depth in the secondary market for corporate credit is so dangerous.

You have an environment that encourages record issuance and the proliferation of bond funds along with the now ubiquitous hunt for yield means any and all supply is promptly snapped up. But if those bonds ever have to be sold in a pinch, there’s no one home at dealer desks thanks to Volcker.

…click on the above link to read the rest of the article…

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