Category Archives: Business

S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since, by Wolf Richter

If anyone doubted the assertion in SLL’s review of Robert Prechter’s book that earnings have no consistent relationship to stock prices, here’s further proof. From Wolf Richter at wolfstreet.com:

Grounded in some sort of new reality? LOL

The S&P 500 stock index edged up to an all-time high of 2,351 on Friday. Total market capitalization of the companies in the index exceeds $20 trillion. That’s 106% of US GDP, for just 500 companies! At the end of 2011, the S&P 500 index was at 1,257. Over the five-plus years since then, it has ballooned by 87%!

These are superlative numbers, and you’d expect superlative earnings performance from these companies. Turns out, reality is not that cooperative. Instead, net income of the S&P 500 companies is now back where it first had been at the end of 2011.

Hype, financial engineering, and central banks hell-bent on inflating asset prices make a powerful fuel for stock prices.

And there has been plenty of all of it, including financial engineering. Share buybacks, often funded with borrowed money, have soared in recent years. But even that is now on the decline.

Share buybacks by the S&P 500 companies plunged 28% year-over-year to $115.6 billion in the three-month period from August through October, according to the Buyback Quarterly that FactSet just released. It was the second three-month period in a row of sharp year-over-year declines. And it was the smallest buyback total since Q1 2013.

Apple with $7.2 billion in buybacks in the quarter, GE with $4.3 billion, and Microsoft with $3.6 billion topped the list again. Still, despite the plunge in buybacks, 119 companies spent more on buybacks than they’d earned in the quarter. On a trailing 12-month basis, 66% of net income was blown on buybacks.

To continue reading: S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since

 

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Worse Than a Decade of Stagnation, by Wolf Richter

SLL has long maintained that the economy is in much worse shape than indicated by official statistics. With President Trump taking office, it’s a good bet the numbers will catch up with reality. From Wolf Richter at wolfstreet.com:

Retail sales are held up by only two sectors. The rest are sinking.

There are two components of “retail and food services sales” that have been booming over the past few years through the fourth quarter 2016. And then there’s all the rest combined – 71% of total retail sales – that has been in decline since the third quarter of 2008. That’s the tough reality of retail sales in the US.

First the good news: e-commerce sales

In the fourth quarter, e-commerce sales soared 14.3% from a year earlier, to $123.6 billion, not adjusted for seasonality and price changes, according to the Commerce Department today. E-commerce sales for the entire year 2016 jumped 15.1% year-over-year to $394.9 billion, accounting for 8.1% of total retail and food services sales, up from 7.3% in 2015. You see where this is going.

E-commerce sales include online sales by retailers with brick-and-mortar stores, such as Walmart and Macy’s that are all trying to carve out a presence on the internet, with varying success.

This chart uses seasonally adjusted e-commerce sales to eliminate the very large seasonal fluctuations, including the spike every Q4 and plunge every Q1, but it’s not adjusted for inflation:

While e-commerce soared 14.3% year-over-year in Q4, total retail and food services sales, including e-commerce, rose only 3.9%. In all of 2016, total retail sales edged up only 2.9% from 2015. So what is left over once e-commerce is removed from the equation?

To continue reading: Worse Than a Decade of Stagnation

 

“Seriously Delinquent” Auto Loans Surge, by Wolf Richter

The latest canary in the coal mine is surging auto loan delinquencies. The upturn in the auto industry cannot withstand a credit retrenchment. From Wolf Richter at wolfstreet.com:

The New York Fed, in its Household Debt and Credit Report for the fourth quarter 2016, put it this way today: “Household debt increases substantially, approaching previous peak.” It jumped by $226 billion in the quarter, or 1.8%, to the glorious level of $12.58 trillion, “only $99 billion shy of its 2008 third quarter peak.”

Yes! Almost there! Keep at it! There’s nothing like loading up consumers with debt to make central bankers outright giddy.

Auto loan balances in 2016 surged at the fastest pace in the 18-year history of the data series, the report said, driven by the highest originations of loans ever. Alas, what the auto industry has been dreading is now happening: Delinquencies have begun to surge.

This chart – based on data from the Federal Reserve Board of Governors, which varies slightly from the New York Fed’s data – shows how rapidly auto loan balances have ballooned since the Great Recession. At $1.112 trillion (or $1.16 trillion according to the New York Fed), they’re now 35% higher than they’d been during the crazy peak of the prior bubble. Note that during the $93 billion increase in auto loan balances in 2016, new vehicle sales were essentially flat:

No way that this is an auto loan bubble. Not this time. It’s sustainable. Or at least containable when it’s not sustainable, or whatever. These ballooning loans have made the auto sales boom possible.

To continue reading: “Seriously Delinquent” Auto Loans Surge

Biggest EU Banks Embark on the Mother of All Debt Binges, by Don Quijones

European banks need to raise capital, so they are issuing a brand new type of debt: senior non-preferred bonds. They are considered capital, have “senior” in the name so they pay a lower interest, but can be “bailed in.” In other words, if the bank runs into trouble, this class of creditors will have made an involuntary and probably unrecoverable contribution to the bank. This will not end well. From Don Quijones at wolfstreet.com:

Spain’s three biggest banks, Banco Santander, BBVA and Caixa Bank, have got off to a flying start this year having issued €8.6 billion in new debt, seven times the amount they sold during the same period of last year. The last time they rolled out so much debt so quickly was in 2007, the year that Spain’s spectacular real estate bubble reached its climactic peak.

Santander accounts for well over half of the new debt issued, with €5.12 billion of senior bonds, subordinate bonds, and a newfangled class of bail-in-able debt with the name of “senior non-preferred bonds” (A.K.A. senior junior, senior subordinated or Tier 3) that we covered in some detail just before Christmas.

Investors beware…

This newfangled class of bail-in-able debt was cooked up last year by French-based financial engineers in order to help France’s four global systemically important banks (BNP Paribas, Crédit Agricole, Groupe BPCE and Société Générale) out of a serious quandary: how to satisfy pending European and global regulations demanding much larger capital and debt buffers without having to pay investors costly returns on the billions of euros of funds they lend them to do so.

That’s what makes senior non-preferred debt so ingenious: it pretends to be simultaneously one thing (senior), in order to keep the yield (and the cost for the bank) down, and another (junior) in order to qualify as bail-in-able. What it amounts to is a perfect scam for big banks to bamboozle bondholders – usually institutional investors like our beaten-down pension funds – into buying something with other people’s money that doesn’t yield nearly enough to compensate them for the risks they’re taking.

To continue reading: Biggest EU Banks Embark on the Mother of All Debt Binges

 

Would Ayn Rand Have Cast President Trump As A Villain? by Steve Simpson

Donald Trump may have read and liked Ayn Rand, but his scattershot philosophy is light years from Rand’s carefully thought out and elucidated philosophy, reasoned from basic first premises to its revolutionary conclusions. From Steve Simpson at the Foundation for Economic Education, fee.com:

After Donald Trump announced a number of cabinet picks who happen to be fans of Ayn Rand, a flurry of articles appeared claiming that Trump intended to create an Objectivist cabal within his administration.

“Ayn Rand-acolyte Donald Trump stacks his cabinet with fellow Objectivists,” proclaimed one article. Would that it were so. The novelist and philosopher Ayn Rand was a passionate champion of individual freedom and laissez-faire capitalism and a fierce opponent of authoritarianism. For her, government exists solely to protect our rights, not to meddle in the economy or to direct our private lives.

A president who truly understood Rand’s philosophy would not be cozying up to Putin, bullying companies to keep manufacturing plants in the United States, or promising “insurance for everybody” among many other things Trump has said and done.

And while it’s certainly welcome news that several of Trump’s cabinet picks admire Rand, it’s not surprising. Her novel Atlas Shrugged depicts a world in decline as it slowly strangles its most productive members. The novel celebrates the intelligent and creative individuals who produce wealth, many of whom are businessmen. So it makes sense that businessmen like Rex Tillerson and Andy Puzder would be among the novel’s millions of fans.

But a handful of fans in the administration hardly signals that Trump’s would be an “Ayn Rand” administration. The claims about Rand’s influence in the administration are vastly overblown.

To continue reading: Would Ayn Rand Have Cast President Trump As A Villain?

Why Renewables Are Doomed and Fossil Fuels Are the Future, by James Delingpole

Fossil fuels will be with us for a long time, especially when renewables lose favor with, and subsidies from, governments. From James Delingpole at breitbart.com:

We’re on the verge of a new energy revolution. Except it’s the exact opposite of the one the “experts” at places like BP, the International Energy Agency and – ahem – the Guardian are predicting.

For years we’ve been assured by politicians, energy industry specialists and green advocates that renewables such as wind and solar are getting more and more cost-competitive while dirty fossil fuels are so discredited and wrong and evil we’ll soon have to leave them in the ground.

But to believe this you’d have to believe in a world where Donald Trump and Brexit hadn’t happened; where taxpayers were still prepared to bankroll, ad infinitum, the expensive, inefficient, environmentally-damaging produce of favoured crony-capitalists; where no one had access on the internet to articles showing how the whole climate change industry is such a scam.

That world doesn’t exist.

This is why we need to take with a massive pinch of salt, for example, the latest BP Energy Outlook 2017 which claims that renewables are set to grow and grow over the next two decades:

Renewables in power are set to be the fastest growing source of energy – at 7.6% per year to 2035, more than quadrupling over the Outlook period. Renewables account for 40% of the growth in power generation, causing their share of global power to increase from 7% in 2015 to nearly 20% by 2035.

It’s why we should laugh to scorn articles like this one in Vox boasting about how the US solar industry employs more people than the US coal industry.

To continue reading: Why Renewables Are Doomed and Fossil Fuels Are the Future

Which Assets Are Most Likely to Survive the Inevitable “System Re-Set”? by Charles Hugh Smith

This article offers food for thought about which assets will be worth holding on to when governments start going bankrupt. From Charles Hugh Smith at oftwominds.com:

Your skills, knowledge and social capital will emerge unscathed on the other side of the re-set wormhole. Your financial assets held in centrally controlled institutions will not.

Longtime correspondent C.A. recently asked a question every American household should be asking: which assets are most likely to survive the “system re-set” that is now inevitable? It’s a question of great import because not all assets are equal in terms of survivability in crisis, when the rules change without advance notice.

If you doubt the inevitability of a system implosion/re-set, please read Is America In A Bubble (And Can It Ever Return To “Normal“)? This brief essay presents charts that reveal a sobering economic reality: America is now dependent on multiple asset bubbles never popping–something history suggests is not possible.

It isn’t just a financial re-set that’s inevitable–it’s a political and social re-set as well. For more on why this is so, please consult my short book Why Our Status Quo Failed and Is Beyond Reform.

The charts below describe the key dynamics driving a system re-set. Earned income (wages) as a share of GDP has been falling for decades: this means labor is receiving a diminishing share of economic growth. Since costs and debt continue rising while incomes are declining or stagnating, this asymmetry eventually leads to insolvency.

The “fix” for insolvency has been higher debt and debt-based spending–in essence, borrowing from future income to fund more consumption today. But each unit of new debt is generating less economic activity/growth. This is called diminishing returns: eventually the costs of servicing the additional debt exceed the increasingly trivial gains.

To continue reading: Which Assets Are Most Likely to Survive the Inevitable “System Re-Set”