Tag Archives: Earnings

Debt Matters, by the Northman Trader

Posted on March 2, 2018 | 1 comment

Debt is one of SLL’s favorite subjects. Here’s one more guy weighing in, with lots of charts to back him up. From the Northman Trader at northmantrader.com:

My take: Consumer debt is a massive problem. There are people that don’t see it that way. I think that’s a mistake and I’ll outline my case here with some charts/thoughts and you are of course free to draw your own conclusions.

I don’t think it’s an accident that markets have been reacting negatively to yields spiking. And it’s also not an accident that home sales are dropping in the face of higher rates.

How sensitive to higher rates is the entire construct? Currently every spike in the 10 year invites selling during the day. Jerome Powell’s words led to yesterday’s 10 year spike above 2.9% and it flushed stocks.

Yesterday we also learned that 72% of earnings growth since 2012 was due to buybacks, or financial engineering in short:

“Volatility is an instrument of truth, and the more you deny the truth, the more the truth will find you through volatility.” Over the past decade, there has been no corporate instrument of mistruth more powerful than buybacks, an issue we have dissected in these pages for years. U.S. firms have spent roughly $4 trillion on buybacks since 2009, making corporations the biggest single source of demand for U.S. shares. According to Artemis’s calculations, buybacks have “accounted for +40% of the total earnings-per-share growth since 2009, and an astounding +72% of the earnings growth since 2012.”

That’s a big number and it reveals the extent of the mirage that has been propagated for the past few years. Consumers and the government are drowning in debt and the construct continues to be held up by low rates, hence the sensitivity.

To continue reading: Debt Matters

 

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What the Headlines about Tesla, Snap, and Twitter “Earnings” Should Have Said, by Wolf Richter

Posted on February 9, 2018 | Leave a comment

Truth is the first casualty of war and earnings reports. From Wolf Richter at wolfstreet.com:

How can the media be so gullible – and pliable? I don’t know either.

When Snap reported “earnings” this week – in quotes because it was its biggest loss ever – media headlines were euphoric, from TechCrunch(“Snap shares skyrocket on first earnings beat with revived user growth”) to The Wall Street Journal (“Snap Climbs Back Above IPO Price After ‘Shocker’ Earnings”).

The theory was that Snap had reported “better-than-expected earnings.” Thanks to these headlines, over February 7 and 8, Snap shares skyrocketed 48% to $20.75, though they have fallen off somewhat since then.

So here are some modest suggestions as to what the headlines should have been, based on Snap’s “earnings” report:

Snap losses surge 106% to $350 million in Q4, and 570% to $3.4 billion for the year, the most ever.

Snap lost more money than it generates in revenues; what is it doing with all this money?

Snap burned $820 million in cash in 2017, but still sits on $2 billion from investors and can keep going at this cash-burn rate through 2019, so no problem.

Snap Q4 loss soars to $350 million, on $286 million in revenues. Stop and think about that for a moment.

Losses are ballooning faster than revenues, and from a larger base, which is the road to financial perdition, but no problem for analysts.

Twitter also reported earnings this week, and the media headlines showered it with love, from The New York Times (“Twitter Has Good News for Once: Its First Quarterly Profit”) to CNBC (“Twitter rockets more than 20 percent after the company reports first-ever net profit”).

Twitter’s shares jumped 27% on the announcement, after they’d already soared 60% over the past year on takeover hype that never materializes but keeps getting trotted out time and again to pump up shares. Since the spike following the earnings announcement, shares have declined 10%.

So here are some suggestions for headlines to describe Twitter’s situation:

Twitter 2017 revenues shrink 3.4%, Q4 revenues inch up 2%, as company embarks on Cost-Cutting as strategy

Twitter makes $91 million in Q4 profit after gutting R&D and sales and marketing expenses, which might explain revenue stagnation. But still loses $457 million for the year.

Twitter cuts $68 million from R&D and $71 million from sales and marketing expenses in Q4, trying to shrink itself to growth. Good luck.

Even the ceaseless promos from President Trump and the media circus around his Twitter actions fail to boost Twitter’s revenues.

No other company has ever gotten this much constant and free promo from any White House, but Twitter still can’t make it work.

To continue reading: What the Headlines about Tesla, Snap, and Twitter “Earnings” Should Have Said

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U.S. Stocks Are Disastrously Overvalued, by Bill Bonner

Posted on May 9, 2017 | Leave a comment

If there are any value investors left, US stocks do not currently represent good value. From Bill Bonner at bonnerandpartners.com:

SALTA, ARGENTINA – Today, we write about corporate earnings.

Unless you’re playing the game of “greater fool” – buying in the hope that someone out there is willing to pay a higher price – the only reason to buy a stock is for its earnings.

As a shareholder, you participate in the business’s profits. All else being equal, as earnings rise, so do stock prices.

Weighing Machine

Investors have their moments of darkness and their periods of euphoria.

Over the short term, this changes the “multiple” investors are willing to pay for each dollar of earnings.

When investors expect higher future earnings, price-to-earnings (P/E) ratios rise. When they expect lower earnings ahead, P/E ratios fall.

But when all is said and done, hope and despair give way to the reality of earnings. You pay for a stock. You expect to get some money back.

Over the long run, stock markets rise and fall, more or less… sort of… on earnings.

Billionaire investor Warren Buffett famously described the stock market as a “voting machine” over the short run… and a “weighing machine” over the long run.

Earnings are what investors are putting on the scales.

According to figures from Yale economist Robert Shiller, over the history of the S&P 500, investors have paid an average of $15.65 for each dollar of underlying earnings.

With the S&P 500 trading at 25.4 times earnings, investors today are willing to pay 60% more than the historical average for each buck of earnings.

Fed Model

Is that “too high”?

The so-called Fed model – which compares how much investors are willing to pay for stock market earnings to how much they’re willing to pay for income on long-term government bonds – tells investors not to worry about it.

Because interest rates are so low, it makes sense that stocks should be high. If you have to pay $40 for every dollar of earnings from a government bond, you shouldn’t mind paying $25 for a dollar of corporate earnings.

That’s the theory.

But government bond yields are low because the Fed pushed them down by diktat. This pushed up the amount investors were willing to pay for stocks without any need for increased earnings.

Ultimately, prices are the only reliable measure of what a stock is worth. But they are subject to change without notice.

To continue reading: U.S. Stocks Are Disastrously Overvalued

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The Biggest Stock Bubble In U.S. History, by Investment Research Dynamics

Posted on April 7, 2017 | Leave a comment

If you make an apples to apples comparison of earnings now to those in 1999, the stock market is now in its biggest bubble ever. From investmentresearchdynamics.com:

Please note, many will argue that the p/e ratio on the S&P 500 was higher in 1999 than it is now. However, there’s two problems with the comparison. First, when there is no “e,” price does not matter. Many of the tech stocks in the SPX in 1999 did not have any earnings and never had a chance to produce earnings because many of them went out of business. However – and I’ve been saying this for quite some time and I’m finally seeing a few others make the same assertion – if you adjust the current earnings of the companies in SPX using the GAAP accounting standards in force in 1999, the current earnings in aggregate would likely be cut at least in half. And thus, the current p/e ratio expressed in 1999 earnings terms likely would be at least as high as the p/e ratio in 1999, if not higher. (Changes to GAAP have made it easier for companies to create non-cash earnings, reclassify and capitalize expenses, stretch out depreciation and pension funding costs, etc).

We talk about the tech bubble that fomented in the late 1990’s that resulted in an 85% (roughly) decline on the NASDAQ. Currently the five highest valued stocks by market cap are tech stocks: AAPL, GOOG, MSFT, AMZN and FB. Combined, these five stocks make-up nearly 10% of the total value of the entire stock market.

Money from the public poured into ETFs at record pace in February. The majority of it into S&P 500 ETFs which then have to put that money proportionately by market value into each of the S&P 500 stocks. Thus when cash pours into SPX funds like this, a large rise in the the top five stocks by market cap listed above becomes a self-fulfilling prophecy. The price rise in these stocks has nothing remotely to do with fundamentals. Take Microsoft, for example (MSFT). Last Friday the pom-poms were waving on Fox Business because MSFT hit an all-time high. This is in spite of the fact that MSFT’s revenues dropped 8.8% from 2015 to 2016 and its gross margin plunged 13.2%. So much for fundamentals.

To continue reading: The Biggest Stock Bubble In U.S. History

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Despite Financial Engineering and Clever Reporting Schemes, S and P 500 Earnings per Share Stuck for 3+ Years, but Stocks Soar, by Wolf Richter

Posted on March 21, 2017 | Leave a comment

Wall Street has been putting lipstick on a pig—earnings have gone nowhere for three years, which means that a rising stock market has elevated price-earnings ratios into the stratosphere. It’s dangerous up there. From Wolf Richter at wolfstreet.com:

$1.7 trillion blown on making EPS look less bad.

The S&P 500 index, closing today at 2,373, hovers near its all-time high. Total market capitalization of the 500 companies in the index exceeds $20 trillion, or 106% of US GDP. In the three-plus years since the end of January 2014, the index has soared 33%.

And yet, over these three-plus years, even with financial engineering driven to the utmost state of perfection, including $1.7 trillion in share buybacks and despite “ex-bad-items” accounting schemes that are giving even the SEC goosebumps – despite all these efforts, the crucial and beautifully doctored “adjusted” earnings-per-share, perhaps the single most manipulated metric out there, has gone nowhere.

“Adjusted” earnings per share are back where they’d been at the end of January 2014. It’s a sad sign when not even financial engineering can conjure up the appearance of earnings growth.

Companies report earnings in two ways:

1. All companies report as required under GAAP (our slightly inconvenient Generally Accepted Accounting Principles). These earnings are often a loss or way too small and shrinking, instead of growing, and hence not very palatable.

2. So most companies also report pro-forma, ex-bad-items, “adjusted” earnings, based on the companies’ own notions of what matters. Analysts and the media hype that metric. This is just a method of reporting the same results in a more glamorous manner.

Then there’s financial engineering. Companies borrowed heavily over the past few years and used those funds to purchase their own shares. This hollowed out equity and left companies with piles of debt. Over the past three years, companies blew $1.7 trillion on share buybacks. This money was not invested in productive activities that would have expanded the company and the economy, and generated cash flow to service this debt. All it did was reduce the number of shares outstanding. This has the effect of increasing earnings per share (EPS) though the company didn’t actually make more money.

Add this system of share buybacks to the system of “adjusting” earnings per share via reporting schemes, and the result should be a miracle of soaring “adjusted” EPS. But no.

To continue reading: Despite Financial Engineering & Clever Reporting Schemes, S&P 500 Earnings per Share Stuck for 3+ Years, but Stocks Soar

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

Posted on February 19, 2017 | 4 comments

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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The Numbers Look Great… As They Always Do Before A Crash, by John Mauldin

Posted on November 19, 2016 | 2 comments

Wall Street plays the same game every quarter. They start with inflated earnings estimates and take them down as the quarter progresses. By the time companies announce their earnings most of them beat the revised-downward estimates. Wall Street then trumpets all the companies that are beating estimates! From John Mauldin at MauldinEconomics.com via zerohedge.com:

It’s quarterly report time for US stocks. If you just casually glance at the earnings news, you might think companies are having a great year. Many are beating expectations and reporting impressive revenues and profits.

The markets reward companies for meeting expectations (as we shall see below). But the reality is that the S&P 500 is on track for a sixth straight drop in year-over-year earnings.

How do companies keep continuing to beat expectations when earnings are falling?

Expectations take a dive

Equity analysts are a big part of the problem. Their job should be getting those estimates right. They should not just take what are clearly suspect numbers from companies and plug them into their spreadsheets.

The chart below is from my friends at Ned Davis Research. It shows the consensus estimates for S&P 500 operating earnings when those estimates are first created and then what happens to the estimates over time.

This chart starts with the year 2012, and there has not been one year since that has not seen a significant revision downward of earnings forecasts.

In 2015 (the green line if you are seeing this in color), consensus estimates went from an initial forecast of $137 to barely above $100 by the end of the year. That is a huge miss—over 30%.

But that dive didn’t dismay the analysts because they initially predicted roughly the same level of earnings for 2016. And as of September 30, it looked as though earnings are going to come in at roughly $110.

For 2017, earnings predictions started above $140 and are now down to $132. In a world where GDP growth may be in the neighborhood of 2%, do you think it makes a whole lot of sense that earnings are going to grow by 20% in 2017? Really? Honest?

And these are operating earnings—you know, what I called EBIBS: Earnings Before Interest and Bad Stuff.

The lie is leading to another 2008 event—or 1929

When bullish analysts talk about the price-to-earnings ratio (P/E ratio) being roughly 20 today, they are using operating earnings in their calculation.

If they used reported earnings, they would find that the P/E ratio is roughly 24, a 20% difference and certainly up in nosebleed territory. I should note that using the much more useful CAPE (the cyclically adjusted P/E ratio created by Professor Robert Shiller), today’s P/E is 26.79.

That is back up in 2007 range and was exceeded only in the irrational markets of 2000 and 1929. And it’s higher than when the bear markets of 1901 and 1966 started.

Digging a little farther, you find that analysts are projecting earnings to grow roughly 30% from where we sit today by the end of 2017.

It rather boggles the mind that people take these estimates seriously. But that is the problem. A very large number of people and market advisors do. That is why, of course, you hear that you’ve got to be bullish and stay in the market.

Because if earnings really do rise that much, a forecast of 2500 on the S&P is not unreasonable in this market environment. And so you get a lot of predictions of a big S&P 500 bull market in 2017.

To continue reading: The Numbers Look Great… As They Always Do Before A Crash

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Over Past 50 Years This Big Of Earnings Recession Has Always Triggered A Bear Market, by Jesse Felder

Posted on July 29, 2016 | 1 comment

Earnings are plummeting. US equity markets to follow? From Jesse Felder at davidstockmanscontracorner.com:

It’s earnings season once again and it looks as if, as a group, corporate America still can’t find the end of its earnings decline since profits peaked over a year ago. What’s more analysts, renowned for their Pollyannish expectations, can’t seem to find it, either.

So I thought it might be interesting to look at what the stock market has done in the past during earnings recessions comparable to the current one. And it’s pretty eye-opening. Over the past half-century, we have never seen a decline in earnings of this magnitude without at least a 20% fall in stock prices, a hurdle many use to define a bear market.

In other words, buying the new highs in the S&P 500 today means you believe “this time is different.” It could turn out that way but history shows that sort of thinking to be very dangerous to your financial wellbeing.

http://davidstockmanscontracorner.com/over-past-50-years-this-big-of-earnings-recession-has-always-triggered-a-bear-market/

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Chart of The Day: Mind The Crooked GAAP Gap, by David Stockman

Posted on May 24, 2016 | Leave a comment

From David Stockman at davidstockmanscontracorner.com:

http://davidstockmanscontracorner.com/chart-of-the-day-mind-the-crooked-gaap-gap/

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How Much Of S&P Earnings Growth Comes From Buybacks, by Tyler Durden

Posted on April 8, 2016 | Leave a comment

Stock-buyback smoke and mirrors, from Tyler Durden at zerohedge.com:

Having pounded the table on buybacks as the only marginal source of stock purchasing since some time in 2013, we were delighted one month ago when Bloomberg finally got it, writing an article titled “There’s Only One Buyer Keeping S&P 500’s Bull Market Alive.” The answer: corporate stock repurchases of course.

This is what it found:

Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year. Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.

“Anytime when you’re relying solely on one thing to happen to keep the market going is a dangerous situation,” said Andrew Hopkins, director of equity research at Wilmington Trust Co., which oversees about $70 billion. “Over time, you come to the realization, ‘Look, these companies can’t grow. Borrowing money to buy back stocks is going to come to an end.”’

But, when you have the ECB backstopping purchases of corporate bonds, giving companies a green light to issue debt at will and use the proceeds to buyback even more stock, it won’t end just yet.

However, now that it is common knowledge that over the past several years the market has been conducting the most elaborate acrobatic example of pulling itself up by its bootstraps, by conducting a slow motion LBO in which just over 1% of the S&P has been purchased with incremental leverage, another question which bears answer is how much of S&P EPS growth comes from buybacks?

This is important because with Q1 earnings season starting and expected to post the worst, -8.5% drop in EPS since the financial crisis, and one in which collapsing energy and financial will be routinely ignored, we asked what would happen to “earnings” if one also excluded the benefit from buybacks.

To continue reading: How Much Of S&P Earnings Growth Comes From Buybacks

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