Category Archives: S&P500

17/5/16: US Earnings Recession: Four Quarters Long… but How Much Longer?


Recently, I have been highlighting in my Risk & Resilience course for MBAs at MIIS and on this blog the perils of corporate earnings gaming, including the rather worrying trend toward companies posting negative net cash flows (basically using debt to fund shares repurchases).

Here are two of my lecture slides from two weeks ago:


And to add to the pile of evidence, as 1Q 16 earnings rolled in, the numbers were coming in at a frankly put brutal squeeze: we had the fourth consecutive quarter for the S&P 500 earnings running in the red, with 1Q 16 decline being the steepest since 2008-2009 at 6.3%:


However, some interesting insight on the matter of forward earnings guidance was recently published by the Deutsche Bank Research and here is a link to the article discussing it: http://www.valuewalk.com/2016/05/earnings-q1-marks-darkest-hour-just-dawn-says-db/.

Yes, DB's model for earnings for S&P500 is an interesting one. No, without seeing actual standard econometric tests, I can't tell if it makes any sense in reality or not (just because it has high R-sq means diddly nada without knowing how the residuals behave). And no, I am not sure I am buying the idea of 'all factors in favour' arguments presented by DB Research. I am, however, pretty certain that probabilistically a bet should be for more moderate earnings performance in 2Q compared to 1Q, which of course will prompt DB Research lads cheering confirmation of their own model. So I am skeptical, but... still, the article is worth a read.

15/4/16: Corporate Finance, S&P500 and Bubble Trouble…


Classical corporate finance tells us that companies should be valued on their earnings with past earnings being indicative of future earnings (predictive component). Which is tosh. In today's world that is.

Q4 2016 saw highest payouts to shareholders (combined cash dividends and share repurchases) in over 10 years (couple of slides from my course presentation):

And yet... yet... earnings have hit the brick wall back in Q3 2014 and have been trending down ever since:

You really can't call S&P500 anything but a sail-in-the-Fed-wind. There are no fundamentals sustaining it above 1600-1650 range. At least, not corporate fundamentals.

Unless, of course, one expects the recent extraordinary payout performance to remain indefinitely present in the future. Which only a sell-side analyst or a lunatic can...

19/3/16: Shares Buy-Backs: The Horror Show of QE Cash Excesses is Back


Remember the meme of the ‘recovery’?

The story of years of rising shares buy-backs by corporate desperate to do something / anything with all the debt they could get their hands on from the lending banks, whilst having no interest in investing any of these loans in real activity.

Well, back at the end of 2011 and the start of 2014, pumped up on hopium  of the so-called imminent recovery in global demand, we witnessed two dips in shares buy-backs, with resulting volatility going the flat trend taking us through some 12 months before lifting off the whole circus to new highs.

Source: @soberlook

And as you can see, the same momentum is now back. Shares buy-backs are booming once again, almost reaching all time highs of 2007. Thus, the toxic scenario whereby companies use cheap credit (QE-funded) to leverage themselves only to fund shares buybacks and not to fund new investment - that vicious cycle of leverage risk and wealth destruction - is open us once again.

Note: I have been tracking the topic on this blog, covering few months back the link between buybacks and lack of corporate capex: http://trueeconomics.blogspot.com/2015/11/111115-take-buyback-pill-us-corporates.html.