Whistling Past The Graveyard

That was quick. The trade war scare was over by noon yesterday, and by the market close they were singing “Gary Cohn, we hardly knew ya”.

Folks, what more evidence do you need that the financial markets are completely uncoupled from reality and that these feeble bounces between the 50-day and 20-day chart points are essentially the rigor mortis of a dead bull?

At the moment, the 50-day stands at 2740 on the S&P 500 and is functioning as “resistance” according to the chart mavens, while the 20-day at 2700 is purportedly acting as “support”.

So there’s that, but also this: At the exact mid-point of 2720, the broad market is currently trading at 25.6X reported earnings for 2017. That’s the nosebleed section of history no matter how you slice it—-and most especially in the context of an earnings growth trend that is shackled to the flat line, and which has no prospect of breaking away before the next recession, either.

With virtually every company having reported, it turns out that GAAP earnings for 2017 came in at $109.46 per share on the S&P 500. Then again, 40 months earlier in September 2014 reported LTM earnings were $105.96 per share. That tabulates to a 1.0% per year gain during what will surely prove to have been the sweet spot (month #63 to month #102) of the current long-in-the-tooth business expansion.

Yet to hear the talking heads tell it on bubblevision, robust earnings growth is purportedly breaking out all over—-as if this gray-haired cycle is getting a stiff shot of financial Viagra.

But we’d say there no evidence yet—nor is any likely to be forthcoming. Yes, Q4 2017 earnings of $26.54 per share were up 10% from the $24.16 per share posted for the S&P 500 during Q4 2016.

But here’s what the man from Bloomberg man didn’t tell you:To wit, S&P 500 earnings were actually $26.48 per share way back in Q4 2013.

That’s right. The has been just six cents per share of earnings gain during the last four years!

Needless to say, we think there is a considerable difference between rounding as opposed to growing.

What happened during the interim, of course, was just the pig-passing-through-the-python owing to the China-driven global credit, production and earnings mini-cycle. Apparently, however, Wall Street views zero growth over 4 years as either as ancient history or a mere factoid. In either case, the dip-buying robo-machines and punters are ignoring it—like most else—at their own peril.

Likewise, LTM earnings for 2017 of $109 per share compare $85 per share way back at the prior cycle peak in mid-2007. So earnings have grown at only 2.5% per annum for the entire decade; and even much of that was due to share count shrinkage owing to massive buybacks.

At the same time, future earnings growth due to the tax cut is vastly exaggerated because it ignores the upcoming bond market “yield shock”. We are referring, of course, to the unprecedented $1.8 trillionfiscal/monetary collision in the government bond pits that will incept six months from now during FY 2019.