Weekend Reading: Are You Not Entertained?
Over the last several weeks, a majority of U.S. companies have divulged their earnings. The vast majority have been their downwardly revised estimates for the first quarter with bottom line earnings per share growing at more than 18% on an annualized basis.
Yet, the market has failed to respond. Even stocks that have crushed earnings by a wide margin have failed to hold onto their gains in many cases like Boeing (BA).
While there are certainly bright spots to be had, the overall trend and direction of the market remains lacking. As Doug Kass noted yesterday:
“My expectation is of a clearly defined trading range (over the near term) of the S&P Index of between 2550 and 2725. While I believe that it’s increasingly likely that we will breach the lower side of the range in the second half of this year – for now I see a continued trading range (of about 175 S&P points).”
Just a reminder…the “second half of the year” begins next month.
Stepping back we can see this direction-less trading range more clearly.
Yesterday’s “dump and pump” was led by “pretty positive comments” coming out of China relative to trade talks. The good news is the late day surge kept the markets above critical 200-day moving average support keeping bulls alive for now.
While buyers, or should I say “robots,” have repeatedly showed up to “buy the 200-dma dip,” the question is will they be able to maintain it?
The hope is that since earnings have been beating expectations the market will begin to gain some traction. However, speaking of earnings, they may not be as “organic” as they seem.
According to S&P more than $1 Trillion has gone to dividends and buybacks (exactly where we said it would go) and with Apple’s announcement of another $100 Billion the total numbers will continue to rise.
“Given the environment … and the ‘desire’ of companies to show shareholder return, the return to a double-digit actual cash payment gain (year-over-year) seems feasible, along with the first trillion-dollar year of dividends and buybacks for the S&P 500.
So far, 169 S&P 500 members have hiked their dividends in the first four months of the year, while no company in the index cut their dividend.Those buyback have produced an outrageous 72% gain.” – Howard Silverblatt.
But therein lies the problem, and something I noted earlier this week:
“Our experience tells us that these leaderless periods typically occur during important transitions in the market. So what is that transition today and how can we harness it to make money? Sticking with our original thesis for 2018, we think the market is digesting the fact that the tax cut last year has created a lower quality increase in US earnings growth that almost guarantees a peak rate of change by 3Q. Furthermore, the second order effects of said tax cuts are not all positive.”
With estimates through the end of 2019 still at astronomically high levels, the “Herculean task”of actually achieving those lofty levels will be quite challenging. In just the past month(between April 1st and April 30th) the estimated earnings per share for 2019 has risen by more than $8 per share.
Of course, estimates will be revised lower, which will raise forward valuations, and investors will have to start adjusting overly optimistic expectations for reality. Furthermore, as we head into 2019, the year-over-year growth rates comparisons are going to fall markedly.
In other words, with companies rushing to issue dividends and buy back shares the current environment is just about as “good as it can get.” As Sam Zell just recently noted:
“The stock market, despite all of the gyrations, is still at an all-time high. Real estate is priced to perfection.”
Which is problematic for things getting “gooder.”
Which leaves a whole lot of room for disappointment.
Are you not entertained?
Just something to think about as you catch up on your weekend reading list.
Economy & Fed
- Economy In Better Shape Than You Think by Jonathon Trugman via NY Post
- Trump Is Taking Economics Back To The 1800’s by Simon Constable via Forbes
- Economic Factors Causing Millennials To Swing Right by IBD
- Democrat’s Economic Populism by Reihan Salam via The Atlantic
- As Fed Grows More Hawkish, Yield Curve Flattens by Edward Harrison via Credit Writedowns
- 7-Indicators Hint Recession Nowhere To Be Found by Brian Sozzi via TheStreet.com
- How Is That Tax Cut Working Out? by Paul Krugman via NYT
- Tax Cut Investment Boom Yet To Appear by Matt Phillips & Jim Tankersley via NYT
- “Vanderpump Rules” & The State Of The Economy by Maureen Callahan via NY Post
- What Trump Gets Right About China & Trade by Simon Lester via CNBC
- What Previously Sustained The Economy Is Melting Away by David Lynch via Washington Post
- 10-Years After 2008, The Problems Still Remain by Nicole Gelinas via City Journal
- Goldman: Economic Momentum Slows Most Since 2011 by Tyler Durden via ZeroHedge
- As Good As It Gets For Market Rally by Caroline Baum via MarketWatch
- Wall Street Is Sleeping Walking Past 3-Big Risks by Pedro Da Costa via Business Insider
- What Could Threaten The Bull Market by Jed Graham via IBD
- The Data Has Spoken – Buy Stocks by J C Parets via All-Star Charts
- Markets Unimpressed By Best Earnings In 24-Years by Mark DeCambre via MarketWatch
- The Bull And Bear Case For Stocks by Upfina
- Change In Bond Yields, Not Levels Is What Matters by Sunny Oh via MarketWatch
- Midterm Mays Have Been Bad For Stocks by Ryan Vlastelica via MarketWatch
- Time To Buy Long-Term Treasuries by Erik Swarts via Market Anthropology
- Fears Of Bond Bears Are Misplaced by Joe Calhoun via RCM
- Is Value About To Start Outperforming Again? by Barron’s
- Not All Value Is Created Equal by Nick Maggiulli via Dollars and Data
- Sell In…May Be Sound Advice by Dana Lyons via Tumblr
Most Read On RIA
- Bull Markets Actually Do Die Of Old Age by Lance Roberts
- Bullish Hopes Vs. Bearish Signals by Lance Roberts
- Employment Without Rose Colored Glasses by Michael Lebowitz
- Everyone Is On The Same Side Of The Boat by Lance Roberts
- How’s Your Bond Fund Doing by John Coumarianos
- A Market Without Leadership by Doug Kass
Research / Interesting Reads
- Mortgage Rates Jump To Highest Levels Since 2011 by Wolf Richter via Wolf Street
- The “Handmaid’s Tale” In Reverse by Chelsea Follett via Foundation For Economic Education
- Tesla’s Financial Shenanigans Comes Home To Roost by Jerry Bowyer via Vident Financial
- Debt-Enabled Bubble Crashing Into Demographics by Danielle Park via JugglingDynamite.com
- Cash Is Once Again King by Dan Weil via Wealth Management
- Jenrette’s 24-Rules For Success by Katia Porzecanski via Bloomberg
- 10 Lessons From The Weimer Republic by Harold James via Project Syndicate
- The Last Man Who Knew Everything by Matthew Walther via The Week
- Peak Quality? by Albert Bridge Capital
- Debt, Loans & Credit Quality: Devil In The Details by Frank Martin, CFA
- Gender Pay Gap? Not In The Corner Office by Andrew Ross Sorkin via NYT
““Three simple rules – pay less, diversify more and be contrarian – will serve almost everyone well.” ― John Kay
(TLB) recommends other informative financial reading at Real Investment Daily.
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