• U.S. economy on the verge of stalling:
    • ECRI’s latest WLI is a -4.0  .
    • The Atlanta Fed GDP data is presenting a 0.6% Q1 GDP growth picture.
    • Retail sales are contracting since November at a pace almost never seen outside of recession. That’s not all attributable to cold weather!
    • I expect Q1 real GDP growth to be around 1%, and the same for Q2.  I expect recession in Q3.
  • S&P500 Q4 2014 earnings are now done.
    • As-reported earnings per share are down 17% from the previous quarter (despite share buybacks, or this would be even worse), and 14% from Q4 the previous year.  A lousy quarter.  Didn’t see that in the financial press?  Hmmm.  Here’s what you were told by the financial press:
      • 69% of companies beat (sandbagged) earnings estimates, so it was OK.
      • Trailing 12month operational earnings (aka earnings before bad stuff), were up 5.3%. It’s all good.     Believe what you want.
  • The Fed released the second part of its view on bank capital requirements.  All U.S. banks got approval to start returning money to shareholders. Bank of America will have to re-submit a new and improved plan in a few months time. Santander and Deutsche Bank (2 of the largest banks in Europe) had capital reserves that were deemed insufficient to pass the Fed’s stress test, so they’ll have to hold more money and try to pass next year’s stress test.  The fact that 2 of the largest European banks did not pass the Fed’s stress test but they did pass the ECB’s stress test speaks volumes. A bank regulator will avoid making one of the banks it is responsible for look bad — even if it is undercapitalized and therefore at risk of bringing the entire financial system down. This reinforces what I’ve been writing for years now i.e., the European banking system remains highly susceptible to a melt-down. The ECB’s QE program has been implemented to buy time for their banks to built capital reserves so they may sustain severe damage once the training wheels come off, but not take the global financial system down.
  • As a follow-up to the previous bullet — U.S. bank execs are going to trip over themselves using company reserves to buy back shares in the next few weeks and months. They’ll increase the dividend and reduce loan loss reserves.  You’ll begin to see this in their Q1 report 4 weeks from now. Earnings growth will be non existent, but after loan loss reserve reductions and the impact of share buybacks, earnings will be blown away (exceeded by considerable margin). This makes for a great headline to drive stock prices higher, but a deeper look reveals a much weaker fundamental view.  Also: expect to see these same executives in a panic sell of their own personal shares. In fact I expect to see extremely elevated insider selling across the board for the entire S&P500 for Q2.
  • Here’s food for thought:

buybacks, insider selling, spx peaks

 

  • The U.S. 10yr Tnote is yielding 2.1%. That’s pretty low by historic standards. However, money is flocking to the USD because you need a magnifying glass to see the yield on other 10yr Tnotes:
    • Japan  0.39%
    • Germany  0.25%
    • The Netherlands  0.28%
    • France  0.49%
    • Italy  1.13%
    • Spain  1.15%
    • Yes, Italian and Spanish Tnotes are yielding 1% less then their U.S. equivalent. With the ECB sucking-up piles of new eurozone sovereign debt, BBB-rated Italian and Spanish sovereign debt is lower risk than AAA-rated U.S. debt.  How about that?
  • If the U.S. dollar remains this strong — or continues to get stronger- a large part of S&P500 earnings are going to drop (40-50% of S&P500 company revenue comes from outside the U.S.).