17/9/20: Stonks are Getting Balmier than in the Dot.Com Heat

Via Liz Ann Sonders @LizAnnSonders of Charles Schwab & Co., Inc. a neat chart summarizing the madness of the King Market these days:

Yeah, right: PE ratio is heading for dot.com madness levels, PEG ratio (price earnings to growth ratio or growth-adjusted PE ratio) is now vastly above the dot.com era peak, and EPS is closer to the Global Financial Crisis era lows. 

What can possibly go wrong, Robinhooders, when a mafia don gifts you some chips to wager at his casino?

6/5/20: S&P500 and Fundamentals: What should matter, doesn't

S&P500 and earnings per share: what should matter, doesn't

We are now in extreme territory of the markets ignoring basic corporate fundamentals.

6/9/19: Small Cap Stocks EPS: racing to the bottom of the MAGA barrel

Everything is going just plain swimmingly in the Land of MAGA, where American companies are now expected to do their duty by President Trump's agenda for investment in the U.S. because, you know, this:

As 'share' part of the EPS ratio has shrunk (thanks to buybacks and M&As tsunami of recent vintage), earnings per share should have gone up... and up... and up. Instead, small cap stocks' EPS has collapsed. To the lowest levels since the 2007-2008 crisis.

But never mind, more money printing by the Fed will surely cure it all.

Source for the above chart: @soberlook and WSJ.

2/7/19: Factset: Negative EPS guidance hits the highest 2Q level since 2Q 2006

Bad news for the 'fundamentals are sound' crowd when it comes to justifying stock markets exuberance: based on data from Factset, to-date, the number of companies reporting negative earnings per share (EPS) guidance in 2Q 2019 has reached 87 - the highest number after 1Q 2016, and the highest number for any 2Q period since 2006. Total number of reporting companies to-date is 113, which means that so far in the reporting season, a whooping 77% of reporting companies are guiding negative EPS.

Technology sector leads negative EPS guidance issuance. Per Factset: "Information Technology sector, 26 companies have issued negative EPS guidance for the second quarter, which is above the five-year average for the sector of 20.4. If 26 is the final number for the quarter, it will tie the mark (with multiple quarters) for the second highest number of companies issuing negative EPS guidance in this sector since FactSet began tracking this data in 2006, trailing only Q4 2012 (27). At the industry level, the Semiconductor & Semiconductor Equipment (9) and Software (6) industries have the highest number of companies issuing negative EPS guidance in the sector." Which means the tech sector is singing the blues. Consumer discretionaries and Healthcare are the other two sectors showing underperformance relative to 5 year average.

Which is ugly. Uglier, yet, as we are not seeing any correction in the markets to reflect the deteriorating fundamentals. And uglier still when one considers the fact that the 'S' part of EPS has been gamed dramatically in recent years through rampant shares buybacks, while the 'E' bit has been gamed via opportunistic M&As.

6/3/19: Expectations Sand Castles and Investors

As raging buybacks of shares and M&As have dropped the free float available in the markets over the recent years, Earnings per Share (EPS) continued to tank. Yet, S&P 500 valuations kept climbing:

Source: Factset 

As noted by the Factset: 1Q 2019 "marked the largest percentage decline in the bottom-up EPS estimate over the first two months of a quarter since Q1 2016 (-8.4%). At the sector level, all 11 sectors recorded a decline in their bottom-up EPS estimate during the first two months of the quarter... Overall, nine sectors recorded a larger decrease in their bottom-up EPS estimate relative to their five-year average, eight sectors recorded a larger decrease in their bottom-up EPS estimate relative to their 10-year average, and seven sectors recorded a larger decrease in their bottom-up EPS estimate relative to their 15-year average."

Bad stuff. Yet, "as the bottom-up EPS estimate for the index declined during the first two months of the quarter, the value of the S&P 500 increased during this same period. From December 31 through February 28, the value of the index increased by 11.1% (to 2784.49 from 2506.85). The first quarter marked the 15th time in the past 20 quarters in which the bottom-up EPS estimate decreased while the value of the index increased during the first two months of the quarter."

The disconnect between investors' valuations and risk pricing, and the reality of tangible estimations for current conditions is getting progressively worse. The markets remain a spring, loaded with the deadweight of expectations sand castles.

7/6/17: Markets, Investors Exuberance and Fundamentals

Latest data from FactSet on S&P500 core metrics is an interesting read. Here are a couple of charts that caught my attention:

Look first at the last 6 months worth of EPS data through estimated 2Q 2017 (based on 99% of companies reporting). The trend continues: EPS is declining, while prices are rising. On a longer time scale, EPS have been virtually flat in 2014-2016, but are forecast to rise nicely in 2017 and 2018. Whatever the forecast might be for 2018, 2017 increase would do little to generate a meaningful reversion in EPS to price trend

However, the good news is, expectations on rising EPS are driven by rising sales for 2017, and to a lesser extent in 2018. This would be (if materialised) an improvement on the 2014-2016 core drivers, including shares repurchases (chart below).

Next, consider P/E ratios:

As the chart above indicates, P/E ratios are expected to continue rising in the next 12 months. In other words, the markets are going to get more expensive, relative to underlying earnings. Worse, on a 5-year average basis, all sectors, excluding Financials, are at above x14. Hardly a comfort zone for 'go long' investors. The overvalued nature of the market is clearly confirmed by both forward and trailing P/E ratios over the last 10 years:

Forward expectations are now literally a run-away train, relative to the past 10 years record (chart above), while trailing (lagged) P/Es are dangerously close to crisis-triggering levels of exuberance (chart below).

In summary, thus, latest data (through end-of-May) shows continued buildup of risks in the equity markets. At what point the dam will crack is not something I can attempt to answer, but the lake of investors' expectations is now breaching the top, and the spillways aren't doing the trick on abating them.

7/9/16: Don't Tell the Cheerleaders: U.S. Corporates Are Getting Sicker

Some at the U.S. Fed think the U.S. economy is in a rude health (http://www.cnbc.com/2016/09/06/federal-reserve-interest-rate-outllok-williams-wants-hike-as-us-economy-in-good-shape.html), and others in the financial world think the U.S. corporates are doing just fine (http://www.wsj.com/articles/u-s-corporate-profits-rise-as-gdp-ticks-down-to-1-1-1472214856). But the reality is different.

In fact, U.S. companies are bleeding cash like there is no tomorrow (http://www.bloomberg.com/news/articles/2016-09-06/buyback-addiction-getting-costly-for-s-p-500-ceos-burning-cash) and they are doing so not to support capex or investment, but to support share prices.

Source: Bloomberg

And earnings are down:

Meanwhile, earnings per share are falling (and not only in the U.S.), as noted here: http://trueeconomics.blogspot.com/2016/09/4916-earnings-per-share.html

And here is 12 ko Forward P/E ratio for the U.S. on 12mo MA basis:

iSource: FactSet https://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_9.2.16

And it gets worse on a trailing basis

So, quite obviously, things are really going swimmingly in the U.S. economy... as long as you don't  look at the production / supply side of it and focus on 'real' indicators like jobs creation (unadjusted for productivity and quality) or student loans (unadjusted for risk of default) or home sales (pending or new, of course, but not existing). Which should be helped marvelously by a Fed hike, because in a credit-based economy, sucking out fuel vapours from an empty tank is undoubtedly a great prescription for sustaining forward growth.

4/9/16: Earnings per Share

You know the meme: corporate sector is healthy world over and the only reason there is no investment anywhere in sight on foot of the wonderfully robust earnings is that… err… political uncertainty around the U.S. elections. Because, of course, political uncertainty is everything…

Except when you look at EPS

H/T @zerohedge 

Now, what the above is showing?

1) EPS is down in the politically ‘uncertain’ U.S.

2) EPS is even more down in the politically less ‘uncertain’ Europe (though you can read on that subject here: http://trueeconomics.blogspot.com/2016/09/4916-some-points-on-russian-european.html

3) EPS has been falling off the cliff since the ‘political uncertainty’ (apparently) set in 4Q 2012 in the U.S. One guess is the markets expected, correctly, the epic battle between The Joker and the Corporate Godzilla back then. And in Europe, since mid 2013, apparently, markets had foresight of who knows what back then.

But never mind, there is no secular stagnation anywhere, because earnings are, apparently very very healthy… very robust… very encouraging… All of which means just one thing: the markets are not overpriced or overbought. Pass de Kool-Aid, lads!

16/5/16: Earnings Surprises and Share Price Impact

A very interesting summary graph from Factset on the impact of earnings performance relative to consensus expectations on share prices

In basic terms, upside to consensus is systemically rewarded, while downside impact decays over time. The chart reflects 5 years worth of data, so capturing the period of declining earnings, where positive surprises should naturally be priced at a premium. The question the data above raises is whether coincident or subsequent shares repurchases provide support to the upside for underperforming firms and/or for outperforming firms.

Remember, recent McKinsey research showed that deviations from consensus forecast do not matter that much when it comes to underwriting longer term returns:

15/5/16: Gamable EPS and Shares Buybacks

EPS (Earnings per Share) is a corporate metric that is often pursued by the corporate managers and executives to increase their own payouts, and confused by investors for a signal of company health. As is well known (and we show this in our Risk & Resilience course), EPS is a 'gamable' metric - in other words, it can be easily manipulated by companies often at the expense of actual balance sheet quality.

And I have written about this problem here on the blog for ages now.

So here is a fresh chart from the Deutsche Bank Research (via @bySamRo) detailing shares buybacks (repurchases) contribution to EPS growth:

In basic terms, there is no organic EPS growth (from net income) over the last 7 quarters on average and there is negative EPS growth from organic sources over the last 4 consecutive quarters.

As noted in my lecture on the subject of 'EPS gaming', there are some market-structure reasons for this development (basically, rise of tech-based services in the economy):

Source of data: McKinsey

Source: McKinsey

However, as the chart above shows, shares buybacks simply do not add any value to the total returns to the shareholders (TRS) and that is before we consider shift in current buybacks trends toward debt funded repurchases. So, in a sense, current buybacks are rising leverage risks without increasing TRS. Which is brutally ugly for companies' balance sheets and, given debt covenants, is also bad news for future capex funding capacity.

24/10/2014: One Ugly with some Ugly Spice... EURO STOXX EPS

It's Friday... ECB is coming up with the banks tests on Sunday... And before then, if you want 'ugly', here's 'ugly':

The above chart plots Earnings per Share, in euro, for S&P500 and for EURO STOXX. It comes via @johnauthers

Now, despite this, you wouldn't believe it, but roughly 68% of European companies reporting earnings this quarterly cycle to-date have been outperforming analysts expectations.

And for some real 'ugly' spice on top of this pizza, the sub-trend decline in the EPS for European stocks has set on roughly H2 2011... something we shall remember when we re-read all the European 'recovery' tripe from 2011 and 2012 and a good part of 2013.