EARNINGS WATCH
A third of the way:
- 134 companies (35.2% of the S&P 500’s market cap) have reported. Earnings are beating by 5.8% while revenues are surprising by 1.3%.
- Expectations are for declines in revenue, earnings, and EPS of -0.7%, -4.7%, and -2.4%, respectively.
- EPS is on pace for +1.4%, assuming the current beat rate for the remainder of the season. This would be +5.7% excluding Energy and the Big-5 Banks.
The beat rate is 69% on EPS but only 41% on revenues which continue to decline (-0.7% YoY). The biggest beats on EPS are in Energy (80%, +12.8%), Health Care (80%, +3.4%), Industrials (73%, +5.3%) and Consumer Disc. (65%, +9.2%). (RBC)
Thomson Reuters’ tally shows EPS down 3.7% in Q2, better than –4.5% expected on July 1st. Meanwhile, Q3 estimates are being cut from +2.0% on July 1st. to +1.1%. Q4 estimates remain high at +8.9% even though this is down from +9.5% on July 1st.
Shareholder compensation is in late cycle mode
(…) In terms of a moving yearlong sum, net dividends plus net equity buybacks approximated $1.173 trillion as of March 2016. In all likelihood, the yearlong estimate of shareholder compensation has already surpassed December 2007’s record high of $1.191 trillion. Nevertheless, a cycle peak for this metric is not yet in sight. (…)
Equity buybacks now strengthen the ability of better-than-expected financial results to boost share prices. Many corporations repurchase, or buyback, their own equity in order to compensate shareholders for the subpar growth of operating profits. (…)
With 35% of S&P 500 companies having reported, buybacks have contributed +2.4% to their EPS, reducing the YoY declines from –4.7% to –2.4%. Moody’s continues:
Regarding the US corporate credit rating revisions of the year-ended June 2016, the 65 downgrades at least partly ascribed to equity buybacks and other forms of shareholder compensation towered over the 15 upgrades stemming from infusions of common equity capital. June 2016’s yearlong sum for shareholder-compensation linked downgrades was the highest since the 78 of December 2007.
Meanwhile, June’s yearlong sum of common-equity infusion upgrades edged up from March 2016’s current cycle low of 14. The latter represented the fewest common-equity infusion upgrades since the 11 of the year-ended June 2009. (…)
Meanwhile, (via The Daily Shot):
1. In private markets, here are the median EBITDA multiples of US M&A (including PE buyouts). Yes, valuations are higher than what we saw before the financial crisis.
Source: @PitchBook
2. Private equity add-ons are a bit like movie sequels: lighter effort, less risk.
Source: @PitchBook
3. Here we have private debt dry powder statistics. Notice all the distressed debt funds being raised.
Source: @Preqin
Things are Great…Buy Stocks! Things are Terrible…Buy Stocks! What looks like a classic rotation into cyclical stocks is happening without a rotation out of defensive shares, presenting a puzzle. The answer could lie in a mix of finance psychology and the aftermath of panic over China and Brexit.
Everything is awesome when you are a U.S. shareholder. Turmoil in the rest of the world pushing bond yields down? Awesome: utility shares and consumer staples love low yields. Wait, a strong U.S. economy is pushing bond yields up, you say? Awesome: pile into cyclical stocks like car makers and step on the gas. (…)
This presents a puzzle: what looks like a classic rotation into cyclical stocks is happening without a rotation out of defensives, prompting a market melt-up. (…)
But this contradiction in the market cannot last. If growth is confirmed and inflation returns, it will not work out well for bonds and the expensive defensives. If, yet again, growth hopes are dashed, it will be another lovely day to buy defensives, no matter how costly they look compared with riskier stocks. Either way, there is a limit to the awesomeness of the market.
Another contradiction: “crude oil has diverged from US HY bonds. Something has to give here” (The Daily Shot)
NYSE Margin Debt and the Market
Not a leading indicator, rather a trend accelerator, up and down.
In all, investors are leveraging their investments into equities of companies themselves leveraging their balance sheet to better their results and lure more investors.
CETERIS NON PARIBUS
(…) The internet giant is using technology from the DeepMind artificial intelligence subsidiary for big savings on the power consumed by its data centers, according to DeepMind Co-Founder Demis Hassabis.
In recent months, the Alphabet Inc. unit put a DeepMind AI system in control of parts of its data centers to reduce power consumption by manipulating computer servers and related equipment like cooling systems. It uses a similar technique to DeepMind software that taught itself to play Atari video games, Hassabis said in an interview at a recent AI conference in New York.
The system cut power usage in the data centers by several percentage points, “which is a huge saving in terms of cost but, also, great for the environment,” he said.
The savings translate into a 15 percent improvement in power usage efficiency, or PUE, Google said in a statement. PUE measures how much electricity Google uses for its computers, versus the supporting infrastructure like cooling systems. (…)
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Huawei lifts smartphone sales 25% Growth puts Chinese company a step closer to beating Apple and Samsung in global rankings
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Apple’s China Problem Is That Local Phones Are Good. And Cheap
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China start-up Mobvoi makes first foray into US smartwatch sector Google-backed start-up seeks inroads into big western market
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A top Silicon Valley investor predicts what the world will look like in 10 years, when roads are full of self-driving cars
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Caterpillar Outsmarted Again
Komatsu, (…) the Japanese dump-truck maker on Thursday announced it’s acquiring Joy Global for $28.30 a share, or more than $3.6 billion including current net debt. (…)
- More unintended consequences of central banks experiments: Pension Returns Slump, Squeezing States and Cities Long-term returns for U.S. public pensions are expected to drop to the lowest levels ever recorded, intensifying a national debate over whether states and cities can continue to afford pension obligations.
Twenty-year annualized returns for public pensions in the U.S. are poised to decline to 7.47% once fiscal 2016 results are released in coming weeks, according to an estimate from Wilshire Trust Universe Comparison Service, which tracks pension investment returns.
That would be the lowest-ever annual mark recorded by Wilshire, which began tracking the statistic 16 years ago. In 2001, near the height of the dot-com boom, pensions’ 20-year median return was 12.3%, according to Wilshire. (…)
Connecticut now allocates 10% of its budget to pay down unfunded pension liabilities that more than doubled in size over the past decade. Chicago’s $20 billion pension-funding hole prompted its credit rating to tumble to junk, a rare low mark for an economically diverse city. (…)
The drop in 20-year annualized returns is significant because officials who oversee retirements for police officers, firefighters, teachers and government workers have long said one bad year or two isn’t as important as the long-term average, and they would earn enough money over decades to pay for retiree obligations. (…)
Funding shortcomings often mean taxpayers or workers are asked to chip in more to account for rising liabilities. Every one-percentage-point drop in investment returns represents an increase of 12% in liabilities, according to the Center for Retirement Research at Boston College. (…)
Many states and cities tried to narrow funding gaps following the last financial crisis by passing a series of changes to benefits. But even as those moves were made, a sustained period of low interest rates pulled down returns just as a wave of new retirees started to collect pension checks. (…)
WHY PRODUCTIVITY IS FALLING?
Via The Daily Shot:
- Here is what America is searching for on Google right now.
- iPhone users spend more time on Pokemon Go than other popular apps – including Facebook and Snapchat.
Total time on Pokemon, FB, Snapchat, etc: 116 minutes on average per day. That’s nearly 2 hours a day! Not counting the time spent on The Bachelorette, MLB and political sagas.