THE DAILY EDGE (18 January 2017): Earnings Watch

Empire State Survey Remains Positive; Prices Surge

The Empire State Manufacturing Index of General Business Conditions for January continued to suggest positive economic conditions, though it eased to 6.5 in January from 7.6 in December. It was the third straight positive reading following more than a year’s worth of negative figures.

Based on these figures, Haver Analytics calculates a seasonally adjusted index that is comparable to the ISM series. The adjusted figure improved to 50.9 from 48.5. It was the highest level since April and also the first to indicate positive growth in the same period. During the last ten years, the index posted a 63% correlation with the change in real GDP.

Amongst the index components, new orders, shipments and inventories each posted positive readings. Other series were negative, but improved versus December. The employment index jumped to -1.7, its least negative figure since August. During the last ten years, there has been a 69% correlation between the employment index and the m/m change in factory sector payrolls.

The prices paid series jumped to 36.1, the highest level since January 2014. A sharply increased 41.2% of respondents reported paying higher prices, while a fairly steady 5.0% reported them lower. The prices received index similarly surged to 17.6, its highest point since April 2012.

EARNINGS WATCH

• 35 companies (10.4% of the S&P 500’s market cap) have reported. Earnings are beating by 6.1% while revenues are missing -0.3%.
• Expectations are for revenue, earnings, and EPS growth of 4.1%, 4.5%, and 6.4%, respectively.
• EPS is on pace for 9.6%, assuming a typical beat rate for the remainder of the season. This would be 8.1% excluding the benefit of easy comps at AIG and GS. (RBC)

Ex-Financials, EPS are beating by 3.6% with only 28 reports in (6%). Their beat rate is 68% vs 74% overall.

• Target cuts fourth-quarter profit and sales outlook after disappointing holiday sales

(…) The company said same-store sales fell 1.3% in the November to December holiday period. Total sales fell 4.9%, including the impact of the Dec. 2015 sale of the company’s pharmacy and clinic business. “While we were pleased with Black Friday sales, December digital sales growth of more than 40 percent and continued strength in our signature categories, these results were offset by early season sales softness and disappointing traffic and sales trends in our stores,” said Brian Cornell, chairman and CEO of Target. The company is now expecting GAAP per-share earnings from continuing operations of $1.45 to $1.55, down from prior guidance of $1.55 to $1.75. Full-year EPS is forecast at $4.57 to $4.67, compared with prior guidance of $4.67 to $4.87. Same-store sales are expected to decline 1.5% to 1.0% for the quarter. (…)

OPEC sees smaller oil glut, upbeat on non-OPEC cut compliance

IEA Sees Significant Gains in U.S. Shale Oil as Prices Rise

China’s housing boom ends as prices fall in top cities Decline marks end to huge growth that saw values rise as much as 40% last year

(…) China’s real estate and construction sectors made up a fifth of GDP growth in the first half of last year, according to Liang Hong, chief economist at China International Capital Corporation.

China province admits falsifying fiscal data Liaoning’s ‘large-scale financial deception’ latest blow to country’s statistics credibility

(…) Fiscal revenues in the province were inflated by at least 20 per cent from 2011 to 2014, said provincial governor Chen Qiufa, according to Communist party mouthpiece The People’s Daily. “Liaoning was involved in large-scale financial deception at city and county levels that lasted a long time and involved many people,” Mr Chen added. (…)

I. BERNOBUL

My old friend Igor Bernobul sent me a strategy piece from Waverly Advisors, LLC. These last three letters are for Limited Liability Company. Indeed, I am sure they will assume very limited liability if their strategy proves costly to their clients. This is a good example of why equities can get bubbly from time to time. There is always someone with “no concerns about buying “overvalued” markets”, especially if it is with client money…

Also limited are their thoughts on valuation:

This chart needs some more info to be thorough, objective and truly informative:

• The 1970-1990 period was one of high and volatile inflation which kept P/Es generally low;
• the high P/Es in 1991-1992 were on depressed recessionary profits (-24%) followed by sharply declining inflation;
• the 1998-2004 and 2007-09 high P/Es proved dramatic to most people. Eventual liabilities were far from being limited…

Here’s the truth about high P/E markets:

This chart takes no account of varying inflation rates since 1940. These do (from The Rule of 20: The Historical Record):

Here’s an absolute scare: according to The Credit Strategist (Michael Lewitt), the S&P 500 Index is now selling at 11.2x EBITDA. Buying here, you’re liable to get nasty surprises unless you are smart and nimble enough when the time comes…believe me, it will come!

Eleven times EBITDA is like investing with a 9% cashflow yield on capital, before interest, taxes depreciation and amortization. That does not leave much room for a decent, risk-adjusted net return on investment, especially if interest rates rise. Tax reform must come very friendly and fast…

• You must weigh not only the alluring probabilities of being right, but the dire consequences of being wrong. (Peter Bernstein)
• The stock market is filled with individuals who know the price of everything, but the value of nothing. (Phillip Fisher)
• Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investing is an effort, which should be successful, to prevent a lot of money from becoming a little. (Fred Schwed Jr.)

  Deutsche Bank Completes $7.2 Billion Mortgage Security Settlement With U.S. Deutsche Bank completed a $7.2 billion deal to resolve U.S. claims that it misled investors on mortgage securities it sold before the 2008 financial crisis, authorities said.

Business euphoria over Trump gives way to caution, confusion

Trump Least Popular New President in at Least a Generation, Poll Finds As Donald Trump prepares to take the oath of office, a growing share of Americans disapprove of how he has handled his transition to the White House, a new Wall Street Journal/NBC News poll finds.

(…) Some 48% of Americans said they view Mr. Trump in a negative light, and 38% in a favorable one. But among Republicans, just 10% view him negatively, while 85% of Democrats hold an unfavorable view. (…)

The opinions of Democrats and Republicans remained largely unchanged over the last month. But there was a negative turn among independents, who in December approved of Mr. Trump’s handling of his transition, 53% to 32%. Now their verdict is negative, with 44% approving and 47% disapproving. (…)

More than three-quarters of adults said that keeping U.S. jobs from going overseas should be a top priority for Mr. Trump’s first year in office. Some 64% gave urgent priority to funding highways and other infrastructure, and 59% supported higher tariffs on countries viewed as taking advantage of trade deals, a position at odds with that of many GOP leaders. (…)

Perhaps the most surprising finding is that, for the first time since the health-care law was enacted in 2010, more people say it is a good idea than a bad one, 45% to 41%. (…)

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  Majority of Americans Disapprove of Trump’s Twitter Use

Some 69% of adults agreed with the statement that his use of Twitter is bad because “in an instant, messages can have unintended major implications without careful review.”

By contrast, 26% agreed that Mr. Trump’s tweeting was a good thing, because “it allows a president to directly communicate to people immediately.” (…)

Among Republicans, 47% said his use of Twitter is a bad thing, while 46% think it is good. Two-thirds of independents and 89% of Democrats thought his use of Twitter was bad.

Even among millennials, the most social-media savvy generation, Mr. Trump’s Twitter use isn’t going down well. Some 76% of 18- to 34-year-olds say Mr. Trump’s use of Twitter is a bad idea. (…)

• Donald Trump: ‘I don’t like tweeting’ but have no plans to quit

(…) ‘Look, I don’t like tweeting. I have other things I could be doing. But I get very dishonest media, very dishonest press, and it’s my only way that I can get out and correct.’ (…)