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It may come as a surprise to some, but as we first pointed out in late July when Q2 earnings season was peaking, the earnings recession – traditionally a harbinger to the broader, economic recession – is already here as a result of two consecutive quarter of declining earnings Y/Y. And, with Q3 earnings season on deck, its set to get worse.

As Morgan Stanley calculated, S&P 500 y/y EPS growth came in at roughly zero in 1Q and 2Q…

… while the much broader S&P 1000 EPS growth is closer to -6% for 1Q and 2Q.F

Worse, the recession is set to get far worse with consensus now estimating Q3 y/y EPS growth for the S&P 500 will be -4% and S&P 1000 will be closer to -9%. And while some investors have dismissed this as either ‘old news’ or a temporary trough before a reacceleration, the problem with that argument, in the view of Morgan Stanley’s Michael Wilson, is that the same one was proposed in April and then again in July, “yet 3Q EPS growth estimates are now lower than 2Q and 4Q looks vulnerable to further revisions.“

And yet, as Wilson pointed out, “the S&P 500 seems not to care either and so we have to acknowledge that perhaps the market knows something we do not.” To this, the Morgan Stanley strategist counters that the market is once again blissfully complacent, and his own earnings model has proven to be accurate this year, and over time, and is still indicating that next year’s consensus estimates of $181 are about 10 percent too high.

Wilson’s take: it is “hard to believe the market won’t care if next year’s EPS potentially falls $20 over the next few quarters.“

Sarcasm aside, of course the market will care, unless the Fed finds some way to boost P/E multiples by 2-3 additional turns (coughQE4cough). Alternatively, perhaps the market has some uncanny ability to see the future better than the most accurate sellside strategist of 2018. While Wilson briefly considers this possibility, he then quickly dismisses it noting that one key market limitation is that “it has a difficult time thinking beyond 12 months.”

This is also why the MS equity team uses next 12 months EPS rather than calendar year forecasts when looking at valuations; the bank explains that it has found this time period to have the highest efficacy to predicting stock prices, but herein lies a problem, too: “Over the past 20 years, we believe the investment community has become over reliant on company guidance for its earnings forecasts. Therefore, earnings forecasts tend to be more tightly clustered today for the time periods for which there is “company guidance.”

But most companies don’t provide guidance beyond their current fiscal year, which means the following year tends to be an extension of the longer term averages and/or current trends, which is where we find ourselves today.

Indeed, as we have moved through 2019 and watched earnings guidance drop every quarter, the estimates have followed… “but the numbers haven’t changed as much for2020 because companies don’t guide that far out, leaving 2020 estimates unrealistic.“

As a result, today consensus bottom up forecasts 10.4% EPS growth for the S&P 500, allowing the forward 12 months EPS to remain flat and even rise this year as we have gone forward in time. According to Wilson, “it is very unusual for the index to sell off much when next 12 months EPS is rising, as it has been this year. Quite frankly, this was a bit of a miss on our part as we just assumed these numbers would follow the 2019 cuts, but they haven’t.”

Why is thie relevant? Because as Wilson concludes, the trend in forward EPS forecasts is about to turn down again, much like it did last fall, for three reasons:

First, this is the time of the year when companies may have to give up any furtherexpectation of a rebound for the year if it has not emerged yet. As a reminder, the second half of 2019 is when many companies expected we would see an earnings recovery; instead this has failed to materialize and another disappointing quarter of results and guidance would seal the deal on 2019.

But what about 2020? While most companies likely will not guide on 2020 until January, some will start to lower the bar if they know it is unachievable to avoid further disappointment, particularly if stocks fall on bad earnings results.

Finally, and perhaps more importantly, we ares tarting to see the forward estimates come down now for the mid caps and small caps which have been leading the S&P 500 lower in this earnings recession (chart below). It is also worth pointing out that small / mid caps have underperformed materially this year which makes sense given the material deterioration in NTM EPS that has been going on all year.

The bottom line on the deteriorating earnings recession is that according to Morgan Stanley, the market (at the index level) has generally ignored the poor results to date simply because the 12 month forecasts have yet to fall. This is largely a technical issue related to stale 2020 estimates that will soon be cleaned up as we go through October and November, much like lastyear.

That, as Michael Wilson concludes, “should put downward pressure on the index like it has for the small and mid cap indices all year”, and lead to the S&P swinging from trading near Morgan Stanley’s upper price target band…

… to the lower one. The only question is when.

Authored by John Rubino via DollarCollapse.com,

Pity the guys now running the Fed. They’ve inherited an economy that requires ever-bigger infusions of new credit and ever-lower interest rates to avoid financial cardiac arrest. But with interest rates already perilously close to zero the usual leeway is no longer there.

Making the best of a bad hand, Fed chair Jerome Powell has been cutting the Fed Funds rate but managing expectations for future cuts by calling the current ones “recalibration” and “insurance.” In other words, “don’t expect a quick excursion into steeply-negative territory. In fact this latest cut might be all there is.”

But the economy, like any addict, is profoundly uncomfortable with not knowing where the next fix is coming from and is behaving accordingly. From just the past couple of days’ headlines:

US manufacturing survey contracts to worst level in a decade

US gross national debt jumps by $1.2 trillion, to $22.7 trillion

Growth hits the wall

Student loan debt soars, totaling $1.6 trillion in 2019

There is good reason to fear the repo

Midwest’s faltering economies will spread pain nationwide

Treasury yields sink after U.S. manufacturing weakness raises recession fears

VC veterans host emergency meeting of unicorns as IPO ‘bubble’ implodes

Now equities are picking up the anxious vibe. See Global stocks plunge for a second day to start Q4.

What happens next? Almost certainly, a “coordinated” round of aggressive easing by the US Fed, the ECB and BoJ. With some unconventional coercion thrown in by the People’s Bank of China.

As for the timing, it’s just a question of “the number.”

That is, how far does the S&P 500 have to fall before the stampede begins. Since this question will be answered by a bunch of largely clueless men dripping fear sweat and trying to figure out why their models have stopped working (and more poignantly why their life’s work has turned out to be a fraud), the number is unknowable in advance.

But it probably won’t take too many more days like the last couple before the Fed issues its “whatever it takes” statement, cuts rates by a half-point or more, and initiates a QE program that includes equities along with bonds.

Oh, and before a US-China trade deal is signed that accomplishes little but is sold as “historic” and “huge.”

And before a trillion-dollar infrastructure plan passes both houses of Congress with bi-partisan support.

Stocks will of course pop on these announcements, which makes the “short everything in sight” impulse less than the sure thing it appears. But the initial upward thrust won’t hold because there are limits to both how far interest rates can fall and how big central bank balance sheets can become before even the pretense of capitalist free markets evaporates. We don’t know what those limits are but they’re definitely out there.

Source: Bloomberg

Put another way, an economy that has been LBO-ed by its government is no economy at all.

North Korea has confirmed a new successful missile launch on Wednesday, which notably involved its first submarine-launched ballistic missile (SLBM) in three years, and a new type of “vertical mode” ballistic missile. 

The test was “to contain external threats and bolster self-defense” as Reuters reports, and comes just two days ahead of working level talks with the United States in Stockholm, Sweden at the end of this week. 

State news agency KCNA hailed the “successful” test as of “great significance” as it marks a “new phase” in defending North Korea from the threat of “outside forces” via a “new-type ballistic missile fired in vertical mode” in waters off Wonsan Bay.

There’s little doubt that the tests are meant to give Pyongyang some last minute leverage just before heading into talks with Washington. 

The United States and North Korea will begin working level talks in Stockholm, Sweden beginning tomorrow, Friday Oct 4, according a source with knowledge of the plans. The chief negotiator from the North Korean side will be the DPRK’s former ambassador to Vietnam, Kim Myong Gil.

— Will Ripley (@willripleyCNN) October 3, 2019

Noting the crucial timing of the SLMB test, The Guardian reports the following:

Ankit Panda of the Federation of American Scientists described the missile, the Pukguksong-3, as Pyongyang’s longest-range-capable solid-fuel missile, adding that Wednesday’s launch was “unambiguously the first nuclear-capable missile test since November 2017”.

“Kim Jong Un’s ‘rocket men’ kept busy during the diplomatic charm offensives of 2018-2019,” Panda added.

Analysts believe it was likely launched from a special underwater platform designed for the test, or possibly from a submarine. 

The ability to launch SLMBs from submarines or from anywhere in the water gives the north a “second-strike capability”. If its bases or cities come under attack, it can rely on its underwater arsenal, which is considered much harder for other nations’ defenses to detect. 

Meanwhile, South Korea’s military described that Wednesday’s test involved the missile traveling about 450km in an easterly direction and reaching an altitude of 910km.

When it comes to politics, one thing is certain: it is all about fake news, and how it is spun. Which is why some people prefer finance: after all, when it comes to math-based financial data, reality is either a 1 or a 0.

Unfortunately, it now turns out that even financial “data” can mean whatever one wishes to read from it. Case in point: today’s CNBC appearance by Goldman’s chief equity strategist David Kostin, who when commenting on the fate of the market in the context of trade war, warned that stock buybacks – the primary driver of stock upside together with the Fed in the past decade – “are getting muted” (1’40” in the clip below) and thus clients are turning cautious.

There is just one problem with Kostin’s statement: it is dead wrong, at least according to the latest buyback data from Bank of America’s trading desk.

As BofA’s Jill Carey Hall writes in her latest client flow trends, “corporate buybacks accelerated to their strongest weekly level in our data history since 2009″, led by Tech buybacks for the fifth week. This is in line with BofA’s expectations, which had predicted that tech would benefit from a ramp up in buybacks YTD given the high announced/completed buyback ratio for the sector heading into the year.

As a result of this burst in stock repurchases, cumulative YTD buybacks are now +25% YoY, with 3Q to date buybacks +39% YoY and stronger than normal seasonal trends (which typically slow through late Sept, and pick up over the next ~6 weeks amid earnings season).

In other words, far from “muted” – as Goldman claims- stock buybacks heading into the Q3 blackout period have been bigger.

But why did buybacks just soar to an all time high? After all, isn’t it naive and foollish to launch a record stock repurchase program with the S&P at all time highs? Well, no, when the one paying for it is the greatest fool of all – the yield-starved corporate bond investor. Recall that September saw a record monthly corporate bond issuance, with some $434 billion in bonds sold globally, $5 billion more than the previous all time high of March 2017.

And since a substantial portion of the proceeds is used for stock buybacks, it should not come as a surprise that we just saw a record week for stock buybacks… and why stocks are surging today even as both PMIs now suggest the US is headed for a recession.

But if companies are buying every share of their stock they can find – with no price discrimination – who are the sellers? We know that answer too: as we reported a week ago,  corporate insiders – typically CEOs, CFOs, and board members, but also venture capital and other early state investors – sold a combined $19BN of stock in their companies through to mid-September. Annualized, on track to hit $26BN for the year, which would mark the most active year for insider sales since 2000, when executives sold $37bn of stock amid the idiotic frenzy of the first tech bubble. That 2019 total would also set a post-crisis high, eclipsing the $25bn of stock sold in 2017.

Finally, as for Goldman once again completely misrepresenting reality and peddling “fake news”, we hope that by now that comes as no surprise to any of our regular readers.

Liberal film director Michael Moore – who called Trump’s 2016 victory (and may have inadvertently contributed to it), says that former Vice President Joe Biden is “this year’s Hillary.”

During an interview with MSNBC this week, the “Fahrenheit 11/9” director called out Biden for saying he “never” discussed his son’s business dealings in Ukraine, while in a different interview saying they had spoken a few times. 

“Joe Biden is not going to excite the base to get out there and vote on Nov. 3, 2020,” Moore added. “The things that he said publicly are very strong … “But it looks like he’s not really wanting to deal with it. He’s afraid to be out there.” 

Moore’s suggestion? “We need all the candidates right now — need to be unified and coming at this full force. No backing down and no trying to placate the other and none of this, ‘Well we have to wait and see.’” 

Moore was one of the few liberal personalities to predict Donald Trump would win the presidential election in 2016 — and claimed earlier on that Biden would be the one to overtake Trump in a presidential race.

He still believes that — but feels the former vice president needs to take a stronger stance on the allegations against the Biden family in order to motivate people to come out and “vote against Trump.”

The heat is on Joe Biden’s son, Hunter Biden, following Trump’s and others’ accusations that the two Biden men were in some way involved in corruption connected to Burisma Holdings, the Ukranian natural gas company on whose board Hunter Biden sat (and pulled in $50,000 a month for doing so though he had no experience in this area of business). –The Political Insider

Perhaps Moore will make another campaign ad for Trump this time around?