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Two weeks ago, when we did our latest analysis of GAAP and non-GAAP earnings, we were stunned by several findings:

First, consensus Q1 2016 non-GAAP earnings, the kind that even Warren Buffett openly rails against, have imploded from +5% to -8.3% (this was “only” -7.4% two weeks ago), and more than double the -3.4% plunge in Q4 2015 EPS.

Keep in mind that all of the above is on a non-GAAP basis, and if one looks at GAAP earnings, the picture goes from dire to absolutely disastrous. 

Second, we said that if one uses I/B/E/S GAAP earnings, which exclude the barrage of pro-forma write offs, addbacks, “non-recurring items” and countless other “misleading numbers that can deceive investors”, what one gets is a true shocker: instead of 118 in LTM EPS for the S&P 500 (shown in red in the chart below) the true, Warren Buffett-approved number (shown in blue in the chart bellow) is a paltry 91.5! This is also the lowest S&P500 GAAP earnings per share since 2010, and translates into a 21.2 GAAP PE. 

Two weeks later, after the market’s recent surge, the market’s GAAP PE is now over to 22x.

We then explained what is taking place with the following chart showing the amount of EPS
“writeoffs” and pro-forma adjustments should explain it. “In 2015, 26.5 of the total non-GAAP in S&P earnings, is the result of accounting gimmicks. The addbacks to the S&P’s EPS are now the highest since the 2008 financial crisis, and in nominal dollar terms, are already an all time high”

 

Today, we are delighted to find that Factset itself has taken on this critical distinction between GAAP and Non-GAAP earnings as the core topic of its weekly earnings insight report.

It’s finding confirms everything we warned about two weeks ago, and explains why every single company is desperate for investors to look only at its non-GAAP myth, and to stay as far away from the GAAP reality as possible.

Did DJIA Companies Report Higher Non-GAAP EPS in FY 2015?

 

While all US companies report EPS on a GAAP (generally accepted accounting principles) basis, many US companies also choose to report EPS on a non-GAAP basis. There are mixed opinions in the market about the reporting of non-GAAP EPS by US corporations. Supporters of the practice argue that it provides the market with a more accurate picture of earnings from the day-to-day operations of companies, as items that the companies deem to be one-time events or non-operating in nature are typically excluded from the non-GAAP EPS numbers.Critics argue that there is no industry-standard definition of non-GAAP EPS, and companies can take advantage of the lack of standards to (more often than not) exclude items that have a negative impact on earnings in order to boost non-GAAP EPS.

 

 

 

As of today, all of the companies in the Dow Jones Industrial Average (DJIA) have reported EPS for FY 2015. What percentage of these companies reported non-GAAP EPS for FY 2015? What was the average difference between non-GAAP EPS and GAAP EPS for companies in the DJIA for FY 2015? How did this difference compare to last year?

 

 

For FY 2015, 20 of the 30 companies in the DJIA (or 67%) reported non-GAAP EPS in addition to GAAP EPS for the fiscal year. For 18 of these 20 companies, non-GAAP EPS was higher than GAAP EPS. On average, non-GAAP EPS exceeded GAAP EPS by 30.7% for these 20 companies. For FY 2014, 19 of the 30 companies in the DJIA (or 63%) reported non-GAAP EPS in addition to GAAP EPS for the fiscal year. For 15 these 19 companies, non-GAAP EPS was higher than GAAP EPS. On average, non-GAAP EPS exceeded GAAP EPS by 11.8% for these 19 companies. Thus, there was a wider gap on average between non-GAAP EPS and GAAP EPS in FY 2015 compared to FY 2014 for companies in the DJIA.

 

 

Due in part to this wider gap between non-GAAP EPS and GAAP EPS, companies in the DJIA on average reported a much smaller year-over-year decline in year-over-year EPS on a non-GAAP basis than on a GAAP basis for the year. For FY 2015, the 20 companies in the DJIA that reported non-GAAP EPS reported an average year-over-year decline in non-GAAP EPS of -4.8%. These same 20 companies reported an average year-over-year decline in GAAP EPS of -12.3%.

So now that we know our math was right, perhaps our punchline from two weeks is correct as well, and it ias follows: “if using GAAP earnings, and applying the market’s already generous 16.5x non-GAAP P/E, one gets a fair value of the S&P 500 of 1,500, or over 25% lower than the recent prints in the S&P 500.”

Which may explain the unprecedented scramble to pump up both the market, and P/E multiples as high as possible before the trapdoor is opened once again.

via Zero Hedge http://ift.tt/229XC8Q Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Anyone who thinks the Democratic Party isn't imploding for the exact same reasons the Republican party is imploding is purposefully ignoring reality.

Legions of pundits are crawling out of the woodwork to gloat over the implosion of the Republican Party. Corrupt, crony-capitalist, Imperial over-reach–good riddance.

But far fewer pundits dare declare that the other corrupt, crony-capitalist party of Imperial over-reach–yes, the Democratic Party–is imploding, too, for the same reason: it too is rotten to the core and exists solely to protect the privileges of the few at the expense of the many.

Democrats need to ask themselves: if Hillary Clinton is the shining epitome of what the Democratic Party stands for and represents, then what does the Democratic party stand for other than corruption, greed, pay-to-play, Imperial over-reach, elites who are above the law, and a permanent war state overseen by a corporatocracy bent on protecting the unearned privileges of the few at the expense of the many?

Two Clintons. 41 years. $3 Billion.

How about the Clintons' $153 million in speaking fees? Just good ole democracy in action?

How about Hillary's "super-delegates"–you know, the delegate system that makes the old Soviet Politburo look democratic by comparison. Hillary has rigged the media coverage, a fact that is painfully obvious to anyone who is non-partisan. The New York Times, for example, couldn't wait to announce in blaring headlines that Hillary regains the momentum after she rigged a couple-hundred vote caucus in Nevada–and barely won that.

The mainstream media fell all over themselves to declare Hillary the clear winner in the Michigan debate, and were delighted to run story after story of Hillary's commanding 21-point lead– all designed, of course, to discourage Sanders supporters from even going to the polls.

It was obvious to non-partisan observers that Sanders won the debate–no question. And he went on to trounce Clinton despite her "commanding 21-point lead", which was quickly finessed away by a servile corporate media.

How many pundits are commenting on the fact that Democratic voters are staying away in droves? Or that–according to one zany poll–venereal disease is more popular than Hillary among young quasi-Democratic voters?

Every American knows the system is rigged to guarantee the skim of the protected classes. Insider Peggy Noonan recently penned an essay calling out the protected class, which can only be protected by stripmining the unprotected: Trump and the Rise of the Unprotected.

The only difference between the two parties' protected class is the Democrats protect public union employees from any market or fiscal realities, until their unaffordable pay and health/pension benefits bankrupt local governments. At that point, the party bosses will come crying to Washington, D.C. to bail out benefit and payroll costs that were never fiscally viable in the first place.

The protected classes love the Status Quo, because it exists to protect their privileges. The unprotected classes loathe the Status Quo for the same reason.

Anyone who thinks the Democratic Party isn't imploding for the exact same reasons the Republican party is imploding is purposefully ignoring reality–a reality that threaten the protected classes' lock on wealth and power.

via Zero Hedge http://ift.tt/1pCkOyG Tyler Durden

In a historic first, earlier today ECB vice president Vitor Constancio (the same one who in October 2014 explained that the European stress tests refuse to consider a scenario with deflation  “because indeed we don’t consider that deflation is going to happen” just a few months before Europe got its first deflationary print since the crisis) penned an official ECB opinion piece, some might call it a blog post, titled “In Defense of Monetary Policy” just hours after the ECB’s historic “all in” gamble which included the first ever monetization of corporate bonds.

In it he tried to do two things:

• To explain why, despite repeated rumblings that monetary policy is longer relevant, it is in fact essential, or as he says “not only is it wrong to start talking down monetary policy – it’s actually dangerous“, and to do this he attempts to prove a counterfactual saying that without QE, European deflation would be far worse than it is now, and that structural reforms, while critical “it is difficult to see how they could spur growth significantly in the next two years, especially when the current problem is lack of global demand.”  In other words, yes, we should no longer stimulate, but we can’t stop as governments are too inefficient, and take too long to do what they have to, so we will keep stimulating.
• The second one is both a justification for negative rates, in which far from the now accepeted reason that the ECB no longer wants to impair bank profitability, what Constancio suggests is that the only gating factor is fears about a flight to cash should rates go even more negative (and hence why the ECB has been so aggressively moving to eliminate the €500 bill).

The problem with these two points, and especially the second one, is that it runs completely counter to the entire narrative that was sloppily errected overnight as justification for today’s rally, which as a reminder was that the ECB will no longer cut rates to support European banks, and that the ECB is explicitly no longer targeting a weaker Euro but instead will do everything in its power to promote credit creation (as it did with LTRO1-4, as it did with QE1 and so on).

We were not the only ones who wre left scratching our heads. In a note by JPM’s Malcolm Barr, he admits that JPM is likewise “thoroughloy confused” by Constancio’s blog, and says that “it is disappointing to us to see the ECB without a clear and convincing explanation for why it perceives a bound on rates at -0.4% at this point.“

The explanation is simple: the ECB not only has gone all but is now grappling and adjusting the narrative to fit to whetver the market wants to hear at any given moment just to go higher. This is precisely what happened on December 4th after the ECB’s last “policy failure.” The problem is that Draghi’s attempt to jawbone markets higher lasted only a few days.

The risk, as JPM implies, is that once Friday’s buying rally fizzles not only in the US but in Europe, and all attentions turns back to the ECB for “more”… there will be nothing there, and Draghi will have to revert back to even more negative rates, to banning cash, and to reminding markets that absolutely nothing has changed.

What is most ironic, is that everything was working out great – the market was soaring for whatever reason, and the narrative had shifted to make it seem that the ECB actually knew what it was doing… and then Constancio once again spoke up and demonstrated that the ECB really has no idea what is going on!

Here is JPM’s note on the topic, authored by Malcom Barr

ECB’s Constancio: Dazed and confused?

ECB Vice-President Constancio has taken the unusual step up of publishing an “Opinion piece” on the ECB website (link), entitled “In Defence of Monetary Policy”. We can’t recall any instances of senior ECB officials putting pen to paper (as opposed to giving interviews) so soon after an ECB decision. In our view, two things in this piece stand out. One we would welcome, the other we find thoroughly confusing.

• A reality check on fiscal policy and structural reform. Constancio points out that there are significant legal and political constraints on the ability of countries to use fiscal policy to stimulate growth. In his words “countries that could use fiscal space, won’t; and many that would use it, shouldn’t”. The hint that these constraints may be at least a little unhelpful reflects the drift of opinion on this issue we have been seen of late from the leadership of the ECB. What Constancio has to say about structural reform, however, cuts somewhat against the grain. Pointing out that structural reforms tend to be deflationary in the first instance, he states: “Structural reforms are essential for long-term potential growth, but it is difficult to see how they could spur growth significantly in the next two years, especially when the current problem is lack of global demand”. We agree, and it is refreshing to see the ECB acknowledge this so openly.
• Why the bound at -0.4%? Having argued that monetary policy has had to step into the void left by other policies, Constancio argues that monetary policy has boosted growth by around two-thirds of a percentage point over the last two years. But “all policies have limits. In the case of the instruments, we are now using, this is particularly true of negative interest rates on our deposit facility. The reasons are more fundamental than just the effect on banks”. At this point Constancio cites a recent blog by Cecchetti and Schoenholtz (link), before pointing out that bank returns on equity in the Euro area went up in 2015 despite negative rates. But if it is not the impact on bank profitability that sets a limit to the usefulness of negative rates, then what is the “more fundamental” reason?

The Cecchetti and Schoenholtz blog discusses the experience in Europe to date, and notes that rates have been moved further below zero than was thought possible without beginning to trigger flight to cash by banks. They suggest that the floor on rates may be higher in large jurisdictions than in smaller, owing to economies of scale in cash holding. And they also point out that the limit may change dependent on how long rates are expected to be below zero. But they do not conclude that we have, by now, clearly reached the limits of how low negative rates could go. Moreover, the piece almost completely ignores the impact that the specific design of tiering regimes can have on the marginal incentive to hold cash (where the exemption on negative rates is withdrawn as banks’ holdings of cash rise).

So this leaves us thoroughly confused. We had thought that the ECB was turning away from further moves into negative territory because of the impact on bank profitability and, hence, on credit availability. Constancio appears to say this is not the key reason, and that the constraint from possible flight to cash is coming into view. In our view, it is not clear that either argument is convincing. But the argument for stopping at -0.4% based on impacts on bank profitability is more convincing than any suggestion that rates simply will not stick much below -0.4% because of flight to cash. It is disappointing to us to see the ECB without a clear and convincing explanation for why it perceives a bound on rates at -0.4% at this point.  

* * *

It’s ok Malcolm, the ECB will just make it up as it goes along, quite literally day by day now.

via Zero Hedge http://ift.tt/1Rd2BO9 Tyler Durden

In what will likely not surprise too many, The Pentagon has admitted it has deployed drones to spy over U.S. territory for non-military missions over the past decade. Confirming yet another conspiracy theory is conspiracy fact, FBI director Robert Mueller testified before Congress that the bureau employed spy drones to aid investigations, but in a "very,very minimal way, very seldom." The report concludes, "the appetite to use spy drones in the domestic environment to collect airborne imagery continues to grow."

As USA Today reports, the report by a Pentagon inspector general, made public under a Freedom of Information Act request, said spy drones on non-military missions have occurred fewer than 20 times between 2006 and 2015 and always in compliance with existing law.

The report, which did not provide details on any of the domestic spying missions,  said the Pentagon takes the issue of military drones used on American soil "very seriously."

 

A senior policy analyst for the ACLU, Jay Stanley, said it is good news no legal violations were found, yet the technology is so advanced that it's possible laws may require revision.

 

"Sometimes, new technology changes so rapidly that existing law no longer fit what people think are appropriate," Stanley said. "It's important to remember that the American people do find this to be a very, very sensitive topic."

 

The use of unmanned aerial surveillance (UAS) drones over U.S. surfaced in 2013 when then-FBI director Robert Mueller testified before Congress that the bureau employed spy drones to aid investigations, but in a "very,very minimal way, very seldom."

The inspector general analysis was completed March 20, 2015, but not released publicly until last Friday.

It said that with advancements in drone technology along with widespread military use overseas, the Pentagon established interim guidance in 2006 governing when and whether the unmanned aircraft could be used domestically. The interim policy allowed spy drones to be used for homeland defense purposes in the U.S. and to assist civil authorities.

 

But the policy said that any use of military drones for civil authorities had to be approved by the Secretary of Defense or someone delegated by the secretary. The report found that defense secretaries have never delegated that responsibility.

The report quoted a military law review article that said "the appetite to use them (spy drones) in the domestic environment to collect airborne imagery continues to grow, as does Congressional and media interest in their deployment."
*  *  *
Shortly before the inspector general report was completed a year ago, the Pentagon issued a new policy governing the use of spy drones. It requires the defense secretary to approve all domestic spy drone operations. It says that unless permitted by law and approved by the secretary, drones "may not conduct surveillance on U.S. persons." It also bans the use of armed drones over the United States for anything other training and testing.

Given the lies that were told about Obama's secret drone assassination project, who knows what the reality is if they are admitting "we droned some American folks on American soil."

via Zero Hedge http://ift.tt/1WfCCKy Tyler Durden

Submitted by Lance Roberts via RealInvestmentAdvice.com,

The standoff between the “bulls” and “bears” continued this week as prices struggled to rise. The “bulls” continue to “hope” that the recent turmoil that started at the beginning of this year has come to an end. The “bears” continue to point out silly things like an ongoing earnings recession, weakening economic data, and deteriorating technicals to make their case.

Silly “bears”.

Interestingly, on Thursday, the ECB launched its biggest “bazooka” yet pushing further into negative interest rates, increasing their already failed QE program and crossing every finger and toe for “good luck.”  Via the ECB:

“At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:

(1) The interest rate on the main refinancing operations of the Eurosystem will be decreased by 5 basis points to 0.00%, starting from the operation to be settled on 16 March 2016.

(2) The interest rate on the marginal lending facility will be decreased by 5 basis points to 0.25%, with effect from 16 March 2016.

(3) The interest rate on the deposit facility will be decreased by 10 basis points to -0.40%, with effect from 16 March 2016.

(4) The monthly purchases under the asset purchase programme will be expanded to €80 billion starting in April.

(5) Investment grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases.”

Question:

“What happens during the next global economic recession when these unsecured corporate bonds go bankrupt?” 

If you remember, Lehman bonds were IG unsecured corporate bonds the DAY BEFORE they went into bankruptcy. That event sparked the global financial crisis. But this time will be different, right?

I’m only asking the question.

Anyway, I digress. This week’s reading list takes a look at various views on the market, the latest jobs report, oil prices and other interesting reads.

---

1) Do Any Of The Recent Rallies Pass The Sniff Test by Charles Hugh Smith via OfTwoMinds

“As Chris Martenson and many others have noted, “price discovery” is a joke now, as markets are either propped up by central bank “we got your back” guarantees or outright asset purchases, or driven up and down by speculative hot money flows.

 

This is not capitalism, or a functioning market: this is the end-game of legalized looting and financialization. What’s the value of real estate? If interest rates are pushed negative, then that gooses housing demand, as the cost of interest on a mortgage declines to near-zero in real terms.”

• But Also Read: This Bull Market Is Getting No Respect by Wallace Witkowski via MarketWatch
• And Read: Are We Going To See 2500 S&P Soon? by Avi Gilburt via MarketWatch
• Don’t Miss: Fasten Your Seatbelts – It’s Going To Get Bumpy by Michael Brush via MarketWatch
• Interesting: GS Says Relief Rally Was Too Fast by Tyler Durden via ZeroHedge

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2)  The Markets Are Stretched, So I’m “All-In” Short by Doug Kass via Real Clear Markets

“My recent column Not So Super Tuesday highlights why I believe markets are tipping over to short-term bearish, while my Top 10 Reasons to Sell Stocks Now piece incorporates most of my intermediate-term concerns.

 

That’s why I moved to “all-in short” on Friday during the market’s post-jobs-report ramp-up. I believe stocks’ recent rally from their mid-February low has stretched valuations and drastically altered the risk-vs.-reward ratio.

 

I‘d also note that Friday’s seemingly good February U.S. jobs report wasn’t quite as “clean” as the strong headline number of 242,000 non-farm job gains suggests. For instance, average wages dropped by 0.1%, while average hours worked fell by 0.2 — a decline usually seen in recessions. (Previous similar drops occurred in February 2010 and December 2013.)”

• But Also Read: The Market Is Doing The Most Bullish Thing It Can Do by Kevin Marder via MarketWatch
• And Read: Stocks Won’t Earn Nearly As Much Over Next 7-Years by Mark Hulbert via MarketWatch
• Further Reading: The Perfect Storm Isn’t Over Yet by Mohamed El-Erian via Project Syndicate

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3) The Wall Street Profits Illusion by Sam Ro via Yahoo Finance

“Wall Street gurus like Societe Generale’s Andrew Lapthorne, have been tracking the discrepancy between GAAP and non-GAAP reported profits for years.

 

But last fall, more experts like Deutsche Bank’s David Bianco grew increasingly concerned with what was becoming a growing divide between GAAP and non-GAAP profits.

 

‘Blended [non-GAAP] 4Q earnings per share is $29.49 with GAAP EPS of $19.92,’ Bianco said of S&P 500 profits on Monday. He further noted that this 67% ratio of GAAP to non-GAAP EPS is ‘well below the normal ~90% ex. recessions.'”

• Also Read: Analyzing Q4 Earnings via RIA
• But Also Read: The Retracement Rally Is Over by Erik Swarts via Market Anthropology

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4) February Jobs Report A Little Misleading by John Crudele via New York Post

“Labor trumpeted that 242,000 new jobs were created in February, although wages declined 0.1 percent, the average workweek dropped by 0.2 hours and aggregate hours worked fell 0.4 percent. And part-time work soared in February while full-time job growth was mediocre.

 

Even the 242,000 job growth looked hokey. Retailing, for instance, saw an unbelievable (as in “not to be believed”) jump of 55,000 jobs despite the fact that February isn’t exactly the month when stores hire people to handle a swarm of shoppers.

 

As I said last Thursday and in a special Saturday column, the February job report was helped by rogue statistics — untrustworthy seasonal adjustments (especially in retailing) and giddy assumptions made by Labor that will probably have to be corrected later.“

• Also Read: Wages – Shadow Hanging Over Jobs Market by Jeff Cox via CNBC
• And Read: Does Jobs Report Point To Recession by Jared Pincin via Real Clear Policy

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5) Oil Prices Should Fall, Possibly Hard by Art Berman via Forbes

“Oil prices should fall, possibly hard, in coming weeks. That is because fundamentals do not support the present price.

 

Prices should fall to around $30 once the empty nature of an OPEC-plus-Russia production freeze is understood. A return to the grim reality of over-supply and the weakness of the world economy could push prices well into the $20s.“

• Also Read: Oil: Lower Prices For Longer via Morgan Stanley
• And Read: The Future Of Oil Is Here & It Ain’t Pretty by Michael Clare via The Nation

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OTHER GOOD READS

• The Failed 401k Experiment by David Dayen via The Fiscal Times
• BIS Sends Global Storm Warning by Lianna Brinded via BI
• Draghi Plays Last Deflation Card by Ambrose Evans-Pritchard via The Telegraph
• Central Banks About To Ambush The Casino by David Stockman via Contra Corner
• The Market’s 7-Year Itch by David Keohane via FT Alphaville
• Interest Rates, Fed & Inflation’s New Normal by Andrew Dasson via CFA Institute
• NIRP – No Need To Go There by Paul Kasriel via Financial Sense
• Dividend Investing – Not All Its Cracked Up To Be by Meb Faber via Faber Research
• Margin Debt’s Message Could Not Be More Clear by Jesse Felder via The Felder Report
• The Line In The Oil Sand via Dana Lyons via Tumblr
• Houston Real Estate Is In Trouble by Aaron Layman

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“When the paddy wagon rolls up, they take the good girls with the bad” – Old Wall Street Bear Market Axiom

via Zero Hedge http://ift.tt/24VxH7s Tyler Durden

Was there ever any doubt…

 

So this happened…

 

Yes it is all very exciting, but year-to-date, Gold is outperforming The Dow by 20ppt…

 

For the best year since 1974…

 

And since The Fed hiked rates…

 

And before we start, remember how excited everyone was in mid-September (before The Fed folded)…

h/t @NorthmanTrader

 

Let's look at markets post-ECB…

 

And post-Draghi's "no more" comments, It looks like someone was desperate to make sure Gold (the anti-centrally-planned world asset) was outperforming…

 

Trannies and Small Caps ripped over 2% today…

 

On the week, it's all green for the 4th week in a row, led by The Dow (rather unusually)

 

But futures show the real craziness…

 

S&P 500 broke above its 200DMA for the first time this year…

 

And just look at the vol in Financials and Energy this week…

 

HYG (deluged with institutional cash looking for a home amid a barren primary issuance market) soared today to its best 4 week gain since Oct 2011 – which marked the top of that bounce…

 

One quick question – if everything is awesome, then why is financials' credit risk so extreme high still?

 

Treasury yields were all higher today (and on the week) with 30Y outperforming (pushing the 2s30s spread to Dec08 lows – 2nd biggest cirve flattening this year)

 

5Y Yields broke back to the middle of the range (up 25bps in 2 weeks – the most in 4 months)

 

 

The USD Index was smacked lower for the 2nd week in a row, near 5 month lows…

 

This is the biggest 6-week drop in USD Index since May 2015…

 

USDJPY rallied back but not like stocks…

 

But EURUSD didn't give any back…

 

Gold and silver closed modestly lower on the week (slammed in the last hour of the day), copper dropped and oil popped…

 

Gold futures aretrading like a penny stock!!

 

Oil rallied for the 4th week in a row (for the first time since May 2015)…

 

The biggest 4-week run (30.8%) since March 2009…

 

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/1Rc9h5j Tyler Durden

The last decade or two has been a failure…

 

For everyone apart from the elites…

 

 

Which created this…

Source: Townhall.com

Which is leading to this…

 

So stay angry my friends…

Source: Townhall.com

As we noted earlier, it seems more than a few are “angry”…

Trump rally. Literally the longest line I've ever seen. http://pic.twitter.com/eQlRFk2x24

— Trymaine Lee (@trymainelee) March 11, 2016

via Zero Hedge http://ift.tt/1nDC98R Tyler Durden