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Nearly three weeks ago, when looking at the incoming Q4 results, we were stunned by an unprecedented divergence: that of GAAP and non-GAAP earnings. We showed this difference as follows:

… and noted that while on a non-GAAP basis, the S&P’s trailing P/E is a relatively rich 16.5x (over 17x as of today), it was the GAAP P/E that was troubling, because at just 91.5 in S&P500 EPS, this implies that the GAAP P/E of the overall market is now a near-record 22x.

We next showed the delta between GAAP and non-GAAP as follows:

At a dollar difference between the two “earnings” series of $26.5, this was the widest such spread since the financial crisis.

Unsure what to make of a spread that was so gaping, and a market that is so broken not to notice, we concluded as follows:

What can possibly short-circuit this positive feedback loop which leads to ever lower earnings, and increasingly lower prices? Two years ago we would have said another major central bank intervention or trillions in new Chinese loans. However, with both of these loopholes largely played out – China’s debt/GDP of 350% means that the entire nation is on the brink of a Minsky Moment collapse at any, well, moment, while recent central bank intervention have only led to even greater market volatility – this time around we don’t know what the true answer is. In fact, it just may be that this time around the market will actually have to crash, like it did in 2008 when the GAAP to non-GAAP spread was just as vast, for the great Wall Street “phony earnings” game to start from scratch.

What we forgot was the desperate actions by the ECB which may have kicked the can by a few more months, in the process sending the S&P 500 to an even more overvalued state.

But while for now the market is stubbornly refusing to crash, someone else noticed our analysis: Goldman Sachs’ chief strategist David Kostin who presents the following oddly familiar (granted we use column charts; Goldman uses line charts) of GAAP (or rather “operating”) vs non-GAAP earnings and the spread between them…

… and says “only three times during the past 25 years has the difference between operating and adjusted EPS exceeded 10%. In 2015, the gap totaled a staggering 18% or $18 per share, with impairment charges by Energy firms responsible for half the difference. Last year’s difference was only surpassed by the record 31% gulf in 2009 at the depths of the global financial crisis.”

Then there is the question of the drop in earnings, because as we pointed out it is not so much about the 4th consecutive Y/Y drop in EPS, but the gargantuan 12.3% crash in 2015 GAAP EPS which even Factset pointed out over the weekend.

 

Sure enough, Goldman chimes in:

S&P 500 operating EPS fell by 11% to $100 in 2015 while adjusted EPS dipped by less than 1%. As a result, the gap between operating and adjusted EPS surged to $18 or 18%. For 2016, we forecast the variance will narrow to 8% as operating EPS rises by 10% to $110 while adjusted EPS increases by less than 1% to $119.

It is unclear where this massive surge in GAAP earnings will come from unless of course oil soars to $100 in the next few months, something even Goldman’s commodity team is saying won’t happen and instead oil will trade in the $25-$45 range for a long time.

This brings us to the next point: what it this huge spread between real and fabricated earnings the result of? The answer: energy companies.

Where did this massive difference between GAAP and non-GAAP come from? Mostly energy names.

Energy asset write-downs contributed $9 per share or 50% of the $18 difference between S&P 500 operating and adjusted EPS in 2015. Other sectors contributed to the gap including Health Care, Information Technology and Materials. The four sectors comprise 95% of the accounting difference between the two measures of earnings.

 

 

Looking ahead, we expect 2016 Energy impairment costs will total $5 per S&P 500 share, more than half of the $9 difference between operating and adjusted EPS. Energy firms take ceiling test write-downs based on trailing 12-month average oil price. The futures curve suggests Brent crude will average roughly $37/barrel in 2016, a full 29% below the average cost per barrel in 2015. Even if the spot price of oil rises modestly this year, the trailing average price is unlikely to increase until 2017.

Good luck, especially since as even Goldman notes, it was wrong once already: “Ceiling cost impairment charges by Energy companies were larger than we expected. Consequently, S&P 500 operating EPS was lower than we had forecast ($100 instead of $106). Looking ahead, we have lowered our 2016 operating EPS forecast to $110 from $117.” … and then, just like Warren Buffett, Goldman adds that “we prefer operating EPS as a gauge of profitability.”

Oops, because we expect this $110 to be lowered back to $100 once again in short notice, forcing Goldman to drastically slash its year end S&P target, although all this will happen in baby step terms and we are certainly happy that Goldman finally admits that its earnings-based growth assumption was wrong all along (the firm last many months ago that multiple expansion is no longer possible).

What Goldman does get right is the following:

“Operating and adjusted EPS both indicate high S&P 500 valuation“

Being Goldman, of course, the firm can’t admit that even as it cuts operating earnings forecasts it also has to cut its year end S&P target (at least not yet), and so is keeping its 2,100 S&P500 target:

Despite lowering our operating EPS projections, we continue to forecast the S&P 500 index will end 2016 at 2100, roughly 4% above the current level. Looking ahead, the trajectory of the S&P 500 index will track slightly below earnings growth, rising to 2200 (+5%) in 2017 and 2300 (+5%) in 2018.

Where will the growth come from? Not P/E expansion that’s for sure:

In December, the Fed raised the target funds rate for the first time in nearly a decade. Investor attention has now turned to the path of future increases and the implications for stock valuation. Our US economists expect 75 bp of rate increases in 2016 starting in June, while the futures market implies 25 bp of hikes. Rising interest rates and tighter financial conditions suggest further valuation expansion is unlikely. The forward P/E declined by an average of 10% during the 12 months following the start of prior tightening cycles.

 

We expect the forward P/E multiple will contract by 7% between the end of 2015 and 2016 based on our top-down operating EPS estimates. Our year-end 2016 index price target of 2100 reflects a forward P/E multiple of 17.1x our 2017 top-down operating  EPS forecast of $123 (assuming an 8.9% margin).

 

The current S&P 500 valuation expansion cycle that began in late-2011 has seen the forward P/E rise by nearly 60%, and has persisted more than three times longer than the typical 16-month expansion. Additional Fed interest rate hikes add to the case against continued valuation expansion. Both the aggregate S&P 500 index and the median stock trade at above-average multiples compared with history.

And the punchline: Goldman blames “consensus” for being overly optimistic.

Consensus bottom-up EPS estimates incorporate what we believe are unrealistic margin expansion assumptions. Our year-end 2016 S&P 500 target of 2100 equates to a forward P/E multiple of 15.6x an aggressive bottom-up adjusted EPS forecast of $135 that assumes a 10.1% margin. As discussed previously, every 100 bp shift in margins translates into roughly $10 in EPS. Depending on the P/E multiple assumed, the incremental $12 in EPS from higher forecast margins translates into roughly 200 points on the S&P 500 index.

Don’t worry though: while multiple expansion is over, as is earning growth, something else will keep stocks propped up: the so-called Plan Z: corporate buybacks of course.

Although we believe valuation expansion from current levels is unlikely, corporate repurchases should keep any valuation declines contained. We forecast S&P 500 firms will return more than $1 trillion to shareholders in 2016 with buybacks growing by 7% to $608 billion. Repurchase authorizations YTD have established a new record. Corporate buybacks continue to represent the primary source of demand for US equities.

Which explains why Mario Draghi effectively gave European firms a carte blance to buyback their stocks with the ECB’s backstop.

So having been well ahead of Goldman as usual, here is out own forecast: within the next 3-6 months, Kostin will cut his year end price target from 2,100 to 1,800 or lower as the mythical operating income growth fails to materialize, as mutiple expansion goes into reverse, and as the market increasingly punishes companies with record net leverage for engaging in even more buybacks once the current short squeeze euphoria ends.

via Zero Hedge http://ift.tt/1U28h4O Tyler Durden

Submitted by Jim Quinn via The Burning Platform blog,

“The inability to predict outliers implies the inability to predict the course of history”
? Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

“I know that history is going to be dominated by an improbable event, I just don’t know what that event will be.” ? Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

Nassim Taleb is a prickly arrogant SOB who doesn’t give a crap what intellectuals, academics, and other establishment elitists think about him. He has an Ivy league MBA, but despises everything about the curriculum of Ivy League MBA programs. He has a PhD, but scorns academics and their worship of theories and models. He enjoys poking holes in the storylines of the propaganda spewing corporate media. He glories in ridiculing the predictions of captured “experts” mouthing the talking points of whichever corporate interest is paying them blood money.

I read his brilliant Black Swan book back in 2008. It was a difficult read, but there were so many gems of wisdom throughout the book, it was a powerful tome predicting the financial collapse in real time. He wrote it in 2006. He understands the world doesn’t operate the way Ivy League models say it is supposed to operate. The world is propelled by black swans, not a normal distribution of the world. He was right in 2006 and he’s right now. The paragraph below has been making the rounds in the alternate media this past week. The establishment media would never publicize it, as their job is to protect the crumbling social order.

 

He sees what the pseudo intellectuals, highly paid pundit monkeys, think tank pay for play sages, and other mouthpieces for the establishment have failed to see. They didn’t see the 2008 black swan coming and they fail to grasp the black swan flying into their midst today. Taleb understands unexpected events of large magnitude and consequence and their dominant role in history. Trump is an extreme outlier who will play a large role in sweeping away the existing establishment. The “experts” foisted upon the masses by the dying legacy media are clueless as to what is really happening.

“The problem with experts is that they do not know what they do not know”
? Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

Trump’s blunt, angry, provocative, anti-establishment message has struck a chord among millions of disaffected Americans who have been ignored, abused, scorned, and shit on by the elitist establishment, banking cabal, corrupt politicians and government apparatchiks. The Deep State establishment has overstepped their bounds. Their ravenous pillaging of the national wealth through outsourcing millions of American jobs, largest mortgage control fraud in history, and outrageous gall in shifting their losing bets onto the backs of hard working Americans is about to bite them in the ass.

With real median household no higher than it was in 1988, the Wall Street criminal banks and their Madison Avenue maggot propaganda machine convinced the masses to add $2.8 trillion of consumer debt since 1988, a 500% increase. Meanwhile GDP has only gone up by 350%. The establishment has stolen the wages of the people while simultaneously enslaving them in chains of debt. TARP, ZIRP, QE, the $800 billion porkulus plan, Obamacare, non-stop social engineering, black lives matter, never ending wars, and now more jobs sacrificed at the altar of TPP, have pushed working class Americans beyond the point of no return. They are finally fighting back.

When you read Taleb’s assessment of our interconnected fragile world written in 2006, you see a mind far more advanced than the phony establishment acolytes appearing on CNN, MSNBC, and Fox on a daily basis:

“Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are now interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one falls, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur … I shiver at the thought.”? Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

Not only did Taleb grasp what was about to happen in the immediate future, he foresaw the global black swans which have blown up the Middle East and threaten to blow up the world:

“Dictatorships that do not appear volatile, like, say, Syria or Saudi Arabia, face a larger risk of chaos than, say, Italy, as the latter has been in a state of continual political turmoil since the second war.”? Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

Taleb’s current assessment that votes for Trump and Sanders are actually votes to destroy the establishment is entirely accurate, in my opinion. One year ago, no one on the face of the earth thought either one of these men had any chance of getting even 1% support for president of the United States. Anyone who says otherwise is a liar. Jeb and Hillary were awaiting coronation as the establishment selections who would keep the status quo and continue the warfare/welfare policies of the corporate fascist surveillance state. The establishment and their paid pundits on propaganda TV were fat, content, smug and happy.

Trump was considered an oddball billionaire reality TV star self promoter. An impartial assessment would say he was an intelligent man, brilliant marketer of himself and his brand, with a spotty record in the casino business, but generally a successful real estate mogul, with no strong political ties. There was absolutely no forewarning of a dynamic popular uprising anti-establishment presidential campaign on the horizon. Sanders has been a black sheep socialist in Congress for the last 25 years. He was the Ron Paul of the left, ignored, shunned and belittled. None of the talking heads or spokesmodels on the MSM faux news networks thought he could garner a vote, let alone challenge Queen Hillary.

I have to admit I didn’t take Trump’s candidacy seriously at first. I knew the mood of the country was darkening. I knew the economic recovery storyline was a fraud. I knew the average American was struggling to make ends meet. I knew the Wall Street criminal banks and their Federal Reserve puppets had saved themselves and their corporate cronies while throwing senior citizens and savers under the bus. I didn’t know they would rally around Trump’s bombastic anti-illegal immigration, anti-corporate trade deal, anti-establishment message in such large numbers. But they have. I was wrong.

You can only agree or disagree with Trump in a general sense, because there are no real specifics or track record to assess. Slogans and broad pronouncements don’t change how a country is governed. That is beneficial for his candidacy, as emotion and the mood of the country are driving his support. He has capitalized on the anger, disillusionment, and cynicism of the public to propel a campaign that can’t be stopped by the establishment. The linear thinkers in the establishment are dumbfounded by this staggering turn of events. Their protected, isolated, posh lives are being turned upside down. Trump is the large deviation black swan ruining their bell curve lives.

It seems the establishment is the turkey in Taleb’s revision of belief tale:

“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.” ? Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

The plutocracy of criminal Wall Street bankers, pliant central bankers, clueless Ivy League academics, internet media moguls, billionaire corporate chieftains, bought off politicians, and their parasitic toadies live in gated compounds, fly on their luxurious Gulfstream jets, are chauffeured to their exclusive dinner parties, have heavily armed private security services, send their kids to exclusive private schools, have private doctors at their beck and call, and never feel the need to mingle with the lowly plebs. They have secretive meetings on private islands off Georgia to decide what’s best for the easily manipulated masses – control of the banking system in 1913 and stopping Trump today.

As a libertarian, much of what Trump is selling does not appeal to my view of the world and how it should function best. But it doesn’t matter what I think at this point. The country is being catapulted by emotion and a wave of anti-establishment sentiment. The establishment is thrashing about in the death throes of a corrupt multi-decade run. They will resort to violence in order to maintain their power, control, and wealth. But this time it will likely fail. Enough people are choosing an assertive leader to follow to blow this thing sky high.

Specific policies are meaningless. This dynamic is driven by pure emotion. People are voting for the enemy of their enemy. No one knows where this will lead. It will likely lead to more violence, civil chaos, economic turmoil, assassination attempts, and eventually war. One thing is certain, the establishment will fall. Some people think Trump is part of a master plan by the establishment to gain even more power. Anything is possible, but keeping the masses sedated and focused on their iGadgets seems to be a better play for the establishment. Allowing the anger and contempt for the existing social order to be unleashed through Trump’s rhetoric is not coming from the standard establishment playbook.

It seems the people are finally beginning to heed Howard Beale’s plea in the 1974 movie Network:

All I know is that first, you’ve got to get mad.

You’ve gotta say, “I’m a human being, goddammit! My life has value!”

So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window, open it, and stick your head out and yell,

“I’m as mad as hell, and I’m not going to take this anymore!!”

We now can plainly see the left wing and neo-con wing of the establishment Party both have the same agenda. These faux believers in free speech are doing their utmost to shut down Trump’s right to free speech. They believe in speech they can control. They believe in pre-approved establishment speech designed to manipulate, mold, and form the opinions of the masses. They are using every dirty trick in their bags to derail Trump. I think they will fail, as the mood of the country grows angrier by the day. Taleb’s assessment about the establishment is accurate. His warning below should also provide some perspective on where we are going. The tens of millions of Americans who have been screwed by the establishment are gathering together behind Trump. Will he lead the country in the right direction? Going it alone against the establishment has failed. It looks like we are going to find out what happens when enough people bind together to destroy the establishment. It’s going to be a wild ride. Prepare yourself and your loved ones.

“Alas, one cannot assert authority by accepting one’s own fallibility. Simply, people need to be blinded by knowledge-we are made to follow leaders who can gather people together because the advantages of being in groups trump the disadvantages of being alone. It has been more profitable for us to bind together in the wrong direction than to be alone in the right one. Those who have followed the assertive idiot rather than the introspective wise person have passed us some of their genes. This is apparent from a social pathology: psychopaths rally followers.”? Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

via Zero Hedge http://ift.tt/1Xr3lnI Tyler Durden

What could go wrong?

 

Today was all about the 200-day moving average for the S&P 500…2019.40 was all that mattered…

 

VIX was slammed every time they lost the 200DMA – and seemed to give up at the close…

 

Oil roundtripped to EURUSD's Drgahi lows but stocks ignored it on super low volumes…

 

On the day, The Dow and Nasdaq clung to gains but the rest got hammered into the close – note the algo confusion around the European close (US on DST, EU not)

 

Energy and Financials lagged on the day…

 

This is what the end of a short-squeeze looks like (Peabody Energy crashed 36% at its lows – the biggest drop ever for the stock)…

 

Treasury yields fell on the day (apart from 2Y which was very modestly higher)…the day was divide by the EU close once again

 

Notably, as CS notes, Treasury options skew shifted back into positive territory for the first time this year (i.e no longer positioning for falling rates)

 

The USD Index ended the day higher but had a volatile day of building strength and sudden weakness…

 

The Brazialian Real dumped after news that Rousseff will seek to name Lula as a minister in her new cabinet…

 

Copper and Silver managed to end unchanged as oil and crude slipped…all slammed at the US equity open

 

Crude's biggest 1 day drop in a month…

 

Gold's biggest 2-day drop since July 2015…

 

What happened the last 2 times it was hit like this…

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/22gzK3t Tyler Durden

Remember Rachel Fox? For those who do not, here is a reminder courtesy of this blast from the February 2013 past interview of the then-16 year old Desperate Housewives “TV star” who became a “star trader” using her acting money, and after returning 30% in 2012 and outperforming 99% of hedge funds, was promptly interviewed by CNBC, unleashing the whole “17 year old hedge fund manager” meme:

Forget Ackman, Einhorn, Bass, And Hendry. There is only one name in the world of equity market performance in 2012 – Rachel Fox, of ‘Desperate Housewives’ fame.

 

With a 30%-plus performance, the day-trading debutante has turned from actress to activist as she day-trades her way through the day. The 16-year-old actress who made 338 trades last year, based mostly on technicals, “…fell in love with the idea and the concept of being able to just buy something, have it go up, or have it go down, depending on which way you bet it and have it make you money. I thought, oh, my, gosh, that’s amazing, and so easy, I have to do this.”

 

If ever there was a sign of the extreme bubble that central planning has re-created for us – it has to be this.

 

Her advice: “you have to really just trade on your own instincts and not just be like, oh, this person says this is great, let me just go for it.”

 

Our advice: next time readers are discussing stock tips with a random employee of Hustler Club, Scores or Spearmint Rhino – don’t just stare, listen! Said ‘random employee’ is almost certainly outpeforming the “smart money”, and the broader market, by a wide margin. Thank you Ben.

 

 

Three years later Rachel is back, all grown up at the ripe old age of 19, and still a star trader according to her latest interview this time not with CNBC but with ABC’s Good Morning America.

 

In it she “shares her financial secrets“, such as the following.

“When I was 16 I was like, I understand a lot about, you know, companies,” the “Desperate Housewives” actress told “Good Morning America” co-anchor Amy Robach. “And … how they IPO on the stock exchange. I had this understanding and know-how. I had the skill of managing money….”

Armed with this skillset she not only generated a 30% return in 2012, nearly double the return on the S&P’s paltry 16%, but put to shame virtually all hedge funds.

How did she do it?

“I have a couple different strategies,” she said. “… With other investments, I will definitely pay attention to what’s going on in pop culture a lot … you can often take that information and kind of, arbitrage it before Wall Street knows about it. So, being a young investor, actually, has huge advantages and nobody even knows about that, because pop culture and, you know, all the things that influences certain companies to do very well, is right at your fingertips.”

So for all those worried about fundamentals, technicals, and which central bank will buy junk bonds next, here is what you’ve been looking for: be young, ideally between the ages of 16 and 19; failing that, just keep an eye on the “pop culture” that fascinates young people and you are guaranteed to outperform the market.

“… If you’re curious about something, just let that drive you and just go with it,” Fox said. “Just let the enthusiasm take you ’cause that’s what I did and I was like … ‘There’s no females in this industry or this world, but I’m gonna do it anyway.'”

The last thing we would like to do is temper the young star trader’s enthusiasm, but we would like to advise young Ms. Fox that the most prominent hedge fund manager (in the U.S. and the world) just happens to be female, and her name is Janet Yellen.

Her full array of “trading secrets” are revealed in the interview below.

via Zero Hedge http://ift.tt/1V7oepe Tyler Durden