“It’s Probably Nothing”: Truck Orders Plunge 37% As Unsold Inventories Soar Most Since 2007

When we last looked at order of heavy, or Class 8, truck one quarter ago – that all-important, forward looking barometer of domestic trade – we said that even with 2015 in the history books, and as we start 2016 where the base effect was supposed to make the annual comps far more palatable, the latest, January data, as abysmal: “the drop continues to be one of Great Recession proportions, manifesting in yet another massive 48% collapse in truck orders in the first month of the year as demand appears to have gone in a state of deep hibernation.”

Fast forward one quarter when we now have another three months of Class 8 truck data, and unfortunately the orderbook has gone from bad to worse. As the WSJ reports, orders for new big rigs plunged and inventories of unsold trucks soared to their highest levels since just before the financial crisis, as uncertainty about future demand and a weak market for freight transportation weighed on truck manufacturers.

About 67,000 Class 8 trucks are sitting unsold on dealer lots, after sales in March dropped 37% from a year earlier to 16,000 vehicles, according to ACT Research. Class 8 trucks are the type most commonly used on long-haul routes. Inventories haven’t been this high since early 2007, said Kenny Vieth, president of ACT.

The number of March orders was the lowest since 2012.

The problem according to the WSJ? Simply not enough freight, or as some may call it, trade: “It boils down to, at present, there are too many trucks chasing too little freight,” Mr. Vieth said.

As the Journal adds, companies that placed large orders in late 2014, only for customers to move less freight than expected last year, are reluctant to buy more vehicles now, analysts said. Online freight marketplace DAT Solutions reported last month that spot market rates for dry vans, or the box trucks that are ubiquitous on U.S. highways, fell 18% between February 2015 and February 2016, an indication of weak demand.

“Fleets are being very cautious in the current uncertain economic environment,” wrote Don Ake, a vice president with FTR Transportation Intelligence, which reported similar order numbers for March. “Freight has slowed due to the manufacturing recession, so they have sufficient trucks to meet current demand.”

Some examples:

Aaron Tennant, owner of Simplex Leasing Inc., a trucking company in Jamestown, N.D., said that last June, anticipating market growth, he placed an order of 115 new Navistar International Corp. trucks to replace 75 trucks and expand his fleet to 245 vehicles. But that growth has not come. “Once this order is complete, I’m probably not going to consider buying any new trucks until at least October or November,” he said. “It’s definitely coming from caution. The market has softened in the last year.”

Meanwhile, the backlog is growing: Stifel analyst Michael Baudendistel wrote in a note Tuesday that the backlog of Class-8 trucks appears to be about six months, and said that truck and truck component manufacturers like PACCAR Inc., Navistar and Meritor Inc. are likely to see further pressure on their share prices and earnings.

But it’s not just trucking weakness. As BMO’s Brad Wishak notes, for the first 12 weeks of 2016, U.S. railroads reported cumulative volume of 2,905,113 carloads, down 13.7% from the same point last year, while Canadian railroads reported cumulative rail traffic volume of 1,540,562 carloads, containers and trailers, down 5.3 percent yoy, largely due to a drop in coal shipments but indicative of a decline across all product lines.

An obvious conclusion is that despite all the talk of a rebound in economic growth and domestic and global trade, the facts on the ground simply do not confirm this.

So, as we asked four months ago, should one be concerned by this precipitous drop? Absolutely not: as the Federal Reserve would certainly say “it’s probably nothing.”



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GE CEO Fighting Back on Bernie Sanders’ Anti-Corporate Rhetoric

More than two months after the first nominating contests of 2016, Hillary Clinton, who was once considered a virtual shoe-in for the Democratic nomination, is still facing an opponent, one whose won five of the last six contents and amassed more than 1,000 delegates.

Clinton spent 2015 lurching leftward, adopting what she believed to be the most attractive Sanders talking points for the Democratic base. It was not enough to put Sanders away. Now for a different tactic. In recent days, Clinton has called into question whether Sanders understands how Dodd-Frank works.

Sanders, meanwhile, suggested Clinton wasn’t qualified to be president because of donations from Wall Street, which he called “an entity whose greed, recklessness and illegal behavior helped destroy our economy.” Wall Street, of course, is a street in Manhattan where the New York Stock Exchange and a metonym for the entire financial and investment industry, not a singular “entity” the way, say, Washington as a metonym for the federal government could be.

And yesterday, General Electric CEO Jeffrey Immelt penned an op-ed for the Washington Post slamming Sanders for his attacks on corporate America, and specifically the claim that corporations were “destroying the moral fabric” of the country.

Immelt, of course, is an imperfect messenger for this kind of defense. GE has in recent years, under Immelt’s leadership, been a major recipient of corporate welfare and practitioner of crony capitalism. The toxic relationship between big government and big rent-seeking corporations has, thanks to low-information voters and misleading rhetoric, directed resentment not toward crony capitalism but free markets.

Sanders’ critique of corporations rarely focuses on the role government plays in undermining free markets and suppressing competition—after all, he wants an even bigger role for government—and instead on those market forces that drive prosperity.

“GE has been in business for 124 years, and we’ve never been a big hit with socialists,” Immelt writes in his Washington Post op-ed. “We create wealth and jobs, instead of just calling for them in speeches.

Immelt also responded to Sanders’ rhetoric about U.S. companies operating overseas. “Sanders says that he is upset about GE’s operations abroad—as though a company that has customers in more than 180 countries should have no presence in any of them,” Immelt writes, pointing out that such a presence supports exports of American goods, supports manufacturing in the U.S. (which is alive and well), as well as global supply chains that also rely on thousands of other U.S. companies.

Immelt also called the U.S. tax code outdated and pushed back against Sanders’ claim that GE pays no taxes, pointing out it pays billions to all levels of government and has called for “comprehensive tax reform” even if that meant higher taxes. “It’s easy to make hollow campaign promises and take cheap shots in speeches and during editorial board sessions, but U.S. companies have to deliver for their employees, customers and shareholders every day” Immelt writes, referring to a New York Daily News interview with Sanders where the senator showed little understanding of what kind of policies would be required to execute his rhetoric. “GE operates in the real world.”

Immelt’s op-ed follows a Vox piece criticizing Sanders’ anti-trade stance (which despite different flavored rhetoric is very similar to Republican frontrunner Donald Trump’s). Perhaps it signals the start of a spell breaking. Anti-trade rhetoric has been a big hit this election cycle for the major party candidates, exploiting Americans’ economic illiteracy to drum up fear about the U.S. losing its prosperity to foreign countries as if economic growth were a zero-sum game. It’s the product of decades of economically illiterate rhetoric from politicians. The worse the major party candidates keep looking overall, the better chance there may be of a Libertarian or other third-party candidate offering free trade the defense it deserves.

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Texas Principal Wants to Arrest Parents Who Let Kids Walk to School

SchoolThe principal of an elementary school in Magnolia, Texas, has forbidden parents from picking up their kids to walk them home. No matter how close the children live to the school, they are required to take the bus or be picked up by car, Fox 26 in Houston is reporting.

If not, the local authorities are ready to enforce the rule with arrests for trespassing. 

The ostensible reason for this step at Bear Branch Elementary is “safety,” but parents interviewed by local reporters think it’s really about the principal exerting ironclad control over the pick-up procedures. A video of the line of cars at pick-up time looked like a funeral cortege, solemnly inching forward.

Parents are so fed up, a few are yanking their kids out of the school:

“She’s threatening to arrest people,” says Wendy Jarman about principal, Holly Ray. 

Jarman pulled her children out of the school Monday and placed them in private school. She lives in the neighborhood behind the school. Her kids were walkers, and she escorted them, but they can’t do that anymore.

Ray won’t allow it. Ray has gotten Montgomery County Constables to be her enforcers.

“This has happened to many parents,” Jarman says. “They have been cited. They have been threatened, if they step one foot on school property, they will be arrested and charged with who knows what.” 

Frank Young has one of those warnings. He also lives close to the school and he also pulled his children out of it. Young says no effort to negotiate a better policy or even hundreds of signatures on a petition got the district to change the policy or bully tactics.

“Mrs. Ray’s policy is implying that a parent doesn’t have the ability or capability to decide what is safest for her children and that the school district does,” Young says. “I disagree.”

He thinks parents have the right to decide what their kids do outside of school? What a nut. The district backs the principal. 

Meantime, you may recall that the number of children walking to school has sunk to a national low of about 13 percent, according to Safe Routes to Schools.

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Video of the Day – Producer of Vaccine Documentary Banned From Tribeca Film Festival Speaks Out

Screen Shot 2016-04-07 at 11.10.24 AM

Before getting into this post, I want to reiterate something I wrote in my last article on the topic, published last year:

I want to start off this post by making it clear that I’m not remotely anti-vaccine. Personally, I chose to receive a Hepatitis A shot prior to my Asia travels last winter, and I also recently received a TDAP booster in order to reduce the risk of transferring pertussis to my newborn son, which can be quite dangerous if contracted by babies.

So while I’m not anti-vaccine, that doesn’t mean I trust the pharmaceutical industry or the U.S. government to keep me safe. This is where VAXXED, the vaccine documentary banned by the Tribeca Film Festival, comes into play. While all the controversy surrounding the film has centered on director Andrew Wakefield who was stripped of his medical license, the film’s producer is clear to point out that the film actually focuses on the testimony of CDC whistleblower Dr. William Thomson.

As such, I found the following interview of VAXXED producer, Del Bigtree quiet interesting:

continue reading

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Gold & Silver Surge Amid Crude & Copper Carnage

As the growth mirage fades (and short-squeeze ammo runs out), so crude and copper carnage is reappearing. Amid its biggest plunge since early Jan, Copper is now down 10 of the last 12 days and crude is plunging back towards it 50-day moving average. Amid this bloodbathery, precious metals are bid as Saxo Bank sees Gold "heading back to its highs and beyond."

Copper & Crude carnage continues as PMs are bid…

 

The biggest plunge in copper since September 2015…

 

Which as Saxo Bank's Ole Hanson notes, is likely driven by NIRP's spread across the world

  • New World Gold Council report cites negative rates as key XAU factor
  • Large portion of the world's sovereign debt now holds negative interest rates
  • US earnings season trouble may also boost gold's fortunes
A world below zero

A world below zero: many of the world's central banks have taken the plunge into negative rates, and one potential consequence may be higher precious metal prices. Photo: iStock
 

Last week saw the World Gold Council release its latest market update titled "Gold in a world of negative interest rates". The moves towards negative rates have probably been among the main catalysts behind the change seen in investor sentiment so far this year. 

Following its January surge, gold has now been trading sideways for almost two months. During this time, the market has been contemplating whether the strong surge in investor demand witnessed since the beginning of the year could lead to profit-taking. 
This is a particular concern given what happened last year, when gold followed a strong start with a sudden reversal in April. The selloff continued for the remainder of the year, marking one more false start among the many seen since the peak in 2011. 
Strong gold demand during Q1

 

One of the main reasons for the belief that this time will be different was highlighted in the market update from WGC. The implementation of negative interest rates by central banks in Europe and Japan has seen trillions worth of sovereign government debt move to negative yields. 
To this, the WGC writes "history shows that, in periods of low rates, gold returns are typically more than double their long-term average".
 
A large portion of sovereign debt now carries negative interest rates; about 30% of high-quality sovereign debt (more than $8 trillion) trades at negative yields, and this figure rises to 51% once inflation is factored in.
Negative interest rates

 

Source: Bloomberg, WGC
 
Among the investments increasingly popping up as alternatives to no-yield bonds are precious metals. The WGC highlights four reasons why negative interest rates will structurally increase demand for gold as a portfolio asset:
  • Reduces the opportunity cost of holding gold.
  • Limits the pool of assets some investors/managers would invest in.
  • Erodes confidence in fiat currencies due to the threat of currency wars and monetary intervention.
  • Further increases uncertainty and market volatility as central banks run out of effective policy options to combat inflation/deflation and/or spur growth. 
(The update, which includes a detailed look at the aforementioned points, can be accessed here.)
 
After finding support below $1,210/oz on numerous occasions, gold has made a renewed attempt to the upside today. This has peen particularly aided by the latest FOMC minutes yesterday, where caution about raising US interest rates was a prominent topic of discussion.
 
Even if we come to see higher US interest rates, it does not change the outlook for very low and negative global interest rates elsewhere.
 
The first-quarter US earnings season kicks off next week and despite seeing the S&P 500 trading near the highs, the market is bracing itself for the worst season since the 2009 crisis. 

Earnings recession

 
In our quarterly outlook released earlier this week, we highlighted the upside potential for gold following a period of consolidation. A weaker dollar (most recently against the JPY), the risk of rising stock market volatility, and the continued focus on negative interest rates may attract renewed interest for gold and silver earlier than expected.
 
Spot Gold
 
From a technical perspective, we see two important resistance levels. First of all there is $1,245/oz, which apart from being the recent top also represents a 50% retracement of the March selloff.
 
A break above the more important $1,255 area – the 61.8% retracement – would signal a return to the high and potentially beyond. The key area of support remains between $1,165/oz and $1,195/oz.


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Putin Denounces “Panama Papers” As U.S. Plot To Destabilize Russia

The last few days days have been rife with speculation about the motivation, if any, behind the release of the Panama Papers, with the most prominent example coming from Wikileaks two days ago on Twitter which accused the journalist consortium behind the leak, the ICIJ, of being a “Washington DC based Ford, Soros funded soft-power tax-dodge which has a WikiLeaks problem” and adding that “PanamaPapers Putin attack was produced by OCCRP which targets Russia & former USSR and was funded by USAID & Soros.”

 

As we further suggested, the fact that none other than Rothschild, which is trying to corner the US-based “tax haven” sector, stands to benefit from the collapse of the Panama offshoring industry (as international clients who demand to maintain their anonymous status are forced to move to the US), may lead to further questions about a potential conflict of interest behind said release.

But while these and many other questions will remain unanswered, including why the ICIJ is cherrypicking which names to release especially as pertains to US clients of the Panamanian law firm, earlier today Russian president Putin made his first public announcement on the topic of the Panama Papers.

Acording to AP, Putin denied having any links to offshore accounts and described the Panama Papers document leaks scandal as “part of a U.S.-led plot to weaken Russia.” Putin described the allegations as part of the U.S.-led disinformation campaign waged against Russia in order to weaken its government. “They are trying to destabilize us from within in order to make us more compliant,” he said.

“So here we’ve got some friend of the Russian president, he has done something, probably there is an aspect of corruption to it… But what aspect [exactly]? Well, there is none,” Putin said on Thursday, addressing a media forum in St. Petersburg. He also pointed out that he himself had not been mentioned in the leaked documents.

“You are all journalists here and you know what an informational product is… They’ve plowed through offshore [funds]. [Putin] is not there, there is nothing to talk about. But the task has been assigned! So what have they done? They’ve created an informational product by having found some acquaintances and friends,” the president told the media forum.

According to Putin, the Panama Papers episode is yet another attempt to destabilize Russia from within, and make it “more agreeable.”

“The easiest way to do so is to induce some mistrust to authorities within the society,” Putin said, adding that the creators of the leak aimed at the unity of the multiethnic Russian people.

The Washington-based International Consortium of Investigative Journalists said the documents it obtained indicated that Russian cellist Sergei Roldugin acted as a front man for a network of Putin loyalists, and, perhaps, the president himself.

Putin defended Rolgudin, describing him as a philanthropist who spent his own funds to buy rare musical instruments for Russian state collections. Speaking at a media forum in St. Petersburg, Putin said Western media pushed the claims of his involvement in offshore businesses even though his name didn’t feature in any of the documents leaked from a Panamanian law firm.

Putin said Roldugin, a longtime friend, did nothing wrong. He said he was proud of Roldugin, adding that the musician spent his personal money to advance cultural projects. Roldugin used the money he earned as a minority shareholder of a Russian company to buy rare musical instruments abroad and hand them over to the Russian state.

“I am proud of people like Sergey Pavlovich [Roldugin]… and am proud to have him among my friends,” Putin said, adding that claims that the cellist has billions are nonsense. “Almost all money that he has earnt he spent on buying music instruments abroad, which he then brought to Russia” and gave them to state institutions, Putin said.

“Without publicizing himself, he also has worked to organize concerts, promote Russian culture abroad and effectively paid his own money for that,” Putin added. “The more people like him we have, the better. And I’m proud to have friends like him.”

Putin contended that Washington has fanned allegations of Russian official corruption in order to weaken Moscow as the U.S. has become concerned about Russia’s growing economic and military might.

“The events in Syria have demonstrated Russia’s capability to solve problems far away from its borders,” he said, adding that Moscow has achieved its goal “to strengthen the Syrian statehood, its legitimate government bodies.”

He also touched on the topic of Ukraine, which yesterday suffered a major diplomatic loss after a Dutch referendum voted against an accession agreement meant to bring Ukraine and Europe closer together. Some of Russia’s counterparts on the international arena “got used to a monopoly” there “and don’t want to consider others,” he said, having also quoted some opinions on why relations with the West have worsened.

“Our position on the situation in the south-east of Ukraine, as well as smaller scale things, such as [Russia’s] refusal to extradite [Edward] Snowden have become irritants in our relations,” Putin said.

Meanwhile, Ukraine’s president, Petro Poroshenko, who was explicitly named in the ICIJ leaks, had to be defended by Rothschild (more on that in a subsequent post).


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Treasury Yields Tumble Near Feb ‘Flash-Crash’ Lows

It appears the search for a safe-haven has left Biotechs and FANGs as investors’ flight to quality sparks a bid under bonds & bullion. US Treasury yields are tumbling with 10Y and 30Y near the low close from mid-February’s “flash-crash” lows.

7Y yields are outperforming for now and 2Y underperforming

 

And with aggregate speculative positioning still notably short…

 

We suspect there is a lot more pain to come as The Fed folds to China’s pressure.


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So Called “Trusted Parties”, Bank Collapse, the ECB and Blockchains: Watch as I Call the Next Bear Stearns, Again!

The vendors and proprietors of blockchain solutions have almost all traveled the private blockchain route. We, at Veritaseum, have decided to go in the opposite direction. Call it a yearing for our macro and fundamental analysis roots, but the risk of trusting untrustworthy parties is just too great. The only way to eliminate the need for tirust is to open the network to many parties. Think the power of the Internet vs the utility of an intranet. Ths is the third in a series of articles that show, hopefully wihtout a shadow or a doubt, that Veritaseum is on the true and righteous path. The previous two, for your convenience, are:

  1. With Wall Street Bitten by the Blockchain Bug, How Do We Admit the Truth About the Technology’s Disruptive Potential?
  2. The Paucity of Plausible Arguments for Private Blockchains in Banking

In January of 2008, I warned (in exquisite detail) of the collapse of Bear Stearns. It was 2 months before Bear Stearns actually fell, while it was trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies. See for yourself: Is this the Breaking of the Bear? As part of the analysis, I did a counterparty risk profile, see below:

Counterparty Risk

In $ million OTC Derivative credit exposure ($ million)
The table summarizes the counterparty credit quality of the company’s exposure with respect to OTC derivatives  
Rating(2) Exposure Collateral (3) Exposure, Net of Collateral (4) Percentage of Exposure, Net of Collateral Total exposure a % of Total assets Net exposure as a % of Total assets Net exposure as a % of equity
AAA 3,369 56 3,333 42% 0.8% 0.8% 25.6%
AA 6,981 4,939 2,153 27% 1.8% 0.5% 16.6%
A 3,869 2,230 1,784 23% 1.0% 0.4% 13.7%
BBB 354 239 203 3% 0.1% 0.1% 1.6%
BB and lower 1,571 3,162 322 4% 0.4% 0.1% 2.5%
Non-rated 152 223 94 1% 0.0% 0.0% 0.7%
  16,296 10,849 7,889 100% 4.1% 2.0% 60.7%

(1) Excluded are covered transactions structured to ensure that the market values of collateral will at all

times equal or exceed the related exposures. The net exposure for these transactions will, under all circumstances, be zero.

(2) Internal counterparty credit ratings, as assigned by the Company’s Credit Department, converted to rating agency equivalents.

(3) Includes foreign exchange and forward-settling mortgage transactions) as of August 31, 2007

 

It didn’t take much of a concentration of bad assets to through Bear off kilter once the market started moving against it. At the end of the day it was a dearth of liquidity and Bear’s counterparties being afraid to touch it with a ten foot pole that did it in. What would such a scenario look like today, 8 years later? Well, look no farther than one of the biggest banks in Europe, and major counterparty to many banks considered a “trusted” party to members of unnamed blockchain consortia, etc. Let’s let the numbers do the talking, shall we? These are pages taken directly out of our 20 page report written for our Blockchain MacroTech consulting clients. If you are interested in becoming a consulting client, contact me here.

 Trusted Party Exposure Credit Analysis - one of hte largest banks in Europe

 

This “trusted party” has a investment grade to junk ratio of 2:1. That’s just about a junk bond fund – and this not only a bank that’s an ongoing concern, it’s one of the largest in its domiciled country. A full one quarter of its equity is junk. Don’t fret, but it gets worse…

 

Trusted Party Internal Default Rating Classes - one of hte largest banks in Europe

Using the bank’s internal rating measures for default exposure to counterparties, 130% of its equity is exposed to medium-high to already defaulted exposure. One more time if that ran past you. 746% of its equity is exposed to medium-high to already defaulted exposure. Bad exposures outweigh good exposures by 1.3:1. This bank is heavily supported by the tens of billions of euro of the ECBs LTRO adn TLTRO (bank welfare) lending facilities, and it’s still not nearly enough. It makes Bear Stearns look like a walk in the park, and it’s arguably too big for the ECB to save in the event of a run, particularly once the counterparty daisychain effect is taken into consideration.

Then there’s the fact that the bank of all of those hundred’s of millions of euro in notional financial contract exposure. But notional value is meaningless in this context, right? Yeah, right!

The Notional Value Argument Often Used By Entities Taking Large Losses

During the last large financial reset of 2008/9, there was a heated debate over the utility of using notional values in the determination of risk and exposure of banks and financial companies. It is the Veritaseum’s contention that notional values must come into play.

The notional value of a financial agreement or security is contract value of said agreement. For instance, if one were to purchase one S&P 500 future for $2,000 at market, the market price (fair value) of said contract is $2,000. The contract controls $500,000 worth of market exposure though since the contract multiplier is 250 (250*$2,000=$500,000).  Thus, the notional amount of the contract is $500,000. Many banks balk using notional amounts to convey the risk of the assets held on balance sheet because the notional amount of derivatives and similar securities/contracts are often much higher than the market or fair value. This can be seen in the example given, $2,000<$500,000.

The problems is that the notional value IS the market value if the underlying moves to the extreme. For instance, if the S&P moved upwards to the exteme (nominally, for the sake of discussion), then the holder of that future would would literally be in the money for the full face value of the contract. The market value of the contract converges with the notional value. Don’t think this can happen? Ask AIG if it could, or Man Financial. Thus, it is quite possible for notional to equal market value. If or when it does, and that value moves against you – it usually means very bad tidings. On that note…

OTC Financial Derivatives-Regulatory Trading Portfolios-contracts not included in netting agreements

OTC financial derivativees no netting 

FICC (fixed income, commodities and currencies) has proven to be a most volatile revenue category, and it looks to be getting worse. Despite the fact it is one of the (if not the) largest revenue categories in the global banking business, it may likely be one of the largest sources of losses as interest rate volatility spikes.

Now, think of a blockchain based trading system with this bank as a “trusted” trading partner. Assume you did not have access to this analysis. Would you really be able to trust this “trusted” partner. 

These are pages taken directly out of our 20 page report written for our Blockchain & MacroTech consulting clients. If you are interested in becoming a consulting client, contact me here.


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European Banks Crash Most In 4 Years As Default Risk Spikes To Pre-Draghi Levels

All the gains post-Draghi's bazooka-est efforts in March have gone as bank credit risk is spiking…Today was the biggest jump in EU bank credit risk in 2 months…

 

And the last 4 weeks have seen the biggest collapse in European banking stocks since April 2012.

 

Having blown his wad in March and been front-run by every Tom, Dick, and Harry trader, "whatever it takes" appears to be failing hard and with nothing left up his sleeves, Mario may not be so super anymore.


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Mainstream Media Explains Why You Should Buy Stocks

The GAAP PE of the market may be nearly 24, meaning on a non-adjusted basis stocks have, with perhaps the exception of the dot com bubble, never been higher and S&P 500 earnings are now expected to plunge plunge 9.6% – the biggest quarterly collapse since Q1 2009 – but for the mainstream media this is great news. Reuters “explains.”

Reuters “explains“:

When Wall Street’s quarterly earnings season kicks in to high gear next week, hundreds of companies will vie for the bragging rights that come from “beating the Street” – showing revenues and profits that are higher than analysts expected.

 

That hurdle may be unusually easy to clear this quarter, as analysts, who saw oil prices and stocks collapse at the start of the year, went really negative on the first quarter of 2016.

 

While the majority of companies typically beat forecasts, the bar for positive surprises may be even lower this time around, with analysts expecting profits of S&P 500 companies to be down 7.4 percent from a year ago, according to Thomson Reuters data.

 

With a handful of early reports coming in well above expectations and some evidence of stability in two company-hurting trends – falling oil prices and a rising dollar – some strategists are predicting enough positive news in an otherwise negative earnings season to boost stocks at least in the short term. In order words: First quarter earnings will be bad, but maybe not that bad.

“For right now there’s more of a chance of a positive surprise than a negative surprise in earnings, and to the extent that positive surprises are generated, that creates buying,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

In fact, the worse the earnings and associated expectations, the better the logic goes.

The one thing that is not mentioned is that as earnings expectations collapsed, stocks never followed. Instead, what they did was frontrun precisely the effect Reuters is trying to explain.

 

The other thing that is not mentioned is how the market managed to stage such a dramatic disconnect from earnings reality. The answer: central banks.

So there you have it. For those whose bullish stock “thesis” is that earnings will be a disaster, if perhaps less of a non-GAAP disaster than others expect, best of luck.


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