Tag: news

Make no mistake, there are any number of landmines that threaten to send global markets into a veritable tailspin. There’s the risk of further weakness (and volatility) in crude, there’s the risk that China suddenly decides on a one-off RMB deval, there’s the risk that someone makes a “mistake” in Syria and triggers a global conflict, etc.

You know the drill.

But when it comes to identifying what’s most likely to present a major problem (i.e. the risk factor that has the best chance of playing out and wreaking havoc) one would be inclined to say that a junk bond meltdown is a good candidate.

The influx of money into HY – attributable in part to the proliferation of more esoteric ETFs and investors’ never-ending quest for yield – has gone a long ways towards keeping primary markets open to distressed issuers. Like US O&G companies who, by virtually of their persistent cash flow shortfalls, are for all intents and purposes perpetually insolvent and rely solely on capital markets to fill their funding gaps.

Well now, the party is over and the energy defaults are beginning, which means capital markets for junk bonds have slammed shut. Need proof? Have a look:

On Thursday, we got still more evidence that the market’s appetite for junk is waning when Goldman ran into trouble trying to get the financing done for the Vista/Solera deal. 

Solera – which is being sold to PE Vista Equity Partners – didn’t have any trouble with a $1.9 billion leveraged loan offering last week (it was actually oversubscribed), but when Goldman tried to price $2 billion in bonds intended to help fund the LBO, things got dicey. Goldman was already figuring on pricing it at 10.75% -11% (which is obviously a rather punishing rate in the first place and was up from initial guidance of 10%) but by this morning, the bank had only managed to drum up about $1 billion in interest, causing pricing expectations to move above the expected range. 

“The difficulties are the latest sign that it is getting harder for heavily indebted companies to borrow,” WSJ noted this afternoon. “Junk-rated firms have issued just $11.6 billion in bonds so far this year, down from $48.5 billion during the same period last year and the lowest total since 2009 during the depths of the financial crisis, according to Dealogic.”

As The Journal goes on to note, this wasn’t the first sign that things are starting to fall apart. “In recent weeks, LeasePlan International NV shelved a €1.55 billion ($1.71 billion) bond sale after failing to get enough investor interest. Banks were forced to fund Endurance International Group Holdings Inc.’s acquisition of email-marketing firm Constant Contact Inc. after failing to find buyers for $1.1 billion of buyout debt.”

So, yeah. You can kiss the M&A boom goodbye, because it won’t be long before HY blows up completely and the contagion spreads to IG, creating a whole host of “fallen angels” who will then also lose market access, and so on, and so forth in a messy default cycle that will not only make this year far, far worse for mergers than last year’s $4.3 trillion bonanza, but will also spell doom for any junk-rated corporates that need to refinance to stay afloat. 

As for the Solera deal – better luck tomorrow. Maybe make it 12% and give investors the weekend to think it over.

via Zero Hedge http://ift.tt/1R5Ay3s Tyler Durden

Earlier this week, we were amused but not at all surprised to learn that Japanese citizens are buying safes like they’re going out of style.

The reason: negative rates and the incipient fear of a cash ban. “Look no further than Japan’s hardware stores for a worrying new sign that consumers are hoarding cash–the opposite of what the Bank of Japan had hoped when it recently introduced negative interest rates,” WSJ wrote. “Signs are emerging of higher demand for safes—a place where the interest rate on cash is always zero, no matter what the central bank does.”

Put simply, the public has suddenly become aware of what it means when central banks adopt negative rates. The NIRP discussion escaped polite circles of Keynesian PhD economists long ago, and now it’s migrated from financial news networks to Main Street.

Although banks have thus far been able to largely avoid passing on negative rates to savers, there’s only so long their resilience can last. At some point, NIM will simply flatline and if that happens just as a global recession and the attendant writedowns a downturn would entail occurs, then banks are going to need to offset some of the pain. That could mean taxing deposits.

As we noted on Monday, circulation of the 1,000 franc note soared 17% last year in Switzerland in the wake of the SNB’s plunge into the NIRP Twilight Zone.  As it turns out, demand for big bills is soaring in Japan as well.

“Demand for 10,000-yen bills is steadily rising in Japan, even as the nation’s population falls and the use of credit cards and other forms of electronic payment increases,” Bloomberg writes. “While more cash might sound like a good thing, some economists are concerned that it shows Japanese households are squirreling away money at home instead of investing it or putting it into bank accounts — where it can make its way back into the financial system and be put to productive use.”

One safe maker who spoke to Bloomberg said safe shipments have doubled over the last six months. While part of the demand for safes is likely attributable to the country’s new “My Number” initiative, “the negative-rate policy is likely to intensify the preference of Japanese households to keep cash at home,” Hideo Kumano, an economist at Dai-ichi Life Research Institute said. “Overall, the trend of more cash at home reflects concern about the outlook for economy among households. This isn’t a good thing.”

No, it’s not. And just wait until the Japanese (and European) public makes the connection between NIRP and the cash ban calls. That is, once average people grasp the concept of the effective lower bound and then figure out that a cashless society will allow policymakers to dictate economic outcomes by robbing the public of its economic autonomy, it will be time to break out the torches and the pitchforks. 

We suppose it’s time for Kuroda to propose banning the 10,000-yen note. You know, to deter the Yakuza…

via Zero Hedge http://ift.tt/21veMh7 Tyler Durden

Submitted by John Browne via Euro Pacific Capital,

On February 16th, The Washington Post printed the article, “It’s time to kill the $100 bill.” This came on the heels of a CNNMoney item, the day before, entitled “Death of the 500 euro bill getting closer.” The former cited a recent Harvard Kennedy School working paper, No. 52 by Senior Fellow Peter Sands, concluding that the abolition of high denomination notes would help deter “tax evasion, financial crime, terrorist finance and corruption.” In recent days, former Treasury Secretary Larry Summers, ECB President Mario Draghi, and even the editorial board of the New York Times, came out in support of the elimination of large currency notes. Apart from the question as to why these calls are being raised now with such frequency, the larger issue is whether these moves are actually needed or if they merely a subterfuge for more complex economic manipulations by central banks to extend control over private wealth.

In early 2015, it was reported that Spain had already limited private cash transactions to 2,500 euros. Italy and France set limits of 1,000 euros. In France, all cash withdrawals in excess of 10,000 euros in a single month must be reported to government agencies. In the U.S., such limits are $10,000 per withdrawal. China, India and Sweden are among those with plans under way to eradicate cash.

On April 20, 2015, the Mises Institute reported that Chase, a subsidiary of JPMorgan Chase and a bailout recipient of some $25 billion (ProPublica, 2/22/16), had announced restrictions on its customers’ ability to use cash in the payment of credit cards, mortgages, equity lines and auto loans. Before that, on April 1, 2015, Chase, in concert with JPMorgan, updated its safe deposit box lease agreement to provide, “You agree not to store any cash or coins [including gold and silver] other than those found to have a collectible value.”

The war on cash unquestionably has extended from government into the private banking sector. But the public is predominantly unaware of the ever-increasing encroachment into individual privacy and freedom.

On February 5, 2016, The New York Times reported, “the United States could face a new recession in 2016 due to a ‘perfect storm’ of economic conditions.” Ten days later, in an introductory statement, Draghi told a European Parliamentary Committee that, “In recent weeks, we have witnessed increasing concerns about the prospects for the global economy.”

When consumers worry about the economy, unemployment and their own finances, spending on non-essentials diminishes. Caution results also in paying down loans and hoarding cash.

When economic growth falters, central banks lower interest rates and inject funds into the economy. But if consumer confidence falls further, cash hoarding causes a fall in the velocity of money. This stimulates central banks to discourage the hoarding of cash by introducing negative interest rates to force deposits out of banks. On February 10th, during her congressional testimony, Fed Chair Janet Yellen admitted that there had been a discussion but never fully researched “the legal issues”. However, her Vice-Chair, Stanley Fischer, already had told the Council on Foreign Relations, nine days earlier, that the Fed had discussed negative rate policy all the way back in 2012.

Should negative rates fail to force funds out of banks, governments may look to limit, and even forbid, the use of cash in large transactions. This is tantamount to a war on cash as part of an effort to eliminate citizens’ control over their wealth.

Furthermore, a war on cash could extend even to seizure of cash deposits under certain circumstances. The confiscation of bank deposits may seem remote to Americans. However, the 2013 Cypriot banking crisis exposed the new central bank stance of ‘bail-ins’ whereby deposits could now be frozen and even confiscated to rescue a bank!

Most of the great economic growth and apparent prosperity of the past 45 years, since the U.S. broke its dollar’s last link to gold, has been financed by credit-unimaginable trillions of dollars of credit. At the heart of this massive credit system are the banks.

The current collapse of oil prices places pressure on the sovereign wealth funds of oil-rich nations to reduce deposits and to sell securities. Lower deposits reduce the banks’ ability to lend and generate profits. If, simultaneously, a shrinking economy leads to bankruptcies and non-performing loans, banks would appear not only less profitable, but increasingly risky. Currently, banks are experiencing many of these pressures, which threaten a credit shortage just when it is needed most to boost confidence. This helps to explain why the current downturn in markets is being led by the financial sector.

To help make sure that depositors’ money stays in banks despite the negative rates, governments have proposed measures to eradicate opportunities to pay in cash. These measures are camouflaged politically as ‘protective’ means against money laundering, especially by terrorists.

But perhaps the most insidious of government motivations to ban cash is to increase the capability of surveillance over all spending by citizens and corporations. Undoubtedly, this makes it harder for anyone to shield income from the taxman, but it also makes it more difficult to achieve any type of anonymity in the marketplace. Soon there may be no legal place to shield legitimate wealth or spending patterns from the eyes of politicians.

Negative interest rates combined with the eradication of cash appear as a desperate attempt to control global private wealth.

Jamie Dimon is one of the world’s most astute and powerful individual bankers. On February 11th, he invested some $26.6 million in the depressed stock of his bank, JPMorgan Chase. Reported as demonstrating confidence, it may be that Dimon sees the stock price recovering strongly when it is realized more widely just how much the banks might benefit from negative rates and the erosion of cash held privately outside the banks.

President Nixon’s decision to unilaterally abolish the last remnants of a gold standard in 1971 heralded a nuclear age for international trade in which nations looked to gain advantage through serial debasement of their currencies and make up the difference with massive debt creation, unfettered by any link to gold. Similar to the nuclear strategy of mutually assured destruction, it set international trade on a course of mutually assured economic destruction.

The size and scope of the political, economic and financial problems that now challenge the relative stability and tranquility of developed societies are unprecedented. Should the war on cash prove unsuccessful in its early stages, banks could be closed for long periods.

Investors should be aware of such possibilities and consider whether to hold cash and precious metals prudently outside the banking system. Better to be even months too early than a second too late should we be left facing a bank’s closed doors.

via Zero Hedge http://ift.tt/1WMz5mU Tyler Durden

As we reported earlier today, European officials have essentially put an expiration date on the EU as we know it. It’s 10 days from now.

That’s when a team from Brussels will convene a summit with Turkey to discuss a coordinated response to the refugee crisis that threatens to plunge the bloc into “anarchy” (to quote Jean Asselborn, Luxembourg’s foreign minister). As the weather starts to improve, Europe fears even more asylum seekers will attempt to make the journey, straining Schengen to the breaking point.

Compounding the crisis is the increasingly negative perception Europeans have of refugees. As we wrote recently, Europe was remarkably resilient in the wake of the Paris attacks as people seemed to view the tragedy more as a symbol of why migrants are fleeing the Mid-East than as an omen of what they’d be exporting to Western Europe.

The goodwill faded however, following a series of alleged sexual assaults early last month and before you knew it, reports were coming in from all over the bloc that seemed to suggest quite a few male refugees had a penchant for rape. Needless to say, most officials were quick to contend that one (or two, or 50) bad apples shouldn’t be allowed to spoil the whole bushel, but others, like far-right Dutch politician Geert Wilders (who called for Arab “testosterone bombs” to locked in asylum centers) weren’t so forgiving.

The death of a 22-year-old Swedish asylum center worker at the hands of a Somali migrant and the rape of a 10-year-old boy by an Iraqi refugee who blamed the act on a “sexual emergency,” haven’t helped. 

(22-year-old Alexandra Mezher was stabbed to death by a 15-year-old migrant at an asylum center)

European officials have proven completely inept when it comes to tackling the problem. Germany and Austria, for instance, attempted to create integration programs designed to teach asylum seekers about European societal norms. The classes touch on everything from how not to enter rooms with closed doors without knocking to where it is and isn’t acceptable to urinate. 

Some countries have also dreamed up some amusing cartoons that illustrate what’s acceptable behavior both in everyday life and at the swimming pool, where refugees have a particularly hard time understanding how to behave. 

Belgium also offers courses in proper behavior but apparently, they aren’t especially effective. We say that because as RT reports, “a 16-year-old Afghan refugee, who had recently taken a course on how to behave towards women, has been charged with raping a female employee at a refugee shelter in Belgium.”

The attack took place in Menan, near the French border where the child has been staying for five months. 

Two weeks before the incident took place, the boy apparently attended a class on how men should treat women in polite society. The class was taught by Red Cross Flanders. 

“When a minor comes to Belgium and when a minor comes to a center of the Red Cross Flanders, we teach them two things: first thing is sexual education… sometimes we are talking about children who are 14, 15, 16 years old. Without parents, they do not know anything,” a spokeswoman for Red Cross told RT.

“We also have to explain what the normal ways of treating women here in Flanders [are],” she added.

Now, we’re not sure what “the normal ways of treating women in Flanders” are, but we’re reasonably certain they don’t involve taking caterers into the basement and raping them which is apparently what this young man did. “He already had an eye on her for quite some time, when he followed her into the basement,” the Red Cross explained. ” The victim worked for a catering company that cooks for the center.

We’re reminded of what Markus Wallner, the head of Austria’s western Vorarlberg region said about the chances that integration courses will ultimately be successful: “Let’s not delude ourselves.”

Tom Van Grieken, leader of the Belgian anti-immigrant party Vlaams Belang, isn’t “deluded.” Here’s what he had to say about the incident: “People who need a course on how to treat women should not be there in the first place.”

via Zero Hedge http://ift.tt/1Qiieo5 Tyler Durden

Submitted by Derrick Broze via TheAntiMedia.org,

A federal court in the Eastern District of Pennsylvania has ruled that filming the police without a specific challenge or criticism is not constitutionally protected.

The cases of Fields v. City of Philadelphia, and Geraci v. City of Philadelphia involve two different incidents where individuals were arrested for filming the police. Richard Fields, a Temple University student, was arrested after stopping to take a picture of a large group of police outside a house party. Amanda Geraci, a legal observer with CopWatch Berkeley, attended a large protest against fracking in September 2012 and was arrested while filming the arrest of another protester.

Both Fields and Geraci are seeking damages from the Philadelphia Police Department for violating their Constitutional right to videotape public officials. Previous rulings have found the public has a right to record police as form of “expressive conduct,” such as a protest or criticism, which is protected by the First Amendment.

The appeals court was specifically tasked with finding out whether or not the public has a First Amendment right to photograph and film police without a clear expression of criticism or challenge to police conduct.

The court wrote:

“Fields’ and Geraci’s alleged ‘constitutionally protected conduct’ consists of observing and photographing, or making a record of, police activity in a public forum. Neither uttered any words to the effect he or she sought to take pictures to oppose police activity. Their particular behavior is only afforded First Amendment protection if we construe it as expressive conduct.”

The court ultimately stated,

“We find no basis to craft a new First Amendment right based solely on ‘observing and recording’ without expressive conduct.”

 

“Absent any authority from the Supreme Court or our Court of Appeals, we decline to create a new First Amendment right for citizens to photograph officers when they have no expressive purpose such as challenging police actions,” the decision concluded.

Eugene Volokh, a professor of law at UCLA, disagrees with the decision and says he believes it will eventually be overturned by the Third Circuit Court of Appeals upon appeal.

“Whether one is physically speaking (to challenge or criticize the police or to praise them or to say something else) is relevant to whether one is engaged in expression,” Volokh wrote in the Washington Post.

 

“But it’s not relevant to whether one is gathering information, and the First Amendment protects silent gathering of information (at least by recording in public) for possible future publication as much as it protects loud gathering of information.”

Whether or not the ruling is overturned, it should serve as a reminder to all free hearts and minds that the cost of liberty is eternal vigilance. We cannot become passive and allow the ruling class and despots in government to subvert our path towards liberation. Now more than ever we need communities to actively organize copwatching and politician-watching campaigns that encourage accountability and transparency.  We must also remain strong in our sense of morality and principles, and not allow what is “legal” or “constitutional” to limit us in our fight for freedom.

via Zero Hedge http://ift.tt/1Q5LZdT Tyler Durden

Two weeks ago, when the strong retail sales report saved the US market from plunging below the critical 1,812 level, we peeked behind the headline of the just reported January retail sales report, and we found that far from the adjusted 3.4% Y/Y increase in retail sales, the actual, unadjusted, number was a paltry 1.4% shown in the chart below…

 

… and matching the lowest January increase since the financial crisis.

 

As we also showed, the seasonal adjustment factor for January 2016 was a glaring outlier, and by far the biggest one this decade.

 

Which brings us to today’s Durable Goods report.

As we reported earlier in the day, the numbers on the surface, were strong, with one of the largest monthly jumps in years even if the annual change continued to underwhelm, while core capex shipment remained negative.

And then something caught our attention: according to a report by Mitsubishi UFJ’s John Hermann, one of the most important, if volatile, series in the overall monthly update, that of commercial aircraft orders made absolutely no sense. As he notes, in January Boeing reported a 70% drop in actual aircraft unit orders (the same in dollar terms), and yet according to the Department of Commerce, the matched series of nondefense aircraft orders soared by 54% in January.

How could this be? Simple: seasonal adjustments.

 

Which made us curious: was this “strong” Durable Goods report nothing than more seasonal adjustment slight of hand? The answer, in a word, yes.

The chart below shows the difference between the actual and adjusted series. We are almost surprised to learn that in January, the monthly adjustment hit a record high $14 billion.

 

But maybe on an annual basis the difference was not quite as gaping? To account for that we repeated the analysis we did with retail sales, only with durable goods excluding transports: after all we already knew that the aircraft number was a complete farce. What we found was that just like with the retail sales report two weeks ago, so all of the upside in the durable goods report was from seasonals.

As shown in the chart below, while adjusted core durable goods barely declined from a year ago – and keep in mind that seasonal adjustments only affects month to month variance, not year over year – dropping a fractional -0.6%, on an unadjusted basis, the drop was a material -2.5%, by far the biggest since 2009.

 

And just to show how acute the adjustment fabrication was January of 2016, here is the seasonal adjustment factor, which we calculated as the annual change in the seasonally adjusted number relative to the unadjusted one. It is rather obvious where the outlier is.

What all the above means is that contrary to the “smoothed over” numbers, in January capital spending was not only far worse than expected and will be revised lower in coming months, but will give the market – and the Fed – a false impression about the state of the economy.

Which would be a problem if the Fed was actually data dependent as it claims. However, since recent events have demonstrated that the Fed was, is and continue to be entirely Dow Jones-dependent, none of the above actually matters, especially since no economic data is relevant when algos engage in short squeeze igniring stop hunts, or when either the Fed or the Treasury decide to postpone a POMO or Treasury auction, and unleash a massive risk ramp higher.

 

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

Today's OMFG face-ripping, short-squeezing, broken-bond-market-buying ramp was crucial for many chart-watchers.

The S&P 500's close above 1950 (or more accurately, above recent highs and back above the all-important 50-day moving-average) provides hopeful confirmation that the uptrend off the Dimon Bottom will continue (as BofA's Stephen Suttmeier recently noted) following the same 'W' shape recovery seen in Q3/4 2015.

For many, hope is that we extend higher after today's all important break of the 50DMA…

 

However, we have seen this pattern on a bigger scale before… and it did not end well.

What happens next?

 

"Hope" is a strategy in today's new normal… especially if The NY Fed can break the bond market again tomorrow.

*  *  *

As we noted earlier, there are a few reasons to be question this bounce in stocks…

Capital Structure says "No" US FINL vs Credit…

Carry Trade says "No" – US Stocks vs Yuan…

 

Inflation Expectations says "No" – EU Stoxx vs Inflation…

 

Bonds say no "No" – US Stocks vs TSY Curve…

via Zero Hedge http://ift.tt/1SYvh3A Tyler Durden

Submitted by Lance Roberts via RealInvestmentAdvice.com,

Earnings Worse Than You Think

Just like the hit series “House Of Cards,” Wall Street earnings season has become rife with manipulation, deceit and obfuscation that could rival the dark corners of Washington, D.C.

What is most fascinating is that so many individuals invest hard earned capital based on these manipulated numbers. The failure to understand the “quality” of earnings, rather than the “quantity,” has always led to disappointing outcomes at some point in the future. 

According to analysts at Bank of America Merrill Lynch, the percentage of companies reporting adjusted earnings has increased sharply over the past 18 months or so. Today, almost 90% of companies now report earnings on an adjusted basis.

Back in the 80’s and early 90’s companies used to report GAAP earnings in their quarterly releases. If an investor dug through the report they would find “adjusted” and “proforma” earnings buried in the back. Today, it is GAAP earnings which are buried in the back hoping investors will miss the ugly truth.

These “adjusted or Pro-forma earnings” exclude items that a company deems “special, one-time or extraordinary.” The problem is that these “special, one-time” items appear “every” quarter leaving investors with a muddier picture of what companies are really making.

As BofAML states:

“We are increasingly concerned with the number of companies (non-commodity) reporting earnings on an adjusted basis versus those that are stressing GAAP accounting, and find the divergence a consequence of less earnings power.

 

Consider that when US GDP growth was averaging 3% (the 5 quarters September 2013 through September 2014) on average 80% of US HY companies reported earnings on an adjusted basis. Since September 2014, however, with US GDP averaging just 1.9%, over 87% of companies have reported on an adjusted basis. Perhaps even more telling, between the end of 2010 and 2013, the percentage of companies reporting adjusted EBITDA was relatively constant and since 2013, the number has been on a steady rise.

 

We are increasingly concerned with this trend, as on an unadjusted basis non-commodity earnings growth has been negative 2 of the last 4 quarters, representing the worst 4 quarter average earnings growth in a non-recessionary period since late 2000.”

This accounting manipulation to win the “beat the earnings” game each quarter is important to corporate executives whose major source of wealth is stock-based compensation. As confirmed in a WSJ article:

“If you believe a recent academic study, one out of five [20%] U.S. finance chiefs have been scrambling to fiddle with their companies’ earnings.

 

Not Enron-style, fraudulent fiddles, mind you. More like clever—and legal—exploitations of accounting standards that ‘manage earnings to misrepresent [the company’s] economic performance,’ according to the study’s authors, Ilia Dichev and Shiva Rajgopal of Emory University and John Graham of Duke University. Lightly searing the books rather than cooking them, if you like.”

This should not come as a major surprise as it is a rather “open secret.” Companies manipulate bottom line earnings by utilizing “cookie-jar” reserves, heavy use of accruals, and other accounting instruments to flatter earnings.

“The tricks are well-known: A difficult quarter can be made easier by releasing reserves set aside for a rainy day or recognizing revenues before sales are made, while a good quarter is often the time to hide a big ‘restructuring charge’ that would otherwise stand out like a sore thumb.

 

What is more surprising though is CFOs’ belief that these practices leave a significant mark on companies’ reported profits and losses. When asked about the magnitude of the earnings misrepresentation, the study’s respondents said it was around 10% of earnings per share.“

Why is this important? Because, while manipulating earnings may work in the short-term, eventually, cost cutting, wage suppression, earnings manipulations, share-buybacks, etc. reach their effective limit. When that limit is reached, companies can no longer hide the weakness in their actual operating revenues. That point has likely been reached.

From the WSJ:

“There’s a big difference between companies’ advertised performance in 2015 and how they actually did.

 

How big? With most calendar-year results now in, FactSet estimates companies in the S&P 500 earned 0.4% more per share in 2015 than the year before. That marks the weakest growth since 2009. But this is based on so-called pro forma figures, results provided by companies that exclude certain items such as restructuring charges or stock-based compensation.

 

Look to results reported under generally accepted accounting principles (GAAP) and S&P earnings per share fell by 12.7%, according to S&P Dow Jones Indices. That is the sharpest decline since the financial crisis year of 2008. Plus, the reported earnings were 25% lower than the pro forma figures—the widest difference since 2008 when companies took a record amount of charges.

 

?The implication: Even after a brutal start to 2016, stocks may still be more expensive than they seem. Even worse, investors may be paying for earnings and growth that aren’t anywhere near what they think. The result could be that share prices have even further to fall before they entice true value investors.

 

The difference shows up starkly when looking at price/earnings ratios. On a pro forma basis, the S&P trades at less than 17 times 2015 earnings. But that shoots up to over 21 times under GAAP.“

History is pretty clear. As long as earnings are deteriorating, you don’t want to be invested in stocks.

Fantasy Vs. Reality

What is most interesting, is that despite the ongoing earnings recession, Wall Street firms continue to predict an onward and upward push of profitability into the foreseeable future. As shown in the estimates below from Goldman Sachs, there is NO consideration for the impact of economic recession over the next several years.

Of course, this was the same prediction made in 1999 and in 2006 until the eventual and inevitable “reversion to the mean” occurred.

Eric Parnell recently penned an excellent piece in this regard entitled “Fantasy vs. Reality:”

“The perpetual optimism of the corporate earnings forecast is remarkable. And while its well understood that things almost never turn out as good as we might anticipate, it is notable how widely divergent these earnings forecasts are from the actual outcomes that ultimately come to pass. Beware the analysis pinning its conclusions on the forward price-to-earnings ratio on the S&P 500 Index or any of its constituents for that matter, for it may lead to conclusions that are ultimately built on sand.

 

Clearly, relying on corporate earnings forecasts for the basis of investment decision making should be done at an investors own risk. Forecasts start out as wildly optimistic, with greater hopes the longer the time horizon. Which leads to a final point worth mentioning. Standard & Poor’s recently released a first look at the earnings forecasts for 2017. And if past experience is any guide, it may be indicating trouble on the horizon for the coming year. For instead of the robust +20% earnings forecasts throughout 2017, we instead see a notable fade as the year progresses. Perhaps these forecasts will improve with the passage of time.

 

But if forecasters are this unenthusiastic about a point that is so far away in the future, what will the reality look like once we finally arrive?”

Unfortunately, considering that historically analysts future forecasts are 33% higher on average than reality turns out to be, the case for a deeper “bear market” is gaining traction.

EBITDA Is BullS***

I have written in the past about the fallacy of using EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) due to the ability to fudge/manipulate the number. To wit:

 

“As shown in the table, it is not surprising to see that 93% of the respondents pointed to “influence on stock price” and “outside pressure” as the reason for manipulating earnings figures. For fundamental investors this manipulation of earnings skews valuation analysis particularly with respect to P/E’s, EV/EBITDA, PEG, etc.”

Ramy Elitzur, via The Account Art Of War, recently expounded on the problems of using EBITDA.

“Being a CPA and having an MBA, in my arrogance I thought that I am well beyond such materials. I stood corrected, whatever I thought I knew about accounting was turned on its head. One of the things that I thought that I knew well was the importance of income-based metrics such as EBITDA and that cash flow information is not as important. It turned out that common garden variety metrics, such as EBITDA, could be hazardous to your health.”

The article is worth reading and chocked full of good information, however, here are the four-crucial points:

1. EBITDA is not a good surrogate for cash flow analysis because it assumes that all revenues are collected immediately and all expenses are paid immediately, leading, as I illustrated above, to a false sense of liquidity.
2. Superficial common garden-variety accounting ratios will fail to detect signs of liquidity problems.
3. Direct cash flow statements provide a much deeper insight than the indirect cash flow statements as to what happened in operating cash flows. Note that the vast majority (well over 90%) of public companies use the indirect format.
4. EBITDA just like net income is very sensitive to accounting manipulations.

The last point is the most critical. As discussed above, the tricks to manipulate earnings are well-known which inflates the results to a significant degree making an investment appear “cheaper” than it actually is.

As Charlie Munger once said:

“I think that every time you see the word EBITDA, you should substitute the word ‘bullshit’ earnings.”

Just some things to think about.

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