Monday, July 8, 2013

What Could Go Wrong II

Wall Street's Con(fidence) Game
Stock price targets are going up at the fastest rate in two years while earnings estimates are going in the other direction...

For some corrupt reason, analysts on average are estimating that the S&P will rise another 8.9% this year. At the same time, earnings estimates for the first quarter were lowered from 8.7% to the realized 1.8%. And for the second quarter just ended, earnings estimates are now flat - zero growth.

Meanwhile, parsing the above article, apparently the rationale for this disconnect comes in the form of presumed "multiple expansion" - which would raise the Price/earnings multiple to 16.4. 

Bulls tell us that a 16.4 price/earnings multiple is below the long-term average of 18.6; however, there is only one problem, which is that U.S. profit margins are currently at their highest level ever. 

Again, as discussed last quarter, growth in profits versus growth in revenue has now become a zero sum game. All of the collective corporate morons laying off employees to boost profits are now impacting revenue growth for every other company. One company's costs are another company's revenues. Only society's largest collection of phony corporate buffoons could still assume that following this strategy will lead to sustainable economic growth.

Borrowing to Buy Stock - What Could Go Wrong?
The reason why profits went up at all last quarter is because there were so many stock buybacks funded using cheap Central Bank dopium. According to ZH, in the past two years, 60% of earnings growth in the past two years was attributable to stock buybacks. Apparently every corporate treasury department has now decided that it's a leveraged hedge fund with a single stock holding - it's own. Now that interest rates are rising, that phony and inevitably risky mechanism for boosting profits using borrowed money just went out the window. One less confidence game in the bag of tricks.

As usual, the Idiocracy is oblivious to all of these shenanigans going on right in front of their face. As long as the Dow keeps rising and there is another season of American Idol, then no amount of chicanery can wake the masses from their narcoleptic food coma.

Corporate Profits as % of GDP