Corporate profitability is one of the canaries in today's financial coal mine.
If companies are making more money each year they tend to hire more people,
pay more taxes and generally make life easier for everyone else. But when earnings
decline, everything from government budgeting to personal financial planning
gets much harder.
Viewed through this lens, 2015 was a "coming to grips" year in which the financial
markets vacillated over the meaning of falling corporate profits: Are they
an aberration or the new normal?
The next corporate earnings season -- commencing this week -- will apparently
settle the matter in favor of new normal:
Stand
by for terrible news from Wall Street ...
(Business Insider) - We are about to get confirmation that earnings growth
for America's biggest companies was negative in the first quarter, compared
to the same period a year ago.
When aluminum giant Alcoa releases its results on Monday, it will mark the
unofficial start of the heaviest reporting season for S&P 500 companies.
Earnings [are projected to be] negative for a third straight quarter.
Earnings expectations for S&P 500 companies usually tumble in the months
leading up to the heavy reporting weeks. This year, the drop was steeper
than usual. Earnings estimates have dropped 9% year-to-date, more than double
the 4% decline typically recorded three months before earnings season, according
to Bank of America Merrill Lynch chief equity and quant strategist Savita
Subramanian.
Obviously, energy-related companies will have the toughest comparisons since
the price of their main product is down by about half year-over-year. But the
bigger story is banking, where the environment has changed in ways that look
disturbingly persistent.
Bank
Stock Roundup: Dismal Q1 Earnings Picture Dominate; Citi & JPMorgan
in Focus
(Zacks) - Major banking stocks remained under pressure over the last five
trading days reflecting concerns over weak first-quarter 2016 results, due
to commence next week. With investment banking revenues projected to be disappointing
and a lower trading revenue outlook provided by some of the major banks,
the earnings picture looks rather subdued heading into the first quarter
results. Therefore, banks' top lines are likely to remain largely under pressure.
Furthermore, banks will continue to be adversely impacted by a low-rate
environment which is not expected to change any time soon. Per the minutes
released of the Federal Open Market Committee (FOMC) meeting in March, an
interest rate hike is unlikely in April as officials remain concerned about
economic output and inflation to underscore their estimates. "Many participants
expressed a view that the global economic and financial situation still posed
appreciable downside risks to the domestic economic outlook," the minutes
cite.
Also, despite undertaking efforts to modifying their businesses and "client
relationship" to comply with regulatory rules, questions regarding breakup
of big banks into smaller manageable entities continue relentlessly.
Why is the banking zeitgeist so negative when macro indicators like the US
unemployment rate are so positive? Because the monetary tools that used to
allow governments to shape the world to the banks' liking no longer seem to
work. Investors have noted this change. Here's Deutsche Bank's share price
over the past year:
Especially in the currency markets, the falcons seem to have stopped listening
to the falconers. From Doug Noland's most recent Credit
Bubble Bulletin:
A few headlines were telling: "Japanese Yen Trade Mystifies and Could Penalize" (CNBC); "Stunning
Rally in Japanese Yen Risks Too Little Faith in BoJ Policy Genius" (Australian
Financial Review); and "Japan Faces Trouble Controlling Yen Rise" (Reuters).
It is no coincidence that the yen is rising as global financial stocks are
sinking. Both are indicative of market fears that global policymakers are
losing control. The yen has rallied significantly in the face of the BOJ
imposing punitive negative interest rates. The euro has also risen to a six-month
high in spite of the ECB's surprise one-third increase in its QE program.
Keep in mind that both the BOJ and ECB boosted stimulus, as the Fed assumed
a more dovish posture, in a concert*ed response to heightened global market
instability. These measures did incite a robust short squeeze, an unwind
of bearish hedges and a general rally in global risk markets. Yet markets
are already again indicating waning confidence that policymakers actually
have things under control.
The Japanese have lost control of the yen, which has hurt prospects for
Japan's equities and overall economy. It has also turned various leveraged
strategies on their heads, portending pressure on the global leveraged speculating
community more generally. Meanwhile, the half life of Draghi's latest "shock
and awe" has proved alarmingly short. European periphery spreads (to German
bunds) widened meaningfully this week. Portuguese spreads surged 48 bps and
Greek spreads widened 41 bps. Italian spreads widened 13 bps and Spanish
spreads increased 12 bps.
This relentless drumbeat of bad news could be allowed to run its course uncontested,
though that would likely involve serious turmoil in equity and currency markets.
Or it could be opposed by huge, new-and-improved, stimulus programs designed
to pump up borrowing and spending in ways that QE and NIRP no longer can. Based
on history, the answer is obvious: Bad corporate earnings equal commensurately
huge stimulus, coming to a central bank near you.
