Morning Note: What Laxity Breeds

On the surface, earnings reporting season has been nothing short of impressive thus far. Under the surface…. well, it’s all about results relative to expectations leading in. And, as you might imagine, Q4 2020 expectations, relative to where they were a year earlier, had been cut, notably

So, yes, as is virtually always the case, Wall Street’s estimates were very accommodative coming into this reporting season. Thing is, actual results are a far cry from what was expected a year ago, while, go figure, the market’s up a bunch over that same time period. 

You of course could say that the market’s doing what it’s supposed to, which is discounting the future. And while of course 2021 is a work in progress, 2022 earnings, after herd immunity and amid a massive surge in activity resulting from pent-up demand, are due to explode higher. 

Well, sure, but compared to what was expected, say, exactly two years ago, if today’s projections come to pass, corporate earnings will miss 2 year-old expectations by 5%. And, as you’ve noticed, the market ain’t down 5% over the past two years.

I.e., while the fundamentals are certainly improving relative to last spring, stock prices, as they’ve accelerated, are leaving them further and further behind… In other words, it’s been virtually all “multiple (as in price-to-earnings multiple) expansion” (read stocks are expensive [to put it mildly!]).

Now, forgive me if I remain the party pooper, it’s certainly not my intent. Our firm exists to exploit the opportunities markets (all markets) offer up. It’s just that we have to do it thoughtfully, responsibly, and forever based on painstaking macro research.

Asian equities leaned green overnight, with 12 of the 16 markets we track closing higher.

Europe’s hanging in nicely this morning as well, with 14 of the 19 bourses we follow trading higher, as I type.

U.S. major averages, however, are struggling to start the day: Dow’s down 104 points (0.34%), SP500’s down 0.11%, SP500 Equal Weight’s down 0.19%, Nasdaq’s down 0.10% and the Russell 2000’s down 0.08%.

The VIX (SP500 implied volatility) is down 1.76%. VXN (Nasdaq 100 i.v.) is up 0.24%.

Oil futures are up 2.03%, gold’s down 0.20%, silver’s up 1.18%, copper futures are up 0.96% and the ag complex is down 0.48%.

The 10-year treasury is down (yield up) and the dollar is once again up 0.25%.

Note*: I can’t emphasize enough how problematic rising interest rates and a rising dollar will be for asset prices should the latest trend continue… I.e., the Fed will go to severe lengths to keep them both at bay, irregardless of what economic performance might otherwise demand. 

Led by energy, oil services companies, silver, base metals and Asia Pac equities, our core portfolio (*which is an expression of the above note), is essentially flat, up 0.06%, to start the session. Healthcare, industrials, tech and consumer staples are the main drags…

Leon Levy, in his absolute must-read (for all serious market actors) book The Mind of Wall Street, perfectly expresses my own observations over my 36 year career:

“Good times breed laxity, laxity breeds unreliable numbers, and ultimately, unreliable numbers bring about bad times. This simple rhythm of markets is as predictable as human avarice.

Regulatory and accounting laxness is easily ignored when stock prices are climbing, but as companies cut corners and hide expenses (to keep prices rising so that executives can exercise options and get their bonuses), they set up a day of reckoning.”

Have a nice day!


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