Blog | The Felder Report | Taking The Financial Road Less Traveled

Finally, it may be enough to simply note that the last two times the gap between GAAP and non-GAAP earnings was as wide as it is today was during the last two recessions. During an expansion in economic activity companies don’t need to resort to these sorts of tricks. During recessions, however, when earnings begin to crater the temptation to try to do what they’re doing today is probably just too great to resist.

Right now they’re clearly feeling that temptation once again and to a great degree. That, in itself, may be a good sign we entering a new recession, if not already in the midst of one. This would also potentially confirm some of the other data out there signaling weakness in the economy right now.

NOTE: The previous link and excerp are contesting this:

Europe, Asia follow Wall Street higher
03:54 a.m. ET • SA Editor Yoel Minkoff
Yesterday turned out to be Super Tuesday for the stock market too, as investors bought equities with gusto.
The Dow popped 349 points (+2.1%) for its second best day of the year, the S&P 500 surged 2.4%, while the Nasdaq logged its greatest day of 2016 with a whopping 2.9% gain.
Despite the additional certainty from the primaries, traders may have more on their mind than the elections: The U.S. economy is picking up (last month’s manufacturing, durable goods and auto sales all came in better than expected). It’s more unlikely the Fed will raise interest rates in March (Bill Dudley’s latest speech), and oil prices appear to have hit a bottom.
The stock rally is now spreading across the globe…
Asia: Japan +4.1%. Hong Kong +3.1%. China +4.3%. India +1.8%.
Europe: London +0.6%. Paris +0.8%. Frankfurt +1.1%.

Comment by MFITZ (A Hedge Fund executive):
It is the “Big Short” moment for markets.
Things are getting poorer than anyone expected in Dec 2015, and the stronger USD is like a noose around the neck of the world economy (vs. weaker USD + US QE, which is like heroin in the world economy). However the market rallies hard.

We have seen a return of NY FED’s Oct 2015 trade. A bad -1% open, is rescued, stabilized to 0%, and ramped throughout the day into the close by +1%.

Only central banks attempt such trades (the big hedge funds only act at the open, or less frequently, at the close, for safety).

The NY FED is even using its favorite conduit – the Goldman Sachs Corporate Buyback Desk. Expect to see the same announcements on CNBC that the market is being supported by corporate buybacks (the best cons are the ones that even get a good chunk of Wall St. buy into).

HOWEVER, at 2,100, the S&P is at a median 12x EV/EBITDA (although, given earnings guidance since Q1, this is closer to 2,050 now), the highest level in stock market history (outside actual crashes, when the EBITDA bit can crash, sending the multiple higher). As we saw in 2015, trying to push the S&P above this, in a deteriorating world economy, was a loosing trade. Nobody will make money on the LONG side above 2,000 – PERIOD.

Last few days have seen massive rallies in the weakest stocks (do not buy anything that is up +25% in the last 9 days, regardless of the “room-to-run” your broker sees – he is selling it to you on behalf of his desk). The amount of liquidity from Euro and Japan QEs (but makes the USD stronger when used) and tactical injections from the NY FED, mean that shorting is also a dangerous option.

This will be a terrible year for stock investing – LONG or SHORT.

Almost everybody will loose money in 2016.

However, as we discovered in January, and as the Chinese government (and latterly Japanese government) discovered, the more you try and ramp equity markets, the greater they come back to bite you.

This is because, as unlevered equity (i.e. mutual funds) sells out in volume, it gets replaced by leveraged traders (i.e. Bridgewater, Citidel, iBanks), on lower volume. When the stock market is nosebleed expensive (i.e. now), the unlevered equity has to watch the rally, but is not compelled to buy back in (unlike at lower valuations, when they do buy back). The “foundations” of the market therefore get more and more dependent on leveraged positions (vs. unleveraged positions), and become dangerously unstable. Hence the collapses in China (and now Japan).

Take a break, go on holiday, get a hobby.

At the end of 2016, you will wish you had (and you will have better memories, and more cash in the bank to show for it).


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