Saturday, 28 May 2016

Weekend Update 28/05/2016 – Monaco v Indy.

Brexit Countdown Clock.

Brexit Quote of the Day.
Faced with the choice between changing one's mind on the EUSSR and proving that there is no need to do so, Dodgy Dave Cameron gets busy on the proof.

With apologies to John Kenneth Galbraith

This holiday weekend in the UK and USA, we focus on the weakening health of the US economy. While Americans watch the 100th running of the Indy 500 this weekend, the rest of the world watches the 73rd Monaco Grand Prix, waiting to see if the two over rated Mercedes drivers will again crash into each other, we see a slow motion train wreck happening across the Atlantic. The Fedster’s free cash in the Wall Street casino seems to have lost its effectiveness. The reality of the sickening mainstream economy has set up the financialised casino for another ”black” Xday, as reality intrudes.  

Let’s see now, Monaco or Indianapolis? Which would you choose?

Earnings fall at fastest rate since the Great Recession

Published: May 26, 2016 4:33 p.m. ET

S&P 500 first-quarter earnings declined for the fourth straight quarter, and more sharply than in any quarter since 2009

First-quarter earnings season is close to over, and the numbers it’s produced are as gloomy as they have been since the Great Recession.

Overall profit for S&P 500 companies was the weakest in 6 1/2 years. The financial sector showed a double-digit percentage decline, while even stodgy utilities saw earnings fall into the red as unusual weather weighed.

After selling assets, cutting capital expenditures and buying back their own shares at a record pace in recent years, companies are now clearly struggling to produce any kind of growth.

“The global economic slowdown over the past couple of years certainly has weighed on U.S. company revenues, which have weakened further due to the strong dollar since late 2014,” said Ed Yardeni, president and chief investment strategist at Yardeni Research, in a note. “In turn, the weakness in revenues and earnings has undoubtedly weighed on U.S. companies’ spending in the U.S. and overseas.”

A full 98.4% of S&P 500 companies have now reported through early Thursday, and profit measured by earnings per share is down 7% from a year ago, according to FactSet. On the heels of a 3.2% decline in the fourth quarter, that marks the fourth straight quarter of year-over-year earnings declines, and it was the biggest drop since the third quarter of 2009.

Against a background of low oil prices, energy was the worst performer, with a staggering 108% decline for the quarter, according to FactSet. Many energy companies posted heavy losses for the quarter, several defaulted on their debt, and some were forced into bankruptcy. The materials subsector was second weakest with a 14.5 % decline, followed by the financial sector, which was down 12.2%.

Banking profit was hurt by weak trading, as well as souring loans to the energy sector. And while oil traded back above $50 a barrel earlier Thursday for the first time this year, easing some concerns about its prolonged slump, banks are not out of the woods.

“Oilfield services loan losses likely lag E&P loan losses by as much as 12 months,” SunTrust Robinson Humphrey analysts wrote in an early note. “Therefore, we expect more downgrades and loan losses for these credits in 2016. These borrowers likely face a slower recovery as well.”

Here’s how investors are duped each earnings season

Published: May 26, 2016 3:10 p.m. ET

Made-up numbers are creating confusion and misery

A year ago, we explained the many ways companies make reading their quarterly earnings reports a miserable task.

We weren’t just whining. We wanted to remind companies that our readers regularly tell us they struggle to understand earnings announcements, and our job is to decode them for investors. Making that difficult isn’t helping anyone.

We noted that some of their tactics — inventing or manipulating numbers, using meaningless jargon, distributing lame executive quotes, and more — can be outright damaging, eroding investor trust and creating skepticism.

We hoped they’d change their ways.

We’re sorry to say that today, as another earnings season draws to a close, things are even worse.

“Companies are definitely less transparent than they used to be,” said Leigh Drogen, founder and chief executive of Estimize, which crowdsources earnings estimates. They are “using accounting schemes that are more specific to … how they want investors to perceive their results.”

Earnings are a crucial quarterly update for investors, as they provide the “best unbiased” view of what’s going on with companies, sectors and the economy, said Karyn Cavanaugh, senior market strategist at Voya Investment Management. “Earnings discount all the noise,” she said.

But today, according to FactSet, more than 90% of S&P 500 companies use their own metrics in an attempt to make their numbers look better. Some conceal revenue and other key numbers in hard-to-access tables. And a recent NYSE rule change has led some companies to report very early in the morning and pushed others to join the posse reporting after the closing bell, creating bottlenecks.

While all this has meant more stress for reporters and analysts, it’s also made things harder for everyday investors trying to do due diligence on the companies they own. Experts say more companies seem to be breaking the most fundamental pact they have with their co-owners: to keep them informed of the true state of their business.

“It’s a holographic presentation bubble distorting underlying operational reality,” said analyst Nicholas Heymann at William Blair. “Companies are working all the angles.”

The growing use of non-GAAP metrics — those that don’t comply with U.S. Generally Accepted Accounting Principles — was one major, and growing, headache we saw this earnings season.

Don’t miss: New York Times Co. uses the same accounting techniques the paper critiques

Companies are obliged to present their earnings using GAAP, but are allowed to use non-GAAP measures to supplement the information. Executives typically claim that non-GAAP numbers are a truer picture of their underlying business because they strip out one-time items such as litigation or merger-related charges or the write-down of assets that have lost value.

Under SEC rules, they are obliged to give equal prominence to GAAP and non-GAAP numbers, and must fully explain how they differ.

But companies often use adjustments described in terms that make them sound very similar to GAAP measures, making it difficult for investors to determine a company’s true financial performance; they don’t calculate non-GAAP measures uniformly, creating further confusion; and because non-GAAP numbers are not subject to audit, they are not checked for comparability, consistency, compliance or accountability.

“There isn’t much scrutiny that’s given to those numbers,” said BTIG analyst Brandon Ross. “There’s no government standard.”

The following table illustrates the problem:

Another Shoe Falls—–U. S. Service Sector Now At Stall Speed

by Jeffrey P. Snider • May 26, 2016

Markit’s Services PMI fell to just 51.2 in May, dropping a rather large 1.6 points from 52.8 in April. That meant the combined US Composite PMI, which puts together both manufacturing and services, was barely above 50, registering just 50.8. As with all PMI’s the distinction around 50 is unimportant, what matters is the direction and for more than a single month. On that count, services reflect what we have seen in manufacturing: that the “rebound” in March and April was nothing more than a small relative improvement after the liquidation-driven start to the year. The economy didn’t get better, it for a few months just failed to get worse.

In terms of the Services survey, Markit reports several distressing indications including respondents’ views for the immediate future:

May data highlighted a renewed fall in business optimism across the service economy. Reflecting this, the balance of service sector firms forecasting a rise in business activity over the year-ahead eased to its lowest since the survey began in October 2009. Anecdotal evidence suggested that uncertainty related to the presidential election and concerns about the general economic outlook had continued to weigh on business confidence. [emphasis added]

While I don’t want to overemphasize individual parts of individual sentiment surveys, it is quite a contrasting summation with the apparent self-delivered economic approval of the FOMC to execute the next policy communication (rate hike in name only). And this is not manufacturing, it is the services component that is supposed to steer the economy far away from the “manufacturing recession.” That was always a dubious proposition, particularly when so much of the supposed “services economy” itself relates to the transportation, management, and then sale of goods.

On that count, Markit’s Chief Economist Chris Williamson noted that May’s update reflected very poorly on measurement expectations for Q2:

Service sector growth has slowed in May to one of the weakest rates seen since 2009, and manufacturing is already in its steepest downturn since the recession.

Having correctly forewarned of the near-stalling of the economy in the first quarter, the surveys are now pointing to just 0.7% annualised GDP growth in the second quarter, notwithstanding any sudden change in June.

This is all a dramatic change condensed tellingly into a rather short economic window. The manufacturing sector has been shrinking for almost two years, but in the service sector indications (such as these PMI’s) had only pointed to a slowing from 2014’s supposedly upbeat pace. Even just six months ago, in the flash Markit US Services PMI for November, the mood was entirely different:

Looking ahead, service sector companies were upbeat overall about their prospects for growth over the next 12 months. However, the degree of positive sentiment remained subdued in comparison to the post-crisis average. Some panel members noted that signs of weaker global economic conditions were a factor leading to caution about the outlook for business activity at their units.

Williamson added:
The US economy is showing further robust economic growth in the fourth quarter, with the pace of expansion picking up in November.

Again, it’s another indication that “something” changed toward the end of last year. In November 2015, service businesses were suggesting only “signs of weaker global economic conditions” but now in May 2016 that has been transformed into “concerns about the general economic outlook” such that forward economic optimism is like 2009 and nothing at all like what is in Janet Yellen’s world. We don’t have to wonder why that would be, as even the FOMC has provided all the necessary indications about “global turmoil” as shorthand for the “dollar.”

We end with a new health warning on cell phones. Dinosaur Graeme rarely uses his smart phone, buy the youngest generation know of nothing else and are the most exposed to a lifetime of radiation exposure.

Link between cell phones and cancer is real, according to major government study

Published: May 27, 2016 9:40 a.m. ET
A major U.S. government study on rats has found a link between cellphones and cancer, an explosive finding in the long-running debate about whether mobile phones cause health effects.

The multiyear, peer-reviewed study, by the National Toxicology Program, found “low incidences” of two types of tumors in male rats that were exposed to the type of radio frequencies that are commonly emitted by cellphones. The tumors were gliomas, which are in the glial cells of the brain, and schwannomas of the heart.

“Given the widespread global usage of mobile communications among users of all ages, even a very small increase in the incidence of disease resulting from exposure to [radio-frequency radiation] could have broad implications for public health,” according to a report of partial findings from the study, which was released late Thursday.

A spokesperson for the National Institutes of Health, which helped oversee the study, wasn’t immediately available for comment. Earlier in the week, the NIH said, “It is important to note that previous human, observational data collected in earlier, large-scale population-based studies have found limited evidence of an increased risk for developing cancer from cellphone use.”

While not all biological effects observed in animals necessarily apply to humans, the National Toxicology Program’s $25 million study is one of the biggest and most comprehensive experiment into health effects from cellphones.

An expanded version of this report appears at

Indy 500

33 cars, 500 miles.

Monaco Grand Prix.

22 cars, 161 miles.

Brexit Thought of the Week.

Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, tell any lie, to assure the survival and the success of the EUSSR.

Dodgy Dave Cameron, with apologies to J. F. Kennedy.

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