The Spook In The Casino - Recession Just Ahead

by: David Stockman

The wise guys keep buying the dips owing to the simple proposition that there is never a lasting bear market without a recession. After today’s blow-out, we are likely to get another call to scoop up the “bargains” because the correction has run its course and the US economy is still chugging along notwithstanding the contretemps in China and other places of purportedly limited moment.

Indeed, on the basis of Wall Street’s muscle memory alone there is surely another dead cat bounce on its way any day. But here’s the memo. BTFDs is not working any more and, more crucially, there is a recession coming and soon. And then the bear will maul, not simply paw as today.

The fact is, BTFD hasn’t worked on a net basis, hasn’t for about 730 days now. The S&P 500 closed today where it first crossed in February 2014.
^SPX Chart

^SPX data by YCharts

In light of this extended dwell time in no man’s land, it is not surprising that the market is getting spooked. After all, the real driver of the post-March 2009 rebound of the stock indices was the Fed’s massive intrusion in money and capital markets, not a sustainable recovery of main street business activity or real household incomes.

And most certainly, the market’s 220% gain between the post-recession bottom of 670 and the May 2015 peak of 2130 was not owing to an explosion of corporate earnings. If you set aside Wall Street's annually renewable ex-items hockey stick, what you actually have on the profits front is a paltry 8% gain since the pre-crisis earnings peak way back in June 2007.

That’s right. S&P earnings on an honest GAAP reported basis peaked at $85 per share in the LTM period for June 2007, and posted at just $90.66 during Q3 2015; and based on Q4 filings to date, are certain to be down another dollar or two per share in the current quarter.

Thus, the most recent reporting earnings are off by 14.4% from this cycle’s peak - and that replicates the exact pattern which occurred during the 2007-2009 collapse. While the Wall Street hockey sticks were projecting earnings of $120 per share or more for 2008, actual GAAP earnings started falling in the June 2007 LTM period, and kept plunging until they hit bottom at $7 per share in June 2009.

The blue bars mark the death throes of a dying bull last time. Self-evidently, this one - market in red - is not far behind.

The recession, of course, is that a recession is coming.