More Bull

|
Includes: ADRA, AIA, CHN, CN, CXSE, EWS, FCA, FXI, FXP, GCH, GXC, IPAC, JFC, JPM, MCHI, PGJ, RINF, SGF, SPY, TDF, VPL, XPP, YANG, YAO, YINN, YXI
by: David Stockman

The robo-machines were raging Wednesday based on precisely nothing except banging 2080 on the S&P cash and a teapot's worth of short-term trading momentum. But a 1% or $300 billion gain in the stock market apparently needs some fig leaf of rationalization. So the lazy hacks who cover the casino's daily hijinks for the mainstream media came up with some doozies.

To wit, JPMorgan (NYSE:JPM) purportedly had a bang up quarter and surprised to the upside and China's export machine came roaring back. This was supposedly some kind of all clear signal. According to the bulls, the market can't rise without "participation" by the financials and China is still the mainspring of global growth.

I won't bother to say, not exactly. You could have learned by the second paragraph that "up" was actually "down".

In fact, JPMorgan's earnings were down 7% from last year, and were nearly $1 billion or 15% below its bookings for the March quarter three years ago (2013). Whatever they implied, JPM's Q1 profits had nothing to do with a break-out to the upside.
JPM Net Income (Quarterly) Chart

JPM Net Income (Quarterly) data by YCharts

That was reinforced by its revenue postings. They came in 3.5% below prior year, and that was no aberration. It seems as if JPMs revenues have been drooping ever since the Feds gifted it with Washington Mutual and Bear Stearns back in 2008. LTM revenues of $92.7 billion are now 10% below the $103 billion it posted back in 2010.
JPM Revenue (NYSE:<a href='http://seekingalpha.com/symbol/TTM' title='Tata Motors Limited'>TTM</a>) Chart

JPM Revenue (TTM) data by YCharts

In any event, why would anyone argue that quarterly accounting income of the giant Wall Street banks has anything to do with the main street economy or even real profits?

It's all just fiddling with accruals--for loan loss provisions, litigation provisions, even bonus pool provisions. After all, until the 4th quarter of 2015, JPM had spent 22 straight quarters draining its loan loss reserve. That is, it minted accounting profits as needed in order to beat by a few pennies whatever the marked down "street" consensus was a few weeks before its quarterly release.

Indeed, over that 22-quarter stretch, JPM minted about $25 billion in earnings without trading a bond, making a mortgage or debiting a customers credit card account. Those loan loss provision releases amounted to 25% of the $100 billion in accounting profits it booked over the period.

This time the bonus accrual took a 13% haircut in order to deliver a "beat". But even then, the lowest Q1 compensation accrual in 5 years doesn't necessarily mean a bleak Christmas in the Park Avenue executive suites any time soon. There are three more quarters in which to talk down the street consensus and thereby manufacture sufficient earnings headroom to accommodate ample compensation rewards all around.

Click to enlarge

On the matter of China's booming exports--no dice. The Chinese do have a habit of moving their New Year's holiday week around from one year to the next--so this time the "up is down" thing operated with a vengeance. The financial pundits said March exports were up by 11.5%, implying that China had regained its traction.

Not exactly. The chart below shows that March exports were the lowest in five years, and that the first quarter as a whole was the worst since late 2008.

Q1 exports were down by nearly 10% and the slump was manifested in every one of its major customer regions. Exports to Japan were down 5.5% while shipments to South Korea were off by 11.2%, EU countries by 6.9%, the US by 8.8% and Brazil by 47.2%.

Click to enlarge

In fact, exports are falling throughout east Asia, meaning that the world's great post-bubble deflation is gathering force. South Korean exports have been down for 15 consecutive months, for example, and were off 10% in March from prior year.

Click to enlarge

By all accounts, Singapore is the trading hub for the Asian mercantilist exporters as a group. Its export trends leave little to the imagination. Shipments early this year were down more than 20% from early 2014 levels.

Click to enlarge

Undoubtedly, that's why its normally circumspect central bankers sounded the alarms last night and reverted to easing measures not employed since the fall of 2008. Singapore based lending has literally ground to a halt. So the idea that there is anything vaguely resembling an "all clear" signal coming out of Asia is not exactly what the incoming data calls to mind.

Indeed, what Wednesday's incoming data did call to mind was more nearly the opposite. Total business sales faltered once again in February and are now down 5.4% from their mid-2014 peak---roughly the same period when Asian exports began to rollover.

As a result, the total business inventory (manufacturing, wholesale and retail) to sales ratio has now notched-up to 1.41X. The are no charts in the historical data in which this giant "X" movement did not signal recession around the corner.

Click to enlarge

In fact, it is pretty hard to argue with the 15-year I/S chart below. But then, again, when is the last time that the Fed's meeting statement or minutes discussed business sales, inventories or I/S ratios?

In the time warp of Professor Tobin's 1960 GDP bathtub, the only inventory that apparently counted was unemployment labor. Unfortunately, it was difficult to measure even then, but impossible in today's globalized, gig-based labor market.

But what is very possible to quantify is the fact the excessive inventories have reached a breaking point. There will be a liquidation. Back before the so-called Keynesian revolution the financial press used to track the state of inventories and sales closely. Business slumps rarely came as a surprise.

Click to enlarge

Here is another measure of inventory that is being ignored. Namely, that the virtuous cycle of declining used car generation, which echoed the sales crash of 2007-2009, is over. Now a steep climb of rising "preowned" inventory owing to off-lease vehicles, repossessions and rental fleet turnover is commencing. That means declining used car prices and fewer qualified borrowers--even as any one who can fog a rearview mirror already has a loan or lease.

Click to enlarge

Not surprisingly, new auto sales are rolling over, too.

So, it is "all clear" after all. At 2082 on the S&P 500, the broad market is being valued at 24.1X LTM reported earnings.

It's all clear, therefore, that the casino is heading for a record bust.