Editor's Note: We are pleased to present this brief Hedgeye Contributor View written by Doug Cliggott. Cliggott is a former U.S. equity strategist at Credit Suisse and chief investment strategist at J.P. Morgan. He is currently a lecturer in the Economics Department at UMass Amherst. Incidentally, he recently sat down with us here at Hedgeye for a Real Conversations interview. Click here to watch.
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By Doug Cliggott
The Fed released the Q3 2015 flow of funds data yesterday. Now we have a good picture of the third quarter.
Profits of non-financial corporations were down 5% vs. Q3.2014, and their debt was up 7% vs. Q3.2014. This 1200 bps gap between debt growth and profit growth is the widest we have seen since 2007. As we talked about in September — watch "An Uncomfortably High Probability of a Significant Correction" — bad things tend to happen when debt growth a lot faster than earnings.
The Fed data also show a violent (75%) slowdown in Q3 net share buybacks. That no doubt played a central role in the equity downdraft during Q3 ... a huge buyer went away.
My guess is this is a central theme for 2016 — contracting corporate profits and much weaker cash flows mean very low share buyback volumes compared with the past four or five years. So U.S. equities will be "missing" a big buyer with no obvious, or less-than-obvious, cast of characters standing in the wings to step in and take their place.
And, on the earnings front, the OECD released new LEI data on December 8th. This data — VERY WEAK — plus wages & salaries growing at 5% point to further weakness in profits.
On that cheery note ... Have a good weekend!