Central bankers are trying to bail out the sinking global economy. But the water keeps on coming in.
Takeaway: Earnings season has just begun and the outlook for the Industrials is looking awful.
If the past week of company earnings updates is any indication of what's in store for earnings this quarter, it could get ugly in equity markets fast.
First, we heard pre-announced guidance revisions on Friday from Honeywell (HON) and PPG Industries (PPG), and then Dover (DOV), yesterday. The results weren't pretty, with downward revisions to company earnings and revenue estimates which sent shares tumbling.
Alcoa (AA) kicked off (official) earnings season today with a bang. But not in a good way. Shares of the industrial conglomerate have plunged -11% so far today after reporting $5.21 billion in revenue. That's down 6% from the prior year. It missed analyst projections of $5.31 billion.
For the record, Alcoa even managed to miss bombed-out Wall Street consensus' earnings per share estimates of $0.33, versus as reported EPS of $0.32. (Note: Wall Street's estimates were down -12% from the prior week and down -30% from a year ago. #Sad.)
Shares are down -5% so far today after the manufacturer of screws, nuts and bolts missed EPS and revenue estimates. Not pretty.
Digging into Fastenal's conference call revealed some interesting insight about the broader U.S. economy. Here's CFO Holden Lewis:
"Qualitatively, it's not clear to us that the tone changed much in the third quarter. We saw that the sales of fasteners and heavy manufacturing construction end markets were relatively weak as we have seen before. The same could be said of our largest customers, our top 100 was flat to maybe down slightly during the period. But again, these are the same dynamics that have persisted throughout 2016."
The company execs were candid about the outlook for the industrial economy. During Q&A, the first question was directed to CEO Daniel Florness about whether he was "seeing any signs that the industrial economy is bottoming?"
"I can't say that we are... I can't say that we saw any kind of inflection."
Wow. Keep in mind this is the same guy who said, while CFO of Fastenal in October 2015, “The industrial environment is in a recession. I don’t care what anybody says because nobody knows that market better than we do.” Believe him.
On a related note, our Macro team reiterates last week's 4Q Macro Themes call for a #DoubleDipRecession in Industrials. An appropriately timed callout, indeed. With earnings season just getting started there's no telling what's in store.
So far, it's not looking good.
Takeaway: The latest signal from Janet Yellen's favorite economic indicator flies square in the face of a rate hike.
SO THE FED SAYS THE 2016 RATE HIKE CASE HAS "STRENGTHENED." Okay, got it.
Now go flip a coin as to what they'll say tomorrow (they've flip-flopped their rate hike rhetoric 7 times in the last 10 months) particularly in light of what Fed head Janet Yellen's *favorite* economic indicator just revealed.
That indicator, "Change in Labor Market Conditions Index," just fell again to -2.2 for the month of September. This index has declined 8 of the last 10 months. Aside from a short-lived blip in July (a reading of 0.8), the last time the index registered positive sequential readings was back in December. Of course, that was the last time the Fed raised interest rates.
At its September meeting, the FOMC said "the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year." It will be interesting to see how continued job market weakness and slow growth filters into the Fed's rate hike calculus heading into its November and December meetings.
Your best bet is to flip a coin with this "data dependent" Fed.
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Takeaway: It's a wonder anyone listens to anything the Fed says anymore.
Take a close look at that (ridiculous) chart.
What it shows you is investor rate hike probabilities for November (grey line) and December (black line), overlaid with the myriad policy pivots (Fed commentary included). As crazy as it may sound, our omnipotent Fed has gone back and forth on its rate hike rhetoric 7 times in just the last 10 months.
Absurd? You decide.
Now, with current December rate hike expectations at 70%, here's the key takeaway for investors confused about what all this Fed jawboning means:
(An excerpt from today's Early Look by Hedgeye CEO Keith McCullough)
"If we’re right on the profit, employment, and GDP cycle slowing to its slowest point in Q4 (we’re at 0.4% q/q SAAR GDP), Yellen's either going to pivot for the 8th time (back to dovish) or make her 2nd policy mistake of #TheCycle and hike into the slow-down."
That's right. When the Fed raised rates last December, the S&P 500 dropped over -10% (peak-to-trough), as economic data continued to slow and investors freaked about the prospects of rate hikes into this slowdown.
In other words...
In the 5-day period ending September 28th, equity mutual funds lost another -$4.6B while bonds funds gained +$5.0B. This is a complimentary research note originally published last week by our Financials team. For more info on our institutional research email firstname.lastname@example.org.
Takeaway: Luxury & High End real estate is struggling with steadily increasing supply of high end homes as demand has been waning and pricing weakens.
Three key developments will be discussed which are important for investors to understand. One is a headwind set to grow stronger over the course of 2017. The other two are risks that just recently emerged which bear close monitoring.
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