GLOBAL ECONOMICS AND POLITICS

Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.

 

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ADVENTURES IN STOCK LAND: THE S+P 500 AND OTHER DOMAINS © Leo Haviland October 3, 2019

“For, you see, so many out-of-the way things had happened lately, that Alice had begun to think that very few things indeed were really impossible.” Lewis Carroll, “Alice’s Adventures in Wonderland” (Chapter I)

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CONCLUSION

The S+P 500 probably started a bear trend following its summer 2019 highs at 3028 (7/26/19)/3022 (9/19/19). A survey of the S+P 500 over the past several years alongside trends for other key advanced nation stocks, travels of emerging marketplace equities, and patterns in several other financial marketplaces underscores this.

This United States equity benchmark thus finally links more closely with the extensive bear trend in emerging marketplace stocks “in general” which embarked after first quarter 2018. The essay “Running for Cover: Marketplace Exits” (8/9/19) stated: “The S+P 500’s decline since its late July 2019 high probably is the start of price convergence between it and emerging marketplace stocks.” And: “the S+P 500 probably is in, or soon will begin, a bear trend.”

The S+P 500’s price divergence relative to leading equity signposts in other developed nations over roughly the past year and a half was significantly less than that relative to emerging marketplaces. However, nowadays it appears likely that prices for notable American, European, Japanese, and Canadian stock playgrounds will continue to retreat together.

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An ardent hunt for “yield” (“return”) in various financial marketplaces (not just stocks) began around end-year 2018. Recall the S+P 500’s 12/26/18 valley at 2347 and the Federal Reserve promulgation of its monetary policy principles of “patience”. In addition to buying the S+P 500, yield pilgrims searched for reasonable (sufficient) return in domains such as other advanced nation stocks, emerging marketplace stocks, lower-grade United States corporate debt, emerging marketplace sovereign debt securities denominated in US dollars, and the commodities sector (witness the petroleum complex).

That frantic quest for adequate yield (return) likewise probably is finished, even though yield-seeking (especially in a low or even negative interest rate environment) of course has not disappeared entirely. As “Running for Cover” (8/9/19) stated, players who raced to identify and achieve “good” returns (by purchasing asset classes such as stocks and commodities) at the end of calendar 2018 and for several months thereafter in these sectors probably have started running for cover (begun to liquidate their long positions). Many other investors/owners in these marketplaces probably are running for the exits too.

The US Treasury 10 year note’s yield decline began in autumn 2018 at around 3.25 percent. Marketplace coaches may attribute interest rate drops in early 2019 to factors such as central bank easy money wordplay and schemes. However, the UST’s yield fall from 5/28/19’s height near 2.30pc also represents a “flight to quality” stage for UST yields. That yield withering, especially its dive beneath two percent, is a bearish signal for American and other stocks.

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Other bearish signs for the S+P 500 and related stock marketplaces include recent mediocre United States corporate earnings, the inversion of the US Treasury yield curve, ongoing international trade wars, substantial global indebtedness, the waning power of the Federal Reserve and its central banking friends to maneuver stock prices higher, and populist pressures in America and abroad.

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Adventures in Stock Land- the S+P 500 and Other Domains (10-3-19)

TICKET TO RIDE: US CORPORATE PROFITS AND S+P 500 TRENDS (c) Leo Haviland, May 17, 2017

In “Ticket to Ride”, The Beatles sing:
I don’t know why she’s riding so high
She ought to think twice
She ought to do right by me
Before she gets to saying goodbye”.

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CONCLUSION AND OVERVIEW

In offering enthusiastic audiences explanations of past, current, and future United States stock marketplace levels and travels, diverse marketplace preachers tell competing tales. Their arguments and conclusions reflect their different marketplace perspectives and methods, including the particular variables they select and arrange. For a majority of devoted visionaries, American corporate profitability is a very important factor.

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After-tax US corporate profits soared after reaching a trough in fourth quarter 2015, not long before the S+P 500’s major bottom in first quarter 2016. The noteworthy profit climb since 4Q15 surely encouraged the S+P 500 to jump from its 1Q16 trough.

Yet Trump’s remarkable triumph in November 2016’s Presidential election created (or at least magnified) faith that United States after-tax corporate profits would increase significantly in calendar 2017 and 2018. The S+P 500 galloped 15.2 percent higher from 11/4/16’s 2084 low to 3/1/17’s 2401 elevation. Thus hopes for greater profits probably greatly assisted the S+P 500’s sharp rally.

What is a key tenet (especially in the post-election period) in the gospel promoting a viewpoint of growing American corporate profitability and an entangled bull stock climb? Much centers on hopes that the Republican-controlled Congress will enact noteworthy corporate tax cuts. Related optimism for marketplace earnings (and stock) bulls includes possibilities for repatriation of corporate cash hoards, dramatic boosts in domestic infrastructure spending, and reduced regulatory burdens.

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However, current sharp divides on the American political scene (including within the Republican congregation) and widespread lack of confidence in (and hostility toward) the President will make it very difficult for a notable change in the corporate (and individual) tax code to become law. Passage of legislation encouraging earnings repatriation is not assured. Moreover, neither is a monumental infrastructure spending scheme.

In addition, despite the fierce climbs in recent calendar quarters, profit highs for recent full calendar years do not manifest a clear trend toward moving to new heights. Full calendar year profits over the past few years have been about flat.

Disappointment relative to widely-forecast profitability gains may inspire S+P 500 price retreats. In any case, history reveals that several noteworthy bear moves in the S+P 500 have intertwined with noteworthy profitability slumps.

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What is too high (too low), high (low), overvalued (undervalued), or reasonable/rational/average/normal (unreasonable, irrational, atypical/abnormal) for stock prices or other economic indicators is a matter of opinion. However, and even though stock valuations can appear very elevated relative for an extended period of time, some marketplace gurus nowadays proclaim that some measures show US stock valuations are on the lofty side.

Also, elevated share buyback levels also have helped to propel US equities higher. There are hints this pattern will not persist.

Current low US stock marketplace volatility, high American consumer confidence, and evidence that financial stress remains below average have reflected (and encouraged) the majestic bull climb in the S+P 500. Observers nevertheless should watch for changes in such measures.

A warning light for S+P 500 bulls is the failure the S+P 500 to motor much above the early March 2017 high. The subsequent record high is 5/16/17’s 2406. If the S+P 500 continues to find ventures much beyond that March 2017 elevation challenging, this arguably will signal that current optimism regarding future corporate profit gains may be ebbing, that the S+P 500 bull trend is tiring, or both.

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So the failure of America to enact important corporate tax “reform” (tax cuts) or embark on a glorious infrastructure spending voyage may not greatly diminish future earnings expectations (or even actual levels) or significantly wound the S+P 500. But they might.

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In addition, challenges to the bullish trend in US equities may come from the long run upward trend of US government interest rates (note the Fed’s tightening plan). Or, concern about US federal budget deficits (or debt problems elsewhere in the world) may march into view. Hopes for higher (or at least not falling) energy prices likely underpin hopes for higher corporate earnings (and profits) in that key financial sector. But commodities “in general” (and petroleum in particular) have fallen from their 1Q17 highs. Anticipated oil output levels from OPEC and its non-OPEC comrades probably will not significantly reduce still-high OECD industry inventories for at least the next several months. The broad real trade-weighted US dollar established highs in December 2016/January 2017, though it has slipped only modestly since then. Contrary to what many believe, increasing US dollar depreciation may help lead to or confirm weakness in the US stock marketplace.

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Ticket to Ride- US Corporate Profits and S+P 500 Trends (5-17-17)

LOOKING BACKWARD, GAZING FORWARD: US CORPORATE PROFITS AND FINANCIAL TRENDS (c) Leo Haviland May 3, 2016

“And I’ll be taking care of business, every day
Taking care of business, every way”. Taking Care of Business”, by Bachman-Turner Overdrive

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CONCLUSION AND OVERVIEW

For a majority of earnest soothsayers, American corporate profitability is an important factor for US stock marketplace levels and travels. Use the S+P 500 as a benchmark for United States equities in general. In second quarter 2015, US after-tax corporate profits peaked (annualized basis). The S+P 500’s record pinnacle occurred alongside this, on 5/20/15 at 2135. It mournfully plummeted about 15.2 percent to its 1812 (1/20/16)/1810 (2/11/16) depth. Despite the S+P 500’s subsequent sharp rally, the current and near-term after-tax corporate profit trend likely will make it challenging for the S+P 500 to ascend much above (or even over) its May 2015 peak during the next several months. History reveals that several noteworthy bear moves in the S+P 500 have intertwined with noteworthy profitability slumps.

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To explain past and current United States stock marketplace levels and trends, and in offering prophecies regarding future heights and patterns, diverse wizards tell competing tales. Their arguments and conclusions reflect their different marketplace perspectives and approaches, including the particular variables they select and arrange.

American and other corporations win or lose given amounts of money for all sorts of reasons. Factors influencing earnings and profitability change, as do the relative importance and interconnections of these variables. Long run inflation increases generally increase nominal values in general. Also, central bank policies, tax regimes, wage trends, and productivity (innovation; efficiency) developments influence sales and profits. The altitudes and paths of the US dollar, interest rate yields, and commodity prices also are relevant in various ways and degrees to particular corporations. Unemployment rates, fiscal situations (budget deficits), debt levels and trends (government, corporate, and consumer), regulatory structures, and population growth matter. America is not an island apart from the rest of the world; globalization has increased in recent decades.

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Admittedly, the ongoing (extraordinary) very lax monetary policy of the Federal Reserve Board and other central bank guardians such as the European Central Bank, Bank of England, Bank of Japan, and China’s central bank helps underpin equity prices in America and elsewhere. Stock-owning audiences around the globe (particularly the praiseworthy investment community) as well as Wall Street institutions, public corporations, and the financial media friends generally adore massive money printing (quantitative easing) and sustained yield repression. Low interest rate yields for US Treasury securities (and negative yields for many government debt obligations elsewhere) encourage fervent scrambles for acceptable returns elsewhere. These often-alluring territories include stock realms (hunting for dividends and potential capital gain), corporate debt, and commodities. American inflation has been quite modest in recent years. Yet as nominal prices in general (all else equal) tend to rise alongside (or on a lagged basis) a climb in US nominal GDP, so will a nominally priced index such as the S+P 500.

The S+P 500’s retreat beginning in May 2015 interrelated with the preceding bear trends in emerging marketplace stocks and commodities (notably petroleum) and a further bull charge in the broad real trade-weighted dollar (“TWD”). Significantly, the S+P 500 (and stocks of other key advanced nations), emerging marketplace equities (“MXEF”, MSCI Emerging Stock Markets Index, from Morgan Stanley; 1/21/16 at 687), and commodities in general (broad GSCI at 268 on 1/20/16) all attained significant troughs around the same time in first quarter 2016. The US Treasury 10 year note yield low was 2/11/16 at 1.53 percent. The TWD established its recent high alongside these marketplaces in January 2016. This interconnection across assorted marketplaces assisted the rally in the S+P 500 from its January/February lows.

Thus to some extent, the recent weakness in the broad real trade-weighted dollar encouraged the ascent of the S+P 500. In any case, central banks did not want the TWD to ascend by much, if at all, over its January 2016 high. They likewise wanted to arrest stock marketplace declines.

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However, suppose the TWD declines further from current levels, perhaps ten percent or more from its January 2016 elevation. Although the first stage of dollar decline has managed to spark and assist a S+P 500 rally, additional sustained depreciation eventually may undermine equity prices. Besides, even if the TWD fall from its January plateau does not reach ten percent, the S+P 500 nevertheless may slide lower. Marketplace history reveals that a weaker dollar does not inevitably (or necessarily) push US stocks upward. And also suppose US interest rates or inflation expectations sustain modest climbs. Rising US Treasury yields can help to lead S+P 500 prices lower. Assume commodities in general manage to hold onto much of their recent gains.

In this environment, further suppose US corporate profits (and those in related regions) continue to remain sluggish (or decline further). Then the S+P 500’s fall from its high probably will be significant, even though the Federal Reserve and its trusty allies will intervene with rhetoric and action to prevent dramatic stock marketplace drops (particularly watch the 20 percent bear market definition threshold).

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Looking Backward, Gazing Forward- US Corporate Profits and Financial Trends (5-3-16)

US SHARE BUYBACKS: OFF TO THE RACES © Leo Haviland May 3, 2015

How best to explain the monumental ascent in key United States stock benchmarks such as the S+P 500 that began in March 2009? What factors should guide marketplace handicappers in their opinions as to whether or not that bull climb will continue? Marketplace guides select between and evaluate assorted and intertwining variables. Their perspectives and arguments differ. However, considerations such as corporate earnings, sustained highly accommodative monetary policy (interest rate yield repression and money printing), and deficit spending stand out on many lists. In today’s global scene, numerous clairvoyants extend their horizons to include other nations to help understand US equity price levels and patterns. Analysts of American stock movements may also rely on interest rate, US dollar, and commodity price levels and trends. Many players harness technical analysis of marketplace phenomena (for example, picture bar charts and moving averages) to their review.

Some gurus include share buybacks by US corporations in their inventory of bullish factors. Such marketplace observers typically focus on the last several years (or recent calendar quarters) and the billion dollar programs of noteworthy firms.

However, to better assess the influence of share buybacks by US companies, investigators should review them primarily from the standpoint of net, rather than gross, buybacks. The focus should be on whether or not there are net share buybacks (in other words, negative net issues) over a given time span. After all, some firms issue new stock. Moreover, explorers should review buybacks over a long run history as well as in relation to after-tax corporate profits and nominal GDP. Let’s concentrate on the Federal Reserve Board’s nonfinancial corporate business category. When reviewed in the context of corporate profits, but also (and especially) from the standpoint of nominal GDP, US net share buybacks in this domain in recent years have been very substantial. This inquiry reveals not only that net share buybacks (negative net issues) have played a particularly prominent role within that US equity arena in recent times. The noteworthy net buybacks (negative net issues) situation has persisted for a few decades. This longstanding accumulation of shares via net buybacks probably has reduced the amount of shares and thereby probably has had increasingly bullish consequences for US stocks in general.

Even if net share buybacks persist, a significant slowdown in their pace (reduction in their level) probably would be a bearish warning sign for equity signposts such as the S+P 500.
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The sustained yield repression scheme of the Federal Reserve Board and its central banking allies not only has helped to encourage many fortune hunters seeking reasonable (good) returns (yields) to purchase equities. It also has lowered corporate borrowing costs. To what extent do net share buybacks, arguably often financed by corporate debt issues, reflect a widely-embraced management opinion that investment opportunities are relatively unattractive? In this context, remember that many corporations nowadays have large cash hoards not being directly invested in their business.

Everyone knows that corporations can raise funds via issuing stock or debt securities, or by borrowing from banks or similar entities. Diverse motivations surely explain share buybacks. Yet at some companies, executive compensation links to the firm’s share price and earnings per share. So perhaps some undoubtedly altruistic corporate leaders nevertheless have an alluring incentive spurring them to reduce the number of shares outstanding.

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US Share Buybacks- Off to the Races (5-3-15)