re: The Global Commodities Bottom

Ha. Glad I could be relatively interesting to you.

I am exploring a ton of tangential thoughts, but my main point here is simply that there is likely an earnings recession coming, and I am in the process of figuring out what to do given that likely occurrence.

Bloomberg had an interesting article today, " Watch Out for the U.S. Recession Signal in Friday's GDP ReportK."

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Pre-tax earnings probably fell 9.5 percent in the fourth quarter from a year earlier, after dropping 5.1 percent in the third, according to economists at JPMorgan Chase & Co. in New York. That would be the biggest decline since the 31 percent free fall in the closing months of 2008 during the height of the financial crisis.

Profits last quarter probably were unusually depressed by a $20.8 billion penalty payment by BP Plc to settle claims over the 2010 oil spill in the Gulf of Mexico. But even after stripping out that one-time charge, earnings likely still fell about 5 percent, by JPMorgan's reckoning.

Why is that important? Well, history shows that when profits fall, the economy often follows them downwards. An earnings hit of the size that JPMorgan says is taking place has led to a recession within three years about 90 percent of the time.

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There will probably be another lackluster-to-mediocre GDP report in store for us on Good Friday, but the research done by JPMorgan on others on the macroeconomic impact of corporate earnings recessions is interesting.

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The bank puts the probability of a recession beginning within two years at around one-in-two and within three years at about two-in-three. Now that's something worth paying attention to.

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I've mostly tried to stay away from macroeconomic recession prognostications, and to stay focused on the corporate earnings figures instead, but I have to admit, the macro implications for the next few years are also interesting.

I'd consider right here, but only for short to mid term holding.

LINK

You'd need to watch it closely. And I know there are a lot of reasons why this isn't a good idea. But there are a lot of reasons why this might meet your goal of long commodities.

One reason for me at least, and it isn't based on logic, is that I think Nuveen's commodities people are a pretty bright set of strategists.

I wouldn't go here simply due to their holdings. Right about 50% is Gsci Excess Return Mar16 Xcme 20160315.

Sure, but the S&P 500 includes energy, and now the tailwinds from lower energy prices are gone for those other sectors. It's not like high oil prices helps the economy.

Anyway, I've been reading into the history of S&P 500 earnings lately, and it does give me pause when I see the record from 1979-1991, when dropping corporate earnings sometimes occurred, but did little to stop the momentum of the long bull market from 1982-2000.

I'm still looking for stocks to drop this summer, but if not, by the end of the summer I'm jumping back in regardless--probably leveraged up on a 3x ETF like TNA.

That being said, the S&P 500 dropped to 1810 in February, and it may drop there again this summer. Yellen may be keeping the markets propped up for now, but that's very predictable, and there are still more earnings reports to come.

I know the Shiller CAPE metric for P/E ratios has fallen out of favor lately, but even looking at forward P/E ratios, most sectors still look expensive.

This, for example, is from a pretty good FactSet report that came out last Friday ( LINK):

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Earnings and Revenue Growth Not Expected to Return Until 2nd Half of 2016

For Q1 2016, S&P 500 companies are reporting year-over year declines in both earnings (-7.6%) and sales (-1.3%). Analysts currently do not expect earnings growth and revenue growth to return until Q3 2016.

Analysts are predicting increases in earnings and revenue growth in the 2nd half of the year. In terms of earnings, the estimated decline for Q2 2016 is -4.4%, while the estimated growth rates for Q3 2016 and Q4 2016 are 1.6% and 7.5%. In terms of revenues, the estimated decline for Q2 2016 is -1.0%, while the estimated growth rates for Q3 2016 and Q4 2016 are 1.8% and 4.3%.

For all of 2016, analysts are projecting earnings (+0.8%) and revenues (+1.5%) to increase year-over-year.

Valuation: Forward P/E Ratio is 16.8, above the 10-Year Average (14.2)

The forward 12-month P/E ratio is 16.8. At the sector level, the Energy (79.4) sector has the highest forward 12-month P/E ratio, while the Financials (12.9) sector has the lowest forward 12-month P/E ratio.

The P/E ratio of 16.8 for the index as a whole is above the prior 5-year average forward 12-month P/E ratio of 14.4, and above the prior 10-year average forward 12 month P/E ratio of 14.2. It is also above the forward 12 month P/E ratio of 16.6 recorded at the start of the second quarter (March 31). Since the start of the second quarter, the price of the index has increased by 0.0%, while the forward 12-month EPS estimate is unchanged (0.0%).

Eight sectors have forward 12-month P/E ratios that are above their 10-year averages, led by the Energy (79.4 vs. 14.4) sector. One sector (Information Technology) has a forward 12-month P/E ratio equal to the 10-year average (15.9). The only sector that has a forward 12-month P/E ratio below the 10-year average is Telecom Services (13.4 vs. 14.6).

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Mind the GAAP Gap, Even for Blue Chip Stocks

Mind the GAAP: Buffett warns of deceptive earnings

It's been yet another eerie week of mixed signals.

On Thursday there was an unexpected spike in jobless claims, with a Reuters article stating ( LINK): "Initial claims for state unemployment benefits increased 20,000 to a seasonally adjusted 294,000 for the week ended May 7, the highest level since late February 2015."

But then on Friday there was also an unexpected jump ( LINK) in consumer spending (if you are a Keynesian who cares about that sort of thing), with a Census Report reporting a 1.3% jump in sales in April. That caused the Atlanta Fed's GDPNow Tracker to jump from a 2.2% prediction to a 2.8% prediction, for real 2Q GDP growth. Pop out the champagne for 2.8% growth, right?

Except that there are still worrying signs among investors. Wall Street is still shedding headcounts and bonuses, and Silicon Valley is still looking worrying, and private equity is still showing diminished returns ( LINK), and so are hedge funds.

Perhaps most ominously (for this week at least), are details about how " Carl Icahn Is Betting Big on a Stock Market Crash."

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To put this short position in context, finance blog Zero Hedge compared Icahn Enterprises’ portfolio to what it had considered to be the most bearish hedge fund, Horseman Global, which has profitably run a short book for four years. Horseman’s net short position is just 98%, far less than Icahn’s 149%.

So far, Icahn’s bets haven’t paid off, with Icahn Enterprises investment funds losing 12.8% in the first three months of 2016, but the famed investor is betting big that he will be proved right in the long run.

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That seems to be buttressed by a recent article on DJIA corporate data (" The Dow is too expensive for my tastes"), which includes not only falling earnings, but also falling revenues:

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Earnings peaked in Q4 2013 and since then have declined by 21%
Revenues peaked in Q4 2012 and have since declined by 25%
The DJIA has increased by 33% since Q4 2012

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Whereas Carl Icahn is focused mostly on U.S. markets, George Soros is focused mostly on China. Which brings us back to the subject of this thread, the Chinese crash and the global commodities bottom that seemed to occur in late January. Will it still hold up?

Recent news has made the situation in China seem worse. It seems like everyday there are articles arguing why Soros is right or wrong on China (most of them seem to argue that he is wrong). The past week, however, has centered on news stories about what Communist Party leaders are actually thinking over in China.

Washington Post (5/12): " ‘Authoritative’ pessimism in China"
The National Interest (5/13): " China's Economy Is Past the Point of No Return"

The latter article by Gordon Chang is an especially good read:

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After a near-disastrous start to the year and a one-month recovery in March, the Chinese economy looks like it’s now headed in the wrong direction again. The first indications from April show the country was unable to sustain upward momentum.

Even before the first dreadful numbers for last month were released, Anne Stevenson-Yang of J Capital Research termed the uptick the “Dead Panda Bounce.”

The economy is essentially moribund as there is not much that can stop the ongoing slide. A contraction is certain, and a severe adjustment downward—in common parlance, a crash—looks likely.

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Even China’s own technocrats do not believe their own numbers. Fraser Howie, the coauthor of the acclaimed Red Capitalism, notes that the chief of a large European insurance company, who had just been in meetings with the People’s Bank of China, said that even the Chinese officials were joking and laughing in derision when they talked about official reports showing 6 percent growth.

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Although debt does not work the same way in China’s state-directed economy as it does in freer ones, eventually rapid credit creation must produce a disaster. Already, the country’s debt-to-GDP ratio is well north of 300 percent, as Barron’s, referring to Victor Shih’s calculations, notes. Soros in January said the ratio could be as high as 350 percent, and Orient Capital Research in Hong Kong suggests 400 percent.

Whatever it is, China is just about at the limits of the debt it can bear, as growing defaults—and a stark warning from the Communist Party itself on Monday—indicate.

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Following up on my earlier threads and posts, I have been checking AFTY & GSG.

AFTY was as high as 13.12 as recently as April 13, but is now down to 12.35. It had previously bottomed out at 11.09 on February 11, after coming down from a high of 24.75 last June.

GSG doesn't seem to be as affected by China as it once was. Recall that it hit a bottom of 12.03 on January 20, which prompted the creation of this thread. Since then, however, it has risen to as high as 15.32 on April 29, and is still at 15.15 now.

At this point, I would still say that a 20% commodity drop this year would be unlikely, but you never know what's going to happen as the slow-motion Chinese implosion continues to unfold.

For my money, I still like cash and want nothing to do with these markets.