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5/6/17

US Stock Market: Wall Street’s Earnings Hopium - by David Stockman

This time IS different. Normally they don’t ring a bell at the top, but right now the bell couldn’t be any louder. Or clearer.

Indeed, anyone left in the casino needs a powerful hearing aid.

The record stock market made a record run during the Donald’s first 100 Days — a period in which the vaunted Trump Stimulus on which it is all depended has sunk into the Imperial City’s swamp…

Trump’s tax proposal amounted to a $7.5 trillion add-on to the nation’s crushing public debt over the coming decade. That means there is no possible GOP majority to pass it. It also included $6.5 trillion of tax relief to business and the top 5%. That means that Dems won’t touch it with a ten-foot pole, either.

The very idea that there is going to be smooth hand-off of the “stimulus” baton to a giant Trump tax cut is by now just ludicrous. Its persistence is evidence we’ve reached the stage in the bubble cycle where Wall Street stock pushers have already gone full George Orwell.

They are now claiming a deflating economy is bounding back and that soft earnings are blowing the lights out. That is to say, when the bubble reaches its manic peak, the lies and hopium become outright comical.

That was evident in the alleged “blow-out” earnings of bellwether stocks like Amazon last week, which were nothing of the kind. Actually, they stunk.

Likewise, I heard some knucklehead from Morgan Stanley on Bloomberg yesterday morning urging not to be troubled at all by the tiny 0.7% annualized first quarter GDP gain because it was all temporary and the economy would come bounding back at 3% + in the next quarter.

My goodness, Wall Street economists have been saying that for six years now. But the ballyhooed arrival of “escape velocity” has never happened — notwithstanding that we are supposedly recovering from the worst recession of the post-war period. The rebound should have been greater on a purely statistical basis alone.

In fact, real GDP for the last quarter was up 1.9% year-over-year (Y/Y). And that compared to a 1.6% Y/Y gain in Q1 2016… a 3.3% Y/Y for Q1 2015… and 1.6% for Q1 2014.

This hardly looks like a sustained breakout after each periodic lull.

So the latest Y/Y growth blip was actually a tad weaker than the average Y/Y rate during the previous six years (2011 thru 2016). That has averaged 2.1% — despite repeated assurances by the Morgan Stanleys that every bout of sluggish growth during that period was just “temporary.”

So what we got again in Q1 was more of the same low growth rut. There’s no evidence for an energetic, sustainable recovery that could possibly justify a 24X valuation multiple on the S&P 500 at month 95 of a weak recovery.

But no matter. The Wall Street earnings narrative has become so corrupted that there really isn’t any need at all for actual economic growth. It has literally become the case that “down” is the new “up.”

For instance, Amazon’s operating earnings actually fell during Q1. It reported an operating margin of 3.7% for Q1 2016. That figure was down to 2.8% during the quarter just completed.

Nevertheless, the Wall Street propaganda machine, which is pleased to call itself the financial press, gushed all the same:

While retailers continue to struggle and dead malls pile up in characterless suburbs across America, Amazon just keeps cashing in, as the e-commerce and media behemoth delivered first-quarter earnings that blew past expectations, sending its stock up 4% in after-hours trading.

It’s certainly true that retailers are struggling and dead malls pile up in characterless suburbs across America. (I covered the topic extensively in yesterday’s Daily Reckoning.)

And it’s true that Amazon is bringing down the entire house of retail cards.

What remains of the the brick-and-mortar industry is resorting to ever more desperate competitive responses.

But as the rally in Amazon stock certainly demonstrates, “down” is indeed the new “up.”

My point is not merely to expose the absurdity of Amazon’s valuation.

The point is that the casino is now so unhinged that the robo-machines added $12 billion to Amazon’s market cap in the face of stunning evidence that its earnings have vaporized entirely.

Amazon has become a profitless engine of retail mass destruction. Because the wild west casino enabled by the Fed has abolished honest price discovery and radically suppressed the cost of risk to the gamblers and structured finance speculators who operate there, Amazon has become egregiously overvalued.

So Amazon’s extreme valuation is just plain irrational exuberance having one more fling. Spasms like this $12 billion gain are absolutely reminiscent of final days before the tech collapse of April-May 2000.

In case I haven’t made myself clear: Amazon is not a profit-making enterprise in any meaningful sense of the word and its stock price measures nothing more than the raging speculative juices in the casino.

In an honest free market, real investors would never give a near one-half trillion dollar valuation to a business that refuses to make a profit, never pays a dividend and is a piker in the free cash flow department — that is, in the very thing that capitalist enterprises are born to produce.

But there is more. The Amazon rampage through the brick and mortar world of retail is not remotely a case of “creative destruction” where new technologies, innovative entrepreneurs and better mousetraps demolish the old and usher in the new to the benefit of rising output and higher standards of  living for all.
 
Au contraire. Amazon is not only hideously over-valued on the stock market. It is also an economic mutant that is destroying wealth and capitalist prosperity because of the perverted incentives for cancerous “growth” at any price that have been fostered by the Fed’s destructive regime of Bubble Finance.

 Read more: Wall Street’s Earnings Hopium - The Daily Reckoning

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