Well the FOMC meeting is finally done. No rate hike in March. 2 rate hikes envisioned this year vs 4 targeted earlier. Stocks, commodities and gold surged.
Next thing to look at will be the Q1 2016 GDP, March employment numbers (seasonally adjusted again?) and of course the earnings season.
This earnings season will see bigger provision for credit losses in banks and greater distress among energy companies. The brief respite in oil price will do little to help as banks have already reduced much of the companies' revolving credit lines in order to pare their (the banks') credit losses. The number of bankruptcies is expected to swell in Q2 (Just yesterday Peabody Energy announced they might have to seek bankruptcy protection).
This could see the S&P being hit hard,igniting a downtrend, led by energy companies and banks.
The S&P has already had 3 quarters in succession of falling earnings, yet despite this, it continued to rally higher. The EPS beats were due to aggressive share buybacks by the companies and little to do with improvement in the top and bottom lines. Also the divergence between non GAAP and GAAP earnings has widened to record. It is "remarkable" that investors continue to ignore the GAAP figures and continue to pile in based on the artificially inflated EPS, non GAAP earnings and the misleading Debt to EBITDA figures.
The worrying trend is that the companies are borrowing to buy back shares just as when the shares are at historic highs. How silly is that? Apparently NOT, when senior management are cashing out their options!
If that is no cause for concern, then maybe the P/E ratio which crossed the 23.5x earnings (Source: Zerohedge) vs the 10 year average of 14.1x and 5 year average of 13.8x.
As at the end of 2014, the S&P companies owed US$1.27 for every US$1.00 earned. No doubt the amount owed must have risen substantially, given the amount of borrowed money used in buybacks throughout 2015 and 2016.
With falling revenue and profit, how will any of the debt be repaid? The Fed perhaps have just given them the green light to borrow more and at the end, the day of reckoning MUST COME.
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