Getting it straight

According to Bloomberg, US stocks had their best week since March. S&P 500 closed a shade below 2100. Gold is down more than 5% to 6% from its recent peaks, because, presumably the Federal Reserve is all set to hike the Federal funds rate to 0.5% in June. The US dollar is strong. Earnings were down for the fifth consecutive quarter in a row (S&P 500, as reported ‘bottom-up’ earnings).

S&P 500 Bottom-Up Earnings Per share_2011-16

Source: Standard & Poor’s

As of quarter ending March 2016, U.S. S&P 500 EPS (bottom-up) is at its lowest level since September 2011.

S&P Index rise since 2011


With EPS down over the five year period since 2011, the index went up by more than 80% in the same period!  One does not need a doctorate to guess the primary and the secondary causal factors. Just in case, will spill the beans. The Federal Reserve (primary) induced stock buybacks (secondary). There could be tertiary factors.

Some choice statistics on U.S. Corporate debt (text paraphrased)

  • Combining all of the corporate cash in the U.S. wouldn’t cover the $1.8 trillion of corporate debt that’s coming due in the next five years, according to a report by Moody’s Investors Service on Friday.
  • That’s because U.S. companies have been borrowing more quickly than they’ve built up the record $1.68 trillion of cash on their balance sheets. And more of that debt comes due sooner.
  • Cash flow from operations declined 0.2 percent to $1.54 trillion in the 12 months ended in December 2015, the first time the metric declined in Moody’s data going back to 2007.
  • In 2015, corporate debt outstanding went up by 17% and cash holding went up by 1.8% in the US
  • Debt/EBITDA ratio at 2.35x compared to a peak of 1.57x in 2007 [Link]

There is more:

According to S&P Global Ratings, debt outstanding increased 50x that of cash in 2015. Total debt rose by roughly $850 billion to $6.6 trillion last year, dwarfing the 1% cash growth ($17 billion). Removing the top 25 cash holders from the equation paints an even more concerning picture: total debt rose $730 billion in 2015, while cash declined by $40 billion.[Source]

None of this matters. Markets are efficient.


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