Beyond multiple expansions driven by liquidity, sales and earnings drive
stocks.
Of the two, sales are most important for determining economic conditions.
Earnings can be massaged any number of ways. However, sales cannot. Either
the money came in the door or it did not.
Unfortunately for the bulls, sales are falling.
1Q15 sales came in 2.4% below 1Q14. And the trend has not improved since
that time.
General Electric (GE), JP Morgan (JPM), Microsoft (MSFT), IBM (IBM),
Citigroup (C), Johnson & Johnson (JNJ), Intel (INTC), Coke (KO), Oracle
(ORCL), Honeywell (HON), Goldman Sachs (GS), and American Express (AXP) have
all reported a decline in Year Over Year sales for the second quarter of
2015.
These companies are not unique. Across the board S&P 500
companies are posting a 4% drop in revenues.
Sales are not the only metric that is tanking.
Annual corporate earnings fell last year for the first time since we
entered the so-called “recovery” in 2009. This is pretty incredible when you
consider the sheer amount of buybacks and other accounting gimmicks used by
corporations to boost their profits.
Indeed, a study performed by Duke University found that roughly 20% of
publicly traded firms manipulate their earnings to make them appear better
than they really are. The folks who were surveyed for this study
about this practice were the actual CFOs at the firms themselves.
All of this gimmicky has resulted in corporate profits trading at an all
time high relative to US GDP. Profits literally have nowhere to go but down
as corporations have cut costs to the bone and juiced earnings through
buybacks and leveraged buybacks (issuing debt to buy shares).
Put simply, both sales and earnings are rolling over… at a time when the
S&P 500 is close to all-time highs. This is a recipe for a correction if
not a crash.
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