I’m Long Stocks And Short Poor People As A Hedge

Ok, well it’s time for your Saturday dose of confirmation bias where I give you a fundamentals-based excuse to stay bullish on the stocks you bought in January then sold in February then bought back again last week.

Of course this “fundamentals-based” excuse will be couched almost entirely in terms of the assumed sugar high from myopic fiscal stimulus and deficit-funded tax cuts. That would be the same myopic fiscal stimulus and the same deficit-funded tax cuts that are almost guaranteed to pull forward the end of cycle and that are similarly guaranteed to put the Fed in a bind just as the Eccles building is set to become even less independent than it already was thanks to a President who will absolutely not be willing to tolerate anything other than a dangerous pro-cyclical lean he imagines will help him fulfill the nebulous promises inherent in his equally nebulous #MAGA mantra.

People like to point to earnings and earnings expectations as a justification for continued bullishness on equities and at the most basic level, that makes a lot of sense. In fact, in isolation it’s the only goddamn thing that makes sense. I mean that’s why you buy stocks, right? To claim your “fair” share of the pie where the “pie” is corporate America. And you know, you’d better claim your share of that pie via stock ownership, because you damn sure aren’t going to get your share handed to you in the form of transfers from capital to labor – that ain’t how this shit works, homie.

So on that front, there’s “tremendous news” that “no one” in the “mainstream fake news media” wants to talk about. And that “tremendous news” is “bigly” earnings beats and topline results “the likes of which no one has ever seen!” To wit, from Goldman:

4Q has been one of the strongest earnings seasons on record. With 80% of S&P 500 companies having reported, 54% has exceeded consensus EPS estimates, the highest percentage since 2010. Revenue results have also been exceptional, with more than half of S&P 500 firms posting results a standard deviation above the consensus estimate, the largest share since 2004. With significant market cap only in the consumer sectors left to report, 4Q EPS are on pace to show year/year growth of 15%. This rate and full-year 2017 EPS growth of 12% each represent the fastest pace since 2011.

As the President would say, “no one is talking about this”. And as he would simultaneously contend (likely in the same tweet), “a lot of people are saying this”.

So despite the fact that “no one is talking about” top and bottom line beats, “a lot of people are saying” that they are some of the best ever and that means it would be “a big mistake” for you to sell stocks on the assumption that the reckless policies emanating from the party formally associated with fiscal rectitude will ultimately end in tears (see here and here).

Of course one of the reasons no one is talking about Q4 is because the tax cuts have made it a noisy quarter. Instead, everyone is looking at 2018 as a whole.

“The market response to both beats and misses has been muted relative to history as stocks posting positive EPS surprises outperformed S&P 500 on the day after reporting by a median of 70 bp compared with 105 bp since 2005,” Goldman goes on to write, before adding that “firms missing estimates lagged the S&P 500 by 164 bp vs. a typical 211 bp.”

Bottom-up consensus estimates for the full-year have risen 7% for the S&P since the tax cut dream became reality:

There’s a give and take here. A tight labor market and expectations that some of the tax cuts will be spent on worker compensation are likely to squeeze margins. “S&P 500 firms in many sectors have announced wage increases and/or one-time bonuses tied to tax reform [and] in addition to these voluntary increases, minimum wages are rising in 19 states in 2018,” Goldman notes, before predicting that “rising wages [will] contribute to valuations and margins both peaking in 2018.”

So about those wages and more specifically, about the expected use of incremental cash flow from tax cuts …. where is the majority of that likely to go? Capex maybe? Or more worker bonuses, perhaps?

Why, fuck no. Are you kidding me with that shit? It’s going to go to shareholders.

Here are some fun bullet points derived from the same Goldman note:

• Companies have pointed to a modest increase in investment as one destination for the incremental cash flow from tax reform. Consensus estimates for 2018 capex have increased by $17 billion (3%) since the passage of tax reform.
• S&P 500 dividend payouts are also rising this year. 39 S&P 500 firms raised their dividends in January, and for the first year since 2012 no companies cut payments.
• Returning cash to shareholder via buybacks remains a clear priority. Since December, S&P 500 firms have announced buybacks totaling $171 bn. YTD announcements of $67 bn represent a 22% increase versus the same period in 2017.

Yep. A 3% increase in capex plans, some one-time bonuses for employees that amount to rounding errors on C-suite paychecks, free Hos and all-you-can-eat Ding Dongs. That’s one side of the equation.

The other side is the first January with no dividend cuts in six years and a 22% increase in EPS-inflating, equity-linked-compensation-boosting buybacks.

Nothing further.

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— Heisenberg Report (@heisenbergrpt) February 16, 2018