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Q3 Earnings Preview

Typical bearishness as we enter Q3 earnings … what you should actually expect … despite overall bullishness, we’re keeping our eye on three headwinds

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Typical bearishness as we enter Q3 earnings … what you should actually expect … despite overall bullishness, we’re keeping our eye on three headwinds

Here we are again on the cusp of another earnings season.

Per tradition, cue the doom-and-gloom headlines…

Source: Fortune.com

Perfect, thank you.

There’s a concern that Q3 earnings will bring disappointments, certainly more so than we saw in Q2.

That’s fair. There are several headwinds impacting earnings that we’ll discuss today.

However, we still believe we’re in store for a net-positive earnings season that helps shake the market out of its current malaise – despite the negative headlines.

To understand why, let’s pull back the curtain on the little game that Wall Street likes to play.

***It seems like every earnings season, investors are subjected to warnings of earnings disappointments

Yet just about every time, the numbers come in better than expected.

How? And why?

Because Wall Street is incentivized to sandbag earnings.

Especially in an uncertain economic environment like we have right now.

Our technical analysts and the team behind Strategic Trader, John Jagerson and Wade Hansen, explained this phenomenon last year, and it’s no less applicable today.

Here they are, revealing how this song-and-dance works:

It’s simple. You lower earnings expectations and then watch corporate America beat those lowered expectations.

You see, Wall Street analysts are professional sandbaggers.

Buy-side analysts — those that work for firms that buy stocks or recommend buying stocks — are amazing at underestimating the true strength of a company’s revenue and earnings potential.

Sell-side analysts — those that work for firms that issue, or sell, stocks — are amazing at finding and emphasizing any little good piece of news about a company and its revenue and earnings potential.

***Why would analysts intentionally sandbag the numbers?

John and Wade tell us the answer boils down to incentives.

Analysts get paid to provide information. If the information they provide makes their clients happy, they continue to get paid. If that information makes their clients unhappy, watch out.

Buy-side analysts know that clients who pay for their insights are going to be much more forgiving of a recommendation that overperforms, rather than underperforms, an earnings-estimate.

Back to John and Wade:

Quarter after quarter, analysts lower expectations on Wall Street by cutting their estimates in the run-up to earnings season, setting everyone up to be pleasantly surprised when the numbers come in “better than expected.” After all, it’s much easier to clear a lowered hurdle.

The amazing thing is that everybody knows this is happening, yet it continues to work a surprising amount of the time.

FactSet – the go-to earnings analytics company used by the pros – acknowledged this last Friday, when it reported on earnings growth expectations for Q3 results (emphasis added):

The S&P 500 is expected to report (year over-year) earnings growth of 27.6% for the third quarter.

Given that most S&P 500 companies report actual earnings above estimates, what is the likelihood the index will report actual growth in earnings of 27.6% for the quarter?

Based on the 5-year average improvement in earnings growth during each earnings season due to companies reporting positive earnings surprises, it is likely the index will report earnings growth of nearly 35% for the third quarter, which would be the third consecutive quarter of (year-over-year) earnings growth above 30%.

***Even though we anticipate overall positive earnings, there are still headwinds that will separate the great companies from the struggling companies

Sandbagging aside, three dynamics will leave their mark on troubled companies this quarter…

Supply chain problems, labor shortages, and inflation.

Here’s Reuters highlighting the first two:

In the run-up to earnings season, a number of companies have issued downbeat outlooks.

FedEx Corp said labor shortages drove up wage rates and overtime spending, while Nike Inc blamed a supply-chain crunch and soaring freight costs as it lowered its fiscal 2022 sales estimate and warned of holiday-season delays…

U.S. companies have so far this year kept profit margins at record levels because they have cut costs and passed along high prices to customers. Some investors are anxious to see how long that can go on.

Even though Q3 earnings “starts” this week, as of last Friday, about 4% (21) of S&P 500 companies had already reported.

Scanning the conference call transcripts of those 21 companies, FactSet searched for specific terms related to several problem factors (e.g., “labor,” “supply chain,” etc.).

Here’s what they found:

Supply chain disruptions and costs have been cited by the highest number companies in the index to date as a factor that either had a negative impact on earnings or revenues in Q3, or is expected to have a negative impact on earnings or revenues in future quarters.

Of these 21 companies, 15 (or 71%) have discussed a negative impact from this factor.

After supply chain disruptions, labor shortages and costs (14), COVID costs and impacts (11), and transportation and freight costs (11) have been discussed by the highest number of S&P 500 companies.

By the way, those transportation and freight costs will be interesting to watch given soaring oil prices.

Yesterday, U.S. crude popped more than 2% to a seven-year high of $81.50 a barrel. Since the end of last October, crude is up more than 120%.

This dovetails us into inflationary pressures.

***Yesterday, legendary investor, Louis Navellier, commented on inflation risk in his Accelerated Profits update

For newer Digest readers, Louis is a market legend. Over the decades, he has developed a high-tech trading system guided by preset algorithms – basically, step-by-step computer instructions. It’s this use of predictive algorithms that led Forbes to name him the “King of Quants.”

Given the emphasis on numbers and quantifiable data, it’s no wonder that Louis is closely watching what’s happening with inflation and its impact on earnings.

From Louis’ Accelerated Profits update:

Inflation still remains a bit of a wild card, as the latest Personal Consumption Expenditures (PCE) reading showed inflation climbed 0.3% in August. It is now running at a 4.3% annual pace, or the highest level in 31 years.

Core PCE, which excludes food and energy, also rose 0.3% in August and is now running at a 3.6% pace in the past 12 months…

The third-quarter earnings announcement season will reveal which companies can still maintain strong earnings and sales growth in the current environment.

What this means is that the market will grow more narrow and more fundamentally focused, as individual and institutional investors grow more selective in their stock picks.

If you’re wondering whether your stocks are strong enough to hold up in this “narrow” market, Louis offers a free tool that’s rooted in the same quantitative computer algorithms he uses to find his winners.

The Portfolio Grader gives a stock an instant grade, like a report card, based on eight fundamental factors. I encourage you to see how your stocks measure up.

***A quick note before we sign off

Last week, Louis Navellier and Eric Fry’s Escape Velocity event highlighted the huge profit potential these two legendary stock investors have found in an often-overlooked corner of the options market.

Basically, the event pulled back the curtain on how professionals use options. It’s a strategy that often transforms small stock increases into truly outstanding gains.

If you missed the evening, click here to watch the free replay.

Just a heads-up that the price of Louis and Eric’s research on this strategy will be going up tonight at midnight. If you join them today, you’ll be locking in the lowest price we’ll ever offer on this service.

To illustrate what it can do, Louis’ back testing showed that instead of stock gains of 55%, 79%, and 159%, this strategy could have racked up options wins of 2,586%, 3,033%, and 4,157%.

Here’s that link again to watch the replay of the event.

Wrapping up, it’s unlikely that earnings season will be a bullish blowout, but we still expect good things. We’ll keep you updated.

Have a good evening,

Jeff Remsburg

The post Q3 Earnings Preview appeared first on InvestorPlace.


Author: Jeff Remsburg

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Economics

30Y Gilts Soar Most Since Covid Crisis In Giant Short Squeeze After UK Slashes Debt Issuance

30Y Gilts Soar Most Since Covid Crisis In Giant Short Squeeze After UK Slashes Debt Issuance

While it is of secondary importance to US readers,…

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30Y Gilts Soar Most Since Covid Crisis In Giant Short Squeeze After UK Slashes Debt Issuance

While it is of secondary importance to US readers, in the UK everyone was glued to the telly following today’s Autumn Budget and Spending Review, and the budget speech in Parliament by Chancellor of the Exchequer Rishi Sunak. For the benefit of our British readers, and for gilt traders everywhere, here is a snapshot of what was just announced courtesy of Bloomberg:

  • Sunak presented his third budget, pledging a “new age of optimism” even as the risk of inflation lurks:
  • Sunak cut taxes on alcohol, part of his “radical” plans to simplify alcohol duty, aligning higher rates with stronger drinks, causing pub stocks to rally, and froze a planned rise in fuel duty. He also gave a one-year 50% reduction in business rates to the retail, leisure and hospitality sectors

  • With the cost of living rising for Britons, Sunak reformed Universal Credit, increasing how much welfare people will keep as their incomes rise. Specifically, the taper rate on universal credit will be reduced by 8% — from 63 to 55%, a much higher level than expected.
    • Pivoting from his spending announcements, Sunak made a philosophical statement that “government should have limits — it needed saying”. He added: “I want to reduce taxes — by the end of this parliament I want taxes to be going down not up . . . that’s my mission over the remainder of the parliament.”
  • With upgraded forecasts to economic growth and tax revenues, Sunak committed to real-term increases in departmental spending in all areas of government. As the FT notes, “there’s a lot of spending in this Budget but quite a bit of it is undoing the austerity years under David Cameron and George Osborne. The rise in per pupil funding, for example, is substantial but also returns the country to where it was in 2010.”
  • But perhaps most important to bond traders, despite those sweeteners, Sunak also focused on strengthening the public finances. As a result, the borrowing forecast for the next five years was lowered by a whopping 154 billion pounds, while planned debt sales for this fiscal year were cut by a fifth.
    • As Resolution Foundation’s Torsten Bell writes, “this is a much much bigger Budget than expected. Why? Because the @OBR_UK have become hugely more optimistic: borrowing down because taxes are up. And it’s a Boris Budget because the Chancellor has basically gone and spent it.”

While the details in the budget are secondary, as they will surely change once the BOE does hike rates throwing the entire forecast for a loop, the one thing worth emphasizing is the projected reduction in gilt issuance: the Debt Management Office has released its gilt issuance plans, and they contain a bigger cut than expected. The U.K. is slashing gilt issuance by 57.8 billion pounds compared to an estimate of 33 billion pounds. This according to Bloomberg shows how far the U.K. is willing to go to curb the debt spree at the height of the pandemic. It also confirms that a BOE taper is now inevitable as there will be far less need to monetize the debt spree.

And while it took a while for them to respond, 30Y gilts have plunged by a whopping 17bps…

… the biggest one-day move since the covid crisis, and one that is surely VaR shock inducing among the countless shorts who are currently spitting blood.

Tyler Durden
Wed, 10/27/2021 – 09:52

Author: Tyler Durden

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Economics

Joint Action Needed to Secure the Recovery

By Kristalina Georgieva G20 should lead in sharing vaccine doses, helping developing countries financially, and committing to reaching net-zero carbon…

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By Kristalina Georgieva

G20 should lead in sharing vaccine doses, helping developing countries financially, and committing to reaching net-zero carbon emissions by mid-century.

When G20 leaders gather in Rome this weekend, they can take inspiration from the bold design of the meeting venue, known as La Nuvola.

Just as the architect created a striking new space, global leaders must take bold action now to end the pandemic and create space for a more sustainable and inclusive economy.

The good news is that the foundations for recovery remain strong, because of the combined effect of vaccines and the extraordinary, synchronized policy measures led by the G20. Yet our progress is held back especially by the new virus variants and their economic impact, as well as supply-chain disruptions.

G20 leaders have a once-in-a-generation opportunity to move the carbon needle.

The IMF recently reduced its global growth forecast to 5.9 percent for this year. The outlook is highly uncertain, and downside risks dominate. Inflation and debt levels are rising in many economies. The divergence in economic fortunes is becoming more persistent, as too many developing countries are desperately short of both vaccines and resources to support their recoveries.

So, what should be done?

Our new report to the G20 calls for decisive actions within each economy. For example, monetary policy should see through transitory increases in inflation, but be prepared to act quickly if risks of rising inflation expectations become tangible. Here, clear communication of policy plans is more important than ever to avoid adverse spillovers across borders.

Carefully calibrating monetary and fiscal policies, combined with strong medium-term frameworks, can create more room for spending on healthcare and vulnerable people. These calibrations can deliver quick benefits through 2022.

After that, growth-enhancing structural reforms provide the bulk of added gains—think of labor market policies that support job search and retraining, and reforming product market regulations to create opportunities for new firms by reducing barriers to entry. Such a package of short-to-medium-term policies could boost aggregate real GDP in the G20 by about $4.9 trillion through 2026.

First, end the pandemic by closing financing gaps and sharing vaccine doses.

The pandemic remains the biggest risk to economic health, and its impact is made worse by unequal access to vaccines and large disparities in fiscal firepower. That’s why we need to reach the targets put forward by the IMF, with the World Bank, WHO, and WTO—to vaccinate at least 40 percent of people in every country by end-2021, and 70 percent by mid-2022.

But we are still behind: some 75 nations, mostly in Africa, are not on track to meet the 2021 target.

To get these countries on track, the G20 should provide about $20 billion more in grant funding for testing, treatment, medical supplies, and vaccines. This additional funding would close a vital financing gap.

We also need immediate action to boost vaccine supply in the developing world. While G20 countries have promised more than 1.3 billion doses to COVAX, fewer than 170 million have been delivered. Thus, it is critical that countries deliver on their pledges immediately.

Equally important is swapping delivery schedules for doses already under contract, allowing the buyer with more urgent needs to go first. Countries with high vaccination coverage should swap delivery schedules with COVAX and AVAT to speed up deliveries to vulnerable countries.

We must take these and other measures to save lives and strengthen the recovery. If COVID-19 were to have a prolonged impact, it could reduce global GDP by a cumulative $5.3 trillion over the next five years, relative to the current projection. We must do better than that!

Second, help developing countries cope financially.

Even as the global recovery continues, too many countries are still hurting badly. Think of how the pandemic caused a spike in poverty and hunger, lifting to more than 800 million the number of people who were undernourished in 2020.

In this precarious situation, vulnerable nations must not be asked to choose between paying creditors and providing health care and pandemic lifelines.

Indeed, some of the world’s poorest countries have benefited from the temporary suspension of sovereign debt payments to official creditors, initiated by the G20. Now we must speed up the implementation of the G20’s Common Framework for debt resolution. The keys are to provide more clarity on how to use the framework and offer incentives to debtors to seek Framework treatment as soon as there are clear signs of deepening debt distress. Early engagement with all creditors, including the private sector, and faster timelines for debt resolution will make a difference in the role and attractiveness of the Common Framework.

Providing help to deal with debt is important, but it’s not enough. Given their massive financing needs, many developing nations will need more support with raising revenue, as well as more grants, concessional financing, and liquidity support. Here the IMF has stepped up in unprecedented ways, including through new financing for 87 countries and a historic allocation of Special Drawing Rights of $650 billion.

Countries have already benefitted from holding the new SDRs as part of their official reserves. And some are using part of their SDRs for priority needs, such as vaccine imports, boosting vaccine production capacity, and supporting the most vulnerable households.

We are now calling on countries with strong external positions to voluntarily provide part of their allocated SDRs to our Poverty Reduction and Growth Trust, increasing our ability to provide zero-interest loans to low-income countries.

Third, commit to a comprehensive package to reach net-zero carbon emissions by mid-century.

New IMF staff analysis projects that increasing energy efficiency and transitioning to renewables could be a net job creator, because renewable technologies tend to be more labor-intensive than fossil fuels. In fact, a comprehensive investment plan with a combination of green supply policies could lift global GDP by about 2 percent this decade—and create 30 million new jobs.

In other words, as we strive to reach net-zero emissions, we can boost prosperity—but only if we act together and help ensure a transition that benefits all. The most vulnerable within societies and among countries will need more help making the structural transformation to a low-carbon economy.

One thing is clear: putting a robust price on carbon lies at the heart of any comprehensive policy package. Here G20 leadership will be critical, particularly when it comes to building support for an international carbon price floor. Moving together could also help overcome political constraints.

Under a proposal put forward by the IMF, a price floor for large carbon emitters would take into account a country’s level of development. It would also allow for equivalent regulations in lieu of an explicit price mechanism like emissions trading. This could jump-start cuts in greenhouse gases at a critical moment for the world.

At COP26 in Glasgow, G20 leaders will have a once-in-a-generation opportunity to move the carbon needle in the right direction and support developing economies. These countries have the fastest growth in population and in demand for energy. But they have the least fiscal firepower to ramp up investment in climate adaptation and emissions reduction—and often lack the technology needed.

At a minimum, this requires richer countries to deliver on their longstanding promise to provide $100 billion per year for green investment in the developing world.

For our part, we are extending a call to channel SDRs to establish the new Resilience and Sustainability Trust that our members strongly endorsed at our Annual Meetings. This will serve the needs of low-income and vulnerable middle‑income countries, including in their transition to a greener economy.

Completing and further strengthening the historic agreement on global minimum corporate tax will also help mobilize revenue for transformative investments.

These and other priorities will be top of mind for global leaders as they gather in La Nuvola.

This futuristic, versatile structure was built through a combination of vision, cooperation, and hard work—exactly what we need from the G20 at this pivotal moment. To secure the recovery and build a better future for all, we must take strong joint action now.

 

 

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Economics

UST Yield Curve Tumbles To 18-Month Lows Amid Policy Error Panic

UST Yield Curve Tumbles To 18-Month Lows Amid Policy Error Panic

“In stark contrast with the mindset of corporate leaders who are dealing…

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UST Yield Curve Tumbles To 18-Month Lows Amid Policy Error Panic

In stark contrast with the mindset of corporate leaders who are dealing daily with the reality of higher and persistent inflationary pressures, the transitory concept has managed to retain an almost mystical hold on the thinking of many policy makers,” El-Erian wrote in an Oct. 25 op-ed in Bloomberg.

“The longer this persists, the greater the risk of a historic policy error whose negative implications could last for years and extend well beyond the U.S.,” he argued.

It would appear from the accelerating flattening of the yield curve, that the market is believing El-Erian’s narrative.

Expectations for rate-hikes are being pulled forward by the market…

Pushing 2Y Yields above 50bps for the first time since March 2020…

And as rate-hikes are increasingly priced in, the long-end of the curve is tumbling…

Crushing the yield curve to its flattest in 18 months…

We give the last word to El-Erian, who said he fears that Fed officials will double down on the transitory narrative rather than cast it aside, raising the probability of the central bank “having to slam on the monetary policy brakes down the road—the ‘handbrake turn.’”

“A delayed and partial response initially, followed by big catch-up tightening—would constitute the biggest monetary policy mistake in more than 40 years,” El-Erian argued, adding that it would “unnecessarily undermine America’s economic and financial well-being” while also sending “avoidable waves of instability throughout the global economy.”

His warning comes as the Federal Open Market Committee (FOMC) – the Fed’s policy-setting body – will hold its next two-day meeting on November 2 and 3.

Tyler Durden
Wed, 10/27/2021 – 09:25





Author: Tyler Durden

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