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OCTOBER 2012: GLOBAL MACRO TIPPING POINT - (Subscription Plan III)

STALL SPEED : Any Geo-Political, Economic or Financial Event Could Trigger a Market Clearing Fall

As we reported last month, Global Economic Risks have taken a noticeable and abrupt turn downward over the last 60 days. Deterioration in Credit Default Swaps, Money Supply and many of our Macro Analytics metrics suggested the global economic condition is at a Tipping Point. Though we stated "Urgent and significant actions must be taken by global leaders and central banks to reduce growing credit stresses" nothing has occurred even after the 19th disappointing EU Summit to address the EU Crisis. Some event is soon going to push the global economy over the present Tipping Point unless major globally coordianted policy initiatives are undertaken. The IMF recently warned and reduced Global growth to 3.5%. This is just marginally above the 3% threshold that marks a Global recession. This would be the first global recession ever recorded. The World Bank is "unpolitically'projecting 2.5%. The situation is now deteriorating so rapidly, as to be impossible to hide anylonger.

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OCTOBER 2012: MONTHLY MARKET COMMENTARY (Subscription Plan II)

CURRENCY WARS: The Fighting Resumes - The "Race to the Bottom" Monetary Policy Programs Accelerates

THE "UNLIMITED" & "UNCAPPED" SALVO - The macroprudential policy strategy of Financial Repression reached a seminal point last month with the announcement of the Federal Reserve's "Unlimited" QEIII/Operation Twist and the ECB's "Uncapped" OMT. We have moved into the outer limits of Monetary Policy which now forces the accelerated currency debasement of the developed economies against its Asian & BRIC competitors. The 'race to the bottom' has entered another phase which now sets the battle lines for the next set of conflicts.

In case you haven't been keeping score, here is how the "Race to Debase" currently stands. (see right) MORE>>

MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS

OCTOBER 2012: MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV)

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	PART I - Understanding FINANCIAL REPRESSION
	PART II - FINANCIAL REPRESSION in Europe
	PART III - FINANCIAL REPRESSION in the US & ASIA
	PART IV - Preparations for FINANCIAL REPRESSION

Password: macro

Q3 EARNINGS SEASON - Headlines & Highlights Suggest a MAJOR DEMAND Problem

Earnings Cliff Ahead? Profit Outlooks Are 90% Negative 10-22-12 CNBC Fast Money

• Earnings conference calls are beginning to resemble crisis hotlines as corporate executives slash profit forecasts because of fears of higher taxes, a recession in Europe and slowing economy in China.
• Of the 20 companies in the S&P 500 that have provided guidance for the fourth quarter during the current earnings reporting season, 18 have slashed their forecasts, according to Goldman Sachs. That's a 90 percent negative run rate that many investors and analysts have never seen before.
• “Although guidance tends to be downbeat, this is especially negative,” wrote Goldman’s David Kostin, in a note to clients over the weekend. The strategist sees this negativity leading to a 14 percent drop in the S&P 500 this quarter.
• “Companies are taking the opportunity to lower the bar,” said Mike Murphy of Rosecliff Capital. “All have one eye on the fiscal cliff, so might as well bring expectations down in case we go over the cliff.”
• The most discussed topic on earnings conference calls is in fact the year-end “fiscal cliff,” when the Bush tax cuts are set to expire and mandatory spending cuts go into effect, barring any action from a lame-duck Congress. Executives fear this may occur whether or not President Barack Obama retains office or Mitt Romney unseats him.

When speaking of demand from truck companies on the conference call, Alcoa CEO Klaus Kleinfeld said:

“messages like fiscal cliff, euro news, China … all of that influences that sentiment, and I guess that that makes them push their orders out.”

This Ugly Earnings Season Summarized In One Paragraph 10-24-12 BI

BTIG's Dan Greenhaus has the sumup:

If you want to see an ugly chart, check out MNST. Or DD. Or APOL, CMG, XRX or IBM for that matter. These companies like many, simply haven’t made it through earnings season unscathed. But the S&P 500? If you can believe it, since AA reported after the close on the 9th, the S&P 500 is down less than 2% or so while the index is down roughly 3.5% since its near term high in mid September. Certainly there’s been rotation; tech is down the most this month after running higher all year but that’s a function of earnings (IBM, RHT, GOOG, semis). Financials are/were the best sector year to date heading into October and that sector is up 1.7% this month.

Bottom line: Some notable bombs, but overall, the market isn't THAT much of a disaster YET.

Drumbeat of Weaker Revenues 10-21-12 Mish

Earnings and revenues can’t diverge forever 10-25-12 James Saft Reuters

• Corporate earnings and revenues can’t, as they are doing this earnings season, diverge forever.
• Just about halfway through the U.S. third-quarter corporate reporting season and we find that 59 percent of S&P 500 companies have beaten their earnings estimates, down a bit from last quarter but still an upbeat number.
• And yet about 60 percent have missed their SALES targets, meaning that corporate America is somehow extracting more profit than promised despite bringing less money into the tills than expected. That’s admirable, but perhaps a bit disturbingly close to magical.
• On many readings, all is rosy in the land of equities. Not only does the market have crucial support from central banks bent on forcing money into risk assets (and hoping some of the profits get spent), earnings are at record highs and the amount investors will pay for a share of those earnings is going up.
• Analysts are forecasting fourth-quarter earnings to grow at a near 9 percent clip, down from the 17 percent they were penciling in earlier but still enough to take the earnings of the S&P 500 to almost $27 per share, in what would be yet another record.
• And next year analysts are looking for growth of about 12 percent.
• That optimism, combined with quantitative easing fever and complacency over the euro zone, has allowed price-to-earnings multiples to expand, and not just in the United States.
• On a global basis, forward-looking P/E valuations have gotten richer since early June, according to Morgan Stanley analysis, most notably for companies in mining, materials, energy and even finance.
• That’s all well and good, but very hard to square with the increasing number of companies saying they haven’t been able to deliver promised growth in revenues.
• The huge majority of S&P 500 companies giving revenue or earnings guidance for the coming quarter have guided downwards, according to data from FactSet.
• DUPONT: Third-quarter revenue for chemicals company DuPont dropped 9.2 percent from the year-before quarter, to $7.4 billion, below the $8.15 billion analysts expected, a miss the company blamed on global drops in demand. DuPont slashed its full-year earnings estimate to between $3.25 and $3.50 a share from about $4.20 before.
• CATERPILLAR: Similarly, farm and construction equipment maker Caterpillar Inc lowered its forecasts for the second time in a year, citing economic weakness and uncertainty.

WHERE’S THE GROWTH?

• So, we have a trend towards lower revenue growth, a dwindling number of companies beating expectations and yet a world in which investors see this combination as growing in value.
• In some ways this is reminiscent of the housing market in the middle years of the last decade, where prices, year after year, outpaced wage and income gains. The argument then was that incomes would soon catch up and that housing was cheap on a financing basis. Housing, of course, was brought down with a thump when people finally worked out that the two numbers – cost and the amount of money available to service the debt backing that cost – could not forever drift further apart.
• So it may prove for shares. Surely some of the growth of earnings is a credit to company managers, who are proving unrelenting in wringing efficiencies from corporate structures, allowing for earnings growth even in challenging times.
• Earnings are, on some level, an opinion. There is art to it as well as just math. Think about a bank which values assets and that drives earnings: those marks are ultimately subjective. While earnings may be more or less than meets the eye, a dollar in revenues is always a dollar.
• Try this: compare earnings on an economy-wide basis and compare to overall economic output. On this measure, corporate America does not have a lot of room to expand its share of the pie, because earnings as a percentage of GDP are at near-record highs and are about half as high again as the kinds of figures we saw in most of the past 50 years.
• The upside is, if the growth of earnings is confirmed over time by growth in the economy, this would send money flooding into corporations and allow for equity prices to rise even more relative to earnings. That, of course, depends on the fiscal cliff, the euro zone, China and any number of other tough-to-call macro issues.
• The downside, of course, is that earnings revert to mean in terms of their share of overall output. When you track U.S. wages against profits, you see where most of the expanding share is coming from.

It may well be, especially if the government is not going to become much more leveraged, that profits will be limited by wage growth within a context of low overall growth. That particular scenario is only an outside chance, but one which would cause a big fall in shares. Ultimately, the pie is going to have to grow for equities to hold their ground, much less gain more.

Q3 EARNINGS SEASONS - Revenues Continue to Be the Problem & Accelerating

Earnings Roundup: The Revenue Picture Starts to Look More Bleak 10-29-12 Thomson Reuters ALPHANow

While S&P 500 companies continue to do a reasonable job of beating profit forecasts this quarter, when it comes to revenues, the picture is entirely different, raising concerns about what may lie ahead in the fourth quarter.

At the midway point in the third-quarter earnings season, with about half of the companies in the S&P 500 having reported their results for the quarter, the pace at which those firms are announcing disappointing revenues appears to be accelerating.

So far, 37% of the companies that have reported their earnings have failed to meet analysts’ expectations with respect to the top line. This is far below the long-term average revenue beat rate of 62%, but that isn’t all that is worrying: the downward trend displayed throughout this earnings season is of equal concern.

As shown in Exhibit 1, below, the rate at which companies are announcing revenue “beats” has declined as the number of companies reporting their results has climbed. Last week we saw the worst revenue performance relative to expectations, with only 34% of companies beating revenue estimates.

The problems companies have in beating revenue forecasts haven’t shown up when it comes to earnings, however. As of last week, the rate at which S&P 500 companies were announcing earnings that came in above estimates was within a normal range, and the consensus for third-quarter earnings growth for the S&P 500 has increased slightly: analysts now are forecasting a decline of 1.2%, an improvement from the decline of 2.1% predicted at the beginning of October. Earnings beat rates are higher than revenue beat rates in every sector with the exception of Telecommunication Services, as shown below in Exhibit 2. This discrepancy is especially pronounced in the Industrials sector, where 69.2% of companies have beaten earnings estimates but a mere 20.5% have done so for revenue, a difference of 48.7 percentage points.

United Parcel Service Inc. (UPS.N) was one of the companies within the Industrials sector to report revenues that fell short of analysts’ estimates. It reported revenues of $13.1 billion, compared to a forecast of $13.3 billion, although it did report earnings that matched the consensus estimate of $1.06 per share. UPS credited e-commerce activity for the strength in its U.S. domestic business, although export activity was weak. “In Europe, more countries are slipping into recession as they impose austerity measures,” said UPS’s CEO, Scott Davis. “In Asia, although projections have come down, economic growth there leads the world.” Still, he noted, Asia’s export activity continues to lag its GDP growth. Davis also expressed concern about the impact of the impending fiscal cliff on UPS. ”The lack of clear direction on future tax and spending policy has and will continue to slow business investment,” he said. “This will clearly impact the B2B small package market.”

The Boeing Company (BA.N) also saw the effects of lower demand on the shipping business on its third-quarter results, as weakness in air freight hurt revenues. Boeing earned profits of $1.35 per share, significantly higher than the consensus of $1.13. Nonetheless, it, too, struggled and failed to match its revenue estimate of $20.03 billion, falling very slightly short when it announced revenues of $20.01 billion.

Companies in the Materials sector have reported results that show a smaller divergence between earnings and revenue beat rates than most other groups in the S&P 500. Unfortunately, that’s for the wrong reason: this is the group whose 41% earnings beat rate is the second lowest for the quarter. (Its revenue beat rate is only 18%.) E.I. du Pont de Nemours and Co. (DD.N) is representative of the troubles facing the sector, having announced big misses on both the top and bottom lines. The company’s quarterly earnings of 32 cents per share represents a 54% decline from last year’s level, and fell well below the 46 cents per share estimate. Revenue was weak as well, as the company’s report that it pulled in $7.4 billion in revenues was below the $8.1 billion forecast, as well as falling 20% below last year’s sales. In response to the weak performance, CEO Ellen Kullman announced an initiative to try to cut costs and boost productivity to try and help improve margins in the environment of declining revenues in which the company now finds itself.

With 114 companies in the S&P 500 scheduled to report their results next week, investors will be watching to see whether this string of revenue disappointments continues. So far this quarter, of the 96 companies that have beaten earnings estimates, 56% of them did so while falling short on revenues. That is the worst ratio on record since 2002. As long as companies continue to display this pattern – positive surprises on earnings accompanied by revenue shortfalls – profits will be generated only through cutting costs and increased productivity. That raises the question of what will happen to profits in the fourth quarter, which may be at risk if that pattern continues. The current fourth-quarter estimate for revenue growth stands at 2.5%; while not very high, it has so far remained quite steady. That could change, however: if companies continue to report weak revenues this earnings season, this may well prompt downward analyst revisions.

Q3 EARNINGS SEASON - UGLY!

Q3 Earnings Season To Date Summary: Ugly... And Getting Worse 10-21-12 Goldman Sachs via ZH

Roughly one third of the S&P has reported earnings so far, with another third reporting in the next five days and almighty AAPL on deck Thursday evening, and if there is one word to describe what has happened so far, that word would be "ugly." The same word would be used to describe how Q4 is shaping up to be. And that word will be very a optimistic prediction of what 2013 will bring unless a major catalyst develops that pushes Congress to resolve the fiscal cliff situation. So far that catalyst is missing. But going back to Q3 earnings, here is how Goldman's David Kostin summarizes events to date: "3Q reporting season is roughly one third finished. Two early conclusions: (1) Information Technology results have been startlingly weak with high-profile revenue disappointments by the four horsemen: MSFT, GOOG, IBM, and ORCL. (2) EPS guidance for 4Q has been overwhelmingly negative across all S&P 500 sectors with 18 of 20 firms lowering 4Q earnings guidance by a median of 5%. Analysts have lowered 4Q EPS estimates for stocks already reported by 0.4%. We expect further EPS cuts of 6% loom ahead. Firms reporting next week: AAPL, T, PG, MRK, CMCSA, AMZN, COP, AMGN, OXY, MO, UTX, MMM, CAT, DD, and FCX." Sorry Bob Pisani, better luck spinning earnings favorably next QE.

More detail on what is shaping up as the ugliest earnings season (even with DVA and loan loss-reserves included) in years:

Two early conclusions from 3Q earnings season: (1) Information Technology top-line sales results have been weak lead by MSFT, GOOG, IBM, and ORCL. Since the start of 3Q reporting season, analysts have cut 4Q sales forecasts for those Information Technology firms  reporting results by 70 bp, lowered margin forecast by 43 bp and cut expected EPS growth by 260 bp. (2) Earnings guidance for 4Q has been overwhelmingly negative across the S&P 500 with 18 of 20 firms lowering 4Q earnings guidance by a median of 5%. Analysts have lowered 4Q EPS estimates for stocks already reported by 0.4%. We expect reductions of perhaps 6% still need to take place.

The distribution of 3Q results has been lower than the historical average. 117 firms in the index have now reported 3Q results (34% of total cap). 37% of companies beat earnings estimates and 21% missed. In a typical quarter, 41% of companies exceed EPS expectations and 13% miss.

The bar for 3Q earnings season is very low. First, 2Q results disappointed with twice as many revenue misses and one half as many beats compared with a typical quarter. Second, guidance heading into reporting season was more pessimistic than usual with 80% of firms guiding below consensus compared with prior quarters when the midpoint of guidance falls below the average analyst estimate roughly 67% of the time. Third, analysts slashed 3Q earnings estimates by 5% during the quarter, leading to the expectation that 3Q 2012 would witness a 1% year-over-year decline in EPS versus 3Q 2011.

Sales are disappointing again in 3Q with year/year growth of just 2% and negative surprises of 30 bp. 15% of firms beat consensus sales expectations by more than one standard deviation (below the historical average of 35%). In addition, 36% of firms have missed sales  estimates by that magnitude, versus 19% historically. Revenue estimates for 4Q have declined by 30 bp.

Margin of 8.6% is slightly below the expectation at the start of earnings season (8.7%) and represents a

year-over-year decline of roughly 33 bp. Information Technology results have been particularly disappointing. Microsoft (MSFT) and Google (GOOG) missed revenue and earnings estimates and IBM and Oracle (ORCL) missed sales estimates. The sector actually posted a nearly 1% positive surprise in revenue relative to analyst expectations. However, analyst methodology for forecasting financial results for certain Information Technology companies differs from the Standard and Poor’s definition of revenues and operating earnings.

Apple reports on Thursday evening. Consensus expects the company will grow 3Q EPS by 28% versus last year. AAPL sales are forecast to rise by 31%. Consensus expects margins will fall by 46 bp to a still stellar level of nearly 23%. Analysts expect AAPL will be the second largest contributor to S&P 500 earnings representing 3.7% of 3Q 2012 EPS and 20% of Information Technology earnings. AAPL represents 4.5% of S&P 500 equity cap and 24% of the Information Technology sector. While Apple’s share of 3Q EPS is not in proportion to its share of market cap, this appears to be a seasonal issue. Next quarter, consensus expects AAPL will contribute 6% of S&P 500 EPS. Information Technology sector is expected to grow 3Q earnings by 7% year/year. However, the sector earnings growth is just 3% excluding AAPL.

Managements are lowering guidance, indicating downside to 4Q EPS. Fully 20 companies have provided 4Q guidance following their 3Q earnings announcements and 18 of these firms have reduced 4Q profit guidance. The midpoint of guidance was below the mean consensus estimate in all but two cases. Although guidance tends to be downbeat, this is especially negative.

4Q EPS estimates for reported companies are down by just 40 bp. We expect further negative 4Q EPS revisions will occur most likely as a result of reduced margin estimates. We forecast full-year 2012 S&P 500 earnings of $100 per share. Assuming no change in 3Q EPS, 4Q estimates would have to fall by 6% to reach our full-year estimate.

Next week 160 firms representing 31% of S&P 500 market cap will report results. At the sector level, 41% of Health Care, 39% of Industrials, and 35% of Information Technology as measured by market cap will release results. Large companies reporting include: AAPL, T, PG, MRK, CMCSA, AMZN, COP, AMGN, OXY, MO, UTX, MMM, CAT, DD, and FCX.

Click to Enlarge

UK - Small Business Credit Squeeze Now Acute - Loan Rejections Rising

Firms 'facing a loans shortfall of £21bn' 10-29-12 The Independent

• Cash-starved companies face a £21bn loans squeeze this year as business lending falls to its lowest level since 2006, according to alarming new forecasts today.
• Smaller businesses will bear the brunt of a 4.6 per cent fall in corporate loans to £429bn this year, Ernst & Young's latest forecasts for the financial sector warn.
• Business lending should return to growth next year but will not recapture 2008 heights for another four years, it adds.
• The accountant blames
  • A poor economic backdrop and
  • Tougher capital requirement for the shortfall as
  • Britain's banks shrink their balance sheets by an estimated £300bn this year.

Carl Astorri, senior economic adviser to the Ernst & Young ITEM Club, said: "The good news is that 2012 is likely to be the last year of such marked deleveraging in the UK – the bad news is that, once again, SMEs will bear the brunt of it. Government schemes to increase lending may help a lucky few but, as banks are encouraged by regulators to store up more capital and to look again at their forbearance policies and so-called bad-loan books, most small business are going to continue to feel the squeeze."

Ernst & Young added that loan rejection rates for businesses were rising, and warned that attempts to boost lending through the business bank set up by Business Secretary Vince Cable, pictured, are likely to fall well short of filling a £19bn "financing gap" faced by SMEs.

Mr Astorri said: "The figures suggest that the business bank's lending capacity could be exhausted in less than a year. Its impact will also be reduced by competition with private sector lending activity: even if the Government aims to lend at market interest rates, it is unlikely to be able to avoid displacing existing lending activity. Indeed, we expect the business bank will have to compete for projects that are commercially viable, and so we do not think the scheme will have a tangible impact on the economy."

UK - In A Recession

UK Economy Update 10-25-12 Bloomberg Brief

The U.K.’s first double-dip recession since the 1970s ended in the third quarter, today’s GDP figures show, assisted by one-time effects including ticket sales for the London Olympic Games and a reversal of the negative impact of an extra public holiday in June. The U.K. economy grew at the fastest pace in five years after GDP rose 1 percent from the three months through September. While the return to growth may cheer the government, the outlook is only for a weak recovery. Stripping out the temporary factors from the third-quarter data may leave underlying growth closer to 0.1 percent.

GDP has shrunk in nine of the past 19 quarters, leaving output 3.1 percent below pre-crisis levels through the third quarter. While the recession may have ended, the National Institute of Economic and Social Research defines a depression as “a period when output is depressed below its previous peak.”

The BOE estimates it will take until 2014 before the U.K. returns to the 2008 level, longer than after the Great Depression of the 1930s.

The first GDP estimate is based on 44 percent of the required information and the ONS frequently makes revisions. The chart shows the difference between the first estimate and the last revision over 52 quarters. There have been no revisions in just three quarters over that period. While the average change is 0.1 percentage point, upward revisions have a mean of 0.4 percentage point.

Consumers may be worse off than the GDP figures suggest. Net national income per person has dropped by 13.2 percent since its peak in 2008, according to the Office for National Statistics. That compares with a 7 percent fall in GDP per person over the same period. While reaching a new low 12 quarters on from its peak, NNI per head recovered to the prerecession peak in 10 quarters and 13 quarters following the recessions that began in 1990 and 1980, respectively.

Underlying third-quarter growth may have been about 0.1 percent, according to Markit, as the composite PMI averaged 50.9 in the period. The repair of overstretched private and public balance sheets is likely to weigh on domestic demand in the coming quarters. BOE Governor Mervyn King said this week the recovery is proceeding at a “slow and uncertain” pace.

EU CREDIT DOWNGRADES - France and UK On Tap

The Complete 'Advanced' Economy Sovereign Ratings Cheat-Sheet 10-29-12 Zero Hedge

S&P recently acted to markedly downgrade Spain, and Moody’s has ended its recent ratings review, leaving Spain at Baa3; and while ratings could remain largely stable in the short-term (supported by OMT's promise and the possible delay of GRExit), there are a few exceptions such as France and and the UK that Citi's Rates group expect to see downgrades on in the short-term. The following table provides the full breakdown of Moody's and S&P's ratings for the advanced economies along with Citi's model views - which imply weak outlooks for most of Europe in the medium-term as Greek reality hits home.

and in cased you were wondering just what Spain is doing with its bank bailout plan:

Via Citi:

Although we expect most sovereigns will have stable ratings in the near-term, there are a few notable exceptions. We expect that Moody’s will place France on a ratings review for a possible downgrade (ie Negative Watch) in the next 2-3 quarters, largely because of the fiscal program and weak economy. Moreover, we also expect that S&P will likely place the UK on Negative Outlook in the next 2-3 quarters (in line with Moody’s Aaa Negative Outlook). We also expect that Portugal will be downgraded over the next 2-3 quarters due to continued recession plus the probable need to extend its Troika programme.

Over the long-term, we still believe that ultimately, it will become evident that the Greek programme remains off track and that Greece’s debt is still unsustainable. We think the likely stalemate between Greece and its international creditors will eventually lead to a withdrawal of international support leaving Grexit as potentially the only available solution for Greece.

Due to our longer-term view on Grexti and various sovereign-specific factors, we continue to expect a wide series of downgrades over the next 2-3 years

GLOBAL -Credit Feuled Globalization in Retreat

Charting The Undoing Of Credit-Fueled Globalization 10-28-12 Zero Hedge

For two decades the rate of growth of world trade volumes considerably outstripped that of industrial production as credit-fueled globalization created huge imbalances in the world.

As Diapason Commodities' Sean Corrigan indicates in these three simple charts, all that vendor-financed circular exuberance has come to an end.

The Bottom-line: Forced deleveraging (not least of which in Europe) is crushing the credit-fueled (and unsustainable) dream of endless growth as debt saturation has been reached (on private and now public balance sheets). To wit: Global Trade Volume growth is deep in the danger zone and about to turn negative; as the hopes of so many Sinomaniacs and Pollyannas is slowly peeled back to a righteous recognition of reality.

The ratio of Global Trade Volumes to Industrial Production remained in a relatively stable uptrend as imbalances fueled by credit averaged 3.4% annually more trade than production. All that ended when whatever Keynesian Endpoint or Debt Saturation barrier we hit in 2008 and the impossible was proclaimed entirely possible.

What this means - simply - is that without credit expansion, world trade volumes are decelerating rapidly.

With Europe on a path to considerable deleveraging (as is clear below)...

...things do not look set to get better any time soon - and expectations for world trade to enter contraction any minute now is highly likely.

DREAMS OF CHINA SAVING THE DAY

And as Sean Corrigan notes - on the dreams of China saving the day once again:

The minor uptick in China’s ‘flash’ PMI estimate for October – from 47.9 to 49.1 ? has sparked the usual explosion of uncritical hopefulness (on the part of those who, by and large, thought there never could be a slowdown under the aegis of the all?powerful CCP to begin with,) that this finally marks a bottom in that country’s economic cycle.

In giving vent to such optimism, the Sinomaniacs conveniently overlooked the fact that much of the improvement was down to the fact that it was the price indices, rather than those relating to output or employment, which struggled back above the expansion/contraction threshold of 50 – a circumstance which might just temper their extend?and?pretend expectations of an ever imminent monetary relaxation, were they to reflect on it for a moment between jubilations.

Worse still, the Pollyannas appear to have forgotten that the PMI simply gauges whether things are generally better or worse than they were last month – and that in a non?quantitative manner, to boot. The unequivocal answer is worse (if marginally so, this time) for the twelfth consecutive month and for the fifteenth out of the last sixteen occasions. Thus, it may be true that the rate of decline seems to have slowed – how enduringly, only time will tell ? but the fact of that ongoing decline itself remains, even after so many uninterrupted months of economic deterioration.

China bulls and the other assorted, ?next quarter? blue?skyers may have either venal or psychological reasons to puff this one reading , but the test of an analyst who knows his stuff – and who is not afraid to be honest with you ? is whether he makes this simple, but crucial, distinction in his commentary.

and on extrapolating this recent China growth, Michael Pettis has a few words:

If you want to make economic predictions, in other words, whereas a long historical view will be very useful because it allows you to consider the dislocations created by a reversal of unsustainable imbalances, recent economic data are largely useless, as are predictions based on linear adjustments of recent economic data. Instead of projecting from past data you must model the various paths by which rebalancing can occur, and your prediction must be limited to those paths.

Q3 EARNINGS SEASON - A Bigger Disappointment than Initially Expected

Why The Real Earnings Picture Is Bad And Getting Worse 10-26-12 Citi via ZH

Listening to the incessant chatter of confirmation bias from CNBC, you could be forgiven for thinking that earnings are 'not that bad'. Headline-makers like AMZN, GOOG, and AAPL scare for a few moments but we are reassured back to numb BTFD-land by some disingenuous analyst (or worse a PM) who says he is buying with both hands and feet. The misleadingly top-down positive impression of looking at a 'beats-to-total ratio', suffers from one rather annoying bias (that often gets forgotten):  analysts constantly revising their expectations throughout the reporting period, and hence rarely deviates from the current level of 71%. But, as Citi notes,

if one examines results relative to analyst expectations prior to the reporting season, it's clear just how disappointing Q3 has been

- especially given the sell-side mark-downs already factored-in.

If one uses unrevised expectations - which simply anchor lower and make every succeeding number look relatively better and better as earnings season progresses in one direction or another -  then the S&P 500's earning surprises are even worse than Q2 - making the sixth quarter in a row of 'missed' pre-expectations...

Via Citi:

Third quarter earnings have surprised to the downside even more than in the second quarter.

What's more, earnings have been particularly disappointing given that sell-side expectations already underwent significant downward revisions months ago.  Indeed, the bottom-up estimate for S&P500 third quarter earnings per share dropped quite precipitously from above 28 down to 26.5 in July as management teams lowered their own guidance. Intriguingly, for as downbeat as third quarter results have been, we've yet to see the sell-side revise down estimates for next quarter or 2013 (see chart).

That could be an ominous sign given that the commentary on many a third quarter earnings call has been so cautious, particularly with respect to the fiscal cliff. Qualitatively speaking, we worry that with almost all companies missing top line revenue targets (most notably OC, AVT, NSC, LLY), fourth quarter earnings may end up disappointing sell-side analyst even more than Q3. Moreover, the weakness we’ve seen in the basics/cyclicals as a result of slower growth in China and Europe (DD, DOW, FCX) and the headwind that sequestration looks like it will pose to the defense industry (NOC, GD, LMT) create potentially formidable challenges for those sectors in particular.

Q3 EARNINGS SEASON - Worst Earning Guidance in Over 5 Years

Charting The Worst Earnings Guidance In Over Five Years 10-22-12 Morgan Stanley and @Not_Jim_Cramer via ZH

With over a third of the S&P 500's market cap having reported, results have been mixed. Aggregate earnings are tracking ahead of expectations but this miracle is driven almost entirely by financials (which account for 85% of the beat) as lower expenses and higher reserve bleeds offset contracting NIMs (combined with a lack of MtM) to enable a total manufacturing of what S&P 500 EPS is. As Morgan Stanley's Adam Parker notes, the quality of the beats has been low, with companies benefiting from a mix of lower operating costs and lower taxes. Revenues are missing estimates (hurt by a stronger USD and macro weakness) and Tech has been particularly weak. More importantly, for all the hope-driven, recovery-is-around-the-corner, 'fiscal-cliff'-won't-happen believers, the majority of forward guidance has been negative resulting in the highest negative-to-positive ratio since 1Q07 but this is not priced in as top-down 4Q12 estimates have hardly budged.

Earnings are slightly ahead of expectations - thanks almost entirely to financials! Do you tust that data?

Negative guidance is dominating positive outlook changes...

yet top-down EPS estimates remain unchanged (to slightly higher - again thanks to financials)

as for the 24th week in a row, net earnings revisions are negative...

and where are the world's EPS estimates being cut the most? (i.e. where was hope highest?)...

So you still believe in miracles?

Charts: Morgan Stanley and @Not_Jim_Cramer

Q3 EARNINGS SEASON -Three Disappointments

3 scariest things about this disappointing earnings season 10-25-12 CNNMoney

So far the reports in general haven't been upbeat. Top strategist Rob Arnott back in March made the case to me that earnings growth was bound to slow. (I had my doubts.)

Now Arnott looks sage-like. S&P estimates earnings of the 500 companies in their index fell 3% in the third quarter from a year ago. That would be the first drop in corporate profits since the end of the recession.

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There are two ways to see that stat. Earnings growth has been phenomenal this recovery, and the third quarter a year ago was a record for the S&P 500. So the fact that we are slightly off the peak isn't too bad. What's more, analysts expect earnings in the fourth quarter to rebound sharply, up nearly 10%. So this is just a blip.

The other way to see it: Watch out below. Unfortunately, I see three reasons it could be the latter.

1. PROFITS TURN NEGATIVE-RARE: First of all, it's very rare for corporate profit growth to turn negative. When it does, it's usually because we are in a recession or headed for one. For instance, corporate profit growth turned negative in the third quarter of 2007. The last time it was negative before that was in 2001. Before that, you basically have to go back to 1989. There is one quarter in 1998 when profit turned negative, and then bounced right back. But that's the one exception in the past 25 years, and it was closer to the end of that bull market than the beginning.
2. PROFIT MARGINS: Second, profit margins, already at all-time highs, look tapped out. Companies have benefited, in a way, from a slow economy that's meant they didn't have to add a lot of workers, or hand out raises. Eventually, that's going to change. When it does, lots of other costs are likely to rise as well including energy and materials. Of course, it's natural for profit margins to shrink at this stage in a recovery. That's what happens. And some have argued that we can have strong earnings growth with a return to normal profit margins. But to do that you have to have strong economic growth. And we don't.
3. ECONOMIC GROWTH - Third, economic growth continues to be weak, and it's looking weaker. A number of economists have been pulling down their GDP growth estimates, many of which were below 2% to start with. And while the U.S. might get better after the election, there's no real reason to think that it would change things in Europe or China.

Given all these risks, you would expect the stock market to be cheap. Stocks have risen a lot this year, confounding a number of smart hedge fund managers, who have sat out this rally. And you can say the smart money is always a lot dumber than it gets credit for. But you can't say their fears about where stocks are headed are unfounded.