The Space Between Headlines and Facts

Far above the Armageddon-like media coverage the America’s economy is, as we used to say, “Smokin'."

By example, KPMG recently released data from a CEO survey that showed huge increases in confidence for growth – they see significant increases in M&A activity and expect continued vast employment needs.  Unsurprisingly, 75% of CEOs called out technology as their greatest need in the jobs arena.

All of this continues to support the demographic powers of the Barbell Economy – where the Baby Boomers are slowly ceding the economic reins over to the Millennials of Generation Y. 

So, as always, we get to choose; either get lost in the scary headlines and become victims to the (mis)fortunes of knee-jerk reactions, or be patient and let all this growth unfold over time.

As for the Data…

The Empire Manufacturing report came in much better than expected, as did the Philly Fed Manufacturing report that followed; the latter at 34.4 vs. 21.0, and it was up further from last month's reading of 23.2 (also a beat).

May represents the 18th straight month that the headline index has come in above 20. That hasn't happened since...ehhh…well, it's actually never happened before!

Prior to this latest report there had never been a streak of more than 17 months since the indicator's inception where the headline index was above 20.

The Problem?

Take a look at the data below. 

I suspect someone that sometime soon someone will tell us that we have reached our peak. Why? Because outside of the short period in the early 1980s, the reading on General Business conditions has a tough time staying above the 35-ish level.

So, what do we have in common now with the early 80's? 

Well, two important things:

1. The Boomers were just getting cranked up to begin driving the world ahead (Gen Y is just taking the wheel today), and

2. President Reagan had just implemented a historic tax cut to unleash business capital, just as Trump has done in this era.

We all got a front row seat to the circa 20 year bull market that happened next from the 1980s to about the year 2000.

Now take a look at the span of time a recession set in after highs on this index (it definitely was not a short period of time):

Earnings Peaked? 

Not.

In a bizarre response, as corporate America spent the last eight weeks smashing the earnings estimates - and looking for more - the media has decided to fill the airwaves with experts warning of "peak earnings." 

Keep in mind that the last time we heard "peak" mentioned this often was in the summer of 2008. 

Oil was hitting $145+ a barrel and stories of peak oil were everywhere.

Sure, it was scary. But it also sure wasn’t correct. In fact, the idea of the world having reached peak oil is now ridiculous – but everyone back then (all the experts) were convinced that it was true.

Once again; we all get to choose what we believe. 

Here Are The Facts:

The S&P 500 data is now available for the Q1-2018 reporting season, which shows that:

• On a per-share basis, revenues jumped 9.5% year-on-year (YOY)
• Operating earnings per share (based on Thomson Reuters data) soared 24.0% over the same period, reflecting the strength in revenues and the tax cut. (Both were at record highs last quarter)
• Quarterly profit margins of the composite rose to another record high of 12.0%, up from 10.9% during Q4-2017, and
• S&P 500 net operating income rose 25.4% YOY to a record $1.2 trillion during Q1.

Here is some chartistry from Dr Ed Yardeni to put that all into perspective - LEI's are off the charts, Forward Earnings are at record levels, as are profits, cash flow and GAAP.

(Note: The NIPA - red line - dipped...this comes from big tax bills on repatriation capital flows - see below):

Stocks dipped 10.2% from their most recent highs during the latest window of chop spanning from January 26 to February 8 of this year.  While that was unfolding - the media flooded the idea that liquidity was "drying up."

The usual scapegoat was the chatter about the Fed’s quantitative tightening, which started during October of last year. Anyone listening for the last five years will note that the bears have been predicting that our next bear market would be driven by the Fed unwinding its QE program.

Yet, that same group told us that the next bear market would be driven by the end of QE as well - which is now three years old.

You could drive a truck through the space between the financial facts and financial headlines.

It all depends on what you want to believe.