Monday Morning Markdown – Corporate Profits and US Economy Shrink

What a busy weekend.

Turkey almost had a coup but it’s already over and you can see that spike down on the end of Friday’s chart that shows you the entire hour that the markets cared about a military coup in one of our NATO allies.   

I’ve already spent more time discussing it than the market has spent caring and I’m not even going to bother mentioning our own Government using the coup in Turkey to slip in GDP revisions under the radar that were revised down from 2.6% in 2016 to 1.9%.  Hey, what’s a 26% downgrade between friends?  Next year is forecast at 2.5% (down 0.1%) and we have 2018 and 2019 to look forward to, at 2.2% growth.

Of course, what really matters is earnings, I guess – but they are sucking too and 90 S&P 500 companies (18%) will report this week and Reuters is projecting a 4.7% decline in earnings from last year but don’t worry, last quarter was down 5% from last year and we’re at record highs 3 months later!  

As I noted on Wednesday (“Record High Rally Based on BS Stock Buyback Binge“), the radically decreased stock base is papering over all those negative proifts and making everything look fine(ish) so we can all keep fiddling while Rome burns – and don’t even get me started on what a mess Italy still is…

18% ($360Bn) of Italy’s bank loans are in technical default.  France is the next “problem” country with 5% vs 1.5% in the UK, Germany and most normal countries.  While the Government in Rome and the ECB have kicked this can down the road over and over again, do not kid yourself – Italy is the next Greece. 

In two weeks, the European Banking Authority will publish their semi-annual report which will highlight the banks’ weak capital positions at the same time as Global Banks are reporting their weak earnings – I wonder if investors will be able to connect the dots?   We flipped short on the Banking Sector last week with FAS.  

Bank of America (BAC) reported a profit of $4.23Bn, or 0.36 per share. That compares with $5.13Bn, or 0.45 per share in the same period of 2015.  Had BAC not bought back 3% of their shares in the past year, earnings would have looked a lot worse!  Revenue fell to $20.4 billion from $21.96 billion a year ago.  Net interest income fell 12% to $9.21 billion from $10.46 billion a year ago, a sharper drop than seen by other big banks.

The big banks have many ways to make money – bond trading is what saved BAC from disaster this quarter.  We’ll be watching the regional and local banks with great interest (get it?) as they have a harder time deflecting the revenue squeeze placed on them by ever-low interest rates.  BAC took a $1Bn charge in anticipation of customers refinancing mortgages at lower rates, which means lower returns on their assets (the home mortgages) – smaller banks don’t have that kind of money to write off…

We will also be paying close attention to the energy sector, as July 4th was already a bust on the demand side and we’re not working off any excess inventory into the summer and that could spell disaster for winter storage builds.  There are reportedly 9, 1Bn barrel tankers of oil floating in the North Sea at the moment, 2 more than there were in May as expectations of $50+ oil for the summer are not panning out.  

Globally, there are 95Mb of oil in floating storage and that’s not including the usual conga-line of 3Bn barrels that are constanly moving in tankers from one place to another.  The IEA reported that global supplies roese 600,000 barrels in June to 96Mb/day – so things are not getting better and that’s reflected in this morning’s renewed drop in oil back to $46.

After hearing from 13 Fed Speakers last week, this week they have chosen to go dark so the market is on it’s own with very limited data (Housing, Philly Fed, Chicago Fed, Consumer Comfort, Leading Indicators and PMI) so the focus is going to be on earnings and we’re not in the prediction game this early in the season – we’re happier to be in CASH!!!

As you can see, we’re hitting the ground running with IBM, NFLX and YHOO this evening but we’ll be watching EMC and VMW to see if other cloud companies are under pricing pressure.  Too many to mention in the rest of the week but this is all nothing compared to the two weeks ahead so strap yourselves in – it’s going to be a wild ride!  

Provided courtesy of Phil’s Stock World.