Earnings are Higher from Savings, not...
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Jonathan Yates
Earnings are Higher from Savings, not Revenues, Which is Disturbing

All the indexes were down after a strong run during a powerful earnings season.  But as the earnings season is concluding, a very disturbing fact is surfacing that the bullish numbers being posted are resulting from reduced expenses.  The revenues needed to produce higher earnings are not being generated.  As the United States is a consumer economy with about 70 percent of gross domestic product emanating from spending by its citizens, that is a concern for the long term health of the bull market in equities.

The low interest rate policies of the Federal Reserve are also allowing for corporations to generate higher earnings.  Borrowing costs are lowered due to record level interest rates.  Stock buybacks, financed by low interest borrowing, increase earnings per share as there are fewer shares.

Stocks are also higher due to low interest rates favoring dividend paying stocks.  The average dividend of a member of the Standard& Poor’s 500 of around 2% is much higher than what a long term certificate of deposit will yield.  As a result, investors are looking for income from the dividend stream of a stock.

Eventually this will turn.

Interest rates will have to rise.  When that happens, investors will pile into bonds.  Corporate borrowing costs will be higher, lowering earnings.  Buybacks will be fewer, reducing earnings even more.

As the chart below shows, the Dow ended on a very bullish note.  The candlestick patterns were negative, intense, and engulfing…all very disturbing.  Bearish sentiment is at 62%.  The number of stocks declining greatly outnumbered those rising.  In the short term, that could easily reverse.  But, long term, the trends to present barriers to the bull market continuing.


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