Juggling Dynamite

Surprise, surprise…right when 100% of the sell side analysts were predicting record profit levels in 2015:

“Forecasts for first-quarter profits in the Standard & Poor’s 500 Index have fallen by 6.4 percentage points from three months ago, the biggest decrease since 2009, according to more than 6,000 analyst estimates compiled by Bloomberg. Reductions spread across nine of 10 industry groups and energy companies saw the biggest cut.

Earnings pessimism is growing just as the best three-year rally since the technology boom pushed equity valuations to the highest level since 2010. At the same time, volatility has surged in the American stock market as oil’s 55 percent drop since June to below $49 a barrel raises speculation that companies will cancel investment and credit markets and banks will suffer from debt defaults…

Profit is forecast to have grown 2 percent in the final three months of 2014 and increase 2.8 percent for the current quarter, down from analysts’ October estimates of 8.1 percent and 9.2 percent, respectively. Without energy companies, profit gains would have been 4.7 percent and 7.8 percent, the most recent projections show.

Except for utilities, every other industry has seen reductions in estimates.” See: Oil whacks S&P 500 earnings growth

 

With West Texas Crude under $47 this morning (West Cdn Select around $35), we must keep in mind the $10 to $40 range (green band below) where oil prices traded before the consumer credit bubble billowed them to anomalous heights from 2004-2008 (see my partner’s chart here.)

We should also understand how overly concentrated and dependent many economies have become on the oil and gas sector the past decade. Mean reversion in the space now, will have a negative impact far and wide, even while lower prices are better for consumers (reducing their expenses and allowing them to pay down debt faster than they could with higher energy costs).

Fadel Gheit, analyst at Oppenheimer & Co., examines the potential impact of cheap oil over a long-term timeframe on economics and oil producers. Here is a direct video link.

In their minds the theory is perfect. In practice their perpetual add-debt-and stir policies have proved devastating for the real economy. Widely revered and misguided, financial academics have served as maniacal pied pipers leading the masses and their governments to fiancial ruin the past 15 years. And while the academics will deservedly lose reputation after the fact, the rest of the world will be left to pay the costs for years to come.

When the central bank was incremental in normalizing rates 10 years ago during a time of enormous froth in the housing, equity and credit markets, it led to huge distortions in the real economy.

“Finally, when the bubbles popped the whole house of cards came down.”

The Fed still hasn’t learned its lesson.

“[It] doesn’t appreciate the precedent of what they put the world through a decade ago and I fear they’re doing it again.”

Here is a direct video link.