Wayne Wile: Fed Fantasies vs. Retail Facts

Three weeks ago I wrote that retail sales were showing real signs of weakness. Now we are seeing the results in the retail stocks and the news is even worse than I expected.

Last Wednesday, shares in Macy’s (M)—the largest department store in the U.S. and an iconic American brand—plunged 15%. The next day, department store Kohl’s (KSS) fell 9% and on Friday, high-end retailer Nordstrom (JWN) joined the bloodbath, dropping 13%. This massive selloff—which the media is calling the “Retail Wreck”—was due to terrible first-quarter results.

This is the latest bad news in what’s been an extremely ugly earnings season. Companies in the S&P 500 are on track to record a 7.1% decline in earnings. That will mark the fourth straight quarter that earnings have fallen. And that hasn’t happened since the 2008-2009 financial crisis.

Macy’s reported a 5.6% drop in its same-store sales last week. Macy’s sales decline last quarter was its biggest since 2009. Kohl’s first quarter same-store sales fell 3.9%, its biggest decline since 2009. Nordstrom did a little better, reporting “only” a 1.7% decline in same-store sales.

Yes these three are bricks-and-mortar retailers but do not be fooled; all three are also big online retailers so this is not a question of one sector growing at the expense of another. These are bad numbers, plain and simple, because the consumer is tapped out.

When I was a stock broker in a previous lifetime, we used to say that many an investor had gone broke underestimating the strength of the American consumer. The shoe is now, finally, on the other foot. Investors are going broke believing that the U.S. consumer can continue to spend.

Today we got the FOMC minutes from their last meeting two weeks ago. The minutes claim to show that the Fed governors had a serious discussion about maybe raising rates at the upcoming June meeting. At least, that’s the way the market seemed to interpret them as the fed futures contract quickly priced in a 36% chance of a hike next meeting from less than 5% last week.

I think there is no way they raise rates in June. The retail numbers are emphatic. The economy is failing before our very eyes. Don’t listen to the Fed; look at what’s happening in the real world.


Wayne Wile, More Evidence the Real U.S. Economy is in Recession

Unfortunately, most of the information we get on the U.S, economy comes from the federal government. As I have said previously, this data is so messaged by higher mathematics that it has become meaningless or misleading.

Fortunately, the private sector also produces data that does not serve a political agenda. One such source is the monthly Cass Freight Index produced by Cass Information Systems from data provided by America’s 400 largest truck and rail shippers. The most recent monthly report for April was published last Friday. Traditionally, trucking and railroad activity has been a key indicator of the health and direction of the U.S. economy.

You are about to see a chart that is undeniable evidence that we have entered a major economic slowdown.


This is not a seasonally adjusted index so you can clearly see the seasonal variations in shipping activity. The red line shows the level of activity for the first four months of this year. You can also clearly see that the trend is sharply down since 2014. In fact, the first four months of this year are the worst since April of 2010. The reality is that we have now seen the Cass Index decline on a year-over-year basis for 14 consecutive months.
In 2007-2008, there was a similar decline in this Index but the Federal Reserve and other “experts” assured us that there was not going to be a recession. Then we immediately proceeded to plunge into the worst economic downturn since the Great Depression of the 1930s.

Just because stock prices are artificially high right now does not mean that the U.S. economy is in good shape.  In fact, there was a stock rally at this exact time of the year in 2008, even though the underlying economic fundamentals were rapidly deteriorating.  We all remember what happened later that year.

Wayne Wile – Another Recession Indicator

As I reported earlier today, the monthly ISM Manufacturing New Orders Index is flashing recession. The March data was released on May 2 and it shows that New Orders have now declined for 17 straight months on a year-over-year basis, with March dropping 4.2% from a year ago.

Real Gross Private Domestic Investment (RGPDI) is another excellent leading indicator of recession. If businesses aren’t investing, recessions almost always follow. The latest update of this economic indicator became available last Thursday. Unfortunately, RGPDI is only reported quarterly.

As illustrated below, RGPDI turned down during the third quarter of last year. It fell a little further during the fourth quarter of last year and fell again in the first quarter of this year (the latest number), which again reinforces my belief that a recession is either underway or will soon begin.


You can see the pattern in the chart as clear as day. The gray vertical lines are recessions and each one of them occurs during a downturn in business investment.

I may sound like a broken record when it comes to this recession issue. But believe me, this is important. This ridiculously over-priced equity market will be punished beyond recognition by an economic recession, presenting investors with one of the best short opportunities in many years. And the onslaught of a recession will also complete the destruction of what credibility the Fed has left, opening the way for the mother of all gold rallies.

Wayne Wile, The Earnings GAAP

Readers will be familiar with my view that we are now in an earnings recession—year-over-year S&P500 earnings are now down three quarters in a row and I’m confident we are headed for more.

But there is a second earnings issue besides the slope of the trend that bothers me just as much. The accounting profession has something called GAAP—Generally Accepted Accounting Principles–which set the standards for how earnings are calculated. GAAP has rules about recognizing revenue, what is expensed, depreciation, tax reporting and so on. The result is a final number that can be compared against the past and against other companies.

At the end of every boom (like now), these standards are increasingly ignored in favor of reporting non-GAAP earnings. What are non-GAAP earnings? The short answer is just about anything you want. Or as one accountant friend puts it, “earnings without the bad stuff”. And at the end of every bust, companies get religion and go back to GAAP to try to win back the confidence of investors. But in the meantime, Wall Street analysts go along with non-GAAP reporting because it makes everyone feel good.

What bad stuff gets left out? Well, stock based compensation for one; it should be expensed as compensation but often is not. Or inventory write-offs and plant closings which seem to happen every year but are slipped out of the earnings calculation as so-called non-recurring items.

How bad is it? The gap between GAAP and non-GAAP has never been wider. Total non-GAAP EPS for the S&P500 are expected to hit $118 for 2015. At an S&P of 1940, $118 implies a P/E multiple of 16.5x.

Now look at GAAP earnings. Using standardized I/B/E/S GAAP earnings (Institutional Brokers’ Estimate System) which excludes pro-forma write offs, add backs, non-recurring items and countless other misleading numbers, you get total S&P500 earnings for 2015 of just $91.5 rather than $118, the lowest S&P500 GAAP earnings per share since 2010. This results in a GAAP P/E above 21, the highest since the financial crisis.


So what is going on here? The growing decline in earnings is being hidden from you. The blue bars tell the tale. At some point, the overstatement of earnings will become clear. It will not be a good day for shareholders.

Wayne Wile – Upward GDP Revision Not Good News

The second estimate of real US fourth quarter GDP released today was a miserable seasonally-adjusted annual rate of 1.0%. But it was up from the even more miserable first estimate of fourth quarter growth of 0.7% which came out at the end of January. The second estimate was even above the consensus range. Good news, right?

Wrong. The increase was due to a higher estimate of inventory accumulation during the quarter. The growing inventories of today are the declining sales and recessions of tomorrow.

Here’s the data:

Prior Consensus Consensus Range Actual
Real GDP – Q/Q change – SAAR 0.7 % 0.4 % 0.2 % to 0.8 % 1.0 %
GDP price index – Q/Q change – SAAR 0.8 % 0.8 % 0.8 % to 0.9 % 0.9 %

The first estimate does not use the data from the full quarter, just the first two months. Demand slowed as the quarter progressed, resulting in a gain in inventories of $81.7 billion compared to the first estimate gain of ‘just’ $68.6 billion. Meanwhile, today’s report downgraded personal consumption expenditures to an annualized (and pathetic) plus 2.0 percent in the fourth quarter versus an initial estimate of 2.2 percent. Alarming.

Any increase in inventories is not good, dear reader, especially if consumption is weakening at the same time. The economy is slowing as any number of data points show. Inventories are already at multi-year highs and the inventory-to-sales ratio has been climbing now for more than three years. Where is the economic recovery in the chart below?

GDP growth

We continue our call for a near-term US recession. Do you really want to own US stocks?


Wayne Wile, The War on Cash (2)

On February 16, 2016 the Washington Post published an oped piece by Larry Summers titled “It’s time to kill the $100 bill” in which he makes it clear that the war against paper money is only just starting. Not surprisingly, just like in Europe, he argues that killing Benjamins will help eradicate crime, saying that “a moratorium on printing new high denomination notes would make the world a better place.”

Who is Larry Summers, you may ask? A very well connected American economist and Professor of Harvard University. He was the Chief Economist at the World Bank from 1991 to 1993 and Undersecretary for International Affairs for the US Treasury from 1993-1995 in the Clinton Administration. In 1995, he was promoted to Deputy Secretary of the Treasury under his long-time political mentor Robert Rubin of Citibank fame. In 1999, he succeeded Rubin as Secretary of the Treasury. While working for the Clinton administration, Summers played a leading role in the deregulation of the U.S financial system, including the repeal of the Glass-Steagall Act. Following the end of Clinton’s term, he served as the 27th President of Harvard University from 2001 to 2006.

Larry is the faithful voice of the financial and economic establishment. When he speaks, you should reach for your wallet before he does.

Larry Summers
This Larry Summers trying to look thoughtful and wise.

Mr. Summers proposes in the Washington Post “a global agreement to stop issuing notes worth more than say $50 or $100. Such an agreement would be as significant as anything else the G7 or G20 has done in years.”

France has already banned residents from making cash transactions of €1,000 ($1,114) or more. The biggest banks in Norway and Sweden are urging the outright abolition of cash. And there are reportedly plans at the highest levels of government in Israel, India, and China to remove cash from circulation.

Deutsche Bank CEO John Cryan predicts that cash “probably won’t exist” 10 years from now.

Governments want you to use money they can easily control, tax, and confiscate. Paper currency gets in their way. Do you think this is paranoid, dear reader? Are these not already the motives you have learned to expect from the authorities?

I suggest you follow the advice of Bill Bonner (http://www.acting-man.com/?p=43321): Always do the opposite of what they tell you to do. As he notes: When cash is outlawed, only outlaws will have cash. We should all be among them. And we should all own some gold.