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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: The Ox who wrote (18476)	11/14/2016 9:57:42 AM
From: richardred	Respond to of 33421

Yes, I happen to notice your posting of the banking stocks charts which will be beneficiaries of higher interest rates.

To: The Ox who wrote (18476)	11/16/2016 12:31:20 AM
From: John Pitera	1 Recommendation Recommended By The Ox Respond to of 33421

What Stocks Need To Go Up Nov. 15, 2016 10:16 AM ET by Elazar Advisors, LLC Summary --This may be overly simplistic but after the bond rout stocks need earnings to go up. -- Earnings have been dismal at best so economic hype needs to seep down to the company level. --The earnings yield story is less attractive after the bond rout so either earnings go up or stocks go down. Q3 actually had the first up earnings quarter since Q1 2015 so maybe just maybe stocks can pull it off. Over the last few years equities (NYSEARCA: SPY)(NASDAQ: QQQ) have not shown strong earnings. Even still stocks have managed to hold up and even go up. Relative to historic low bond yields stocks were still attractive. Now that bonds (NYSEARCA: TLT)(NYSEARCA: AGG) dropped and *yields jumped companies have to start earning. Without it stocks have risk ahead. Let's review what to watch. Stocks Held Up Because Of Earnings Yield* Source: Elazar Advisors, LLC. Data: Y-Charts and St Louis Fed Above you have a chart showing the *S&P 500 earnings yield versus the 10 year treasury. This is called "the Fed model."* When bond yields go down stocks become more attractive. Now with the jump in bond yields stocks are less attractive. You see the blue line shows that stocks have not (literally) earned their valuation. Earnings have come down. Now with the recent jump in bond yields the "difference" between earnings yield and bond yields has dropped. See the red line above. That chart is as of yesterday. If bond yields keep going up and earnings don't come through, everybody's favorite trade (The Fed Model) is getting less and less attractive. You see the red line above is dropping to levels not seen since 2009. Any worse and we get to 2008 levels. Anybody remember what happened in 2008? Earnings were not there to support stocks and stocks dropped. Earnings Hope Can Hold Stocks Up For Short Time Periods The stock market is of course a discounting mechanism (We still believe that.). *Investors could be excited about the coming US fiscal policies which can jump start corporate earnings.* Investors could be excited that GDP has been picking up. Hope can drive stocks for periods of time. Reality though needs to catch that baton of hope with an earnings pick up. Without that, stocks likely don't hold up especially with the bond drop and yield jump. Factset reports that Q3 2016 actually did see the first quarter of earnings growth since Q1 2015. Earnings have thus far grown 2.9% in Q3 2016. Factset says analysts expect 3.6% in Q4 and 11.4% in 2017. If those 2017 estimates were to materialize to actual number than stocks can "earn" their way despite the jump in bond yields. Will Stocks "Earn" Their Values? But with earnings having been down over the last two years we can't yet know if stocks "earn" their valuations. The new US administration has plans to spur growth with fiscal policies which can help. That fiscal spending will require debt issuance. That issuance will flood the market with bond supply which should further raise market rates dropping bond prices. That will also affect the "Fed model" initially driving equities to be less attractive. That said if stocks manage to continue the pick up seen in Q3 earnings stocks could hold on in the face of that bond yield head wind. As an earnings risk the new administration's foreign policy also needs to be fleshed out. Foreign policy could tighten and offset the fiscal policy jump start. It's too early to know. Two Economic Charts We See As Bullish For Earnings While we are not yet sold on earnings growth continuing from Q3, we think it needs to happen for stocks to hold up. Here are two economic indicators that can give some comfort that earnings can start to come through. Those are business confidence and inventories. Both charts are starting to peek higher which hopefully translates into further business confidence and spending. But, again, we'd say that needs to happen. Source: Trading Economics Inventories moving up for the first time since Q1 2015 corresponds to earnings moving up for the first time since Q1 2015. As businesses confidence builds business leaders get worried that they are under-inventoried. To catch expected sales they then build up inventories. That can cycle and drive the economy. Source: Trading Economics ISM purchasing managers index is a sign of business confidence which relates to inventories and thus earnings. As confidence builds businesses build inventories in anticipation of sales which drives the economy and earnings. Conclusion *Q3 earnings were up.* Earnings growth needs to continue. If it continues then stocks can survive the recent bond rout. If not stocks have risk to compensate for their lower relative earnings yield versus the jump in bond yields. We'll have to see if earnings can come through. In the meantime the market is holding up on hope.