The New Recession

November 10, 2015
We look more and more like the lost decade of Japan . . .

Much has been written about third quarter earnings as poor reports continue to come out. With 70 percent of the S&P results reported, we have seen year-to-year declines of 2 percent. This is significant, and many are talking about the first S&P earnings recession in six years.

But here is what I want to point out to you. This recession in corporate America has been going on for some time - since at least 2008. Let's stop focusing on earnings for a brief moment and look at revenues. Revenues have been down for a lengthy time. In fact, I have been talking about this for the last two years. Earnings have been artificially propped up for the last four years. With the quantitative easing, the cheap money, the buying back of stock, and the financial engineering of balance sheets, everybody has been focusing on earnings and lost sight of the fact that earnings are going up while sales continue to go down.

This week alone we see durable goods numbers down. Factory orders and productivity are down again. Wages are stagnant. The Organization for Economic Cooperation and Development (OECD) is a Paris think-tank that puts out economic data. Made up of 34 of the largest economies in the world, the OECD indicates there is a downturn in inflation of about 0.2 percent throughout these 34 nations. But more importantly, this goes to the point of spending habits, which continue to be poor. They tried blaming the downturn on energy, but it is not just energy when we see some of the data coming from the U.S. (retail data, durable goods data, factory orders, and so on). Kellogg's announced this week, amid poor earnings, that they will be cutting back. General Mills says they're shutting down one plant and will be laying off people. Alcoa Aluminum is closing down one of their smelting plants and laying off more people. Behavior of consumers is changing dramatically.

We should be seeing some correlation between the data and the markets, but we are not. All the data is still negative, but, irrationally, the market keeps going up. Goldman Sachs strategist David Kostin said third quarter earnings reports can be summed up as earnings being adequate and sales being dismal. (By the way, this has nothing to do with energy.) Most analysts do not expect any real sales numbers or earnings reports to get better until the end of the first quarter of 2016.

I hope analysts continue to look at (and warn the American people about) the consumer and what the consumer is and is not doing. About the fact that we have no earnings and higher costs in essentials - and health care in particular. Buying habits and behavior are changing (perhaps forever) with the average American.

Every day we look more and more like the lost decade of Japan.

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