Wal-Mart just announced flat year-over-year sales, causing its shares to fall by 9% and wiping $20 billion from its market cap. Which would be unremarkable if the disappointment was an aberration. But it’s not. Earnings season is off to a brutal start, with big names announcing big misses all over the place. Meanwhile, the rare good numbers are mostly the result of blatant (and therefore ineffective) financial engineering. Some examples:
Drug maker Johnson & Johnson’s revenues missed slightly and its earnings were up — but only because of a massively-lower tax rate which won’t be maintained. Apply a normal rate and actual earnings fell hard. Its stock went down in response and management announced a $10 billion share repurchase plan (presumably paid for with borrowed money) to ease shareholder pain.
JPMorgan Chase saw lower revenues at all its major business lines, taking overall revenue down by 6%. Here again, earnings were up due to a one-time tax benefit. Otherwise they were down y-o-y
Bank of America’s revenues were down slightly year-over-year as lower interest rates make it harder to lend profitably. Earnings rose, but only in comparison with last year’s massive litigation-related loss.
Chip maker Intel’s revenue fell by 1% and net profit by 6%. The number of chips it sold fell by 19%.
Yum Brands, parent of Pizza Hut and many other junk-food-related assets, reported that same store sales in China rose 2% versus expectations of 9.6%. Management now expects that number to turn negative in the coming year.
Meanwhile, hedge funds which have feasted on the earnings-recovery/share-repurchase bull market of the past few years are feeling corporations’ pain. In the aggregate they’ve lost about 2% year-to-date, and some big ones are closing:
Hedge funds with more than $16 billion have announced shutdowns so far in 2015, according to data compiled by Bloomberg. Fortress said Tuesday it’s closing its $2.3 billion macro business run by Michael Novogratz after posting losses for almost two years. Bain said last week it’s shuttering its macro fund, which sustained more than three years of declines.
The meaning of all this disappointment? The recovery, such as it was, is over and for big parts of the US economy recession — defined as two negative quarters — has arrived.
And there’s nothing on the horizon to reverse the trend. The dollar is still too high for corporate comfort, interest rates are too low for banks to expand their loan margins, volatility is too high for bank and hedge fund trading desks to successfully manipulate their markets, and oil, coal and other commodities seem to have stabilized at unprofitably low price levels.
So the question becomes: How attractive are financial assets if they’re priced for perfection in a suddenly-imperfect world? The answer: Not very.