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For Corporations And Hedge Funds, The Next Recession Is Already Here

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:

Fortress, Bain Lead Hedge Funds Liquidating in Market Volatility

Fortress Investment Group LLC and Bain Capital are leading the list of big-name money managers liquidating hedge funds this year as volatility roils global markets.

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.

12 thoughts on "For Corporations And Hedge Funds, The Next Recession Is Already Here"

  1. I get the feeling we are reaching “peak nation state”
    Nation states have only been around for about 200 years. Many for about 100 years.
    most of the countries in Europe are less than 200 years old, and ME /Africa/ Asia are about 100 years
    you could argue that the drive for “self determination” which gathered steam after ww1 has done more harm than good
    – Nation states lead to bastardization of ideologies – i think thats universal
    – nation states lead to persecution of minorities
    – most nation states have corrupt governments: this is no longer military industrial, but military industrial congressional financial
    – nation states become expressions of their leaders / oligarchies ego
    – nation states try to use their currency as a tool of power/control, and we can see the results
    – and finally we have failed states. (anarchy and chaos, and things like ISIS, depending on the situation)
    are failed states a symptom?
    is the concept of a nation state passe?

  2. no matter if they print and helio-drop bushels of bucks, the problem is that velocity of money is at a decades low rate…..people will just stuff it under the mattress, they’re scared, they’re tight, the Boomers are retiring and trimming back on spending, the Boomers kids are college-debt-ridden-can’t get a -good-job poor.

    1. Not to mention the massive over capacity of just about every industry. Have you seen the weekly natural gas storage report lately? http://ir.eia.gov/ngs/ngs.html

      And that is after two, back to back brutally cold winters, and a gas drilling rig count that is 88% off the 2008 peak.

      In China they are finishing up the projects they already started, but they are going to have to stop funding uneconomic projects soon. How do we know that? The iron law of financial bubbles: the bigger they are the harder they fall.

      This is what happens when interest rates are suppressed and central banks and governments encourage speculation and malinvestment. This go ’round will almost certainly be worse than 2008, since they can’t cut interest rates.

    2. Exactly, the whole economy is about locked up and this cycle of fear and don’t spend feeds on its self. A lot of towns in the south look like something from a zombie apocalypse movie.

  3. It’s not just top line sales. At the same time sales have been flat or declining, gross margins are also shrinking. I believe Wal-Mart is now below a 25% gross margin and the company I work for is also below 25% with flat or declining sales. Years back, our company hit a 30% gross margin and was always in the upper 20’s.

  4. I’m confused. I thought last quarter was revised upwards and became a blockbuster (3.9%). Why can’t the same adjustments be made again? Dollar weakness is also relative. If gold becomes the new currency standard then – voila! – toilet paper it becomes. Problems solved.

  5. The next real question is when QE4 is announced instead of a rate hike will anyone continue to believe in the “recovery” and if they don’t, then what?

    1. Every state run media outlet will copy and paste “we’re in a recovery”. Tell that lie over and over and it becomes the truth.

  6. Well John, the real question is what are the real prices of assets when the helicopter money starts dropping yet again?

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