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Saturday, March 28, 2015 12:29 PM


Wally Becomes Chief Economist for Dilbert, Predicts "Bubble in Monetary Policy"


On the lighter side, in the March 28, 2015 Dilbert, Wally becomes the new chief economist.



Wally: "The exchange rate on derivatives will trigger a bubble in monetary policy and deflate the Yen."

I like the phrase "bubble in monetary policy". It aptly expresses precisely what has been happening globally.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Friday, March 27, 2015 8:40 PM


Patriot Act Vote Coming Up: Google joins Apple, Others Requesting Spying Controls


The Patriot act expires in June, and anyone in their right mind would wish the entire concept to go away entirely. NSA Spying has a 100% perfect track record of failure.

Sadly, the answer to the question Would NSA Data Surveillance End With Patriot Act? is a resounding "No".

The National Security Agency would lose its legal justification for collecting data on Americans' phone and email activity if Congress does not reauthorize the Patriot Act by June 1, but privacy advocates are skeptical about whether that would mean the end of the controversial surveillance program.

President Barack Obama has called on Congress to pass a bill that would end the bulk surveillance program while keeping certain spying powers intact for national security reasons. The clock is ticking, however, as the NSA loses its legal authority for domestic surveillance provided by Section 215 of the Patriot Act in June. If Congress does not renew that provision then the Obama administration will not push to continue the program, although its absence would damage America’s national security, says Ned Price, a spokesman for the National Security Council.

“If Section 215 sunsets, we will not continue the bulk telephony metadata program,” Price tells U.S. News. “Allowing Section 215 to sunset would result in the loss, going forward, of a critical national security tool that is used in a variety of additional contexts that do not involve the collection of bulk data.”

 The NSA, however, could invoke other legal powers to continue the data collection program without Section 215 of the Patriot Act, says Harley Geiger, senior counsel for the Center for Democracy and Technology advocacy group. The government has also conducted bulk collection of email metadata in the past using Section 214 of the Patriot Act, for instance, which is also called the Foreign Intelligence Surveillance Act “pen trap statute,” Geiger says.

“The FISA pen trap statute does not have a sunset and would not be affected by a sunset of Section 215,” he says. “For these and other reasons, we believe that legislation to end bulk collection would be more effective than merely letting Section 215 sunset. However, we believe Congress should sunset Section 215 if effective reform is not possible.”

Passing surveillance reform may be difficult in a Congress controlled by Republicans, considering it failed last year while Democrats controlled the Senate. Senate Majority Leader Mitch McConnell of Kentucky is among the Republicans who say the NSA powers are necessary to ensure national security.

I will vote for the Freedom Act as long as it doesn’t include reauthorization of the Patriot Act,” Paul told U.S. News recently, adding that he will not vote to reauthorize Section 215.

Paul told U.S. News he will also partner with Sen. Ron Wyden, D-Ore., on a bill to amend the Patriot Act when it comes up for reauthorization.

A bill introduced on Tuesday by Reps. Thomas Massie, R-Ky., and Mark Pocan, D-Wis., would abolish legal powers for surveillance programs, including the entire Patriot Act and the FISA Amendment Act of 2008.
Google joins Apple, Others Requesting Spying Controls

CNET reports Google joins Apple, others in calling for spying controls, as Patriot Act vote nears.
With an important surveillance-related section of the USA Patriot Act up for reauthorization this year, Google has teamed with other tech firms in sending a letter to lawmakers and others that spells out needed changes to US spy policies.

On Wednesday, Google revealed in a blog post that it has joined the Reform Government Surveillance coalition, civil rights groups and trade associations in sending the letter, which promotes transparency, accountability and an end to the bulk collection of data.

The letter (PDF) -- addressed to government figures including US President Barack Obama, Director of National Intelligence James Clapper, National Security Agency Director Michael Rogers and various House members -- underscores the need for reform that will both protect national security and preserve the right to privacy. Google also posted a page online where people can add their name in support of the reforms.

The catalyst for the letter is the USA Patriot Act -- specifically Section 215, which the NSA points to as the legal basis for its bulk collection of data. Section 215 is set to expire June 1, and lawmakers must vote before then on whether to reauthorize the section or allow it to "sunset."

The letter outlines what it says are "essential" elements to surveillance reform, mentioning Section 215, as well as Section 214 -- another part of the Patriot Act that the NSA could invoke to justify its bulk collection and one that's not set to expire this year.

The companies say it has been nearly two years since the first news stories revealed the scope of the NSA's spying, and that "now is the time to take on meaningful legislative reforms" that maintain national security but also protect privacy, transparency and accountability.

The Reform Government Surveillance coalition now counts Apple, AOL, Dropbox, Evernote, Facebook, LinkedIn, Microsoft, Twitter, Yahoo and Google among its members.

The group's principles are based on the idea of placing "sensible" limitations on government surveillance powers and introducing strong checks and balances when governments are granted the power to spy -- to prevent abuse and keep the concept of privacy intact. In addition, the group promotes transparency concerning government demands for data imposed on technology companies, as well as respecting the free flow of information across borders.
Congress Must Reform Our Surveillance Laws

On the Google Public Policy Blog, David Drummond, Chief Legal Officer, Google, states Congress Must Reform Our Surveillance Laws.
We have a responsibility to protect the privacy and security of our users’ data. At the same time, we want to do our part to help governments keep people safe. We have little doubt that Congress can protect both national security and privacy while taking a significant, concrete step toward restoring trust in the Internet.

Google has been working hard for the last two years to reform government surveillance laws, and we will continue to push for broader surveillance reforms in the months ahead.

We invite you to join us in asking Congress to enact surveillance reform by adding your name at google.com/takeaction.
Bill of Rights

As far as I am concerned, any law that does not pass muster with privacy restrictions in the Bill of Rights, should be done away with entirely.

Here's a refresher course on the Fourth Amendment to the United States Constitution, part of the Bill of Rights.
The right of the people to be secure in their persons, houses, papers, and effects,[a] against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

The Fourth Amendment was adopted in response to the abuse of the writ of assistance, a type of general search warrant issued by the British government and a major source of tension in pre-Revolutionary America.
Dear Congress

I find it galling that Republican hypocrites voted for the Patriot Act and any of its extensions. I believe the Patriot act should not be amended but rather abolished in entirety.

Thus, I am torn over half-measures that allegedly will do what is needed. Google says "We have little doubt that Congress can protect both national security and privacy while taking a significant, concrete step toward restoring trust in the Internet.

I have high doubts. Once rights are taken away, history suggests it is damn hard to win them back. The only question at hand is whether or not partial restoration of rights merits your consideration or not.

On the theory that half a loaf is better than none, but also with plenty of reservations, please consider  Google's Dear Congress Petition.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

3:17 PM


Earnings "Beat the Street" Manipulation Underway as Profit Warnings Mount


Of S&P 500 companies providing first-quarter outlooks, MarketWatch reports 84% have been negative as Profit Warnings Pile Up.

Ahead of the start of earnings reporting season, which unofficially kicks off when Alcoa Inc., reports results on April 8, about 84% of the companies that have provided first-quarter outlooks gave negative outlooks. That’s above the 81% that warned Q1 2014, and the five-year average of 68%.



I believe that yellow highlight I added should say Q3. More importantly, it would have been nice for MarketWatch to actually link to FactSet because it contains some interesting charts and analysis.

Earnings Insight

Let's dive into the FactSet Earnings Insight Report for first quarter of 2015.

Key Metrics

  • Earnings Growth: For Q115, year-over-year earnings for the S&P 500 are projected to decline by 4.6%. If the index reports a year-over-year decline for the quarter, it will be the first time since Q 3 2012 (-1.0%).
  • Earnings Revisions: On December 31, the estimated earnings growth rate for Q1 2015 was 4.2%. All ten sectors have lower growth rates today (compared to December 31) due to downward revisions to earnings estimates, led by the Energy sector.
  • Earnings Guidance: For Q1 2015, 85 companies have issued negative EPS guidance and 16 companies have issued positive EPS guidance.
  • Valuation: The current 12-month forward P/E ratio is 16.7. This P/E ratio is above the 5-year (13.7) average and the 10-year (14.1) average for the index.
  • Earnings Scorecard: Of the 16 companies that have reported earnings to date for Q1 2015, 14 have reported earnings above the mean estimate and 10 have reported sales above the mean estimate.

Earnings vs. Price



Q1 2015 Earnings Season: By the Numbers Overview

Analysts and corporations continue to lower expectations for earnings for the S&P 500 for the first quarter. On a per-share basis, estimated earnings for the first quarter have fallen by 8.2% since December 31. This is the largest decline in the bottom-up EPS estimate for a quarter since Q1 2009.

Companies have also lowered the bar for earnings fo r Q1, as 85 companies in the index have issued negative EPS guidance, while just 16 companies have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 84% (85 out of 101), which is well above the 5-year average of 68%. As a result of the downward revisions to earnings estimates, the estimated year-over-year earnings decline for Q1 2015 is -4.6% today, down from an expectation of growth of 4.2% at the start of the quarter (December 31).
There is much more in the report. Inquiring minds may want to take a look.

Earnings Manipulation Underway

In spite of these downgrades (rather, because of these downgrades), when actual earnings are announced, expect a huge majority of companies to "beat the street".

Every year, whether earnings are going up or down, companies guide analysts to numbers low enough they can beat.

Don't Be Fooled

Please consider this CNBC report from April of 2014: Companies are Beating Earnings Estimates But Don’t Be Fooled.
Of the 85 S&P companies that have already reported their first-quarter earnings, 67 percent have beaten analyst estimates on the earnings side, and 51 percent have beaten on the revenue side, according to FactSet. That sounds pretty good—until one considers that over the past four years, 73 percent of companies have tended to beat earnings estimates, and 58 percent have tended to beat revenue estimates.
As with MarketWatch, CNBC did not have the decency to link to FactSet either.

Failure to Beat the Street

The last time companies failed to "beat the street" was third quarter of 1998. At the earnings trough in third quarter of 2008, 58% of companies in the S&P 500 still managed to "beat the street".

Don't Worry Companies Will Still "Beat the Street"

In spite of those downgrades, history suggests corporations will still "Beat the Street".

Even in 2008 and 2009 the majority of firms beat estimates. Here is the way the process works:

  • Corporations give analysts "tips" regarding profit expectations.
  • Those profit expectations are purposely low.
  • Wall Street analysts lower estimates, if necessary, as the quarter progresses such that corporations can "beat the street".
  • If corporations are going to miss and need an extra penny, they change tax assumption or make other "one time" adjustments as necessary.
  • Corporations beat the street by a penny with "pro-forma" (after adjustment) reporting.

Mind the Gap

By the way, that's one hell of a gap between earnings guidance and stock price. The 10-year smoothed PE at the end of this earnings season is set to soar. The 10-year PE is already one of the three most expensive in history.

Doug Short at Advisor Perspective takes a look at the 10-Year PE in his March 2, 2015 post Is the Stock Market Cheap?



Stock are only cheap compared to 1929, the dot-com bubble, and the housing bubble. Given the plunge in earnings estimates, this market will soon pass the housing bubble in amplitude.

The 1929 peak may even be in sight. And in many ways, this bubble is worse than the dot-com bubble, as during the tech wreck one could find many companies with good valuations. It was predominately technology with PE extremes.

Doug Short notes ...
The historic P/E10 average is 16.6. After dropping to 13.3 in March 2009, the ratio rebounded to an interim high of 23.5 in February of 2011 and then hovered in the 20-to-21 range. The latest ratio is at a new interim high -- the highest since December 2007.

A cautionary observation is that when the P/E10 has fallen from the top to the second quintile, it has eventually declined to the lowest quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 550. Of course, a happier alternative would be for corporate earnings to continue their strong and prolonged surge.
Equities and junk bonds globally are now in massive bubbles. Nonetheless, expect analysts to focus on the number of companies that "beat the street" because that is one of the key ways they use to convince you "stocks are cheap".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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