This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here. Reposted with permission.
dentical spot—-$135 per share—–in March 2015 and has already tumbled to $126, and there is still a whole year of reality to unfold.
But here’s the thing. Why would you expect corporate earnings—even the ex-items variety—-to rise nearly 20% during the coming year?
Needless to say, the headwinds are numerous and some of these will be recounted in the coming days. But two of them merit brief mention.
First, even the tepid growth of ex-items earnings in recent years was mainly due to share buybacks and other financial engineering maneuvers. To wit, between the LTM period for September 2011 and the most recent period ex-items earnings grew from $94.64 per share to $104. That’s just 10% or 2.4% annually. And over half of that was due to shrinking the share count.
Stated differently, during the final four years of QE, corporate earnings even on an ex-items basis grew at less than 1% annually before share buybacks. And that was with the tailwinds of massive QE, rock bottom interest rates and the final phase of the global credit inflation and artificial economic boom in China and the EM.
By contrast, the Fed is now slouching toward normalization, the massive global dollar short is facing an endless margin call and world trade is heading into negative territory in the periods just ahead. This time, however, the obstacles to organic earnings growth cannot be compensated by financial engineering.
The fact is, there was upwards of $8 trillion of share repurchases and M&A based share shrinkage during the last six years. On the margin, this massive equity liquidation was funded with borrowed money, not operating cash flow, and much of the latter was below investment grade.
But with the junk debt market cratering, that artificial boost to EPS is vanishing fast.
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