Stock Market

The Truth Is the Enemy of the Share Price

By David Stockman  |  May 24, 2018

“Everybody gets pinched. But you did it right. You told ’em nothing, and they got nothing… I’m proud of you. You took your first pinch like a man, and you learned the two greatest things in life. Never rat on your friends, and always keep your mouth shut.” – James “Jimmy the Gent” Conway (Robert De Niro) to Henry Hill (Ray Liotta), GoodFellas

Caterpillar (NYSE: CAT) committed an unpardonable sin.

It admitted that beanstalks do not grow to the sky.

Sure, according to headline-generating computer algorithms, CAT reported another “blowout” quarter.

CAT’s already hideously overvalued shares jumped another 2% when news of its latest “beat” crossed the tape.

A short time later, CFO Brad Halverson dropped three words to describe the company’s quarter…

…And CAT got monkey-hammered.

“High-water mark” is a phrase about as welcome on Wall Street as a skunk at a garden party.

There’s a price on it too: Telling the quant-, algo-, robo-, and plain-old day-traders your company’s on a downslope will cost you $7 billion in market value.

Only one of its great evils, monetary central planning let loose a horde of petulant, entitled gamblers in the capital of global finance.

Stock prices do grow to the sky and beyond. And they get their “buy” signals always, the truth never.

C-level suites are full of “captains of industry” who now genuflect before our “lords of finance.”

Have you ever heard a CEO talk about their company’s share-count shrinkage rate?

A CFO acknowledge that by borrowing money or diverting cash flow to fund buybacks they were creating risks – even peril – for future performance?

A CEO note that M&A “synergy” savings could just as easily reduce sales… impair operations… retard innovation… as it might increase margins and earnings?

A company admit that – despite management’s best efforts – in the end it’s a creature of the business cycle?

And that no business cycle in recorded history has avoided expiration?

CAT’s accidental truth-telling is so emblematic of the current moment.

On a statistical basis, the current cycle is the equivalent of about a 90-year old American. It’s gone well past the average age.

On a fundamental basis, it’s been living on borrowed time and borrowed money for years.

Among other things, this means ballyhooed double-digit first-quarter earnings growth should be viewed through downright squinty eyes.

Advertised gains add up to goose-eggs in economic terms.

The overwhelming share of those gains is due to one-time boosts from various combinations of the Trump tax cut, share buybacks, and favorable currency moves.

S&P 500 earnings were about $117 per share for the 12 months ended March 31, 2018. That’s up 17% compared to March 2017 and 36% from the mid-2016 low.

It may be the “highest” of high-water marks.

It’s senseless.

The dollar is already reversing, sharply. U.S. bond yields are rising. And the phony “synchronous growth” story is collapsing.

So the greenback has nowhere to go but up.

Even if the dollar’s strong rebound stalls out, it won’t repeat the 10% plunge that boosted first-quarter earnings.

More importantly, average S&P earnings growth over the past four years amounts to a mere 2.4%.

That’s no aberration, either.

Let’s go with the more-than-off-chance that Caterpillar’s CFO was clairvoyant.

Let’s say the first quarter of 2018 turns out to be the cyclical “high-water mark” for the broader market.

S&P 500 earnings will have grown at a mere 3% annual rate for the entire decade since the pre-crisis high of $85 per share way back in June 2007.

The business cycle is now 42 months older than it was at the September 2014 interim high.

Growth at home is slowing. It is abroad too, as China – the “Red Ponzi” – struggles to avoid capsizing under its massive debt.

And profit margins are already rolling over on an aggregate basis.

Forget the headlines.

The mortality rate for business cycles is 100%.

And, now, the current one is dying…

So, is CAT the only “honest” stock?

Stay tuned.

The casino will soon be desperately hoping this high-water mark isn’t the precursor for another 2008-09-style whacking…

David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR