THE BULLY MEETS THE BEAR

The bull finally saw the danger in the Bully (THE BULL MEETS THE BULLY).

The Bully now sees the danger in the bear. Mama bear or Papa bear?

Market odds were only 30% that the Fed would pass last week. The Fed indeed stayed the course but Powell was not seen as dovish enough during his presser. Equities sank.

However, reading carefully, one can see the hawk whitening “dovishly”:

Since September, the U.S. economy has continued to perform well, roughly in line with our expectations. The economy has been adding jobs at a pace that will continue bringing the unemployment rate down over time. Wages have moved up for workers across a wide range of occupations, a welcome development. Inflation has remained low and stable, and is ending the year a bit more subdued than most had expected. (…)

Despite this robust economic backdrop and our expectation for healthy growth, we have seen developments that may signal some softening relative to what we were expecting a few months ago. Growth in other economies around the world has moderated somewhat over the course of 2018, albeit to still-solid levels. At the same time, financial market volatility has increased over the past couple of months, and overall financial conditions have tightened–that is, they have become less supportive of growth.

In our view, these developments have not fundamentally altered the outlook. Most FOMC participants have, instead, modestly lowered their growth and inflation forecasts for next year.

But later he admitted that the policy can change more than slightly if needed:

(…) our policy decisions are not on a preset course and will change if incoming data materially change the outlook. (…)

What kind of year will 2019 be? We know that the economy may not be as kind to our forecasts next year as it was this year. History attests that unforeseen events as the year unfolds may buffet the economy and call for more than a slight change from the policy projections released today. (…)

Powell admits that the risk is clearly tilted to the downside, that the downside could be serious (“buffet”: to strike sharply) and would rapidly call for “more than a slight change from the policy projections”.

Then came the message to President Trump… and investors:

Neither the pace nor the ultimate destination of any further rate increases is predetermined. We will adjust monetary policy as best we can to keep the expansion on track, the labor market strong, and inflation near 2 percent. We know that our policy decisions affect all American families and businesses, and will continue to make our decisions objectively and based solely on the best information and analysis.

In the Q&A, he said that rates have, rather suddenly, reached the “neutral range”, whatever that is (notice the use of “I” and not “we”):

• I think we’ve reached the bottom end of the range of Committee estimates of what might be neutral. I think from this point forward, we’re going to be letting the data speak to us and form the outlook and form our understanding of what would be appropriate policy. So, there’s a fairly high degree of uncertainty about both the path and the ultimate destination of any further increases.
• We’re always data-dependent, but I think it has a particular meaning in this context.

What’s “this context”? Given the “robust economic backdrop and our expectation for healthy growth”  amid “low and stable inflation”, “this context” can only be quickly slowing Europe and China, mainly due to Trump’s trade wars, and sharply lower oil prices, combined with high corporate debt and limited fiscal leeway. In reality, the Fed finds itself with really nothing to fight other than an economic contraction induced by sharply lower corporate spending amid trade wars and low oil prices. (See WHERE’S THE BEEF?) And that was last Wednesday morning, before the S&P 500 nosedived another 8% to enter bear territory. What if consumer spending stalls now?

He even went out of his way to proclaim that accelerating wages would not impact monetary policy:

• I do expect, and I think many forecasters expect, that wage increases will continue, and that would be a welcome development. Wage increases do not need to be inflationary. There’s plenty of evidence of situations, for example, in the very tight labor market of the late 1990s of a, I think in a mentioned in a speech a month or so ago, we had wage increases above productivity plus inflation. We didn’t have high inflation. So, it would be welcome. We hear a great deal of anecdotal information about labor shortages, along with other, you know, bottlenecks and things. So I would expect that wages will keep moving up, and it doesn’t necessarily mean inflation. We don’t think of it that way.

Not dovish? Powell clearly said that inflation is not a problem, that rising wages will not be seen as a problem, quite the opposite, and that the Fed is ready to change policy more than slightly on short notice given the developing negative tone in the economy. More than once during the Q&A session he emphasized that the dot plot, calling for 2 more hikes in 2019, should not be considered the consensus view. This is the Powell Fed.

Let’s looks at some facts released last week:

FLASH PMIs:

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  U.S. Private sector output expands at weakest pace since May 2017

U.S private sector output continued to increase at a solid pace in December, but a slowdown in the service economy contributed to the weakest overall growth for just over one-and-a-half years. The latest survey data also revealed a softer improvement in new order books and a further moderation in the rate of private sector job creation.

The seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index dropped from 54.7 in November to 53.6 in December, to signal the weakest expansion of private sector output since May 2017. A robust increase in manufacturing production growth was offset by a slowdown in service sector growth to its weakest for 11 months.

Some survey respondents reported that heightened economic uncertainty and concerns about the near-term business outlook had contributed to more cautious spending among clients. As a result, the latest data pointed to another slowdown in new business growth, with the pace of expansion the weakest since April 2017.

Softer new order growth helped to alleviate pressures on operating capacity. (…) Meanwhile, staff recruitment lost momentum in the latest survey period. The overall rate of private sector job creation was the least marked since June 2017.

Lower oil-related costs contributed to the slowest rate of input price inflation since the start of the year. Manufacturers continued to report a much faster rate of input cost inflation than service sector companies, which was linked to stretched supply chain capacity and the impact of tariffs on raw material prices.

Private sector firms remain optimistic about their prospects for business activity over the next 12 months. However, the degree of positive sentiment dipped markedly in December to the weakest since June 2016. Some survey respondents cited concerns that a soft patch for the global economy had the potential to hold back client spending during the year ahead. (…)

Service providers meanwhile indicated that rising pay pressures continued to push up their operating expenses in December. However, the latest rise in average cost burdens was the slowest for one year, which was linked to reduced transportation costs. (…)

The rate of manufacturing job creation was the softest since August 2017. More cautious staff hiring policies were partly due to a drop in business optimism to its lowest for 26 months, which a number of firms attributed to concerns about the outlook for the global economy. Some firms also commented on pressure on operating margins following a sustained period of rising raw material costs.

(…) the surveys indicate that the pace of economic growth has faded to 2.0% in December, albeit closer to 2.5% for the fourth quarter as a whole.

Importantly, although growth remains relatively robust, momentum is being lost and is likely to continue to fade as we move into 2019. New order inflows hit the lowest since April of last year and expectations regarding future business growth have slipped to the lowest for two-and-a-half years.

The surveys reveal greater caution in relation to spending amid uncertainty about the economic outlook, linked in part to growing geopolitical concerns and trade wars.

The weaker picture of current and future business growth has curbed appetite for hiring. Jobs growth inched down to the lowest for one and half years but remains consistent with non-farm payrolls rising in December by around 180,000.

Price pressures have meanwhile cooled as lower oil prices feed through, yet rising tariffs remain a concern for many companies, keeping input cost inflation above the survey’s long-run average.

While weakening somewhat this year, Markit’s PMI remains within its range of the past 2 years and suggests 2.0-2.5% GDP growth, right where the Fed sees it, but, as Markit notes, “momentum is being lost and is likely to continue to fade as we move into 2019”. This infers that the risk to the economy is on the downside. Hopefully, FOMC members are not putting too much weight on the ISM survey which has been way off the mark since 2017 while the more accurate Markit survey points to a much more subdued manufacturing sector:

Meanwhile, Europe is fading fast with scant odds of turning around given Brexit, Italy, tariffs and a more hawkish ECB:

• Eurozone business growth slides to four-year low at end of 2018

The latest flash PMI survey data indicate that growth of business activity in the euro area slowed to the weakest for over four years in December. New business inflows almost stalled, job creation slipped to a two-year low and business optimism deteriorated. An undercurrent of slowing economic growth was exacerbated by protests in France and on-going weak demand for autos. Upward price pressures meanwhile eased.

The IHS Markit Eurozone Composite PMI® fell from 52.7 in November to 51.3 in December, its lowest since November 2014, according to the preliminary ‘flash’ reading(…). New export orders (which include intra-eurozone trade) fell for the third successive month, recording the steepest decline since the series began over four years ago.

The reduced inflow of new business meant firms often resorted to eating into backorders to support current activity, meaning backlogs of work fell for the first time in almost four years.

(…) The monthly job gain was the smallest for two years as a result.

Manufacturing remained especially subdued. Although factory output growth picked up slightly, producers nonetheless reported the second smallest increase for four years. With goods orders falling for a third successive month, dropping at the steepest rate for four years, and factory optimism sliding to a six-year low, the forward-looking indicators suggest the production trend could weaken again.

Growth meanwhile slowed sharply in the service sector to the weakest since November 2014, albeit remaining slightly above that of manufacturing. Service sector new business and future expectations also slipped to four-year lows.

The anecdotal evidence provided in the December survey saw growing concerns over global trade and economic growth, rising political uncertainty, Brexit and tighter financial conditions. Widespread reporting was again seen of especially disappointing sales and production in the autos sector.

(…) New orders placed at German factories fell for a third month running, dropping at the steepest rate for just over four years. (…)

Cost pressures remained elevated but eased to the weakest since April. Cost inflation was alleviated by lower oil and other commodity prices, as well as fewer supply constraints relative to demand in much of the region (the incidence of supply chain delays was the lowest for almost two years), France being a notable exception.

Output price inflation also cooled to the lowest since September of last year, though remained far stronger in Germany than in France or the rest of the region as a whole.

While GDP growth in the fourth quarter as a whole is indicated at almost 0.3%, the surveys point to quarterly GDP growth momentum slipping closer to 0.1% in December alone. Forward-looking indicators such as new orders and future expectations remaining subdued suggest that demand growth is stalling, adding to downside risks to the immediate outlook. (…)

Japan also looks problematic:

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  Japan manufacturing production grows at strongest pace since April

Preliminary PMI data shows that Japan’s manufacturing sector closed 2018 with a strong finish. Production expanded solidly in December and at the fastest rate since April. There appears to be no lagged impact on output from the strong contraction in capex spending during Q3. The case for a year-end rebound in GDP looks strong based on PMI data thus far in Q4.

Survey data does bring some cautious undertones to the fore, however. Export orders declined at the fastest pace in over two years, while total demand picked up only modestly. Confidence also continued to fall, a seventh straight month in which this has now occurred. The prospects heading into 2019 ahead of the sales tax hike still appear skewed to the downside.

U.S. HOUSING STILL WEAK

• U.S. Home Builder Index Weakens Considerably

  

• U.S. Housing Starts and Building Permits Recover

(…) A 22.4% rise (21.7% y/y) in starts of multi-family units to 432,000 accounted for last month’s gain in the total. It followed a 1.4% decline. Starts of single-family units fell 4.6% (-13.1% y/y) to 824,000, down for the third straight month. (…)

• U.S. Existing Home Sales Increase

U.S. Durable Goods Orders Improvement Paced by Aircraft

New orders for durable goods rebounded last month. Overall durable goods orders increased 0.8% (5.3% y/y) during November following a 4.3% October decline. A 1.5% increase had been expected in the Action Economics Forecast Survey. (…) In the capital goods sector (…) nondefense capital goods orders less aircraft fell 0.6% (+6.5% y/y), the third decline in the last four months.

Capex are slowing fast: and should slow more from Markit’s survey above:

BUT CONSUMERS CONSUME

U.S. Personal Income and Spending Gains Slow; Pricing Power Is Weak

Personal income rose 0.2% during November (4.2% y/y) following an unrevised 0.5% October increase. (…) Wages & salaries rose a lessened 0.2% (4.2% y/y), the weakest rise in six months. (…) Disposable personal income gained 0.2% (4.7% y/y) following a 0.5% increase. When adjusted for higher prices, disposable income also rose 0.2% (2.8% y/y).

Personal consumption expenditures improved by a lessened 0.4% last month (4.7% y/y) after a 0.8% increase. Adjusted for higher prices, personal outlays rose 0.3% (2.8% y/y). Real durable goods outlays increased 0.9% (3.8% y/y) led by a 1.9% rise (8.9% y/y) in recreational goods & vehicles. Home furnishings & appliance buying increased 1.3% (4.1% y/y) but motor vehicle expenditures declined 0.4% (-2.2% y/y).(…)

The personal savings rate eased to 6.0%, the lowest level since March 2013. It has been falling steadily since the February high of 7.4%. The level of personal savings increased a paltry 1.7% y/y.

The personal consumption chain price index rose 0.1% (1.8% y/y) after a 0.2% rise. The index excluding food & energy also rose 0.1% (1.9% y/y) for a second month.

  

The 70% contributor to the U.S. economy remains very steady. Real spending was up 0.9% in the last 3 months, that is +3.6% annualized. Meanwhile, the core PCE deflator is up 1.9% YoY but only 1.5% annualized in the last 6 months, 1.7% in the last 3 months and 1.6% in the last 2 months (using 2 decimals). Inflation is holding steady below the Fed’s 2.0% target. (Same trends in Canada BTW).

Recall that retail sales were up 4.9% YoY in November, 5.5% ex-autos (+6.1% annualized in the last 3 months, +10.0% in the last 2).

• Retailers Wrapping Up Holidays With Cheer

(…) Total U.S. retail sales, excluding automobiles, rose 5.2% from Nov. 1 through Dec. 19 compared with last year, according to Mastercard SpendingPulse, which tracks both online and in-store spending with all forms of payment. (…)

RECESSION WATCH

• U.S. Leading Economic Indicators Increase

The Conference Board’s Composite Index of Leading Economic Indicators improved 0.2% (5.2% y/y) during November following a 0.3% October decline, revised from +0.1%. (…)

Three-month growth in the leading index declined to 2.2% (AR), the weakest growth in two years.

The Index of Coincident Economic Indicators increased 0.2% (2.1% y/y) in November following a 0.1% uptick during October, revised from 0.2%. (…) Three-month growth in the coincident index eased to 1.9% (AR). That was below the 3.6% peak as of December 2017 and below the 3.1% growth rate in August.

The Index of Lagging Economic Indicators increased 0.4% last month (2.8% y/y) following a 0.5% October rise, revised from 0.4%. (…) The three-month growth in the lagging index strengthened 2.7%, the quickest growth since June and up from no change as of August.

The ratio of coincident-to-lagging indicators is often considered to be another leading indicator of economic activity. As economic slack diminishes relative to current performance, the ratio will rise. It eased to 99.0 last month, the lowest level since June.

From the Conf. Board’s press release:

The LEI increased slightly in November, but its overall pace of improvement has slowed in the last two months,” (…) “Despite the recent volatility in stock prices, the strengths among the leading indicators have been widespread. Solid GDP growth at about 2.8 percent should continue in early 2019, but the LEI suggests the economy is likely to moderate further in the second half of 2019.

From Advisor Perspectives:

(…) the LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession. The latest reading of this smoothed rate-of-change suggests no near-term recession risk.

Here is a twelve month smoothed out version, which further eliminates the whipsaws:

The best known of ECRI’s indexes is their growth calculation on the WLI.

ECRI’s WLIg metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP, and recessions.

But the ECRI has had many false signals this cycle, unlike the Conference Board’s LEI.

More charts trying to predict a recession:

This next chart is US-specific and shows the year-to-year rate of change in the Employment Trends index.  Note how when employment trends have declined, recession followed. So when the labor markets are weakening and below the zero line, recession is a risk. Conditions are currently favorable, with low recession risk. (CMG Wealth Management)

Next, let’s look at the yield curve. I explained last week that it’s flattening but not yet inverted, which would signal recession 9-15 months later. Ned Davis looks at the difference between the six-month Treasury bill and the 10-year Treasury note. The chart shows when that short-term yields were higher than the longer-term one, i.e. an inversion. We’ve highlighted those periods in yellow circles. Typically, it’s anywhere from 9 to 15 months between the inversion and the beginning of a recession. Presently we are not there yet. Yet being the operative word.

Here is another Ned Davis chart. Look at the lower portion, which is their Credit Conditions Index.

In all, a U.S. recession is not in the charts just yet.

From Fedex on December 18 to explain a 20% cut in forecast earnings:

While the U.S. economy remains solid, our international business weakened during the quarter, especially in Europe. (…) Global trade has slowed in recent months and leading indicators point to ongoing deceleration in global trade near-term.

This NDR chart suggests that the world is already in recession.

Confirmed by the MSCI ex-US Index which is down 24.3% from its January peak

The MSCI all-world index is off 21.1%:

But the S&P 500 cratered 20.3% since the September 20 high of 2939, 15.0% in December alone, 8% since last week’s FOMC.

So, while the ROW economy is impacted by trade wars, Brexit, Italy and declining oil and commodity prices, the U.S. looks like the survivor.

But David Rosenberg disagrees, saying that it is too late, because

the lagged impacts of the tightening in financial conditions will sow the seed of a recession next year (…) Of course, included in all this is the unwinding of the Fed’s balance sheet, which based on Jay Powell’s comments at the press conference, is on auto pilot. This alone is worth about 100 basis points of Fed tightening in 2019, even if the Fed pauses, which I believe it will once the erosion in the financial economy seeps into the real economy. Remember, the Fed switched to a tightening bias in the Summer of 2008 on a faulty forecast, and its next move was an ease (several, in fact). I’m having this déjà vu feeling that the Fed has yet again overplayed its hand.

PAPA BEAR OR MAMA BEAR?

My old friend, the legendary Don Coxe, distinguished between Mama and Papa bears. At the onset, the beast is difficult to assess but you always wish it’s a papa bear. Mamas are brutal.

Declining markets are dangerous because of their inherent emotivity which often suppresses rationality. This bear is particularly tricky given the current elevated investor angst about politics and the impact of undiscriminating ETFs on supply. According to Lowry’s Research, down volume during Monday’s shortened session was 87.5% of total NYSE up/down volume, the fourth 80% down day over the past 6 sessions.

The problem is that there is no set level of valuation at which equities typically bottom out. The first chart shows P/Es on trailing EPS displaying a very erratic floor but mainly because of high inflation rates between 1974 and 1985. Excluding this period, P/Es on trailing EPS have tended to trough around 12.5. We are now 14.6.

The Rule of 20 takes inflation into account and thus provides a more consistent range. A Rule of 20 P/E of 15 suggests a nearby floor and pretty positive risk/reward going forward.

At Monday’s close, the Rule of 20 P/E is 16.7 using trailing EPS of $160.50 (adjusted for the full 12 months of tax reform) and inflation of 2.1%. Earnings look solid in Q4 and we can safely expect trailing EPS to reach $162.50 by mid-March which sets the Rule of 20 P/E at 16.5. A possible decline in inflation below 2.0% would take the Rule of 20 P/E to 16.2.

It took 10 years for equities to go from deeply undervalued to overvalued (23.5 in January) and less than a year to retreat back to deep undervaluation.

Prudent investors might want to wait to see if valuations stabilize given the number of issues in investors’ mind:

• Recession?
• Margins and profits.
• Debt.
• The Fed.
• Trump.

The recession call for the U.S. economy seems premature given the strength of the consumer sector during the all-important September-December period. There will likely be no significant inventory overhang entering 2019, inflation is not threatening, oil prices are down, food prices have been flat for 4 years and real labor income is rising steadily in the 2.5% range. Discretionary income is quite strong (e.g. strong sales of recreational goods & vehicles).

Corporate profits, both pretax and after tax, remain solid through Q3:

Profit margins are also solid and not solely due to the tax reform as pretax margins (red line) remain strong. Notice how margins tend to decline prior to recessions. Lower oil prices could negatively impact corporate margins in coming quarters but likely not as much as in 2015-16:

Corporate debt is a well known problem, particularly among smaller companies, but interest rates have turned down recently. The Powell Fed has signalled that it will be very flexible if needed.

Mnuchin’s attemp to calm the markets was totally unnecessary and proved counterproductive. The TED Spread, the difference between 3-m T-Bills (government) and 3-m Libor (interbank) rates was not flashing any significant worries for banks. Mnuchin’s calling the banks last Sunday suggested that the Administration knew something.

Travelling back home on Monday after a week with little news access, I caught up with the Trump daily show, unable to suppress the OMGs that just kept coming reading the saga of this totally dysfunctional White House. The deplorable sitcom is turning into a potentially dangerous melodrama. Mr. Trump was already erratic when things went well for him. Now that events are turning increasingly less favourable, he’s an even looser canon. Investors are understandably becoming very worried that this essentially gutsy one-man show will eventually turn into an economic horror show. His lack of elementary geopolitical/economic/financial/business acumen is simply pathetic and understandably scary.

I am not a fan of Paul Krugman but he hit it right Monday:

(…) The truth is that most of the time, presidential actions don’t matter much for the economy; short-term economic management is mainly up to the Fed. But when bad things happen, we do need the White House to step up. (…)

Trump has adroitly blamed the Fed for the market rout and rising economic uncertainty. On Christmas day, he displayed his smart populist rhetoric and doubled down on Powell:

“Well, we’ll see,” Trump said when a journalist asked whether he had confidence in Powell. “They’re raising interest rates too fast, that’s my opinion. But I certainly have confidence. But I think it’ll straighten. They’re raising interest rates too fast because they think the economy is so good. But I think that they will get it pretty soon, I really do.”

The Fed chairman will need to eat his ego if data dictates “more than a slight change” in policy because, as Krugman says

Unfortunately, there’s no reason to expect [White House] competence if something goes wrong again.

Trump is losing the House next week, he has a very narrow comfort zone at the Senate, and we have not heard from Mueller just yet.

Riveting, but rather uncomfortable.

We really need to trust the Fed here.

SENTIMENT WATCH

• NDR’s weekly sentiment reading is 50.5. It was 54.2 last week.

• Here’s the long-term chart as of Dec. 18:

• NDR’s daily sentiment reading is 15.56. It was 26.6 last week.

TECHNICALS WATCH

Lowry’s Research’s study of the forces of Supply and Demand shows that

the current market pullback has much more in common with prior corrections over the past ten years than a full fledged bear market.” (…) the level of Selling Pressure as of the Sept. 20th 2018 market high had much more in common with the market highs preceding corrections during this bull market than with highs that have devolved into bear markets. (…)

Referring back to the largest loss in the S&P 500 over the past ten years, it is useful to put the current market pullback into the context of earlier significant market drops since 2009. As noted above, there have been three prior major corrections since 2009. On a closing basis, the S&P 500 lost 16% in the 2010 correction, 19.4% in the 2011 drop
and 14.2% in the 2015 decline. With a loss of 17.5% as of Dec. 21st, the current drop in the S&P 500 appears consistent with these earlier market corrections. Media attention has also been focused on the bear market in small caps given the 25.8% drop in the Russell 2000. However, this loss is also consistent with earlier market corrections given the declines of 20.5%, 29.6% and 26.4% in 2010, 2011 and 2015, respectively. In terms of price declines, the current pullback is entirely consistent with large and small cap losses in earlier market corrections. (…)

But Lowry’s is now acknowledging what I was seeing throughout the fall: the dynamics between Buying Power and Selling Pressure remain negative: “Buying Power has definitively broken below its Oct. 24th low. Combined with the trend of Selling Pressure, this suggests a still weakening balance of Supply and Demand”.

Ned David’s own supply/demand measures are also worrisome:

As is the 13/34-week EMA chart. Will we get another quick reversal like in 2012, 2015 and 2016? This pretty good chart suggests patience to conservative investors.

This other NDR chart also suggests patience:

A sell signal occurs when the 200-day MA price line drops from a high point by 0.5% or more. It has now dropped by 0.59%.

For the more adventurous, if no recession, a return to the mean would be rewarding:

We are back into Buy Low territory:

Excerpts from The Rule of 20: The Historical Record:

The Rule of 20 is not a forecasting tool. Rather, it is an objective measure of the risk/reward equation for equities at any point in time. It states that at 20, equity markets are at equilibrium where the downside risk on valuation (-20% from 20 to 16) is equal to the upside potential (+20% from 20 to 24).

Below 20, the valuation risk becomes less than the upside potential and equities get increasingly attractive from a risk/reward standpoint. The farther below 20, the most attractive equities get almost regardless of the economic and financial environment.

Above 20, the valuation risk increases significantly since valuation swings often carry all the way towards 18 or even 15 in the worst cases. The environment, financial, economic, political or social, becomes very important as high valuations make investors increasingly nervous and prompt to sell and book profits. (…)

The smart way to use the Rule of 20 is to gradually increase equity exposure as the Rule of 20 P/E declines towards 16, manage exposure as it rises towards 20, and to aggressively reduce equities as it rises towards 22, being completely out of stocks beyond 22-23.

  

EARNINGS WATCH

In spite of Fedex, pre-announcements are slightly more negative vs Q4’17 but more positive than Q3’18:

Analysts are turning more cautious on both large and small companies:

It seems highly related to the economic outlook. Only less cyclical sectors are spared.

S&P 500: Estimate Revisions by Sector

Q4’18 earnings are seen up 16.0%, from +16.4% on December 12. Q1’19 earnings are expected to be up 5.5%, down from 6.4% on December 12. Full year 2019: +7.4% (8.1%).

Also on the Fed’s radar:

Loan Market Is Freezing: Banks Fail To Sell $1.6 Billion In Loans

(…) according to Bloomberg calculations, the ongoing rout in the corporate loans has now forced many of Wall Street’s largest banks to be stuck with at least $1.6 billion of unwanted leveraged buyout debt which they are unable to sell to investors in what is increasingly shaping up as a bidless market.

In addition to the previously discussed pulled loan deals by banks such as Barclays, Wells Fargo, and Goldman, virtually all banks that sell loans for LBOs are now struggling to sell loans they’ve agreed to make for private equity deals. As a result, at least four loan sales for buyouts and acquisitions have failed to clear the market so far this month, forcing the banks to keep the debt on their books, where it may incur mark-to-market risk should prices continue to fall, further depressing bank earnings. (…)

The hung deals are equal to 14% of the $11.7 billion of loans sold in December, according to Bloomberg data. The good news is that they represent a small fraction of the more than $2.3 trillion of loans to corporations that were on U.S banks’ books as of Dec. 12, according to Federal Reserve data. The bad news is that as the fear and contagion spreads, the bidless market will hit more and more deals resulting in ongoing market lock ups, demands for even more price concessions, even higher yields until a feedback loops develops which may eventually culminate with a violent plunge in loan prices, which as shown below, have already suffered their worst drop in years.