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Fundamentals need to catch up

Brouwer & JanachowskiApril 29, 2016

Well they said it was going to be weak earnings all around, and….it is. Banks we knew about. Regulation, low rates, bad loans all took their toll. It’s been a rough time for financials. Here's the long-term chart.

Blog Apr 29 2016 Financials

Financials peaked over a decade ago. Since then, they have taken on more of a utility role (good thing too, some might add). Most struggle to achieve double digit ROEs. But, funny thing. The news of their Q1 earnings was more like a clearance sale and they bounced back. Apple reported pretty disappointing numbers. Carl sold. They’re suffering from the curse of the Dow. Away from results, this is what caught our eye.


  1. Central Bank time: up first the Fed. Only 40 words changed from what was otherwise a cut and paste job from the March meeting. They said labor market improved (true), inflation was below target (also true) and that household real income and consumer sentiment were up (which was a terminological inexactitude.) Two days later, consumer spending was flat. The same day as the Fed met, consumer confidence broke lower. The GDP numbers were rough, mostly because of reduced investment in structure and equipment.

But…..that does not mean the Fed has gone all dovish. First, odd seasonal adjustment Q1 GDP numbers have been around for a while. Second, financial markets have generally improved led by the U.S. dollar and stable stock. This could all change, of course. But for now, rates look like no change until September.

  1. Bank of Japan: voted to keep rates negative and to keep on buying dollar bonds, corporate bonds, ETFs, commercial paper and the kitchen sink. But it was not enough. The Yen rose and markets fell. They will probably lower again in a few months if inflation or the labor market does not improve.
  1. Borrowing, borrowing: corporate America has been on a borrowing spree. This week’s downgrade of Exxon (XOM) serves as a good example. This is a company that produces about 5% of the world’s oil and 5 million barrels of refined product every day. The concern is that cash will be used for dividends and buy backs not for debt. So, there you have it. Leverage up, use the money for buybacks and dividends. In Exxon’s case $54bn on buy backs and $12bn in annual dividends since 2012 since when the stock has been…er, flat. Don't get me wrong. I own XOM. But the market is, rightfully, getting a little suspicious of buybacks and want growth.

Bottom Line: Stocks gave up some of their recent gains. We thought there might be a correction and another buying opportunity. Treasuries are holding up well. That's mostly down to confidence in the U.S. relative to others.


Hippos and watermelons

Smart people are not happy

David Gilmour, numb to rain

Yes, outflows hurt performance

Eliud Kipchoge just ran the second fastest marathon ever

--Christian Thwaites, Brouwer & Janachowski, LLC


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