Cycling Blindly In Chartland

Wall Street's beer-goggle induced complacency is not simply a matter of eager-beaver optimism or an excessively short-term focus on the meme of the day. It is exhibit #1, in fact, of the profound intellectual mendacity, sloth and downright corruption that has accompanied the Fed's destructive regime of monetary central planning.

Needless to say, the latter has thoroughly falsified financial asset prices and obliterated the processes of honest price discovery. Accordingly, the daily financial narrative has become a dumbed-down derivative---meaning that it merely attaches fleeting headlines and transient talking points to whatever the day traders and robo-machines are doing at the moment.

Between the March 2009 bottom and the January 2018 peak, of course, they were essentially buying the dips----about 50 of them with material dimension. The short-run narrative constantly changed--- low-interest rates, escape velocity ahead, synchronous global reflation, Goldilocks once more----but the mechanic was always the same.

But all bubbles come to an end and this one, too, is now laboring heavily to stay afloat. So right now, the machines and day-traders are whip-sawing furiously between the 50-DMA (resistance) and 200-DMA (support) trend lines on the trading charts.

As is evident, ever since the failed levitation that peaked on January 26 at 2873 on the S&P 500, its been practically an odd and even day cycling motion between the DMAs.

Today the machines had all the purposefulness of a moth heading toward a light bulb. That is to say, they were heading straight for the 50-DMA at 2689 on the chart below, but, alas, faltered in the last hour--the better for the night-shift machines to make another run at it in the wee hours.

Under the circumstances, of course, that particular chart point is ludicrous. It represents 23.4X earnings for the March 2018 LTM period at a point when the current aging business cycle is fixing to roll-over; earnings are being boosted by a one-time change in corporate tax rates; and the coming bond market "yield shock" has just begun to show its ugly head as the 10-year UST pokes above the 3.00% red line.

As we have repeatedly pointed out, a good part of how earnings got to an estimated $116 per share during the current LTM period is that companies borrowed hand-over-fist to buy back stock and to buy out each other. That had the effect of shrinking share count today and thereby artificially fattening earnings per share.

But it also exposed corporate balance sheets to unprecedented debt loads, which nearly doubled since the 2007 pre-crisis peak, and to soaring interest expense as rates normalize and Washington's own debt-a-thon rages.

Accordingly, we estimate that even if the 10-year benchmark manages to stay below 3.75%----and we think it's going far above that----the S&P 500 companies will face $35 per share of higher after-tax interest expense.

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