Registered Investment Adviser Caleb Lawrence
The major averages enter the final hour with incremental gains on little news. The Dow Jones Industrials have completed their earnings reporting for the 3rd quarter featuring the usual massaging of the numbers to meet the analysts’ expectations. Of the 30 companies 14 reported non-GAAP or Generally Accepted Accounting Principles earnings 26% above their GAAP earnings on average. This essentially means earnings with all the bad stuff taken out as it was just a one-off surprise anyway. The biggest offenders here include repeat appearances by Merck, Coca Cola, GE, and Pfizer. Once again its every trick in the book to keep the party going.
The 2007-2009 financial crisis was caused by reckless mortgage lending, particularly of the sub-prime variety. This time around the debt driven crisis is likely to manifest itself from just about all directions at once with record high student, auto, and credit card debt along with record corporate debt particularly of the high yield or junk variety, or if you prefer the new modern term, covenant lite leveraged loans. With the ever-decreasing market volatility as shown by the VIX and MOVE Indexes investors have ventured further and further out on the risk curve chasing yield in a near zero interest rate environment as so far, the market hasn’t bought into the Fed’s 4 rate hikes as evidenced by the flattening yield curve. The last 2-years in particular have demonstrated that nothing matters, and that risk is king, the more the merrier. Just because the markets have lulled investors into thinking that risk has disappeared through the absence of volatility. Assuming that risk has left the building to join Elvis is a strategy fraught with peril because I can assure you, the risk is still there, though it may be sleeping for now.