FORGET THE FED: Here's The Troubling Trend That's Really Behind Stock Market Volatility

There's been an awful lot of belly-aching about the Federal Reserve possibly beginning to taper, or gradually reduce, its stimulative bond-buying program.

Some have attributed the risk of the taper to the return of volatility in the stock markets.

But this volatility may be explained more directly by a larger, more theoretically sound reason: deteriorating earnings expectations.

"[E]arnings matter the most for equities, in our opinion, and there is relatively robust statistical evidence to back up that contention," said Citi's Tobias Levkovich in a note to clients last week.

"In this respect, we have been a tad shocked by the surge in negative-to-positive preannouncement trends that make 2009’s surge appear less worrisome in retrospect. Upward earnings guidance has dipped as well and there has been little consternation or discussion about it."

FactSet's John Butters examined this trend closely recently with regard to the quarter that just ended.

"For Q2 2013, 87 companies have issued negative EPS guidance and 21 companies have issued positive EPS guidance," said Butters.  "If 87 is the final number, it will mark the highest number of companies issuing negative EPS guidance for a quarter.

"The percentage of companies issuing negative EPS guidance is 81% (87 out of 108)," Butters added. "If this is the final percentage for the quarter, it will mark the highest percentage of companies issuing negative EPS guidance for a quarter."

The weirdest thing about this is that this trend has been getting worse for years and the stock market has only been going up.

"Although the number of negative preannouncements is running at an all-time high, the market is not punishing the performance of these stocks in the short term," said Butters.  "For the 87 companies that have issued negative EPS guidance for Q2 2013 to date, the average price change (2 days before the guidance was issued through 2 days after the guidance was issued) was +0.1%. This percentage is well above the average of -1.2% over the past five years."

Here's a chart FactSet demonstrating this counterintuitive yet troubling trend:

It remains to be seen whether or not the stock market will crack under this trend.

But for now, we can try to make sense of the fundamentals.

Butters notes that revenue guidance has been deteriorating, which could reflect problems with demand.

"For Q2 2013, 55 companies have issued negative revenue guidance for the quarter and 14 have issued positive revenue guidance," said Butters. "As a result, 80% (55 out 69) of the companies that have issued revenue guidance for the quarter have issued negative guidance. If this is the final percentage for the quarter, it will mark the third highest percentage since 2006."

Based on corporate commentary, much of this is due to problems overseas, specifically in Western Europe and the big emerging markets.  Here's a roundup of some quotes from the big multinationals via FactSet:

“The economy in Europe continues to be a challenge and China appears to be slowing down as well.” –HP (May 22)

“For the quarter, Europe's results were dampened by ongoing economic uncertainty. First quarter comparable sales were down 1.1%...” –McDonald’s Corp. (Apr. 19)

“We planned for Europe to be similar to 2012, down again, but it was even weaker than we had expected.” –General Electric (Apr. 19)

“In Asia/Pacific, Middle East and Africa (APMEA), first quarter comparable sales declined 3.3% primarily due to ongoing weakness in Japan and negative results in China.” –McDonald’s Corp. (Apr. 19)

“But our growth markets revenue was up 1% at constant currency, clearly not what we expected or what we needed.” –IBM (Apr. 18)

“As we look ahead to the remainder of 2013, we continue to expect China's economic slowdown to have a short-term effect on our industry and on our business, although we do expect to see some gradual improvement in consumer disposable income and, as a result, sequential improvement for our business as the year progresses.” –Coca-Cola (Apr. 16)

“Yeah, so in China, I think the market is very, very strong... I think property transactions in the first quarter were up 60% in China. So again, the market's a lot better than what we had anticipated. We saw that starting in the fourth quarter.” –United Technologies (Apr. 23)

“China results continued very strong, with total sales growing 40% and comparable store sales rising at a double-digit rate.” –Coach (Apr. 23)

“Most of our emerging markets, including China, remained strong.” –General Electric (Apr. 19)

Q2 earnings season starts in a few weeks. It'll be interesting to hear what companies say and how the markets react.

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A Major Economic Report From Japan Is Coming Up

At 7:50 p.m. ET, Japan will release the results of its Q2 Tankan Survey.

This report measure sentiment among Japan's large manufacturers.

Economists are looking for reading of 3 in Q2, up from a Q1 reading of -8.

This would represent a turn to economic optimism.

The Tankan outlook index is expected to improve to 7 from a Q1 reading of -1.

For years, Japan's economy has been struggling to grow.  The country's prime minister Shinzo Abe and central bank governor Kuroda have committed to stimulate the economy through ultra-easy monetary policy.

This report will reveal if companies are really buying into it.

Click Here For Live Updates »

Here's a preview from Soc Gen:

In the previous Tankan survey (March), business conditions had broadly improved on the back of Abenomics which has brought a weaker yen and a stronger stock market. However, the improvement in March was not as strong as we had expected and the results still showed business sentiment in the manufacturing segment at depressed levels (-8 for the current index and -1 for the outlook). However, since the previous survey however, the BoJ has started a new ultra-loose monetary policy, and we think business conditions will have further improved.

Although the yen is not as weak as the level briefly reached in May (USD/JPY reached above 103), the current level of USD/JPY at 97-98 is much higher than what large manufacturers had expected for H1 FY13 (85.33), as shown in the March Tankan survey. In addition, further gains in the stock market boosted consumer confidence to a level not seen since 2007, and this will also have affected domestic business conditions.

Moreover, the recent recovery in exports will also have boosted manufactures’ perception of business conditions. Therefore, we expect the June Tankan survey to again show strong benefits from Abenomics and we also see more scope for corporate profits to come in above the firms’ original guidance.

We expect the further improvement in the June Tankan survey to be concentrated among large manufacturing firms, as they are likely to have benefited most from yen depreciation, and predict that this index will jump to 4 from -8 in March. We also expect the outlook index to extend growth to 8 in September.

In terms of business conditions for large non-manufacturers, we expect to see an improvement in areas such as construction and real estate, which are likely to have been boosted by an increase in infrastructure spending resulting from Prime Minister Abe’s stimulus package. We expect the large non- manufacturing index to have improved to 12 from 6 in March, and the outlook for September to have improved further to 15.

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The Fed-Triggered 'Mid-Cycle Correction' Has More Room To Run

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LIVE: Thousands Of Companies Around The World Are Revealing The Truth About The Economy

HEADS UP: The world's biggest economies will be publishing their June manufacturing PMI reports over the next two days. This is our scorecard.

"Fireworks are a given, even without minor considerations like the 4th of July!" exclaimed Societe Generale's Kit Juckes.

This may be the most closely watched round of PMI reports in a long time as global economic growth hangs in the balance.

Last month, we learned that manufacturing activity was just above stagnation. The chart on the right from Markit summarizes all of the May and April PMI reports.

In recent weeks, volatility has returned to the the global financial markets as the Federal Reserve has signaled it could soon taper its stimulative  bond-buying program.  But any action would be conditioned on ongoing improvement in the U.S. economic data.

Abroad, China's massive economy has shown signs of slowing as credit conditions have become tighter.

Meanwhile in Western Europe, the economies continue to be deeply troubled. However, they are also showing signs of improvement.

PMI

At the beginning of each month, Markit, HSBC, RBC, JP Morgan, and several other major data gathering institutions publish the latest local readings of the manufacturing purchasing managers index (PMI) for countries around the world.

PMI is one of the best leading indicators of the economy. 

Each reading is based on surveys of hundreds of companies. Read more about it at Markit.

These are not the most closely followed data points. However, the power of the insights is unparalleled. Jim O'Neill, the former Goldman Sachs economist, believes the PMI numbers are among the most reliable economic indicators in the world. BlackRock's Russ Koesterich thinks it's one of the most underrated indicators.

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June 28 (All Times ET)

7:15 p.m. Japan: Markit/JMMA Manufacturing PMI — 52.3, up from 51.5 in May

June 30, July 1

7:30 p.m. Australia: AiG Manufacturing PMI —49.6, up from 43.8 in May8 p.m. South Korea: HSBC Manufacturing PMI —
9:00 p.m. China: NBS Manufacturing PMI —
9:45 p.m. China: HSBC Manufacturing PMI — 10 p.m. Taiwan: HSBC Manufacturing PMI —10 p.m. Vietnam: HSBC Manufacturing PMI —
11 p.m. Indonesia: HSBC Manufacturing PMI — 1 a.m. India: HSBC Manufacturing PMI — 1 a.m. Russia: HSBC Manufacturing PMI —
1 a.m. Ireland: Investec Manufacturing PMI —
3 a.m. Turkey: HSBC Manufacturing PMI —
3 a.m. Poland: HSBC Manufacturing PMI —
3 a.m. Netherlands: NEVI Manufacturing PMI —
3:15 a.m. Spain: Markit Manufacturing PMI — 3:45 a.m. Italy: Markit/ADACI Manufacturing PMI —
3:50 a.m. France: Markit Manufacturing PMI —
3:55 a.m. Germany: Markit/BME Manufacturing PMI —
4 a.m. Greece: Markit Manufacturing PMI —
4 a.m. Eurozone: Markit Manufacturing PMI —
4:30 a.m. U.K.: Markit / CIPS Manufacturing PMI—
9 a.m. U.S.: Markit Manufacturing PMI —
9 a.m. Brazil: HSBC Manufacturing PMI —
10 a.m. U.S.: ISM Manufacturing —
10:30 a.m. Mexico: HSBC Manufacturing PMI —
11 a.m. Global: JPMorgan Manufacturing PMI —

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16 Foreign Banknotes That Look Way Cooler Than The Boring American Dollar

One good way to judge a currency is by looking at how it trades on the foreign exchange markets.

A less boring way is to just see how it looks in your hand, all crisp and money-like.

From epic 19th century leaders to blinding color schemes, some of the globe's currencies use style to make up for a dearth in purchasing power.

Sure, the U.S. dollar is great. But the boring colors and lack of diversity (Every face is of a white male) makes it the most boring currency in the world.

So, here you have it: the world's coolest banknotes.

1. Icelandic krona

With a cartoonishly Nordic look, the krona is fun for the whole family.

2. Angolan kwanza

Simple, elegant.

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3. East Caribbean dollar

 A young, smirking Queen Elizabeth gives this banknote an island chicness.

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4. Israeli shekel

The colorful "new" shekel redesign borders on glow in the dark (unconfirmed).

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5. Latvian lats

A direct, bearded figure on a soft red and white background. This currency says, "I'm not the Euro, buddy." 

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6. Brunei dollar

A stunning currency. Blue and yellow pastels contrast with stoic, mustachioed generals of Brunei yore.

7. Liberian dollar

Liberia's history is directly tied to the U.S., and you can actually see it in the banknote, albeit with a uniquely African color scheme and gusto.

8. Comorian franc

The currency from Comoros looks like something out of an old painting.

9. Turkmenistan manat

The manat's purples, maroons, and greens give it a 1980s electropunk feel, but with a certain austere importance to it. Well done.

10. Canadian dollar

For obvious reasons.

11. Samoan tala

Samoa's currency doubles as a travel brochure. Check out that luxurious coastline!

12. Czech crown

An absolute classic, this currency screams, "Never again, USSR. Never again."

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13. Mongolian tugrik

This ancient Mongolian leader is not to be messed with.

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14. Iranian rial

UN sanctions have sent the value plummeting, but the rial itself is a real classic. Staunch leader, big mountain. A simple and effective formula.

15. Bhutanese ngultrum

Stunning (plus honorable mention for best name).

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16. Costa Rican colones

Sharks.

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ANALYST: 'Brace Yourselves, A Huge Week For The Market Starts In A Few Hours'

There are still a couple more hours left of the weekend, but the clock is ticking.

Kit Juckes, a currency analyst at Societe Generale, warns of what's about to come:

Brace yourselves, a huge week for market starts in a few hours' time with Chinese manufacturing PMIs.  Policy meetings galore and a payroll number to boot. Fireworks are a given, even without minor considerations like the 4th of July!

Indeed, the first of every month is PMI Day, and starting Sunday evening, we'll be covering regional manufacturing reports as they come out (first from Asian countries, then from Europe early Monday morning, and then in North America).

And that's just the beginning: We have plenty of labor data coming up this week (as well as other data) which will culminate in this Friday's Non-Farm Payrolls report. Given the focus on whether the Fed is ready to pull back from its easing at all, Friday's report will be given an extraordinary amount of scrutiny.

Juckes, meanwhile, summarizes the big discussion still surrounding the Fed, and whether Bernanke made a mistake recently by coming off too eager to tighten.

 The weekend press has seen a caravanserai of commentators question either the markets' understanding of what Ben said, or Ben's understanding of markets, or both. Gavyn Davies, Paul Krugman, Phillip Coggan, the Guardian, the FT, and more. The basic line is that markets over-reacted and the Fed needs to be careful. And despite one of the aforementioned having a Nobel prize in economics, I mostly disagree with the interpretation.  I may only be a fool on a hill, but if markets go a bit crazy when the Fed merely invites us to imagine what might happen if they stop buying bonds, I think that is rock solid evidence of over-correlated positions. The Fed is right to try and let some air out of the balloon. Back off now, and we'll really be in trouble.

Anyway, tune in Sunday evening, when our Sam Ro begins our wall-to-wall coverage of PMI day.

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