Last week it was Target’s turn to turn in a disappointing quarterly report. While being quite unique in blaming Canada, even the results in the US segment were lackluster, at best. Earnings expectations for the fiscal year were dimmed back in May, from a range of $4.85 to $5.05 down to $4.70 to $4.90. The latest estimates, concurrent with Q2’s earnings announcement, are at the “low end” of May’s profit range. Assuming $4.70, that’s a 7% reduction in a matter of months.

The reason, as with most other retailers including WalMart, is the very conspicuous lack of revenue growth. Same stores sales rose only 1.2% for the quarter when the company, only a few months ago, was expecting same store sales growth of 2% to 3%. Target does not expect this environment to be much different in the second half of the year (they must not be using the same growth prediction models as economists), reducing their full-year revenue estimates to just 1%. At least it is a positive number, for now.

It has been a recurring theme through the nearly concluded earnings season. Lack of revenue has figured prominently in a lot of earnings announcements (I would even say most), though the market only seems to factor in whether a particular company beats pre-announced reductions. With 492 companies reporting so far, Q2 2013 EPS for the S&P 500 is up 3.66% over Q2 2012.

That is hardly a robust figure, but it’s not a precipitous drop either and that has been encouraging for some. Similarly, revenues for the 500 companies are running about 3.4% above Q2 2012; again, the fact that revenues are even positive is taken for a sign of “muddle” rather than contraction.

Historically, that is usually the case. Recession is typically associated with a steep and sudden drop in both revenue and EPS. Companies are growing; then suddenly they are not. If corporate results, then, are to be taken as a proxy for economic health, recession is historically associated with negative numbers. Positive growth, even slight, is inconsistent with dislocation under this interpretation.

ABOOK Aug 2013 S&P Sales

Now, there are complications to that historical narrative. From the rise in importance of financial firms to the degree to which “markets”, including real economy markets, are being distorted by monetary policy, there may not exist a direct comparison with historical precedence. The economy and “emergency” interventions after the Great Recession are nothing like what the economy was operating with before or after the 1990-91 recession, for example.

Conventional wisdom is somewhat skewed by the financial element to the Great Recession. On first blush, it does appear that corporate earnings followed that growth/sudden contraction model of contraction. But the massive weight (amounting to tens of billions per quarter) of credit write-downs did not accurately reflect anything other than the state of the credit bubble reversing. Stripping out financials, corporate earnings and revenue looked more like a nice and decent muddle than recession.

ABOOK Aug 2013 S&P 2008

GDP growth was negative in both Q1 ’08 and Q3 ’08 (deeply so), yet Y/Y sales growth for S&P 500 companies was nearly 10% in the former and almost 4% in the latter. From that perspective, Q2 ’13 sales growth of 3.4% underperforms every quarter before Q4 ’08. The entire trajectory of sales badly underperforms the comparable quarters from the Great Recession.

ABOOK Aug 2013 S&P Sales v 2008

Again, there was no economic muddle in Q1 & Q3 2008, but sales growth was far, far higher in both those quarters than what we have seen in 2013. There has been more consistently weak results posted in 2012 and 2013 than at any point other than the panic/collapse period (Q4 ’08 and on).

So the first three quarters of 2008 were consistent with a pretty nasty recession, but 2013 is a fountain of hope despite falling well below that contrast. This observation is not limited to sales growth – earnings (ex financials) are also trailing 2007-08.

ABOOK Aug 2013 S&P Sales EPS v 2008

There is a striking similarity in pattern, something I have noted before and in many other data series, moving across both time periods that cannot be simple random statistical noise (given how different data is collected in all of these). Where 3.66% EPS growth in Q2 ’13 looks optimistic, it was not all that much different than the 2.92% EPS (ex fins) growth in Q2 ’08. And where Q3 ’08 shot up to 18.1% EPS growth (ex fins), there is the current estimate of 12.75% growth (before it get cuts back by reality in the near future).

The first half (slightly more than half in terms of time) of the Great Recession did not follow the typical script. The Great Recession didn’t start in September 2008, which is why so many were caught unaware and unprepared for what followed, including conventional economists and policymakers. There was a deviation from typical recession patterns that was due to other factors (not just monetary policy, but the structural state of consumer spending and business investment left over from the housing bubble).

Given that current run rates in everything from corporate sales to earnings to retail sales to durable goods are worse or, at best, comparable to that period says a lot about the state of economic affairs. Expectations, however, have not incorporated this view. Conventional wisdom still posits a low risk environment, raising the issue of whether markets see and react to fundamental reality or those policy distortions I alluded to above.

The bond market selloff and the funding market volatility, leading to currency chaos, argue strongly for investor addiction to policy – leading to just this kind of blindness about fundamental interpretation.

 

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