The Sovereign Investor

About the Author The Sovereign Investor

Since 1998, The Sovereign Society has been at the vanguard of the pursuit for personal liberty and free markets. We enthusiastically support the enduring pursuit of freedom and prosperity, and, to that end, we believe in empowering individuals to make educated investment choices. Through the years, we have assembled a talented and deeply experienced team of analysts, editors and researchers who understand that the best investment and wealth-protection opportunities in any market are often hidden. And our approach has led to a great degree of success. Our independent, uncompromised research has predicted some of the biggest financial catastrophes in recent memory. We were one of the very first financial research firms to warn investors about the dangers in the derivatives market and the threat they posed to the global financial system. We also alerted our readers about the dollars crisis of 2004-2005, the meltdown in the private-equity markets in 2007, the collapse of Lehman Brothers in 2008, and we’ve been sounding the alarm bells about the European debt crisis since early 2010, long before the mainstream media started paying attention. In an age when our personal and economic freedoms are being curtailed like never before, our work has never been more important, and our voice never more indispensable. That’s why we remain steadfast in our mission of scouring the globe for investment opportunities that can only be unearthed by our exhaustive, “boots-on-the-ground” approach. With a daunting economic era ahead of us, our purpose is providing our subscribers with the unvarnished truth in an industry filled with artifice and obfuscation. We realize that a world of investment opportunity exists in stocks, commodities, currencies and asset protection that are often overlooked. Our mission is to bring them to you each day. Interested in joining? Sign up for The Sovereign Investor Daily Daily today! (It’s FREE!) Visit http://thesovereigninvestor.com/

Don’t Buy the Earnings Hype, Take Profits Now

By Chad Shoop

Right now, investors are celebrating an earnings season that seems to have topped meaningless analyst expectations. But there is a lot more to this story…

If you’ve followed along this earnings season, you may have noticed a trend.

Most companies are beating bottom-line expectations. Topping these expectations is great, as it shows the company generated better-than-expected profits for shareholders. But those same companies are failing to beat revenue growth expectations, thereby missing a critical element to expanding earnings over the long term. In other words, companies are taking an early lead, but failing to win the game.

Without revenue growth, besting lowered earnings expectations does little to reassure me that our economy is thriving. And after delving further into recent earnings releases, I find the picture is even bleaker when looking at the months ahead. Let me explain.

The Real Earnings Story

Right now, we are more than three-quarters of the way through fourth-quarter earnings season. And we have a good idea of how it’s going to end up — and it’s not pretty.

According to FactSet Earnings Insight, nearly 70% of companies have beaten analyst earnings expectations. This is where the good news ends, and yet it’s what many investors are taunting us with — using it as evidence of a strong economy.

They fail to realize that underlying growth is determined by revenue, and that these figures are not manipulated like earnings are. If you want to get a feel for how the company’s operations are doing, you want to look at revenue growth. Here we find a different story.

Of the 76% of companies that have already reported, less than half have beaten revenue expectations. A stark contrast to the 70% that beat earnings expectations. But this isn’t the end of the earnings-season woes. They’re actually just the beginning.

There were 85 companies who provided first-quarter guidance. Of those, just 17 offered up positive earnings growth. A whopping 68 said they expected negative growth.

Even though the majority of companies beat tepid earnings expectations, we are still faced with a combined earnings decline of 3.7% for the fourth quarter so far. If that holds true for the remaining 24% of companies left to report — and I suspect it will — this will be the third consecutive quarterly decline in earnings on a year-over-year basis, and the first such occurrence since 2009.

As I pointed out previously, there are many ways to calculate an earnings recession. By some accounts, we have been in an earnings recession for over a year. But even with mainstream earnings reporting, where companies have manipulated and favorably adjusted their bottom lines, we are still seeing earnings fall for the third straight quarter.

Take Profits Now

What this means is that the Fed simply can’t continue to raise rates in 2016 … or in 2017 for that matter. A stronger dollar will put pressure on margins, pushing earnings even lower, and slowing revenue growth by reducing American exports.

Falling revenue and declining earnings also show that America’s economy is not as strong as it is being portrayed. If our economy was, in fact, expanding by more than 2%, generating a modest amount of inflation and boosting wages, we would need companies leading this charge to be more fundamentally sound. Until then, don’t expect to see any improvement.

As for what you can do, don’t celebrate too early.

If you are buying on the fact that earnings have topped analyst expectations and ignoring that earnings are actually declining 3.7% (and have done so for the past three quarters), then now is the time to take some profits off the table and prepare for better buying opportunities down the road.