Political Calculations
Unexpectedly Intriguing!
21 May 2024
A crystal ball with the word 'SP 500' written inside it (and 'Earnings' above it) - Image generated by Microsoft Copilot Designer.

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500 (Index: SPX) at approximately the midpoint of the current quarter, shortly after most U.S. firms have announced their previous quarter's earnings.

Since our last update three months ago, expectations for the S&P 500's earnings have improved. The S&P 500's earnings per share had been expected to return to their March 2022 peak of $197.91 after June 2024, but now looks like it will hit that mark before the end of 2024-Q2.

Here is a summary of the major observations that may be seen in the changes of Standard & Poor's earnings projections from 14 February 2024 to 14 May 2024:

  • Earnings per share for 2023-Q4 increased from a projection of $189.74 to a finalized figure of $192.43.
  • Projected earnings for 2024-Q1 improved from $190.54 to $192.93 per share.
  • S&P projects faster earnings growth during the second half of 2024, improving from $217.99 to $218.13 per share by the end of the year.
  • The first projection of where the S&P 500's earnings per share will be at the end of 2025 is $251.91.

The following chart reveals how the latest earnings outlook has changed with respect to previous snapshots:

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, December 2017-December 2024, Snapshot on 14 May 2024

If you look at the historic earnings expectations shown on the chart, particularly the period since 2021, you'll notice a negative pattern in which later projections for earnings are less optimistic than the projections that preceeded them. This is the 'typical' pattern we see in these earnings projections.

About Earnings Recessions

Depending on who you talk to, an earnings recession has one of two definitions. An earnings recession exists if either earnings decline over at least two consecutive quarters or if there is a year-over-year decline over at least two quarters. The chart identifies the periods in which the quarter-on-quarter decline in earnings definition for an earnings recession is confirmed for both the Pandemic Earnings Recession (December 2020-December 2021) and the new earnings recession (March 2022-December 2022) according to the first definition. The regions of the graph shaded in light-red correspond to the full period in which the S&P 500's earnings per share remained below (or are projected to remain below) its pre-earnings recession levels.

Let's define what a "double-dip" earnings recession would be in case that becomes relevant at the time of our next update. This term describes the situation where after having begun to recover, the S&P 500's earnings per share stops rising and falls without having recovered to its pre-earnings recession level.

Our next snapshot of the index' expected future earnings will be in three months. With the improvement in the earnings outlook over the past three months, we should be able to confirm the full recovery from 2022's earnings recession. Then again, at the end of 2023, we didn't expect that recovery would stretch out as it has, so there is the possibility things will turn to be more negative.

Reference

Silverblatt, Howard. Standard & Poor. S&P 500 Earnings and Estimates. [Excel Spreadsheet]. 14 May 2024. Accessed 15 May 2024.

Image Credit: Microsoft Copilot Designer. Prompt: "A crystal ball with the word 'SP 500' written inside it". And 'Earnings' written above it, which we added.

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20 May 2024
An editorial cartoon of a Wall Street bull celebrating the Dow Jones Industrial index hitting 40,000 Image generated by Microsoft Copilot Designer.

The S&P 500 (Index: SPX) set a new record high of 5,308.15 on Wednesday, 15 May 2024 before slipping back to close out the trading week that was at 5,303.27. The index rose a little over 1.5% about its previous week's close.

The momentum behind the move was provided by Federal Reserve Chair Jerome Powell, who assured markets the week's higher-than-expected producer price inflation report would not respond by hiking U.S. short term interest rates.

With that likelihood greatly reduced, investors sent all the major U.S. stock indices higher during the week. Most notably, the Dow Jones Industrial Average (Index: DJI) crossed above the 40,000 milestone, going on to end the week at 40,004.35.

Meanwhile, the trajectory of the S&P 500 took it to the upper end of the dividend futures-based model's projected range, which can be seen in the latest update to the alternative futures chart.

Alternative Futures - S&P 500 - 2024Q2 - Standard Model (m=+1.5 from 9 March 2023) - Snapshot on 17 May 2024

Other things happened during the trading week that ended on Friday, 17 May 2024. Here's our summary of the week's market moving headlines:

Monday, 13 May 2024
Tuesday, 14 May 2024
Wednesday, 15 May 2024
Thursday, 16 May 2024
Friday, 17 May 2024

The Atlanta Fed's GDPNow tool is forecasting an annualized real GDP growth rate of 3.6%, down from the +4.2% growth it projected in the previous week.

Image Credit: Microsoft Copilot Designer.. Prompt: "An editorial cartoon of a Wall Street bull celebrating the Dow Jones Industrial index hitting 40,000".

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17 May 2024

The backers of wind power are running into a big problem. Their ability to generate more power by building ever-bigger wind turbines is running into both physical and economic limits. The problems of scaling up existing wind turbine technology are becoming more evident, as can be seen in this news report from 2022.

A very similar story played out earlier this year just 12 miles away from the site of the wind turbine collapse in the 2022 video.

The physics of today's most advanced wind turbine technology dictates the nature of the problem:

Larger turbines must face the inescapable effects of scaling. Turbine power increases with the square of the radius swept by its blades: A turbine with blades twice as long would, theoretically, be four times as powerful. But the expansion of the surface swept by the rotor puts a greater strain on the entire assembly, and because blade mass should (at first glance) increase as a cube of blade length, larger designs should be extraordinarily heavy. In reality, designs using lightweight synthetic materials and balsa can keep the actual exponent to as little as 2.3.

Even so, the mass (and hence the cost) adds up. Each of the three blades of Vestas’s 10-MW machine will weigh 35 metric tons, and the nacelle will come to nearly 400 tons. GE’s record-breaking design will have blades of 55 tons, a nacelle of 600 tons, and a tower of 2,550 tons. Merely transporting such long and massive blades is an unusual challenge, although it could be made easier by using a segmented design.

The growing size and mass of the components of a modern wind turbine also limit where they can be built.

Today’s longest blades have become too big to be delivered to inland wind farms. They can be taken only by ship to offshore sites, where building costs are far higher.

Beyond that, the challenge of manufacturing and operating such enormous wind turbines is far costlier than anticipated just five years ago. The designs of the biggest wind turbines are proving to not be up to the task:

Wind turbine failures are on the uptick, from Oklahoma to Sweden and Colorado to Germany, with all three of the major manufacturers admitting that the race to create bigger turbines has invited manufacturing issues, according to a report from Bloomberg.

Multiple turbines that are taller than 750 feet are collapsing across the world, with the tallest—784 feet in stature—falling in Germany in September 2021. To put it in perspective, those turbines are taller than both the Space Needle in Seattle and the Washington Monument in Washington, D.C. Even smaller turbines that recently took a tumble in Oklahoma, Wisconsin, Wales, and Colorado were about the height of the Statue of Liberty.

In April 2024, GE Vernova (NYSE: GEV) pulled the plug on building its largest ever vertical wind turbine because of the technical and economic challenges. That move that is rippling through the wind power generation industry:

The wind industry’s global race to make ever-bigger turbines stumbled to a sudden slowdown last week, jarring U.S. offshore wind projects.

When GE Vernova confirmed that it was canceling one of the largest wind turbines ever designed, it signaled a pause in an arms race that for years had led manufacturers to go higher, longer and wider when building towers, blades and other components. Now, that decision is reverberating across U.S. efforts to build wind projects in the Atlantic.

New York canceled power contracts for three offshore wind projects last week, citing GE Vernova’s decision to abandon its largest turbine model, a massive 18-megawatt machine. The timing could hardly be worse. Offshore wind is the keystone of New York’s plan to generate 70 percent of its power with renewable energy by the end of the decade.

The technical challenges of building and operating ever-larger wind turbines are clearly tied to their vertical form factor. After a certain point, building ever-taller towers to support ever-longer whirling turbine blades comes with exponentially greater costs with too little to be gained from it to make the largest designs practical.

But what if you built your wind turbine with a horizontal form factor? That's an intriguing concept being advanced by AirLoom Energy's engineers, which is described in the following video (HT: Core77):

At this point, AirLoom's horizontal wind turbine power generating concept is intriguing, but unproven. If it proves capable, it would be a game changer for the wind power industry. Since its costs are orders of magnitude lower than what it costs to bring a viable vertical wind turbine design to the market, it would still be worth building prototype units to find out how viable it could be.

That's outside the box thinking at its best. Lots of potential upside, with limited downside risks. We'll be following the technology to see how it proves out.

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16 May 2024
An editorial cartoon of a bank building being pushed toward the edge of a cliff. Generated by Microsoft Copilot Designer.

On 31 January 2024, New York Community Bancorp (NYSE: NYCB) dropped a bombshell earnings report. Instead of reporting anything close to the $0.29 profit per share investors expected, the bank reported a $0.27 per share loss.

That the situation was bad was confirmed by the bank's surpise "massive" dividend cut, which signaled the bank's management was seeking to raise capital. NYCB's quarterly dividend slashed by 70.6% from 17 to 5 cents per share. Investors responded to the sudden, negative change in their outlook for NYCB by sending its stock price plunging by 37.7%, falling from $10.38 at the close of trading on 30 January 2024 to $6.47 per share a day later.

Flashing forward to 1 May 2024, NYCB's dividend outlook got worse as its earnings for the first quarter of 2024 fell short of expectations. As part of its announced plan to recover its profitability, NYCB further slashed its dividend to 1 cent per share. The announcement plan boosted its stock price, which had dropped as low as $2.65 per share, but which through the end of trading on 10 May 2024 was hovering around $3.45 per share.

All the same, NYCB's stock chart looks brutal.

New York Community Bancorp (NYSE: NYCB) Stock Chart from 1 June 2019 through 10 May 2024, Source: Yahoo! Finance

We opted to show NYCB's daily stock price over the past five years because the period before its earnings disaster became known on 31 January 2024, the bank appeared to have weathered the major economic and banking crises of the last several years fairly well. Its stock price had recovered from both the coronavirus pandemic and the March 2023 failures of Silicon Valley Bank and Signature Bank. In fact, NYCB was considered strong enough by banking regulators that the Federal Deposit Insurance Corporation facilitated its acquisition of Signature Bank' assets less than two weeks after its failure.

In doing so, the FDIC may have set up NYCB's own earnings collapse less than a year later.

While the Signature deal strengthened NYCB's balance sheet by adding low-cost deposits and brought with it a middle-market business, the transaction also "put us over $100B in total assets, placing us firmly in the Category IV large bank class of banks between $100B and $250B in assets and subjecting us to enhanced prudential standards, including risk-based and leverage capital requirements, liquidity standards, requirements for overall risk management and stress testing," said President and CEO Thomas Cangemi.

Prior to its FDIC-facilitated acquisition of Signature Bank, New York Community Bancorp fell below the $100 billion threshold. Banks below this threshold have greater flexibility in how they manage and underwrite loans compared to larger banks that have to routinely comply with costly federal banking regulations. Regulatory requirements with which NYCB had little experience in managing, which left them exposed to risks they hadn't fully appreciated would be a consequence of the acquisition and their change in status from a small to a medium-sized bank:

“As part of management’s assessment of the company’s internal controls, management identified material weaknesses in the company’s internal controls related to internal loan review, resulting from ineffective oversight, risk assessment and monitoring activities,” the bank said in the filing.

That leads to a good question. Why did federal regulators facilitate NYCB's acquisition of Signature Bank? Weren't they aware the bank's established loan review and risk assessment practices weren't capable of meeting the requirements of the new regulatory status into which they were promoting them? And if they were not, why not?

NYCB has put forward their plan to address their identified shortfalls in their loan review processes. Where is the federal regulators plan to address where they fell short in pushing through the acquisition to NYCB? What actions could they have taken to help get NYCB up to speed with their new regulatory requirements?

These questions must be asked because of what could happen the next time banking regulators have a crisis. Maybe the next time around, other banks that might consider assisting the rescue will sit out instead because of what happened with NYCB. What do you suppose the consequences of a failed bank rescue might be? The current system in which those who come to the rescue of a failed bank with the assistance of federal regulators are punished because of it doesn't qualify as any kind of smart policy.

If you think about it, the now demonstrated risk from increased regulatory exposure could lead other small banks to deliberately restrain their growth to keep their asset level below the arbitrary threshold regulators have set. What consequences to the industry and to the economy might follow from that?

Afterword

NYCB will partially address its "size" problem by getting smaller. The bank announced on 14 May 2024 that it is reducing its commercial real estate loan portfolio by selling $5 billion in mortgage warehouse loans to JPMorgan Chase (NYSE: JPM).

Image credit: Microsoft Copilot Designer. Prompt: "An editorial cartoon of a bank building being pushed toward the edge of a cliff."

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15 May 2024

The rate at which carbon dioxide is increasing in the Earth's atmosphere stalled during April 2024.

That pace is defined by the trailing twelve month average of the year-over-year change in the concentration of CO₂ in the air as measured at the remote Mauna Kea Observatory. The following chart shows how that measure has evolved from January 2000 through April 2024:

Trailing Twelve Month Average Year-Over-Year Change in Parts per Million of Atmospheric Carbon Dioxide, January 2000 - April 2024

This change coincides with the anniversary of a surge of carbon dioxide being added to the Earth's atmosphere in early 2023. That surge followed China's lifting of its zero-COVID lockdown policies in December 2022.

A year later, the relative change is such that we're seeing little change in the trailing twelve month average of the rate of CO₂ accumulative in the atmosphere, which makes for a nice footnote to the surge that accompanied China's post-lockdown recovery.

Analyst's Note: The MLO's data series contained substantial revisions to historic data, including the data for the period from March 1958 through May 1974, which is highly unusual. Data for the period from March 2012 through March 2024 was also subject to notable revisions. We typically see revisions are concentrated over the most recent last three to four years, so the changes to the data that was released on 5 May 2024 really stands out as out of the ordinary.

References

National Oceanographic and Atmospheric Administration. Earth System Research Laboratory. Mauna Loa Observatory CO2 Data. [Online Data]. Updated 5 May 2024.

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Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

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