Stock Market ‘Dilemma’: Rising Real Wages or Plunging Capex?

Turning attention to that last bastion of monetary surety, equities, the oil slump might be the greatest challenge yet to the non-stop stock escalator. Earnings especially for the S&P 500 are being revised lower as energy companies weigh on results. And while there may be a tendency to dismiss energy as its own problem, there is much deeper unwinding underneath that is actually being concealed by it.

Excluding energy, where profits are expected to slump 19% in the fourth-quarter, S&P 500 earnings are expected to rise 3.6% in the fourth quarter.

That article doesn’t specify whether that earnings figure is GAAP or non-GAAP, as CFO’s have decided that they will decide what constitutes earnings. Overall, even that earnings growth may prove to be optimistic as the trend in the past few weeks (let alone months) has been one of rapidly changing circumstances:

Profit is forecast to have grown 2 percent in the final three months of 2014 and increase 2.8 percent for the current quarter, down from analysts’ October estimates of 8.1 percent and 9.2 percent, respectively. Without energy companies, profit gains would have been 4.7 percent and 7.8 percent, the most recent projections show.

The fact that the above 4.7% is different than the 3.6% in the first article I included (both written today) shows that various definitions and methods of coming up with earnings estimates have proliferated. Regardless, however, neither 4.7% nor 3.6% are anything like healthy earnings growth. While oil focuses attention on rig counts and drilling activity as the measure of US capex, the erosion of economic function is far more widespread.

Industrial companies will also slash capital spending this year by 15 percent, the first decline since 2009, projections show. U.S. Steel Corp., the country’s second-biggest producer of the metal, said this week it will lay off more than 750 employees at two pipe plants as the oil-price slump cuts investments by energy companies.

If American industrial growth is entirely predicated upon the continuance of North Dakota and shale formations, then the American economy is not just now entering difficult territory. In an actually healthy economy, withstanding the end of artificial oil production and cost would be an additional “tailwind” rather than the apparent end of good fortunes. Mainstream commentary has decided that oil prices act as a tax cut, and they should, but without the slashing of all marginal capital expenditure. At the very least, there is something very large missing from the economic equation as it sets up at the beginning of 2015.

“My initial thought was oil would take a dollar or two off the overall S&P 500 earnings but that obviously might be worse now,” Dan Greenhaus, the New York-based chief strategist at BTIG LLC, said in a phone interview. “The whole thing has moved much more rapidly and farther than anyone thought. People were only taking into account consumer spending and there was a sense that falling energy is ubiquitously positive for the U.S., but I’m not convinced.”

The only “anyone” who were unconcerned about energy and commodity prices were those encamped under the monetary “stimulus” tent, held up by nothing more than the Establishment Survey’s self-referential benchmarks. As with everything, seeming, it all gets back to the “best jobs market in decades” talk. Economists are fully expecting all of this to be a minor fluctuation because the unemployment rate is being driven by the denominator? Even those that are entirely sure there is an economic “boom” right now admit, as even the FOMC does, that the numerator isn’t exactly the same equivalence relation with wages that it has been in every other economic growth period in post-war history. The entire hope of the modern world rests upon not wage growth but future wage growth of a nonspecific origin to an as-yet undiscernible degree.

“The U.S. is again the engine of global growth,” said Allen Sinai, chief executive officer of Decision Economics in New York. “The economy is looking stellar and is in its best shape since the 1990s.”



“We are still waiting to see the kind of strengthening of wage numbers we would expect to be consistent with what we are seeing elsewhere in terms of growth and the absolute jobs numbers,” Federal Reserve Bank of Atlanta President Dennis Lockhart said in a Jan. 9 interview.



While wage gains have lagged — average hourly earnings fell 0.2 percent last month from November — they will accelerate as the labor market continues to tighten, according to Mohamed El-Erian, a Bloomberg View columnist and an adviser to Munich-based Allianz SE.


“It’s just a matter of time before wage growth picks up,” he told Bloomberg Television’s “In The Loop” program on Jan. 9.

In other words, the stock market is finally being dragged into the bonds vs. economists debate as actual financial prices and the actual, resultant drag on actual activity is weighed today against the promises of only economists that wages will act at some unspecified moment in the comparatively distant future in a manner in which they didn’t during the “best jobs market in decades.” Admittedly, there is some absurdity in framing it as I did in that manner, but only a little – which is precisely why commodities, credit markets and, above all, funding markets are paying absolutely no attention to the unemployment rate or the rantings of economists’ unfounded suppositions.