Tags: Albert Edwards | Societe General | recession | stocks

SocGen's Edwards: Profit Slump Like This Year's May Signal Recession

By    |   Friday, 27 February 2015 06:20 AM

U.S. stocks are hitting record highs as investors appear to be ignoring forecasts for deteriorating company profits and negative economic data, said Albert Edwards, chief global strategist at Société Générale.

He said the pressure on earnings is not isolated to the energy industry, which has been pressured by a crash in oil prices since last summer. Nor is it the result of the dollar’s strengthening as investors prepare for an increase in U.S. interest rates from the Federal Reserve.

“The downturn in U.S. profits is accelerating and it is not just an energy or U.S. dollar phenomenon,” he said in a February 26 report obtained by Newsmax Finance. “A broad swathe of U.S. economic data has disappointed in February.”

Edwards established his reputation as a perma-bear in 1996 with his Ice Age thesis that argued that stocks will collapse and bond values will climb because of deflation, as seen in Japan after its economic bubble burst in the early 1990s.

His bearish calls aren’t always accurate. In 2012, he said the U.S. was in recession and stocks would slump. Instead, they have continued to advance to record levels.

Among the recent bearish statistics he cited is the 0.8 percent drop in retail sales during January.

Deteriorating Outlook

More broadly, the earnings outlook among financial analysts has been cut in the past three months, with 4.8 percent being cut from the 2015 estimate and 6.6 percent from the 2016 forecast, according to Société Générale.

A downgrade in U.S. forecasts last month was the worst since the 2009 financial crisis and the ratio of analyst upgrades to total estimate changes has fallen to 35 percent, the Paris-based bank said.

"The six-month decline in 12-month forward U.S. EPS estimates is normally associated with a recession," Andrew Lapthorne, global quantitative analyst for Société Générale, said in a February 24 report.

And what about the Federal Reserve's plan to raise interest rates, perhaps beginning around mid-year?

"The economic cycle will be brought down by asset bubbles bursting long before 'tight' policy has any effect," Edwards said. "Lessons were learned from the global financial crisis, but not that one."

Many Americans appear to agree with Edwards on the economy. Gallup's Economic Confidence Index dipped to an average of negative 2 for the week ended Feb. 22, down from positive 3 the prior week.

A 27 percent total of Americans said the economy was "excellent" or "good," while 29 percent said it was "poor." That produced the negative 2 total.

This is the first sub-zero reading for the index since late December. Prior to that, the index was consistently in negative territory since Gallup began tracking it daily in 2008.

"It is not clear what is behind last week's decline in confidence, although quickly rising gas prices last week may have played a role, given that the drop in gas prices coincided with the rise in confidence in late 2014," writes Gallup's Rebecca Riffkin.

Gasoline prices have climbed a hefty 3 percent in the last week to a national average of $2.34 a gallon for regular. To be sure, that still represent a whopping 32 percent drop from $3.43 a year ago.

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U.S. stocks are hitting record highs but the deterioration in company profits only adds to the abundance of recent negative economic indicators, said Albert Edwards, chief global strategist at Societe Generale.
Albert Edwards, Societe General, recession, stocks
Friday, 27 February 2015 06:20 AM
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