Are Earnings Expectations Realistic?

John Mauldin

Apr 17, 2013

In today’s Outside the Box, Sheraz Mian, Director of Research for Zacks Investment Research, gives us a thorough overview of corporate earnings trends for the past several quarters, along with consensus expectations for this year and next. Then he asks, “How realistic are these expectations?” Not very, he says, and proceeds to tell us why. If we accept his analysis – and he admits right up front that it runs counter to the consensus – then we should be asking ourselves, how does a potential falloff in earnings vs. expectations matter, and why is it important at this particular juncture? I’ll let Sheraz answer those questions, too – he does so convincingly – but I’ll just add that his analysis is a significant piece in the puzzle we’re all putting together here in this tipping-point year of 2013.

Depending on what the politicians and bureaucrats do, or fail to do, in the US, Europe, and China (not to mention Japan), we could turn one of two corners this year: The left-hand turn – toward ever more QE, ballooning fiscal deficits, and an accelerating global currency war – would take us further up Inflation Hill, whose back side is a sheer cliff. The right-hand turn – toward deepening austerity and unemploymentspirals us down into the Morass of Negative Growth. It is only by forging straight ahead along the Main Street of innovative business and technological development, supported by balanced fiscal and financial policies and realistic market expectations (based on valid data and assumptions something I have been driving at in my last couple Thoughts from the Frontline letters), that we will get through this challenging decade intact. But that is a difficult path to find between the siren calls of austerity and more printing.

Zacks Investment Research was founded in 1978 by Len Zacks, PhD. Many innovations have come from this firm over the years, including the creation of the Earnings Consensus that many investors now use to compare earnings estimates with actual earnings reports. Most notably, Len discovered the predictive power of earnings estimate revisions. He harnessed these benefits into the proprietary Zacks Rank stock rating system that has allowed Zacks Rank to compile an outstanding track record.

As I write this, I find myself in Singapore, where it is early Wednesday morning, so I have lost a day – but I’ll get it back next Friday. I will meet Grant Williams in a few hours, and we will take a train to Malaysia for lunch and discuss the markets and business.

It really is time to hit the send button. Have a great week. And yes, I know gold went down. That just means I get more coins when I buy at the end of the month – if it will stay down.

Your needing to find a gym analyst,

John Mauldin, Editor
Outside the Box

Are Earnings Expectations Realistic?

By Sheraz Mian, Director of Research, Zacks Investment Research

We all know that markets don’t always reflect the health of the economy. It is not unusual to experience stellar market returns in an otherwise mediocre economic backdropsomething that investors are currently experiencing. But future success in this investing climate is a greater challenge and requires a good hard look at how realistic earnings expectations are.

On March 28, the S&P 500 hit a new all-time closing high and is now on the cusp of surpassing the intraday high set in March 2000. The Dow Jones Industrial Average and a number of market indices comprising small- and mid-cap stocks are already at record levelsall in the midst of a struggling economy.

The first-quarter 2013 reporting season about to get into high gear will be the second earnings cycle of the current market rally. The rally got underway last November, but the first two months this year overlapped with the fourth-quarter 2012 earnings season. With corporate earnings generally considered to be the mother’s milk of stock prices, the market’s positive year-to-date momentum could be safely interpreted as investor satisfaction, if not happiness, with the earnings picture.

Past performance matters to the market, but it is far more concerned with what will happen in the future. After all, stock prices reflect expectations about the future. You can think of these future expectations built into the current stock prices as the collective wisdom of all investors. “Consensusestimates of all the key variables that investors care about – like earnings, revenues, the economy, the Fed, etc. – reflect this “collective wisdom.”

So, where do current market expectations stand?

Earnings growth has been essentially flat over the last three quarters, a trend that current consensus expectations project into the first half of 2013. But the market’scollective wisdom,” as reflected by consensus estimates, expects growth to come roaring back in the second half of the year and continue into 2014.

My experience leads me to disagree with the consensus. I don’t see a return to booming growth panning out this way, and would like to share the basis of my skepticism with you.

I am by no means suggesting that an earnings train wreck is on the horizon. Nor am I making a call to exit the market altogether. What I am suggesting instead is that current earnings expectations are vulnerable to significant downward revisions. An acceleration in that negative revisions process will most likely result in the market giving back some, if not all, of its recent gains.

You don’t have to agree with my conclusions, wholly or partly. In fact, many of my colleagues and I don’t see eye to eye on this issue. But nevertheless, it would pay to be a little skeptical of current earnings expectations being touted in the media, and maybe take another look at your portfolio to perhaps reposition it for a period of potential market weakness.

The discussion is particularly timely with the 2013 Q1 earnings season about to get underway. Expectations remain low, as they were ahead of the 2012 Q4 earnings season. The Q4 earnings season turned out to be better relative to preseason expectations, and we will likely see a repeat performance in the Q1 earnings season. But that shouldn’t lead to overly optimistic expectations for the coming quarters.

My goal in this write-up is to give you an update on how the Q4 earnings season turned out, and what recent estimate revisions trends tell us about the future of earnings growth.

Evaluating the Q4 Earnings Season

By most conventional measures, the Q4 earnings season turned out to be average. Not particularly good, but not bad either.

Total earnings for companies in the S&P 500 were up +2% year over, and 65.6% of companies beat earnings expectations with a median surprise of +3%. Total revenues were up +2.6%, with 62% of companies beating top-line expectations and median revenue surprising by +0.6%. Excluding the Finance sector, earnings were barely in the positive category.

The table below provides a summary picture of the actual results for 2012 Q4 and consensus expectations for 2013 Q1. Please be mindful of two factors as you read the table below and other earnings data here.

First, we have divided the S&P 500 into 16 sectors, compared to the Standard & Poor’s official 10 sectors. This gives us a more granular view of sectors like retail, construction, autos, transportation, aerospace, and business services. Second, the earnings data here accounts for employee stock options as a legitimate expense, rather than excluding them, as is the practice on Wall Street. As a result, the earnings numbers and growth rates are relatively lower.

Source: Zacks Data. Finance-sector revenue in the fourth quarter got a one-off boost from gains at Prudential Financial (Ticker: PRU). Excluding the Prudential revenue, total Finance-sector and S&P 500 revenue growth would be +11.9% and +2.6%, respectively. The margins column represents the net margins (total net income/total sales).

Despite Q4's average results, the stock market’s strong year-to-date performance shows that investors are overall quite happy with them. But why would this be? Simply, the reason is the extremely low levels to which expectations had fallen as the reporting season was getting underway in early January.

As you can see in the chart above, consensus expectations in early January were significantly below where they stood in early October. This tells us that the market’s favorable response to the Q4 earnings performance was largely a function of how low expectations had fallen between October and January.

But how does the Q4 earnings performance compare to other quarters?

The growth rates for earnings and revenues were better than in Q3, but significantly lower compared to the average for the preceding four quarters.

Note: The average is of the four quarters preceding 2012 Q4.

The “beat ratio,” the percentage of total companies coming out with positive surprises, reflects the same trend, particularly on the earnings side. There is an unusually high proportion of beats on the revenue side, but that’s likely a “payback” for the very low beat ratio in the third quarter. Expectations had come down to an exaggeratedly low level following the Q3 underperformance, which set us up for the unusually high level of positive revenue surprises.

Evaluating Expectations for the Coming Quarters

Earnings estimates from analysts are heavily influenced by guidance from management teams, particularly on the earnings calls. And while the tone of guidance in Q4 was somewhat less negative relative to what we heard from management teams in Q3, it was nevertheless predominantly weak and tentative. This prompted analysts to cut their estimates for the coming quarters, and particularly Q1.

The first table below provides the expected earnings growth rates for the coming quarters, while the second table looks at this year and next.

Note: The growth rates are year over year

To provide a context for the consensus growth expectations for the coming quarters, the next two tables show the absolute dollar levels of total quarterly and annual earnings (as against the YoY growth rates shown above).

Note: The quarterly data is for actual total earnings in the last four quarters and the consensus earnings expectations for the coming four quarters. The annual data shows the actual earnings for the five years through 2012 and the next two years. For example, companies in the S&P 500 earned $238.2 billion in the last quarter of 2012 and $965 billion for the full year 2012. Consensus expectations are for total earnings to come in at $242.3 billion in 2013 Q1 and $1.03 trillion in full-year 2013.

What we see from looking at the last few quarters is that total quarterly earnings have yet to get back to the 2012 Q1 peak of $248 billion. Total earnings have basically been trending down over the last three quarters, but consensus expectations are looking for earnings to start trending back up from 2013 Q1 onwards, with the growth pace materially picking up from Q2 onwards.

Another way to look at this data is by comparing the consensus expectations for the first half of 2013 with the actual results for the same period in 2012. Expectations are for flat earnings growth in the first half of the year, but a ramp-up in the back half of the year to a growth pace of +9.5%. This growth momentum is expected to carry into 2014, giving us earnings growth of +11.7% that year, after the +6.8% gain in 2013 and the +3.8% growth in 2012.

In absolute dollar terms, consensus expectations are for companies in the S&P 500 to earn $1.03 trillion (yes that is a trillion) in 2013 and $1.15 trillion in 2014. In terms of earnings per share, this approximates to $109.88 per “share” of the S&P 500 index in 2013 and $122.72 in 2014.

How Realistic Are These Expectations?

In my professional opinion, they are not realistic. I don’t think these expectations will pan out, and here is why.

Earnings increase through two ways: revenue growth and/or margin expansion (margins are basically earnings as a percentage of sales). The outlook on both fronts is problematic.

Margins have peaked already and at best can be expected to stabilize around current levels. And you can’t have significant revenue growth in the current growth-constrained environment.

Another avenue for growth, particularly at the individual company level, is through mergers and acquisitions. While many M&A deals don’t end up creating value for the acquiring company’s shareholders and don’t generate growth at the aggregate level, they do produce growth at the company level. The historical track record of corporate deal making, in terms of aggregate growth and returns, is spotty at best. But management teams are ever ready for a deal, particularly when elevated equity markets provide them with an easy-to-use currency and the credit markets are willing to fund anything, as is the case at present.

The expected strong earnings growth in the second half of 2013 and next year reflect a combination of revenue growth and margin gains. Revenue growth has a very strong correlation with (nominal or non-inflation-adjusted) global GDP growth. But economic growth has been very anemic lately, with the rich world’s slow-motion deleveraging process casting a dark shadow over the faster-growing emerging world.

The US economy is actually in better shape relative to the recession in Europe and Japan’s nascent efforts to inflate away its problems. But that’s only in relative terms – the reality is that the US economy is at best on a sub-2% growth trajectory. Even that growth pace may be at risk from unfolding fiscal austerity efforts such as the budget sequester and Fiscal Cliff-related tax hikes.

But consensus expectations are looking for a second-half 2013 GDP growth ramp-up that pushes the growth pace close to +3%, and even higher next year. With the US economy barely producing any growth in 2012 Q4, it is hard to envision the growth outlook improving to that extent. But current revenue-growth expectations reflect these optimistic assumptions.

As the chart below shows, margin gains play a big part in projected earnings growth in the coming quarters.

Note: These are net income margins, meaning total net income for the S&P 500 as a percentage of total sales. The data for the last four quarters and last seven years represents what companies actually reported. Net margins for the next four quarters and two years represent current consensus expectations.

Margins have already travelled quite some distance from the 2009 bottom and are essentially in line with the prior cyclical peak. One could argue that margins should move past the prior peak like the stock market; but before we buy into that argument, let’s not forget what gave us the 2006/2007 peak in the first place. Without even getting into the details of how the housing bubble back then pumped up everything, one could say with a lot of confidence that those were unusual times and cannot be expected to repeat. Total earnings, on the other hand, are already above the 2007 peak.

Margins follow a cyclical pattern. They expand as the economy comes out of a recession and companies use existing resources in labor and capital to drive business. But eventually capacity constraints kick in, forcing companies to spend more for incremental business. At that stage, margins start to contract again. Given the extent of unemployment and under-employment in the US economy, one could reasonably say that we haven’t reached those levels. That said, it is hard to envisage companies doing more with less forever.

So What Gives?

Not only are margins already at record levels, but corporate earnings as a share of GDP are also at multi-decade highs. Just as trees don’t grow to the skies, margins and the ratio of earnings to GDP don’t expand forever, either.

What all of this boils down to is that current earnings estimates are too high and they need to come down – and come down quite a bit. One could reasonably draw a scenario where earnings growth turns negative this year. But the most likely path appears to be for earnings growth to flatten out – with the absolute level earnings this year and next not much different from what we got in 2012.

Granted, negative earnings revisions would not be a new phenomenon, as estimates have been coming down for more than a year now. But the market has essentially shrugged off this weakening picture in the hope of an improving earnings outlook for the coming quarters. Importantly, investors have been heartened by the improving outlook for China, a less worrisome European picture, and resolution of some of the domestic macro issues.

But the level of calm in the market is bordering on complacence. After all, Europe remains in a recession; and recent Chinese data about PMI, industrial production, retail sales, and inflation show that we can’t take a rebound in that country for granted. Importantly, recent talk of changes to the Fed’s QE program from within the FOMC are offsetting its effectiveness, Bernanke’s assurances notwithstanding.

With global tailwinds dissipating, the earnings outlook question becomes far more significant for the market. Unless the domestic and international growth backdrop materially improves from current levels, it is hard to imagine current earnings growth expectations holding up. And as investors wake up to the significantly weaker corporate earnings backdrop over the coming months, it will become harder to justify the market’s recent gains, potentially leading to a broad-based pullback.

Investing in a Low Earnings Growth Environment

The bottom line is that actual earnings growth will be substantially lower than what is currently built into stock prices. This view is contrary to current consensus expectations and could potentially serve as a major headwind for the market once investors begin to share it in coming months.

The way to invest in such an environment is to look for stocks that don’t reflect aggressive growth expectations and that enjoy company-specific growth drivers not tied to broader macro trends. Companies that generate plenty of cash flows beyond their immediate capital needs and have track records of sharing excess cash with shareholders through dividends and buybacks are particularly well suited for a period of sub-par earnings growth.

Can China Adapt?

Zhang Jun

18 April 2013

 This illustration is by Paul Lachine and comes from <a href=""></a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.

SHANGHAIChina’sTwo Sessions” – the annual gatherings of the National People’s Congress and the Chinese People’s Political Consultative Conference held every March – have always drawn global attention. But the meetings this year seemed particularly significant, owing not only to the country’s leadership transition, but also to its economic slowdown amid calls for deeper reform. How, then, will China’s new leaders respond?
The problem is simple: No one can predict accurately how long the slowdown will last. The authorities, lacking confidence in their ability to restore pre-2009 rates of annual GDP growth, have lowered the official target to 7.5%.
Many economists are becoming even more pessimistic, pointing to Japan as evidence that, after three decades, China’s breakneck growth may be coming to an end. Japan’s economy, they point out, achieved more than 20 years of sustained rapid growth; but, in the 40 years since 1973, annual growth has exceeded 5% only a handful of times, and output has stagnated for the last two decades.
But today’s pessimists need to account for some fundamental differences between the two economies. For example, Japan was already a high-income country in 1973, with per capita income (in terms of purchasing power parity) at roughly 60% of the United States’ level. The “Four Asian Tigers” (Hong Kong, Singapore, South Korea, and Taiwan) experienced a slowdown in GDP growth at a similar relative income level. By contrast, China’s per capita income is only about 20% of the US level. In other words, we should not underestimate the Chinese economy’s potential to converge toward developed countries.
The pessimists, however, doubt that China can maintain catch-up economic growth. They argue that the current growth model, if not the economic system more broadly, is driving the country into a “middle-income trap.”
Attributing problems to systemic causes is a typical habit of thought in China. But can a system that has sustained 30 years of hyper-growth really be worse than those systems adopted in Japan and the Four Tigers?
China’s economic system, which developed from the institutions of central planning, must have had some merits during this period. But the development and ultimate structure of economic institutions are closely related to a country’s income level or stage of economic development. If some aspects of the current system cannot be adapted to support further economic development, they could end up hindering it. What really matters for economic growth is not whether a system is the “best,” but whether it can be adjusted to serve a new phase of economic development. From this perspective, it is vital to ensure that an economic system is open to institutional reform.
No economic system, however “optimal,” can sustain long-term growth once it is no longer reformable. After its extraordinary post-1945 economic miracle, Japan fell into a pattern of ultra-slow growth because it lacked the flexibility to adapt its institutions for a new phase of economic development, characterized by heightened global competition. By contrast, South Korea has maintained its growth momentum since the Asian financial crisis of the late 1990’s. Western economists often criticize its economic system, but the key point is that its institutions are flexible and open to change, which implies a high degree of economic resilience.
Why is one system amenable to reform, while another is not? In recent years, research has indicated that vested interests and powerful lobbies distort economic policies and cause governments to miss good opportunities. A system receptive to reform requires the government to have greater power or wealth than any interest group, thus enabling it to pursue long-term policy goals and ensure the success of reform.
For example, Yao Yang of Peking University has argued that the Chinese government is able to decide the right policies at critical points, because it is not unduly swayed by any interest group. It is this neutrality, he says, that explains the success of China’s economic transition and its three decades of rapid economic growth.
But what about now? China is entering a new phase of development, and institutional reform in key areas – particularly the public sector, income distribution, land ownership, the household registration system, and the financial sector – has become imperative.
Obviously, reform is more difficult today than it was when China began its economic transition. State-owned enterprises, for example, currently account for 40% of total corporate assets, but only 2% of all firms, which implies significant policy influence. But China seems unlikely to go the way of, say, Russia. On the contrary, the accumulation of wealth in the Chinese government’s hands should enhance its ability to press ahead with reform.
Institutional flexibility has been the key to China’s economic transition and rapid growth over the last three decades, and it is vitally important that the Chinese government remains neutral and avoids being captured by interest groups. In short, the authorities must ensure that the system remains open to change in the long run. Successful implementation of another round of far-reaching reform depends on it.

Zhang Jun is Professor of Economics and Director of the China Center for Economic Studies at Fudan University, Shanghái.

History Tells Us That A Gold Crash + An Oil Crash = Guaranteed Recession

Apr 18 2013, 07:14

by: Michael T. Snyder  .

History Tells Us That A Gold Crash + An Oil Crash = Guaranteed Recession

Is the United States about to experience another major economic downturn? Unfortunately, the pattern that is emerging right now is exactly the kind of pattern that you would expect to see just before a major stock market crash and a deep recession. History tells us that when the price of gold crashes, a recession almost always follows. History also tells us that when the price of oil crashes, a recession almost always follows. When both of those things happen, a significant economic downturn is virtually guaranteed.

Just remember what happened back in 2008. Gold and oil both started falling rapidly in July, and in the fall we experienced the worst financial crisis that the U.S. had seen since the days of the Great Depression. Well, a similar pattern seems to be happening again. The price of gold has already crashed, and the price of a barrel of WTI crude oil has dropped to $86.37 as I write this. If the price of oil dips below $80 a barrel and stays there, that will be a major red flag.

Meanwhile, we have just seen volatility return to the financial markets in a big way. When volatility starts to spike, that is usually a clear sign that stocks are about to go down substantially. So buckle your seatbelts - it looks like things are about to get very, very interesting.

Posted below is a chart that shows what has happened to the price of gold since the late 1960s. As you will notice, whenever the price of gold rises dramatically and then crashes, a recession usually follows. It happened in 1980, it happened in 2008, and it is happening again...

The Price Of Gold
(Click to enlarge)

A similar pattern emerges when we look at the price of oil. During each of the last three recessions, we have seen a rapid rise in the price of oil followed by a rapid decline in the price of oil...

The Price Of Oil
(Click to enlarge)

That is why what is starting to happen to the price of oil is so alarming. On Wednesday, Reuters ran a story with the following headline: "Crude Routed Anew on Relentless Demand Worries." The price of oil has not "crashed" yet, but it is definitely starting to slip.

As you can see from the chart above, the price of oil has tested the $80 level a couple of times in the past few years. If we get below that resistance and stay there, that will be a clear sign that trouble is ahead.

However, there is always the possibility that the recent "crash" in the price of gold might be a false signal because there is a tremendous amount of evidence emerging that it was an orchestrated event. An absolutely outstanding article by Chris Martenson explained how the big banks had been setting up this "crash" for months...

In February, Credit Suisse 'predicted' that the gold market had peaked, SocGen said the end of the gold era was upon us, and recently Goldman Sachs told everyone to short the metal.
While that's somewhat interesting, you should first know that the largest bullion banks had amassed huge short positions in precious metals by January.
The CFTC rather coyly refers to the bullion banks simply as 'large traders,' but everyone knows that these are the bullion banks. What we are seeing in that chart is that out of a range of commodities, the precious metals were the most heavily shorted, by far.
So the timeline here is easy to follow. The bullion banks:
    1) Amass a huge short position early in the game
2) Begin telling everyone to go short (wink, wink) to get things moving along in the right direction by sowing doubt in the minds of the longs
  3) Begin testing the late night markets for depth by initiating mini raids (that also serve to let experienced traders know that there's an elephant or two in the room
    4) Wait for the right moment and then open the floodgates to dump such an overwhelming amount of paper gold and silver into the market that lower prices are the only possible result
5) Close their positions for massive gains and then act as if they had made a really prescient market call
6) Await their big bonus checks and wash, rinse, repeat at a later date
While I am almost 100% certain that any decent investigation by the CFTC would reveal that market manipulating 'dumping' was happening, I am equally certain that no such investigation will occur. That's because the point of such a maneuver by the bullion banks is designed to transfer as much wealth from 'out there' and towards the center, and the CFTC is there to protect the center's 'right' to do exactly that.

You can read the rest of that article right here.

There are also rumors that George Soros was involved in driving down the price of gold. The following is an excerpt from a recent article by "The Reformed Broker" Joshua Brown ...

And over the last week or so, the one rumor I keep hearing from different hedge fund people is that George Soros is currently massively short gold and that he's making an absolute killing.

Once again, I have no way of knowing if this is true or false.
But enough people are saying it that I thought it worthwhile to at least mention.
And to me, it would make perfect sense:
1. Soros is a macro investor, this is THE macro trade of the year so far (okay, maybe Japan 1, short gold 2)

2. Soros is well-known for numerous market aphorisms and neologisms, one of my faves being "When I see a bubble, I invest." He was heavily long gold for a time and had done well while simultaneously referring to it publicly as a speculative bubble.

3. He recently reported that he had pretty much exited the trade in gold back in February. In his Q4 filing a few weeks ago, we found out that he had sold down his GLD position by about 55% as of the end of 2012 and had just 600,000 shares remaining. That was the "smartest guy in the room" locking in a profit after a 12 year bull market.

4. Soros also hired away one of the most talented technical analysts out there, John Roque, upon the collapse of Roque's previous employer, broker-dealer WJB Capital. No one has heard from the formerly media-available Roque since but we can only assume that - as a technician - the very obvious breakdown of gold's long-term trend was at least discussed. And how else does one trade gold if not by using technicals (supply/demand) - what else is there? Cash flow? Book value?

5. Lastly, the last public interview given by George Soros was to the South China Morning Post on April 4th. He does not mention any trading he's doing in gold but he does reveal his thoughts on it having been "destroyed as a safe haven"
It is also important to keep in mind that this "crash" in the price of "paper gold" had absolutely nothing to do with the demand for physical gold and silver in the real world. In fact, precious metals retailers have been reporting that they have been selling an "astounding volume" of gold and silver this week.

But that isn't keeping many in the mainstream media from "dancing on the grave" of gold and silver.
For example, New York Times journalist Paul Krugman seems absolutely ecstatic that gold has crashed. He seems to think that this "crash" is vindication for everything that he has been saying the past couple of years.

In an article entitled "EVERYONE Should Be Thrilled By The Gold Crash," Business Insider declared that all of us should be really glad that gold has crashed because according to them it is a sign that the economy is getting better and that faith in the financial system has been restored.

Dan Fitzpatrick, the president of, recently told CNBC that people are "flying out of gold" and "getting into equities" ...

"There have been so many reasons, and there remain so many reasons to be in gold," Fitzpatrick said, noting currency debasement and the fear of inflation. "But the chart is telling you that none of that is happening. Because of that, you're going to see people just flying out of gold. There's just no reason to be in it. Traders are scaling out of gold and getting into equities."

Personally, I feel so sorry for those that are putting their money in the stock market right now. They are getting in just in time for the crash.

As CNBC recently noted, a very ominous "head and shoulders pattern" for the S&P 500 is emerging right now...

A scary head-and-shoulders pattern could be building in the S&P 500, and this negative chart formation would be created if the market stalls just above current levels.  
"It's developing and it's developing fast," said Scott Redler of on Wednesday morning. 
Even worse, volatility has returned to Wall Street in a huge way. This is usually a sign that a significant downturn is on the way...
Call options buying recently hit a three-year high for the CBOE's Volatility Index, a popular measure of market fear that usually moves in the opposite direction of the Standard & Poor's 500 stock index.

A call buy, which gives the owner the option to purchase the security at a certain price, implies a belief that the VIX is likely to go higher, which usually is an ominous sign for stocks.

"We saw a huge spike in call buying on the VIX, the most in a while," said Ryan Detrick, senior analyst at Schaeffer's Investment Research. "That's not what you want to hear (because it usually happens) right before a big pullback."

The last time call options activity hit this level, on Jan. 13, 2010, it preceded a 9 percent stock market drop that happened over just four weeks, triggered in large part by worries over the ongoing European debt crisis.
And according to Richard Russell, the "smart money" has already been very busy dumping consumer stocks...
What do billionaires Warren Buffet, John Paulson, and George Soros know that you and I don't know? I don't have the answer, but I do know what these billionaires are doing. They, all three, are selling consumer-oriented stocks. Buffett has been a cheerleader for US stocks all along.

But in the latest filing, Buffett has been drastically cutting back on his exposure to consumer stocks. Berkshire sold roughly 19 million shares of Johnson and Johnson. Berkshire has reduced his overall stake in consumer product stocks by 21%, including Kraft and Procter and Gamble. He has also cleared out his entire position in Intel. He has sold 10,000 shares of GM and 597,000 shares of IBM.

Fellow billionaire John Paulson dumped 14 million shares of JP Morgan and dumped his entire position in Family Dollar and consumer goods maker Sara Lee. To wrap up the trio of billionaires, George Soros sold nearly all his bank stocks including JP Morgan, Citigroup and Goldman Sachs. So I don't know exactly what the billionaires are thinking, but I do see what they're doing -- they are avoiding consumer stocks and building up cash. 

... the billionaires are thinking that consumption is heading down and that America's consumers are close to going on strike.

So what are all of those billionaires preparing for? What do they know that we don't know?
I don't know about you, but when I start putting all of the pieces that I have just discussed together, it paints a rather ominous picture for the months ahead.

At some point, there will be another major stock market crash. When it happens, we will likely see even worse chaos than we saw back in 2008. Major financial institutions will fail, the credit markets will freeze up, economic activity will grind to a standstill and millions of Americans will lose their jobs.

I sincerely hope that we still have at least a few more months before that happens. But right now things are moving very rapidly and it is becoming increasingly clear that time is running out.

Time Is Running Out