by Chart School - December 11th, 2013 9:35 am
Courtesy of Doug Short.
With 99% of companies reporting for Q3 2013 earnings season, here is the latest update of my ongoing “thought experiment” for forecasting the S&P 500 price based on earnings fundamentals.
Warning: Forecasted earnings have been lowered, and the average monthly closes are above the forecasted earnings projections.
The chart below is based on the latest trailing twelve-month earnings (TTM) data published on the Standard & Poor’s website as of December 10th, 2013. The numbers are from the spreadsheet maintained by senior analyst Howard Silverblatt. See dshort’s monthly valuation update for instructions on downloading the spreadsheet.
Here are the key assumptions in the calculations:
- The 10-year average of nominal TTM earnings is 61.26 at the end of 2012, rising to 66.79 by the end of 2013, based on “as reported” earnings forecasts.
- The average nominal cyclical P/E10 is currently 18.20.
- The S&P 500 historic prices used in the calculations are monthly averages of daily closes.
- Standard & Poor’s estimates of TTM earnings for Q4 2012 through Q4 2014 are:
- The months between the quarterly earnings estimates are linear interpolations.
The blue line represents Standard & Poor’s TTM forecast earnings by month multiplied by the historical nominal 10-year P/E ratio. At 2013 year-end earnings of $96.75 and an average nominal P/E of 18.20, we would see the S&P 500 at 1761. At this level, the nominal P/E10 would be 26.70, and the index would be about 51% above a hypothetical price multiple of the extrapolated 10-year earnings average.
The red line represents a hypothetical S&P 500 price that is a multiple of the average nominal P/E10 of 18.20 and the 10-year average earnings of 61.25 for December 2012. The monthly index price estimates thereafter are linear extrapolations based on average 10-year earnings growth and earnings estimates from Standard & Poor?s.
The optimistic view (blue line)would put us around 1761 in the S&P 500 by the end of December, the assumptions being that the Standard & Poor’s earnings forecasts are correct the nominal P/E10 ratio is the multiple we see.
by Chart School - December 11th, 2013 9:35 am
Courtesy of Doug Short.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Auto sales in the U.S. economy look solid on the surface. According to Autodata, in November, the annual rate of auto sales in the U.S. economy was 16.41 million units. In October, the annual rate of auto sales was reported to be 15.23 million and in the same period a year ago (November 2012), it was 15.32 million. (Source: Autodata web site, last accessed December 10, 2013.) Cleary, auto sales are increasing.
By looking at the auto sales numbers, one could be easily tempted to suggest consumer spending is increasing. But this is not the case. A deeper look at the numbers reveals a large increase in subprime lending to finance consumer auto purchases.
According to Experian, an information services company, loans issued for new vehicles to nonprime, subprime, and deep subprime borrowers made up 26.04% of all auto loans in the third quarter of this year. In the same period a year ago, this number was 24.84%. For used vehicles, loans issued to nonprime, subprime, and deep subprime borrowers made up an astonishing 54.95% of all auto loans in the third quarter. (Source: Experian, December 4, 2013.)
But this is not all. We are also seeing more and more consumers interested in buying vehicles on credit. For example, in its “Household Debt and Credit Developments” report for the third quarter of 2013, the Federal Reserve Bank of New York reported that in the third quarter, 168 million inquires for auto loans were made. In the second quarter of 2012, that number was only 159 million. (Source: Federal Reserve Bank of New York, November 2013.)
All of this shouldn’t be taken lightly. We know what happens when this kind of behavior prevails. Just look at what happened to the housing market of the U.S. economy when subprime borrowers became so prevalent. A significant amount of money was lent to subprime borrowers, they defaulted, and we saw a housing crash.
Auto loans in the U.S. economy are increasing. In the third quarter of 2013, auto loans reached their highest level since the third quarter of 2007; they increased to $97.4 billion.
I question if auto loans are taking on the shape of a bubble.
by Zero Hedge - December 11th, 2013 8:54 am
Submitted by Tyler Durden.
Absent the “obvious” bubble in the late 90s, the US equity market is at its most expensive valuation since right before the ’30s crash. As Bloomberg notes, thanks to the exuberance of stocks in the last quarter, Pavilion Global Markets has calculated Tobin’s Q (a valuation indicator based on market ‘price’ versus ‘asset value’ for non-financial companies) has only been higher at the peak of bubble exuberance. Still want to BTFATH? Afraid of missing out?
The index posted a dramatic 7.5% rise in Q4 so far pressing it to near-record levels absent the euphoria of the late 90s.
by Zero Hedge - December 11th, 2013 8:24 am
Submitted by Tyler Durden.
A stunning 64% of American say the US no longer offers everyone an equal chance of ‘getting ahead’, according to a new poll by Bloomberg. The widening gap between rich and poor – as we have previously noted as wide as during the roaring 20s – has eroded faith in the American dream. The lack of faith, Bloomberg reports, is especially pronounced among those making less than $50,000 a year with 73% of those saying the economy is unfair. As class warfare is stoked, by none other than the President himself in his recent speech, noting economic trends have “jeopardized middle-class America’s basic bargain, that if you work hard, you have a chance to get ahead,” man-of-the-year Pope Francis recently commented, “such an economy kills.”
Inequality wider than during the Roaring 20s…
“Everyone on both sides of the aisle talks about the American dream,” says Sekac. “Right now, that’s not something everyone in this country can aspire to.”
Still, respondents are almost evenly split on the need for government action to narrow the income gap: 45 percent say new policies are needed, while 46 percent say it would be better to allow the market to operate freely even if the gap gets wider.
“More people who are of color get opportunities now than they did,” but a lack of education holds too many back, says David Bakker, 56, a model-train builder in Baltimore.
In the Bloomberg poll, 68 percent of Americans say the income gap is growing, while 18 percent say it is unchanged and 10 percent say it’s shrinking.
While the public is divided over whether the government should take steps to close the income gap, support for greater action is strongest among lower-income Americans, with 52 percent saying officials should do something and 35 percent putting their faith in the market.
“The government keeps taking and taking and taking from us,” she says. “Eventually, people are going to strike back.”
By 56 percent to 35 percent, they endorse [The Pope's] criticism of “trickle-down” economics, which provides tax cuts for the wealthy as a means to spur job growth.
by Zero Hedge - December 11th, 2013 8:12 am
Submitted by GoldCore.
Today’s AM fix was USD 1,255.25, EUR 912.05 and GBP 765.49 per ounce.
Yesterday’s AM fix was USD 1,245.75, EUR 906.13 and GBP 757.76 per ounce.
Gold rose $21.90 or 1.77% yesterday, closing at $1,262.50/oz. Silver soared $0.53 or 2.67% closing at $20.40/oz. Platinum climbed $15.25, or 1.1%, to $1,386.99/oz and palladium also rose $1.50 or 0.2%, to $735.20/oz.
Gold neared a three week high after climbing the most in 7 weeks, on strong physical buying in China and a weak dollar. Gold has recovered from a 5 month low on December 6 to reach $1,268/oz yesterday, its highest price since November 20. Physical demand, especially from Asia seems to be outweighing the jitters regarding the Federal Reserve’s much mooted ‘tapering’.
Shanghai Gold Exchange’s spot contract, rose for a third day to 15,224 kilograms yesterday showing continuing robust demand in the emerging global economic powerhouse.
Markets may have already priced in the possibility of a December tapering as prices did not show any weakness after last week’s stronger than expected non-farm payrolls data. Rather, gold has risen and hedge funds have rushed to cover their short positions ahead of the Fed meeting next week and due to growing concerns of a short squeeze.
However, market participants may again be proved wrong regarding tapering as there is a real risk that the Fed’s $85 billion bond buying programme continues. There is even a chance that the Fed’s bond buying programme increases due to the very fragile U.S. economy.
The dollar index is trading near a six-week low today as investors evaluate the uncertain outlook for the U.S. economy and dollar in 2014.
BOE Says U.S. “Could Do Today” And U.S Authorities Doing Simulation Exercises
The U.S. already has in place plans for bail-ins in the event of banks failing. Indeed, the U.S. has conducted simulation exercises with the U.K. in recent weeks and will do so again in 2014.
On October 12, Art Murton, the FDIC official in charge of planning for resolutions, and the Bank of England’s Deputy Governor Paul Tucker, both confirmed that the U.S. system is ready to handle a big-bank collapse.
by phil - December 11th, 2013 8:02 am
We have a budget deal.
We don't have all the details yet but it seems like unemployment benefits won't be extended and that means about 1.5M people will no longer be considered unemployed – problem solved! The question for next week then is, will this cause the Fed to begin tapering and the answer is – NO!
Don't be silly, the Fed is not going to taper right before Christmas and we won't get the minutes of this meeting until late January so other than the usual 4-6 word change in the statement, what do people think is going to happen next Wednesday?
This will not stop the Financial Media from filling page after page and hour after hour of TV time with endless speculation on what the Fed will do next week and what it means for the economy and the markets but we're not going to play that game. They won't taper and then the media will seamlessly flip to speculating on the next meeting, giving no indication that they wasted your time for two weeks wondering about the last meeting.
Of course, wasting your time is what the Media is all about. 160M Americans don't work at all and 40M of the 140M that do work are only working part-time so the MSM better distract the proles before they look around and realize how badly they are being screwed by the top 10M people, who have made 95% of the economic gains in the past 30 years.
As long as we can keep our lower classess comfortably numb, all is well and we can keep on raking in the big bucks. We held our weekly Webinar yesterday at 2pm and, at about 2:40, I showed our Members a simple way to profit from the end of day market manipulations on the Russell by selling TNA puts. In this case, we sold the TNA weekly $72 puts for $2.22 into the close and they closed at $1.95, which was up 12% in about an hour and should do even better this morning. Beats working at Wal-Mart, right?
by Zero Hedge - December 11th, 2013 7:57 am
Submitted by Tyler Durden.
The 21st century has proven interesting when it comes to Time’s choices for person of the year: George Dubya, twice, Barack Obama, twice, Vladimir Putin, Ben Bernanke, and of course, Mark Zuckerberg. And now, moments ago, the Time person of the year 2013 has been revealed: the winner – Pope Francis, best known recently for bashing materialists and those who cry over a 2 point drop in stocks everywhere. Sorry Miley Cyrus – more twerking will be required in 2014 to make up for this epic loss.
Time has named Pope Francis its person of the year.
Jorge Bergoglio of Argentina is known as a humble man, a capable administrator and — as expected of a new Pope — a man of great faith.
He is also a man of many firsts: the first non-European Pope in the modern era; the first pontiff from South America; and the first Jesuit to be elected head of the Roman Catholic Church.
In his first public act, the new Pope broke with tradition by asking the estimated 150,000 people packed into St. Peter’s Square to pray for him, rather than bless the crowd first.
Francis, 76, was born in Buenos Aires on December 17, 1936. The son of an Italian immigrant, he trained as a chemist before deciding to become a priest.
He was ordained by the Jesuits in 1969 and became co-archbishop of Buenos Aires in 1997, then sole archbishop of that city one year later. He was made a cardinal in 2001 and was president of the Argentine bishops conference from 2005 to 2011.
As cardinal, Francis clashed with the government of Argentine President Cristina Fernandez de Kirchner over his opposition to gay marriage and free distribution of contraceptives.
He was runner-up in the 2005 papal conclave, behind then-Cardinal Joseph Ratzinger, according to a profile by CNN Vatican analyst John Allen published by the National Catholic Reporter.
The new Pope brings together the first and the developing worlds, Allen writes. Besides his Italian roots, Francis studied theology in Germany.
His career coincided with the so-called Dirty War in Argentina, which lasted from 1976 to 1983. It is estimated that as many as 30,000 people were killed or
by Zero Hedge - December 11th, 2013 7:50 am
Submitted by Tyler Durden.
The last time the housing bubble popped, the “frontier” marginal market of Las Vegas was the first harbinger of what was about to come. It is that again, and as real estate expert Mark Hanson explains, “Las Vegas housing demand has crashed.” This is hardly an auspicious sign for the rest of the epically reflated housing market which as we have been tirelelessly pointing out for the past two years, has not recovered, but has merely had its 4th dead cat bounce on the back of i) the implicit bank subsidy of foreclosure stuffing, ii) money laundering by “all cash” foreign buyers using the NAR’s anti-money laundering exemption loophole, and iii) private equity zero cost of credit REO-to-Rent programs which are now in their last days.
From Mark Hanson: Lost Vegas
Las Vegas housing demand has crashed. “Crash”…there is no other word to use. This is not hyperbole. “Crashed” is absolutely the appropriate word to use here given sales are suddenly the weakest levels since Armageddon 2009. I mean come on…sales at the same pace as when the stock market was in the midst of one of the greatest plunges in history speaks loudly…at least to me. Volume precedes price.
Supply is surging in Vegas with “months-supply” back to nearly 7 months (over 7 for condos), and at 2010/11 levels. There certainly is NO LACK OF SUPPLY in this market. And ponder about this for a minute…and apply it to all these other “investor-centric” regions around the nation. That is, in Vegas there are 10s of thousands of single-family houses being readied for rent by new-era “investors”. This flood of freshly rehabbed “for rent” supply will competes at some level with resale and builder “for sale” supply. Even if it competes at a factor of .4, then Las Vegas “normalized” month’s supply could right now be back to a year.
Lastly, houses are as expensive on a monthly payment basis — and relative to the income needed to qualify for a loan — then they were at the peak of the bubble in 2006. But, this is a fact masked over for the past year by the plethora of all-cash buyers who are not governed by employment, income and safe & sound mortgage lending requirements. Like Sacramento, Phoenix, regions in the Inland Empire, and…
by Zero Hedge - December 11th, 2013 7:32 am
Submitted by Tyler Durden.
- Wall Street Exhales as Volcker Rule Seen Sparing Market-Making (Bloomberg)
- GM to End Manufacturing Down Under, Citing Costs (WSJ)
- U.S. budget deal could usher in new era of cooperation (Reuters)
- Ukraine Police Back Off After Failing to Stop Protest (WSJ)
- First Walmart, now Costco misses (AP)
- Dan Fuss Joins Bill Gross Shunning Long-Term Debt Before Taper (BBG)
- China New Yuan Loans Higher Than Expected (WSJ)
- China bitcoin arbitrage ends as traders work around capital controls (Reuters)
- Blackstone’s Hilton Joins Ranks of Biggest Deal Paydays (BBG)
- Europe sketches plan to close troubled banks (Reuters)
- Madoff Planned Everything, Cried Before Arrest, Jury Told (BBG)
- US and Japan differences stall Pacific Rim trade deal (FT)
- FDIC Details Bailout Plans Without Taypayer Funds (WSJ)
- China cuts more red tape, paves way for NDRC slim-down (Reuters)
Overnight Media Digest
* House and Senate negotiators, in a rare bipartisan act, announced a budget agreement Tuesday designed to avert another economy-rattling government shutdown and to bring a dose of stability to Congress’s fiscal policy-making over the next two years.
* The U.S. government’s first major auction of wireless airwaves since 2008 has speculators panning for gold. After years of complaining about the need for more airwaves, none of the major carriers have signed up. Instead, the January auction is crowded with people who don’t own networks but are hoping to cash in on a scarce asset.
* Discovery Communications Inc is considering a bid for Food Network majority owner Scripps Networks Interactive Inc said a person familiar with the matter, signaling that a consolidation wave among television channel owners may be on its way.
* Massachusetts gambling regulators set the table Tuesday for another public vote on whether the Suffolk Downs thoroughbred track near Boston’s Logan Airport can proceed with efforts to land a $1 billion resort-casino.
* U.S. gun sales are slowing from their recent torrid pace. Smith & Wesson Holding Corp said late Tuesday that its profit in the three months ended Oct. 31 fell 20 percent from the year-earlier quarter as sales rose just 2 percent. That follows rival Remington Outdoor Co’s forecast a day earlier for sales growth between about 34 percent and 37 percent for…
by Zero Hedge - December 11th, 2013 7:07 am
Submitted by Tyler Durden.
Contrary to some expectations, the budget deal has done absolutely nothing to push global markets or US futures higher which was to be expected: markets are no longer driven by fundamentals but by such things as carry pairs which signal monetary policies. Sure enough, as a result of the strength in the Yen, overnight markets have reacted with a mixture of cautiousness and optimism. On the cautious side, Asian equities are down across the board which can at least be partially attributed to nervousness at the prospect of a December Fed taper. If Congress passes the budget over the next few days, the probability of a taper next week increase at the margin, given that we have lower fiscal uncertainty (and higher spending) over the next two years. Losses in equities are being led by the Nikkei (-0.7%) and the Hang Seng (-1.3%). Asian credit shows no sign of taper nervousness this morning with the Asia IG index 4bp tighter and high beta EM names such as Indonesia trading firmer (5yr CDS -10bp). 10yr UST yields are unchanged at 2.80% and the US dollar is slightly stronger against the major crosses. The Hang Seng China Enterprises index is down 2.3% ahead of the results of China’s central economic work conference which is expected to end tomorrow and may set a number of economic targets for 2014.
In European trade, equities are seen mainly up across the board with the exception of the FTSE MIB. In terms of fixed income markets, outperformance has been observed in Spanish bonds after being supported by domestic buying, with a tightening in the 5y and 10y SP/GE spread. Furthermore, this morning also saw a Schatz auction which had a lower bid-to-cover ratio of 1.7, compared to the previous of 2.2. From an FX perspective, the USD index has risen after going through the 61.2% fib level taken from the highs seen in the November rally.
The only events due today in the US include the usual US weekly mortgage applications (up 1% this week compared to a -12.8% drop last week) and the monthly US budget statement estimated to post a $140 billion budget deficit. There will be no other major data releases across Europe or the US.
Overnight news bulletin from Bloomberg and RanSquawk
- US Representative Ryan