Last week, David Tepper, a billionaire hedge fund titan and president of Appaloosa Management remarked on CNBC …
Two things are happening. It’s that easy sometimes. Either the economy is going to get better by itself, in the next 3 months and what assets are going to do well? You can guess what assets will do well – stocks are going to do well, bonds won’t do so well, gold won’t do as well. OR The economy is not going to pick up in the next three months and the Fed is going to come in with QE. Right? Then what’s going to do well? Everything! In the near term – Everything!
Earnings vs. Share Prices
One might not be able to argue with Tepper’s past performance, but one sure can argue with his current logic. Stocks do not necessarily go up because earnings go up. Stocks rise or fall primarily based on sentiment.
Right now, sentiment is so bullish and earnings estimates so lofty there is room for hefty earnings expansion that falls short or estimates. Buying stocks that miss wildly optimistic earnings estimates is not likely to work out well.
Furthermore, even if earnings do come in on target, there is no historic guarantee that stock prices follow. For example, on March 31, 1973 the S& P was at 111.52 with trailing earnings of $6.80. Seven years later, on March 31, 1980 the S&P was at 102.09 with trailing earnings of $15.27.
Thus, over a span of seven years, earning rose 125% while stock prices fell 8.5%!
What happened? The PE ratio on the S&P fell from 16.40 to 6.68, that’s what.
Moreover, those were real earnings then. Now, corporations hide garbage in SIVs with the blessing of the Fed and analysts cite pro-forma earnings that throw out "one-time" charges that occur with increasing regularity.
Thus, anyone who says stock prices will go up because earnings go up, does not understand history. This does not make Tepper wrong, but it does make his argument fallacious.
What About Quantitative Easing?
Tepper also argues that everything will be good if the Fed falls back on quantitative easing. Really?
Regular visitors to dshort.com know I follow Howard Silverblatt’s earnings spreadsheet on the Standard & Poor’s website. Free registration is required to access this data. I’ve received several requests for more specific details on where to find the spreadsheet. It is fairly well hidden. Here are two links to help frustrated seekers: step one and step two.
I follow the "As-Reported" earnings and top-down estimates for future earnings (see column D in the spreadsheet). The chart below shows the higher estimates of future earnings from the most recent spreadsheet, dated August 24th, and three earlier spreadsheets (February 17th, April 28th, and July 15th).
The latest earnings estimate for 2Q 2010 is 67.20. Friday’s close gives us a P/E ratio of 15.84, which is close to the average trailing 12-month P/E of 15.48. Beyond the 2Q, the chart illustrates increasing optimism about next year’s earnings. The August 24th estimate of $80.20 for 4Q 2011 at today’s P/E would put the S&P 500 at 1,270 at the end of 2011. That’s a gain of 19.3% from the latest close.
But will as-reported earnings really live up to these estimates? Last month Howard Silverblatt pinpointed the problem for earnings in a Bloomberg article No Sales Means No Jobs Means No Recovery. His concluding remarks are worth repeating here:
I look to sales as a future indicator. On this basis, earnings are running ahead of Q1 2010, but sales are flat, and that’s the problem. It’s great that companies have improving earnings, but those improvements are due to high margins, which were the product of cost cuts — specifically job reductions, the very thing that we need to improve now. Until companies and consumers start to spend more, the job front will not get better, but they won’t spend more until they believe things are getting better. The stimulus programs were supposed to jump start the economy and break the downward cycle by convincing both groups that better times were here. But so far we’re not seeing the sales or the jobs; but earnings are good, at least for now.
Companies in the S&P 500 sell across the world. But consumption in the US, which remains critical for sustained earnings growth, has been undergoing a sustained contraction —, a fact that…
This excellent piece (below) was on Bloomberg yesterday and cites another bearish note from Gluskin Sheff’s David Rosenberg. It notes that the analyst community now expects 35% earnings growth for 2010. They go on to show that this has only happened 6 times in 75 years and has been accompanied by 10% GDP growth each time. In essence, the implication is that this recovery is entirely different and is unlikely to rhyme with these other robust earnings recoveries. This is accurate, but terribly misleading in terms of timing. Have a look here and continue reading below:
What Rosenberg and Bloomberg fail to be more descriptive about is the timing of these high estimates. As we have long noted with our expectation ratio and earnings analysis (which has been spot on) the analysts have remained far too bearish for the last year. Where the above analysis goes wrong is in bunching 2010 estimates together as a whole as opposed to breaking them down by quarter.
A closer look at these estimates is vitally important in positioning your portfolio for the coming few quarters. In our 2010 investment outlook we said we were bearish about H2 2010 partly due to the potential for overly optimistic earnings analysis. If you look at current estimates analysts are calling for just 2.7% sequential growth in 2009 Q4 earnings. For 2010 Q1 they are calling for just 1.9% sequential growth. In a nutshell, they expect earnings to be in-line with the last few quarters (which I believe is utterly naive and lacking in any real analysis worthy of paid employment). These estimates are almost certainly low. Where things get interesting is in the later quarters of 2010.
In Q2 analysts are calling for a big jump in growth to 11.3% sequentially and 33% year over year. The same goes for Q3 where they are currently calling for 7% sequential growth and 25% year over year growth. These are big numbers. $19.72 & $20.62 in operating earnings per quarter is essentially what the S&P was doing back in 2006 & 2007 when the economy was at record low unemployment and the banks were cranking their high leveraged ponzi scheme on all cylinders. Can we realistically return to such levels so…
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
The CBOE Vix Index topped 17.0 and the highest level since early-August on Monday morning amid declines in U.S. equities to start the trading week. The volatility index is off its earlier highs to trade 5.0% higher on the session at 15.65 as of 11:30 am ET. Options volume on the VIX is hovering near 360,000 contracts, or just more than 50% of the average daily reading of around 660,000 contracts. Calls are far more active than put options, as evidenced by the call/put ratio up above 4.2 in morning trading, perhaps as some traders position for volatility to stick around.
Large call spreads traded on the VIX today caught our attention as one big optio...
Yes, the market showed significant weakness last week for the first time in quite a while. In fact, the Dow Jones Industrial Average moved triple digits each day. But it was all quite predictable, as I suggested in last week's article, and certainly nothing to worry about. Now the market appears to be poised for a modest technical rebound, and longer term, U.S. equities should be in good shape for a year-end rally. However, I still believe more downside is in order before any new highs are challenged. Moreover, market breadth is important for a sustained bull run, so the challenge for investors will be to put together broader bullish conviction, including the small caps.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, re...
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Ebola is spreading too quickly for Ebola-vaccine makers to conduct typical studies of safety and efficacy on experimental vaccines. Instead, vaccines will be tested for basic safety, but then deployed with protocols devised now in order to test for efficacy essentially on the field. Testing has to be expedited because the situation in West Africa gets worse every day while there are no approved vaccines or other treatments.
The chart below is from a paper in the New England Journal of Medicine showing estimates of the virus's trajectory projecting out to November 1, 2014. If current trends continue...
Despite the various opinions on Bitcoin, there is no question as to its ultimate value: its ability to bypass government restrictions, including economic embargoes and capital controls, to transmit quasi-anonymous money to anyone anywhere.
Opinions differ as to what constitutes "money."
The English word "money" derives from the Latin word "moneta," which means to "mint." Historically, "money" was minted in the form of precious metals, most notably gold and silver. Minted metal was considered "money" because it possessed luster, was scarce, and had perceive...
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Well PSW Subscribers....I am still here, barely. From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.
First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices. Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment. Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer. For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...
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