Market Still Deluding Itself That It Can Escape The Inevitable Dénouement
by ilene - September 13th, 2010 9:09 pm
Market Still Deluding Itself That It Can Escape The Inevitable Dénouement
Courtesy of John Mauldin, Outside the Box
One of my favorite analysts is Albert Edwards of Societe Generale in London. Acerbic, witty and brilliant. Emphasis on brilliant. The fact that he is a Doppelganger for James Montier (who long time readers are well acquainted with) is a coincidence (or he would say vice versa). I only kind of have permission to forward this note to you, but better to ask forgiveness… So, this week he is our Outside the Box. And a short but good one he is.
I am in Amsterdam and it is late, but deadlines have no time line. Tomorrow more work on the book. It is getting close to the end. Most books are finished when the authors quit in disgust. How many edits can you do? I am close.
I wonder late at night, with maybe a few too many glasses of wine, why I feel like a book is so much more than an e-letter. Really? The last ten years of what I have written are on the archives. Good (ok, sometimes really good) is there. But some are an embarrassment. What was I thinking?
But somehow in my Old World brain, a book is more than a weekly letter. It is somehow more permanent than an “online” letter. Which may be archived forever. The book is “paper” and may be around for a few years. But the online version is here for a long time.
I know that is stupid. Really I do. But what is a 61 year old mind to do? A strange world we live in.
It is really time to hit the send button. More than you know! The conversation tonight has been too deep!
Your trying to figure out the purpose of life analyst,
John Mauldin
Market still deluding itself that it can escape the inevitable dénouement
By Albert Edwards
The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar…
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WHY AREN’T EQUITIES SELLING OFF MORE SIGNIFICANTLY?
by ilene - September 3rd, 2010 7:23 pm
WHY AREN’T EQUITIES SELLING OFF MORE SIGNIFICANTLY?
Courtesy of The Pragmatic Capitalist
The deterioration in the economy has been clear in recent months, but the equity markets have confounded many investors. Stocks are just 10.6% off their highs and have shown some remarkable resilience, particularly in the last few weeks. There’s a great tug-of-war going on underneath what appears like a potentially frightening macro picture.
A closer look shows that what we’ve primarily seen is deterioration in the macro outlook and not so much in specific corporate outlooks. Despite the persistently weak economy, earnings aren’t falling out of bed. Without a sharp decline in earnings there is unlikely to be a sharp decline in the equity markets (outside of some exogenous event such as a sovereign default).
The most distinct characteristic I can recall from the the 2007/2008 market downturn was the persistent deterioration in earnings. Like dominoes we saw the various industries go down one by one: housing, then banks, then consumer discretionary and on down the line. While the macro picture has deteriorated recently we haven’t seen the same sort of deterioration in earnings that we saw in 2007 and 2008.
In a recent strategy note JP Morgan elaborated on the divergence between the macro outlook and the earnings outlook:
“What matters for equities is earnings and not GDP growth. US GDP growth projections are being cut, but earnings projections have been little affected so far. Investors and analysts are hoping that, to the extent the soft patch in US GDP growth lasts for only a few quarters and does not spillover to the rest of the world, US companies will be able to protect their revenues and profits. Indeed, this is what happened during 2Q, when US companies were able to deliver strong top line and EPS growth even as US GDP grew at only a 1% pace.
It is a prolonged soft patch that poses the greater threat for corporate earnings and equity markets as it raises the specter of deflation and profit margin contraction. Why is deflation bad for corporate profitability? When nominal interest rates are bounded at zero, a fall in expected inflation causes a rise in real interest rates and the cost of capital, hurting corporate profitability. In addition, nominal wage rigidities mean that deflation reduces output prices by more than input prices putting pressure on corporate profitability. Indeed, the
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STOCKS ARE CHEAP, BUT THIS METRIC DOESN’T WORK?
by ilene - August 30th, 2010 8:58 pm
STOCKS ARE CHEAP, BUT THIS METRIC DOESN’T WORK?
Courtesy of The Pragmatic Capitalist
I’ll be frank – I have a special place in my heart for the PE ratio and it is the same place where all the things I hate are stored. This simple to understand metric has, in my opinion, resulted in more misguided Wall Street thinking than just about any metric in existence. A quick glance at the breakdown of the PE ratio shows serious flaws at work here. It is basically a moving price target (which is never correct unless you still believe in EMH) divided by the earnings estimates that are created by analysts who have literally no idea where future earnings will be. In other words, you might as well pick random numbers out of a hat and divide them and then go buy or sell
What disgusts me even more about this metric is its incessant use in selling buy and hold strategies. You can’t read a book on value investing or buy and hold without running into the PE ratio. “The market is cheap – stocks for the long-run!” You’ve probably seen this slogan on every mutual fund pamphlet you’ve ever read. Your stock broker no doubt thinks the market is “cheap” right now. The PE ratio has become the sales pitch of an entire generation of sales people who are just herding small investors into fee based products. “Did you know Warren Buffet is a value investor?” “Just buy cheap stocks and hang on. Your status on the list of the world’s richest is in the making!” Or so goes the old sales pitch.
So, I wasn’t surprised to open Yahoo Finance this morning to see the following headline arguing that stocks are cheap according to the PE ratio. But just two articles down is an article from the WSJ arguing that the PE ratio doesn’t work in this environment. You can’t make this stuff up. According to the article:
“Not only is the P/E
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ANALYSTS HAVE BEEN WRONG FOR A DECADE
by ilene - May 17th, 2010 3:13 pm
ANALYSTS HAVE BEEN WRONG FOR A DECADE
Courtesy of The Pragmatic Capitalist
Interesting commentary in the latest McKinsey Quarterly on the analyst community. As we’ve often noted here, the analysts have been impressively wrong year in and year out. In fact, McKinsey notes that the analyst community has been too optimistic for the majority of the last decade. And they haven’t just been wrong – they’ve been horribly wrong. Their estimates have fallen short by almost 50% over this period:
Source: McKinsey
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Apple Praise Borders On Hyperbole
by ilene - April 21st, 2010 3:13 pm
Time to invest in, say, Orange. – Ilene
Apple Praise Borders On Hyperbole
Courtesy of Joshua M Brown, The Reformed Broker
Every single living, breathing analyst on Wall Street (and some that are deceased) has come out with a bull call on Apple ($AAPL) this morning on the heels of the company’s blockbuster first quarter earnings announcement. In over a decade trading this market, I have never seen anything like this analyst lovefest.
Never.
Don’t believe me? How ’bout this?
Clyde Montevirgen, Standard & Poor’s: Buy rating; new target $295, up from $270.
Samuel Wilson, JMP Securities: Market Outperform rating; target to $290, from $260.
Peter Misek, Canaccord Adams: Buy rating; target to $325, from $300.
Robert Cihra, Caris & Co.: Buy rating; target to $310, from $300.
Tavis McCourt, Morgan Keegan: Outperform rating; target now $325.
Keith Bachman, BMO Capital: Outperform rating, target now $290, up from $265.
Doug Reid, Thomas Weisel Partners: Overweight rating; target to $320, from $300.
Andy Hargreaves, Pacific Crest: Outperform; target to $330, from $300.
Jeffrey Fidicaro, Susquehanna: Positive rating; target to $300, from $275.
Shaw Wu, Kaufman Bros.: Buy rating; target to $315, from $305.
Scott Craig, Bank of America/Merrill Lynch: Repeats Buy rating; target to $300 from $260.
Mike Abramsky, RBC Capital: Outperform rating; target to $350, from $275.
Gene Munster, Piper Jaffray: Overweight rating; target to $323, from $299.
Toni Sacconaghi, Bernstein Research: Overweight rating; target to $300, from $275.
Yair Reiner, Oppenheimer: Outperform rating; target to $320, from $285.
Mark Moskowitz, J.P. Morgan: Overweight rating; target to $316m, from $305.
Richard Gardner, Citigroup: Buy rating; target to $320, from $300.
Phil Cusick, Macquarie: Outperform rating; target to $325, from $250.
Bill Shope: Credit Suisse: Outperform rating; target to $315, from $300.
Ben Reitzes, Barclays Capital: Overweight rating; target to $315, from $300.
Katy Huberty, Morgan Stanley: Overweight rating; target to $275, from $250.
Chris Whitmore, Deutsche Bank: Buy rating; target to $350 from $325.
Told ya.
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STAT OF THE DAY: 93% OF ANALYSTS EXPECT S&P TO RALLY HIGHER
by ilene - March 19th, 2010 6:19 pm
STAT OF THE DAY: 93% OF ANALYSTS EXPECT S&P TO RALLY HIGHER
Courtesy of The Pragmatic Capitalist
As if sentiment wasn’t already starting to get a bit too bullish! The latest compilation of analyst estimates and year-end targets is now calling for substantially higher earnings and equity prices. Of the 13 major banks, JUST ONE (Andrew Garthwaite of Credit Suisse) is calling for the S&P 500 to finish the year below the current level. We’ve covered Garthwaite’s full year outlook and it’s very much in-line with our own – a relatively robust first half and a dicey second half. On the other end of the spectrum is Binky Chadha whose price target sits at 1325.
Firm Strategist 2010 Close 2010 EPS =============================================================== Bank of America David Bianco 1,275 $75.00 Bank of Montreal Ben Joyce 1,225 $74.50 Barclays Barry Knapp 1,210 $71.00 Citigroup Tobias Levkovich 1,175 $76.50 Credit Suisse Andrew Garthwaite 1,125 $77.00 Deutsche Bank Binky Chadha 1,325 $80.80 Goldman Sachs David Kostin 1,250 $76.00 HSBC Garry Evans 1,300 JPMorgan Thomas Lee 1,300 $81.00 Morgan Stanley Jason Todd 1,200 $77.00 Oppenheimer Brian Belski 1,300 $76.00 RBC Myles Zyblock 1,225 $76.00 UBS Thomas Doerflinger 1,250 $81.00 --------------------------------------------------------------- Mean 1,243 $76.82 Median 1,250 $76.25 High 1,325 $81.00 Low 1,125 $71.00
Source: Bloomberg
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THE 5 BIGGEST RISKS OF 2010
by ilene - December 28th, 2009 4:18 pm
THE 5 BIGGEST RISKS OF 2010
Courtesy of The Pragmatic Capitalist
As we enter the new year investors will be wise to focus on the risks of 2009. Although the crisis appears long behind us it’s important to keep an eye on the bigger picture. Little has changed in terms of the structure of our global
1) Those darned analysts
It would be comforting to think that Wall Street’s analysts were in fact doing us all a great big favor with their expert analysis, but the truth is, more often than not, they aren’t. As we have seen with my proprietary expectation ratio, the analysts have been behind the curve at every twist and turn of the crisis. They remained too bullish heading into 2007 & 2008 and then were behind the curve as operating earnings tanked and they turned very bearish in Q408 and Q109. Like clockwork, the ER bottomed and the market soon followed. The greatest risk heading into 2010 is an analyst community that becomes wildly bullish and sets the expectation bar too high for corporate America to hurdle itself over. Early readings show this is not a great risk at this point, but it continues to tick higher.
2) Stimulus, stimulus, stimulus.
There is little doubt that the greatest mean reversion in modern economic times has been largely due to government stimulus. The bank bailouts, housing bailouts/stimulus and auto bailouts all helped stop the bleeding during a time when the economy appeared to be on its deathbed. Unfortunately, government spending isn’t the path to prosperity and the private sector will be forced to pick up the slack sooner rather than later. 2010 is likely to largely hinge on this transition. The government will begin to sap the economy of its massive stimulus as the year drags on and with that comes increased risks that the equity markets will struggle on without big brother’s aid.
3) Anything China
China has grown to become the hope of the global economy. With their booming growth, growing consumerism, and fiscal prudence, China is the envy of the economic world. The rally…
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Telling Big Earnings Lies is Easy
by ilene - July 30th, 2009 8:09 pm
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Telling Big Earnings Lies is Easy
Courtesy of Ben Bittrolff, The Financial Ninja
FN: The full article is mind boggling.
Wall Street Analysts Keep Telling Big Earnings Lie: David Pauly:
At a time when the financial industry’s credibility is at an all-time low, you would think Wall Street’s finest would break their necks providing transparency.
Not so. Stock analysts continue to promote corporate earnings lies, insisting that net income isn’t really what investors need to know.
Instead, their earnings estimates ignore often huge expenditures that can’t help but affect a company’s health.
In analystspeak, Intel Corp. wasn’t hit with a $1.45 billion fine from the European Union in the second quarter for anticompetitive practices.
After setting aside funds to cover the fine, which Intel is appealing, the semiconductor-maker had a quarterly loss of $398 million, or 7 cents a share. Disregarding the fine altogether, analysts maintain the company earned 18 cents a share, beating their average estimate of 8 cents.
As Wall Street tells it, the employee stock options Google Inc. granted in the second quarter didn’t cost its shareholders $293 million.
Google, according to generally accepted accounting principles, earned $1.48 billion, or $4.66 a share, in the period. Not enough for Wall Street, which prefers to say the company earned $5.36 a share, leaving out the cost of stock options.
Continue reading Bloomberg article here.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.