Now Is a Better Time to Assess Earnings, Not Valuations

Declines of more than 40% for the S&P/TSX composite index since hitting a high in mid-June have been dominated by the energy, materials and technology sectors in terms of both performance and earnings revisions, according to UBS strategist George Vasic.

However, looking back to when the credit crunch first started to shake equity markets in July 2007, the declines are more uniform among non-defensive sectors. Nearly 90% of the TSX excludes telecom, utilities, health care and staples.

Regardless of which period you look at though, the decline in valuations has been more similar across sectors than has their corresponding changes in forward earnings expectations, Mr. Vasic told clients.

It may seem obvious that outperformance should come from picking the sectors whose earnings do relatively better, but this is not always the case, he noted. As a result, the strategist said now is a better time to assess earnings prospects as opposed to relative valuations, and highlighted technology, staples and industrials as having better prospects than the broader market.

Comments

[Prudent Man...:]

All investments are only worth what they earn, especially free cash flow. One of the most respected (of course unheralded because he wasn't and an "establishment" guy, only cared about sales and free cash flow because to manipulate sales is fraud regardless of what the clueless nonsense espouse at the FASB.

The NBER will probably say this recession started this year when it started in March, 2007 and that great discounting mechanism, the stock market, continued to hit new highs like they did in 2000 when the recession started in March and the NBER lists the start in 2001, when it actually ended. Idiots learning from other idiots and getting Phds for it. (See Nobel winners Krugman as well as Merton and Scholes of LTCM fame with their "fellow traveler" Arafat and Jimmy Carter.)

My friend was so good the management had to replace him with and an Ivy Leaguer (son of a friend of Alan Greenspan) as he wasn't one of "them", even though he won a Lipper (the only one the firm ever earned) and the fund, under its new "prestigious" manager folded. My friend also stated the truism that a derivative is only as good as its underlying security but with more risk. That was in 1987.

If you haven't learned in the last ten years, that the smartest guys in the room are not on Wall Street, Boston or Washington as their P.R. people try to sell you on, you are doomed to continue to rely on the same investment statists.

I think the next Secretaries of Treasury and Commerce along with the Council of Economic Advisors should be staffed with successful farmers and small businessmen - the less "formal" education the better. They know the "real world" every day and not by Ivy League syncophants who got their positions through networking.

2008 Nov 30 10:51 AM

[Peter Bowers:]

Amen! The idiots are part and parcel to the current mess. The so called graduates of higher education clubs should be ignored and replaced with others having a real world awareness.


On Nov 30 10:51 AM PrudentMan, CFA wrote:

> All investments are only worth what they earn, especially free cash
> flow. One of the most respected (of course unheralded because he
> wasn't and an "establishment&amp... guy, only cared about sales
> and free cash flow because to manipulate sales is fraud regardless
> of what the clueless nonsense espouse at the FASB.
>
> The NBER will probably say this recession started this year when
> it started in March, 2007 and that great discounting mechanism, the
> stock market, continued to hit new highs like they did in 2000 when
> the recession started in March and the NBER lists the start in 2001,
> when it actually ended. Idiots learning from other idiots and getting
> Phds for it. (See Nobel winners Krugman as well as Merton and Scholes
> of LTCM fame with their "fellow traveler" Arafat and Jimmy Carter.)

>
>
> My friend was so good the management had to replace him with and
> an Ivy Leaguer (son of a friend of Alan Greenspan) as he wasn't one
> of "them", even though he won a Lipper (the only one the firm ever
> earned) and the fund, under its new "prestigious&q... manager
> folded. My friend also stated the truism that a derivative is only
> as good as its underlying security but with more risk. That was
> in 1987.
>
> If you haven't learned in the last ten years, that the smartest guys
> in the room are not on Wall Street, Boston or Washington as their
> P.R. people try to sell you on, you are doomed to continue to rely
> on the same investment statists.
>
> I think the next Secretaries of Treasury and Commerce along with
> the Council of Economic Advisors should be staffed with successful
> farmers and small businessmen - the less "formal" education the better.
> They know the "real world" every day and not by Ivy League syncophants
> who got their positions through networking.
>

2008 Nov 30 01:57 PM

[Kyle Napier...:]

Wow, bravo PrudentMan, that couldn't be more true. Unfortunately we can look forward to the exact opposite of your advice happening for years to come...


On Nov 30 10:51 AM PrudentMan, CFA wrote:

> All investments are only worth what they earn, especially free cash
> flow. One of the most respected (of course unheralded because he
> wasn't and an "establishment&amp... guy, only cared about sales
> and free cash flow because to manipulate sales is fraud regardless
> of what the clueless nonsense espouse at the FASB.
>
> The NBER will probably say this recession started this year when
> it started in March, 2007 and that great discounting mechanism, the
> stock market, continued to hit new highs like they did in 2000 when
> the recession started in March and the NBER lists the start in 2001,
> when it actually ended. Idiots learning from other idiots and getting
> Phds for it. (See Nobel winners Krugman as well as Merton and Scholes
> of LTCM fame with their "fellow traveler" Arafat and Jimmy Carter.)

>
>
> My friend was so good the management had to replace him with and
> an Ivy Leaguer (son of a friend of Alan Greenspan) as he wasn't one
> of "them", even though he won a Lipper (the only one the firm ever
> earned) and the fund, under its new "prestigious&q... manager
> folded. My friend also stated the truism that a derivative is only
> as good as its underlying security but with more risk. That was
> in 1987.
>
> If you haven't learned in the last ten years, that the smartest guys
> in the room are not on Wall Street, Boston or Washington as their
> P.R. people try to sell you on, you are doomed to continue to rely
> on the same investment statists.
>
> I think the next Secretaries of Treasury and Commerce along with
> the Council of Economic Advisors should be staffed with successful
> farmers and small businessmen - the less "formal" education the better.
> They know the "real world" every day and not by Ivy League syncophants
> who got their positions through networking.
>

2008 Nov 30 03:09 PM

[bobbobwhite:]

The big problem in correcting any part of our very entrenched economic system is that the very rich always take very good care of the rest of the very rich, as they have done all through man's history. Are we going to change that short of a revolution? No, as the very rich run all of the highest offices and institutions in the world and thus control nearly all of the world's worth. Revolutions cost big bucks.

At one time, it only took more bodies to overthrow others, but now the very rich also control immensely powerful devices that can kill millions of revolutionaries with the touch of a finger. How can the masses overcome that...those early days are gone. It can only be done now through the politcal process, and guess where the power is there?

These econ cycles will continue to change as they always have and the poor will be continually manipulated out of what little they gain in each up cycle with a regularity that matches the sunrise. Don't expect much to change until Armagedon.

And, the very rich may even escape that.

2008 Dec 01 02:14 PM

[bbowen7:]

Re-read Animal Farm, or the story of the Russian Revolution. Those who benefit from revolutions are the leaders of the revolution who become the next generation of the elite. One is best to learn how to play the game.

2008 Dec 01 03:07 PM