MetLife (NYSE:MET) is a leading global provider of insurance, annuities and employee benefit programs. It serves approximately 90 million customers. It (and its subsidiaries) operate in the US, Japan, Latin America, Asia, Europe, the Middle East and Africa. It counts over 90 of the top 100 Fortune 500 companies among its corporate clients. It is the largest life insurer in the US and Mexico. It pays a substantial and dependable 2.10% dividend.
As one of the largest US insurers it is considered a bellwether and it has not disappointed in that respect over the last year. In the latest quarter (Q3 2013) it reported a 6% increase in operating earnings year over year to $1.5B. However, on a per share basis they were only up 2% due to the conversion of equity units issued in 2010 to fund the Alico acquisition. Operating earnings were up 7% in the Americas and 37% in EMEA (Europe, the Middle East and Africa), although EMEA earnings were up only 28% on a constant currency basis. Operating earnings were down -1% in Asia, but they increased +7% on a constant currency basis. MetLife reported net Q3 2013 income of $942 million. Since this included -$355 million in after tax derivatives losses, operationally it was an excellent quarter. Book value was up from $47.70 per share at Q3E 2012 to $47.99 at Q3E 2013.
This all sounds great. Why do I say MetLife has issued a warning signal? Simply MET announced that it was no longer going to provide earnings guidance. To me this means that MetLife is very unsure of what the future holds. It means that it sees a considerable chance for a downturn in its business and in the overall US and world economies. MetLife does not want to be sued for misleading investors with probably erroneous information in the coming quarters. It also does not want to give too conservative guidance. I quote from Steven A. Kandarian, Chairman and CEO of MET:
"The bottom line really from our perspective was if earnings guidance really provides information that's useful in investors and analysts better understanding our business and earnings for the coming year, then we should give it. And our view was because of the capital market sensitivity of our overall business and the impact of things like the equity market returns, this wasn't all that useful to people to get our earnings guidance on a specific point or number for EPS in the coming year. We thought that if we gave you information, more information on other parts of our business and sensitivities, that people could build their own models based on their view of, let's say, what the S&P500 will do next year or what interest rates will be or other factors that could influence the short-term earnings of MetLife."
Essentially the above is saying that many parts of MET's business are dependent on the US economy, interest rates and the US equity markets. Annuities are particularly susceptible to these things. Annuities take in money over many years. Then they guarantee to pay out a consistent amount upon retirement for either a fixed amount of time (say 20 years) or for as long as the annuitant lives. It is easy to see how these could be hurt by a downturn in the equities markets. It is easy to see how new money invested might be helped by increased interest rates. However, the value of already owned bonds would be hurt by increased interest rates.
Why worry now? One big reason might be the CAPE (cyclically adjusted PE) of the S&P 500. The long-term average of this number is 16.51. The current reading for the S&P 500 is 24.42 as of November 5, 2013. The chart below shows the last two years of CAPE data for the S&P 500.
The 24.42 reading is a +16.85% increase over the year ago figure. This indicates that the S&P 500 (NYSEARCA:SPY) is very over priced. You probably wouldn't buy one of your favorite stocks at a PE of 24.4 when you knew it typically sold at a PE of 16.5. Of course, if there was some great new news about the company, you might. However, there is no great new news about the S&P 500. There is no great new news about the US and world economies. In fact the news is flat to negative. The recent lowering of rates by the ECB should tell investors that ECB head, Mario Draghi, still believes the EU is facing strong headwinds. I could go over many other world indicators, but let's stick with the US, as its markets more directly impact MetLife's business.
NYSE margin debt is a barometer many people use. The following chart from Investech Research shows what happened soon immediately after the last two major margin debt peaks were reached.
As you can see the correlation has been extremely strong for the last two extremely "high margin debt" peaks. Each of these was at least partially mediated by easy monetary policy from the US Federal Reserve. Investors should also recognize that HFT has only really been prevalent since the 1990s onward. The growth of the internet and the vastly increased speed of computers have enabled it. It tends to lead to exaggerated momentum moves upward in popular stocks. When the stock market begins to fall off strongly, partially "fake" peaks, such as the ones seen above, can fall very steeply.
Another salient point is that bull markets since 1871 have had a median duration of 50 months and an average duration of 67 months. The current bull market has been going since early March 2009 (about 56 months). The bull markets since HFT became a big factor (the last two before this one) had durations of 57 months and 49 months. It seems likely that this one will also have a like duration, especially when you consider the CAPE data and the margin debt data mentioned above.
There are many factors besides the above that lead one to believe that a bear market is near. However, I will not mention them all here. Instead investors should be aware that the median bear market lasts 24 months, and the average bear market lasts 45 months. The median drop in a bear market is -37.69% and the average drop is -40.16%. When you start measuring these potential losses against potential gains in an over-priced stock market, you have to worry that your risk/reward ratio in many stocks is not very good. When bellwether stocks like MetLife start to warn you about a possible downturn (refusing to give guidance due to uncertainty), you have to start to worry seriously. That is what MetLife has done, and its assessment fits extremely well with much other technical and fundamental data about the overall US equities market.
With all that said, MET is still a bellwether. It still pays a respectable dividend. With the red flag of "no guidance," it is no longer a buy. However, it is still a very strong business, and investors can continue to hold it. Plus analysts give it a mean recommendation of 1.9 (a buy). Panic is not indicated. You can still collect your 2.10% dividend, and we have not yet seen the S&P 500 nor the margin debt peaks clearly top out. Analysts are still forecasting next five years EPS growth per annum of 8.63% for MET, which is robust for a company its size. There has been no recent insider selling, and there has been only a small amount of institutional selling (-3.97% in the prior quarter to this quarter).
The two-year chart of MET provides some technical direction for this trade.
The slow stochastic sub chart shows that MET is at overbought levels. The main chart shows that it has been in a strong uptrend for about a year. The stock price is far extended above MET's 50-day SMA and MET's 200-day SMA. It seems likely to fall a bit in the near term. However, if the overall market keeps going up in the short term, it is likely that MET will keep going up with it. It is a hold at the current time. Besides investors will want to continue getting their 2.10% dividend as long as nothing is demonstrably wrong. The PE of 23.37 is a bit pricey, but the FPE of 9.11 seems quite reasonable.
In the case of the overall market the signs are more dire. The CAPE of 24.42 for the S&P 500 versus and average historical value of 16.51 is much more over-inflated. There is no huge improvement in earnings coming for the S&P 500. In fact in Q3 2013, 89 S&P 500 companies have issued negative EPS guidance, while only 12 companies have issued positive EPS guidance with 486 companies having reported. Earnings growth for Q3 2013 for the S&P 500 was up only +3.4%. The surprise percentage for Q3 2013 was the lowest since 2008 at +1.7%. Blended revenue growth for Q3 2013 was only +2.9%.
Overall the warning from MET seems much more dire for the S&P 500 than for MET itself. It is probably appropriate to at least lighten up on positions in the SPY, even if you believe in a Santa Claus rally. There are too many negatives and too many risks. Plus the US federal budget fiasco has brought some extra problems, and it could bring even more soon. A second sequester cut of $109.4B is due in January 2014.
NOTE: Some of the above fundamental financial data is from Yahoo Finance.
Good Luck Trading.