Fighting Yoda

Caterpillar: Another Example of 'Groupthink' on Recovery

The whole recovery theory V shaped or any other has been totally debunked, but CNBC and along with its talking heads keep seeing recovery - where? I see none. Leading indicators was the latest farce - what are leading indicators - PMI, S&P, Consumer confidence - none of these things are real - they are simply hope and hype. We have real numbers from mainstream companies - GE, CAT etc - they are showing complete and deep ongoing recession - with essentially no end in sight. Specialty companies like Apple, Google etc can do well but that does not mean anything for the overall economy.

The only real numbers that should be looked at for sign of recovery are - capacity utilization, hours worked, wages, and employment - all these continue to show contraction.

Why Do CNBC and Bloomberg Report Operating Earnings?

1. Operating earnings are used because charges are onetime events (some are positive some are negative)- it would distort the earnings picture if there were huge fluctuations. The charges are hard to predict and forecast for the analysts, managements have discretion of if and when. But as long as you understand what the number stands for you should know how to deal with it. The logic is similar to excluding volatile food and energy from core inflation. Typically on a long term basis only reported earnings matter and are followed.
In any case all earnings are operating/GAAP etc are reported - choose the one fits you. Don't worry about headlines on CNBC - media is only giving sound bites - you should be able to filter all the noise.

2. Methodology: S&P PE methodology is simple divide total market cap by total dollar earnings - gives you PE. Nothing fancy here.

3. Earnings Weightings: A few months ago Jeremy Siegel (the famous author of Stocks for the Long run) wrote an OpEd suggesting earnings should be weighted. Here is S&Ps response:

In his Feb. 25 op-ed, Professor Siegel claims that S&P systematically understates the earnings of the S&P 500. In his view, the recent losses of the financial companies in the S&P 500 should be discounted because of their diminished weights in the Index.
His argument, however, fails the simple tests of both logic and index mathematics. A dollar earned or lost is the same irrespective of whether it is earned or lost by a big index constituent or a smaller one.
Professor Siegel’s example of Exxon-Mobil illustrates why S&P’s method of calculating earnings works. If large Exxon-Mobil earned $10 billion and small Jones Apparel lost $10 billion, index investors collectively -- and individually – would bear a proportionate share of both Exxon’s earnings and Jones’ loss, despite the fact that the value of Exxon-Mobil’s shares in the index portfolio is about 1,381 times the value of the Jones’ shares.
To use an analogy, we could hypothetically view the S&P 500 as a single company with 500 divisions, with each division having earnings and an implicit market value. The smallest of these divisions could have an outsized loss that wipes out the combined earnings of the entire company. Claiming that these losses should be ignored or minimized because they came from a less valuable division is flawed.
Professor Siegel’s approach -- applying the weights based on market values to the results based on a company’s earnings -- effectively mixes apples and oranges.

After GE's Miss, Who’s Next?

Results for financials are essentially managed - write downs, Level-3, etc. Financials still should be in the kitchen sink mode - so large write downs shouldn’t be surprising. How the market reacts is unknown - the markets have held up pretty well despite the impending gloom. Whether the C, MER etc crash to the indicated levels is anybody's guess (speculation)- however the trend is definitely downwards. I am short.
Infrastructure is another story - good or bad results from CAT and the like notwithstanding. It is all about sector rotation - investors have the money and have to at least some part of it somewhere. Infrastructure, commodities, energy etc is a very saleable story for now. Recommend buying on pullbacks.