The S&P 500 Enters A Post-Transition Period [View article]
I'm having problems with the syntax as well and the suggestion dividends and rates of growth in dividends are the sole determinants of equity valuations. The author assert the market's attention is riveted on 1Q2014 and notes that the estimates for the trailing growth in dividends for that quarter have been falling and, because of this, that the market is slightly overbought all without explanation. I might be tempted to think when the 20 day average of daily stock appreciation intersects with the declining green line at ,say, 8% the market might become over bought. On a differnt note, the author notes that should investor attention should move from 1Q2014 to earlier quarters the market might crash. I have a problem with this as I would wager that more attention is already being given to 2Q2013 and 3Q2013 than 1Q2014. Still an interesting article.
Weighing The Week Ahead: Are You Ready For Some Fedspeak? [View article]
I think Jeff makes a number of interesting points in his discussion of QE and equity prices. The closely intertwined data and dynamics makes it difficult to pull the matrix apart and determine the contribution of earnings, QE and other factors to higher equity prices.
The hard data seems to support the view that increases in earnings have been the driver behind the market going up, but if the prevailing wisdom is that large scale asset purchases are driving the market any scaling back of purchases is certain to rattle the market and turn attention to the domestic and global economy and essentially flat growth in US corporate sales.
I think it would be a huge mistake to assume that market catalysts remain constant and dismiss the possibility that, while earnings have driven the market up, a scaling back in asset purchases could eaily driive the market down. Catalysts need not be symmetrical.
From a PIMCO viewpoint:
Based on our analysis, QE has not been the driving force behind rising equity prices in recent years. We found that since 2009, corporate profits have had a more direct relationship to stock prices. For clues on where the equity market is headed, we suggest investors focus on corporate earnings, dividends and cash flows and pay particular attention to valuations. At PIMCO, we acknowledge that the linkages between QE and stocks are complex. There are a number of arguments for the indirect effects of easy monetary policy on corporate profitability. For example, by purchasing mortgage-backed securities in the various QEs, the Fed drives down mortgage rates. Lower mortgage rates can result in increased housing market activity, which would in turn benefit the real economy and corporate profits.
Weighing The Week Ahead: Are You Ready For Some Fedspeak? [View article]
In the most recent report on the economy - the first estimate of first quarter growth - the BEA estimates the economy is growing at 2.5% with real final demand (excluding inventory effects) running at 1.5%.
And the unemployment rate has fallen from a high of around 10% to 7.5% largely on the back of falling labor force participation rates. This hardly a success unless you rely upon the exhausted argument things could have been worse without large scale asset purchases.
Sensing failure but not wanting to go public, Fed officials and some observers are presently arguing that the efficacy of QE is beginning to wane with lower incremental returns on additional purchases. And more recently, both the IMF and BIS have warned of growing dislocations in capital markets stemming from QE and the risks to central bank balance sheets should they continue with unchecked purchases. So there are pressures building to scale back purchases.
The Fed said it would pursue ZIRP until unemployment falls to 6.5% and many believe by implication this applies to large scale asset purchases as well. With a continuing contraction in labor force participation rates, I foresee a scenario in which the unemployment rate drops to something close to the Fed target but the economy remains stuck in a 2% rut amid essentially flat global growth.
Even with little evidence of success and warnings from global institutions, I believe the Fed will embrace a flexible policy with the possibility of actually increasing asset purchases as the decision is essentially a political decision. And should Yellen replace Bernanke the Fed will embrace yet more dovish policies while possibly expanding purchases and/or extending the rate of purchases.
If we keep moving up like this, stocks could go "parabolic," says Art Cashin. The stocks that have the heaviest short positions have already raced ahead of the indices, and they are going to crumble if we keep going. (Video). [View news story]
Based upon various valuation metrics and different technical indicators, including some offered in the comments above, I believe the market is becoming detached from both the fundamentals and reality. But in the current environment in which central banks across the globe have pumped over $7 trillion into the global banking system, suppressed interest rates and distorted capital markets, I believe the S&P can easily go to 1700 or higher before reality sets in. There is little doubt that a bubble is in the making and if, and when, central banks begin to taper their purchases we will be forced to pay attention to flat global growth, uneven economic fundamentals in the US and stagnating corporate sales (in the US) which in the most recent quarter fell .2% yoy. The Fed has a history of creating asset bubbles and there is no reason to believe this time will be any different.
I have FactSet data as of 2/15 which suggests blended earnings increased around 3.5% in the fourth quarter of 2012 over the same quarter of 2011. Sales increases seen in the fourth quarter came in around 3.9%. The first quarter of this year may see a slight decline YoY earnings growth whereas in late September analysts were looking for a 5% increase. Policy uncertainty combined with continuing weakness in global economic growth are straining earnings.
Weighing The Week Ahead: Can You Bet On The Housing Recovery? [View article]
Diva, I really like your thinking and I would bet on a bubble and extended valuations before we see higher rates and/or a serious contraction in earnings.
The second possible outcome (earnings contraction) is a judgment call whereas the prospect for a material rise in longer term rates is factually and statistically remote. Even though the Fed is prevented from owning more than 70% of any one treasury issuance, at the current rate of purchases of $45 billion per month they could acquire all treasuries with a maturity of 10 to 20 years in three months. Alternatively, they could own all of the publicly held treasuries with a maturity between 20 to 30 years in a little more than six months.
The market in longer dated treasuries is really no longer a market; it's the dominion of the Fed and while we may see price fluctuations the Fed, like the Hunt brothers, has cornered the market. With supply and inventory constrained and unlimited Fed purchasing power, I believe there is little room for treasuries to fall.
A remote, but interesting possibility, is for an exogenous event (possibly China or currency movements) to create havoc in the front end of the duration curve and, with this, an inverted yield curve. This, of course, would bring an end to the "happy days" narrative and weigh upon the broader market.
And as Jeff notes failure to avoid sequestration cuts would also be a big hit but, I believe, short lived because a compromise would be quickly reached as neither party wants to be the architect of the next recession.
Weighing The Week Ahead: Can You Bet On The Housing Recovery? [View article]
And it nice to see you Diva.
I didn't mean to imply operating earnings of $100 to $110 per share in 2013 would be good but only to suggest using either estimate as a basis for current valuation based upon historical multipliers of future earnings would suggest the market is richly valued.
The fourth quarter is turning out a bit better than expected with many beats and a blended earnings gain of around 3% over the prior year. The problem, though, is guidance with 90% of companies issuing negative guidance for the first quarter which is what has likely spooked Eddy, Jeff and others.
And this brings into question attainability of FactSet's estimate of $113 in operating earnings for the current year.
As to where we are right now, it looks like we will conclude 2012 with $87 of "as reported" earnings and something close to $97 to $99 of operating earnings. Most studies I am familiar with use ttm "as reported" earnings to calculate the trailing P/E ratio, meaning we are somewhere around a multiple of 17.5X which gives us an earnings yield of 5.7% compared to a 10yr treasury yield of 2.0%.
In a normal environment this would be exceedingly constructive as many believe when (1) the spread is around 4% it is bullish and/or (2) the treasury yield/earnings yield is .5 or less it is bullish.
The problem with all of this is that this is not a normal environment, rates are being artificially suppressed, the future is highly uncertain, the economy is fragile and vulnerable to shocks, the business cycle is "old" and there are many different rule sets, many of which conflict. Further the trailing P/E is getting a little bit rich (avg close to 16.7) but nowhere near the trouble zones of the low 20's.
China's Buying Cannot Stop Bond Yields Rising [View article]
We're on the same page Tom and thanks for adding - what I forgot to mention - the clear risk that the yield curve inverts and introduces a clear caution sign.
China's Buying Cannot Stop Bond Yields Rising [View article]
Interesting article but I think there are more pieces to the puzzle than foreign purchases reported through TIC.
Of the $10.2 trillion of US treasury debt held by the public, almost 70% has a maturity of less than five years of which the Fed owns very little. And I suspect this is basket where most Chinese investments are parked.
With respect to maturities exceeding five years, there is around $3.2 trillion outstanding of which the Fed owns close to 40%. And within this category, the Fed owns 42% of treasuries with maturities between 10 and 20 years.
At an acquisition rate of $45 billion per month they could own the entire basket in three months although they are prohibited from owning more than 70% of any one issue. Similarly, they could own all of treasuries in the 20 to 30 basket in a period of slightly more than six months.
The Chinese have the potential to rattle short term rates and this may resonate with other short term market anxieties, but the market for longer dated treasuries is really no longer a market. It is fully under control of the Fed and many bond wizards have been adding to the long end on dips.
Weighing The Week Ahead: Can You Bet On The Housing Recovery? [View article]
As always Jeff a nice piece though I would have mentioned collapsing growth in the EMU as an item of concern because many believe global growth will remain stagnant through this year if not longer.
In this context, I think the housing bottom is in but the larger question is perhaps what we should expect residential housing to contribute to the economy. Some time ago I said the upside was .5 points of annual GDP growth and over the last four quarters it has averaged .32 points. While welcome, it’s not the catalyst that many wild eyed pundits and bloggers would have us believe.
Separately, I tend to agree with the thinking of Eddy Elfenbein on the subject of corporate earnings but disagree with his casual remarks as to valuation.
Data essential to calculating forward P/E ratios became available only until recently and David Kostin from Goldman Sachs has developed the longest data series I am aware of documenting the 12 month forward P/E for the S&P 500.
Going back to 1976, the average forward PE works out to be 12.8. Separately, John Hussman, using linear regression models and data going back to 1948, has estimated that the average 12-month forward P/E is 12.
Ignoring whether forward estimates are derived from the bottom or the top, the suggestion that the market is cheap when earnings are $100 to $110 is misleading if not a bit disingenuous. We are living in a new world of risk asset valuations.
And with rates at zero bound, QE underway in many developed economies, discussion in some quarters of overt monetary transactions and unleashed animal spirits there is no reason to believe a major correction is at hand and over time we could see further upside.
John, let me add several slants to your very interesting article.
It was around 1980 that manufacturing peaked and the consumer consumption debt supercycle began in earnest. This, along with expansion of the FIRE sectors of the economy, fueled US growth through the GFC. Capital spending has been constrained in most sectors of the economy with the exception of FIRE (finance, insurance and real estate) where there is great excess capacity.
Corporate leaders fully understand the sources of past growth and are aware that the growth outlook is rather dim as result of continued deleveraging and global structural challenges. Reduced international trade and recessions in Japan, the UK and the EMU all speak to the frailty of future global growth. And Brazil, India and Russia are at a standstill which is why non-financial corporations - who are sitting (globally) on close to $5 trillion in cash and equivalents - are investing very little.
If history is a guide to the future, then it's clear that continued monetary accommodation will lead to unsustainable asset price appreciation disconnected from underlying fundamentals and sustainable organic growth. The correlation between, say, asset purchases by central banks and increases in the value of risks assets is tighter than it is with changes in either GDP or unemployment.
This asymmetrical relationships provides the answer to the question posed by Mr El Erian: “The big question for 2013 is whether the effectiveness and benefits of unusual central bank policy activism will be undermined by collateral damage and unintended consequences.” While inflation remains a risk and a possible unintended consequence, we should expect collateral damage in the form of bursting asset bubbles.
Sep Personal Income and Outlays: Income +0.4% m/m vs. +0.4% expected, +0.1% prior. Personal spending +0.8% m/m +0.6% expected, +0.5% prior. PCE core price index +0.1% in-line with expectations, +0.1% prior. [View news story]
I know the immediate meme is that the economy is recovering and that we should receive and review this report in that context. Sadly, though, the facts argue otherwise. In real terms, personal disposable income remained flat in September while real expenditures rose .4%, meaning that savings had to fall by the difference (.4). And sure enough, savings fell from 3.7% in August to 3.3% in September.
Weighing The Week Ahead: Premature Verdict On Q3 Earnings? [View article]
Diva, your post/response to TLB is simply excellent. With respect to China, Kate MacKenzie makes an interesting point but it bears largely upon Chin'a reluctance to report annualized growth on a quarterly basis.
In my mind, the larger issue is the reliability of Chinese data and the possibility of sovereign manipulation of data for political purposes. To this point, the folks at Capital Economics note “The speed of the turnaround implied by the official figures is implausible, their analysis of data including freight, electricity output and construction “suggests that conditions on the ground are weaker.”
Capital Economics said its own analysis indicates the economy expanded about 6.5 percent in the third quarter, below the 7.4 percent year-over-year growth reported by the NBS.
Standard Chartered also questioned the acceleration of industrial production in September to a 9.2 percent pace from a year earlier from 8.9 percent in August, a three-year low. A production sub-index of September’s official purchasing managers index “was flat compared to the average reading of the previous two months,” calling into question the increase.
Weighing The Week Ahead: Premature Verdict On Q3 Earnings? [View article]
The S&P futures market has actually been in decline since the market closed on Wednesday though there was a brief bounce on Thursday that quickly gave way to mounting concerns over global growth, earnings and problems specific to the EMU.
While Greece and Spain remain huge questions, European political leaders and the European Commission did take halting steps to invest the ECB with regulatory authority for banks across the EMU, promising to develop a framework by the end of the year.
Of more importance is what they did not do, which is set a date at which the ESM may directly inject cash into troubled banks. Not only did they (Germany) waffle on this, but Merkel is on record as saying the ESM may not be used for legacy assets and may only assist banks going forward. Lastly, the FT reported that plans for a centralized banking authority under the auspices of the ECB may be illegal. Europe is very nervous.
The issues weighing on the market and the correlation between the value of the euro and S&P is, well, sometimes scary. And it works in reverse as well, making it a double intertwined helix. When Google prematurely announced disappointing earnings, the euro fell along with the market.
Going into this earnings season we knew it was going to be difficult with revenues flat and earnings down around 2.5%. As it currently stands, the problem is two fold. Of the 98 companies in the S&P 500 have reported revenues and earnings for the third quarter, only 42% have reported actual sales above the mean estimate.
This percentage is well below the average for this stage of the earnings season (20 days after the end of the quarter) and, according to FactSet, is the lowest percentage of companies to report sales above estimates at this point in the earnings season since Q1 2009 (35%).
Of much greater significance is guidance. Of the 22 companies that have issued EPS guidance for the fourth quarter, 21 have issued projections below the mean EPS estimate and just one has issued a projection above the mean EPS estimate. Thus, 95% of the companies that have issued EPS guidance to date for Q4 2012 have issued negative guidance.
The market is really displaying angst about the fourth quarter as ebullient analysts, in the face of horrible guidance and a deteriorating global economy, are still forecasting earnings growth of 9% or more for the quarter of this year. This when big investment houses are warning clients about various fiscal cliff scenarios none of which are pretty.
Weighing The Week Ahead: Will Q3 Earnings Disappoint? [View article]
Live from MarketWatch:
October 15, 2012, 1:01 PM . We’re in the early innings of the third-quarter earnings reports.
Of the 32 S&P 500 companies that have reported through Oct. 12, 63% beat Wall Street’s profit targets. That’s running below the 70% average over the past four quarters, FactSet data shows
The S&P 500 Enters A Post-Transition Period [View article]
Weighing The Week Ahead: Are You Ready For Some Fedspeak? [View article]
The hard data seems to support the view that increases in earnings have been the driver behind the market going up, but if the prevailing wisdom is that large scale asset purchases are driving the market any scaling back of purchases is certain to rattle the market and turn attention to the domestic and global economy and essentially flat growth in US corporate sales.
I think it would be a huge mistake to assume that market catalysts remain constant and dismiss the possibility that, while earnings have driven the market up, a scaling back in asset purchases could eaily driive the market down. Catalysts need not be symmetrical.
From a PIMCO viewpoint:
Based on our analysis, QE has not been the driving force behind rising equity prices in recent years. We found that since 2009, corporate profits have had a more direct relationship to stock prices. For clues on where the equity market is headed, we suggest investors focus on corporate earnings, dividends and cash flows and pay particular attention to valuations. At PIMCO, we acknowledge that the linkages between QE and stocks are complex. There are a number of arguments for the indirect effects of easy monetary policy on corporate profitability. For example, by purchasing mortgage-backed securities in the various QEs, the Fed drives down mortgage rates. Lower mortgage rates can result in increased housing market activity, which would in turn benefit the real economy and corporate profits.
Link: http://bit.ly/14jQJnV
Weighing The Week Ahead: Are You Ready For Some Fedspeak? [View article]
And the unemployment rate has fallen from a high of around 10% to 7.5% largely on the back of falling labor force participation rates. This hardly a success unless you rely upon the exhausted argument things could have been worse without large scale asset purchases.
Sensing failure but not wanting to go public, Fed officials and some observers are presently arguing that the efficacy of QE is beginning to wane with lower incremental returns on additional purchases. And more recently, both the IMF and BIS have warned of growing dislocations in capital markets stemming from QE and the risks to central bank balance sheets should they continue with unchecked purchases. So there are pressures building to scale back purchases.
The Fed said it would pursue ZIRP until unemployment falls to 6.5% and many believe by implication this applies to large scale asset purchases as well. With a continuing contraction in labor force participation rates, I foresee a scenario in which the unemployment rate drops to something close to the Fed target but the economy remains stuck in a 2% rut amid essentially flat global growth.
Even with little evidence of success and warnings from global institutions, I believe the Fed will embrace a flexible policy with the possibility of actually increasing asset purchases as the decision is essentially a political decision. And should Yellen replace Bernanke the Fed will embrace yet more dovish policies while possibly expanding purchases and/or extending the rate of purchases.
If we keep moving up like this, stocks could go "parabolic," says Art Cashin. The stocks that have the heaviest short positions have already raced ahead of the indices, and they are going to crumble if we keep going. (Video). [View news story]
Earnings Season Ends With A Thud [View article]
Weighing The Week Ahead: Can You Bet On The Housing Recovery? [View article]
The second possible outcome (earnings contraction) is a judgment call whereas the prospect for a material rise in longer term rates is factually and statistically remote. Even though the Fed is prevented from owning more than 70% of any one treasury issuance, at the current rate of purchases of $45 billion per month they could acquire all treasuries with a maturity of 10 to 20 years in three months. Alternatively, they could own all of the publicly held treasuries with a maturity between 20 to 30 years in a little more than six months.
The market in longer dated treasuries is really no longer a market; it's the dominion of the Fed and while we may see price fluctuations the Fed, like the Hunt brothers, has cornered the market. With supply and inventory constrained and unlimited Fed purchasing power, I believe there is little room for treasuries to fall.
A remote, but interesting possibility, is for an exogenous event (possibly China or currency movements) to create havoc in the front end of the duration curve and, with this, an inverted yield curve. This, of course, would bring an end to the "happy days" narrative and weigh upon the broader market.
And as Jeff notes failure to avoid sequestration cuts would also be a big hit but, I believe, short lived because a compromise would be quickly reached as neither party wants to be the architect of the next recession.
Weighing The Week Ahead: Can You Bet On The Housing Recovery? [View article]
I didn't mean to imply operating earnings of $100 to $110 per share in 2013 would be good but only to suggest using either estimate as a basis for current valuation based upon historical multipliers of future earnings would suggest the market is richly valued.
The fourth quarter is turning out a bit better than expected with many beats and a blended earnings gain of around 3% over the prior year. The problem, though, is guidance with 90% of companies issuing negative guidance for the first quarter which is what has likely spooked Eddy, Jeff and others.
And this brings into question attainability of FactSet's estimate of $113 in operating earnings for the current year.
As to where we are right now, it looks like we will conclude 2012 with $87 of "as reported" earnings and something close to $97 to $99 of operating earnings. Most studies I am familiar with use ttm "as reported" earnings to calculate the trailing P/E ratio, meaning we are somewhere around a multiple of 17.5X which gives us an earnings yield of 5.7% compared to a 10yr treasury yield of 2.0%.
In a normal environment this would be exceedingly constructive as many believe when (1) the spread is around 4% it is bullish and/or (2) the treasury yield/earnings yield is .5 or less it is bullish.
The folks over at Lakshami have examined this pretty closely. http://tinyurl.com/bfj...
The problem with all of this is that this is not a normal environment, rates are being artificially suppressed, the future is highly uncertain, the economy is fragile and vulnerable to shocks, the business cycle is "old" and there are many different rule sets, many of which conflict. Further the trailing P/E is getting a little bit rich (avg close to 16.7) but nowhere near the trouble zones of the low 20's.
For more on ttm P/E ratios visit Doug Short at http://tinyurl.com/8x2...
China's Buying Cannot Stop Bond Yields Rising [View article]
China's Buying Cannot Stop Bond Yields Rising [View article]
Of the $10.2 trillion of US treasury debt held by the public, almost 70% has a maturity of less than five years of which the Fed owns very little. And I suspect this is basket where most Chinese investments are parked.
With respect to maturities exceeding five years, there is around $3.2 trillion outstanding of which the Fed owns close to 40%. And within this category, the Fed owns 42% of treasuries with maturities between 10 and 20 years.
At an acquisition rate of $45 billion per month they could own the entire basket in three months although they are prohibited from owning more than 70% of any one issue. Similarly, they could own all of treasuries in the 20 to 30 basket in a period of slightly more than six months.
The Chinese have the potential to rattle short term rates and this may resonate with other short term market anxieties, but the market for longer dated treasuries is really no longer a market. It is fully under control of the Fed and many bond wizards have been adding to the long end on dips.
* Data from TF Market Advisors.
Weighing The Week Ahead: Can You Bet On The Housing Recovery? [View article]
In this context, I think the housing bottom is in but the larger question is perhaps what we should expect residential housing to contribute to the economy. Some time ago I said the upside was .5 points of annual GDP growth and over the last four quarters it has averaged .32 points. While welcome, it’s not the catalyst that many wild eyed pundits and bloggers would have us believe.
Separately, I tend to agree with the thinking of Eddy Elfenbein on the subject of corporate earnings but disagree with his casual remarks as to valuation.
Data essential to calculating forward P/E ratios became available only until recently and David Kostin from Goldman Sachs has developed the longest data series I am aware of documenting the 12 month forward P/E for the S&P 500.
Going back to 1976, the average forward PE works out to be 12.8. Separately, John Hussman, using linear regression models and data going back to 1948, has estimated that the average 12-month forward P/E is 12.
Ignoring whether forward estimates are derived from the bottom or the top, the suggestion that the market is cheap when earnings are $100 to $110 is misleading if not a bit disingenuous. We are living in a new world of risk asset valuations.
And with rates at zero bound, QE underway in many developed economies, discussion in some quarters of overt monetary transactions and unleashed animal spirits there is no reason to believe a major correction is at hand and over time we could see further upside.
Where's The Economic Growth? [View article]
It was around 1980 that manufacturing peaked and the consumer consumption debt supercycle began in earnest. This, along with expansion of the FIRE sectors of the economy, fueled US growth through the GFC. Capital spending has been constrained in most sectors of the economy with the exception of FIRE (finance, insurance and real estate) where there is great excess capacity.
Corporate leaders fully understand the sources of past growth and are aware that the growth outlook is rather dim as result of continued deleveraging and global structural challenges. Reduced international trade and recessions in Japan, the UK and the EMU all speak to the frailty of future global growth. And Brazil, India and Russia are at a standstill which is why non-financial corporations - who are sitting (globally) on close to $5 trillion in cash and equivalents - are investing very little.
If history is a guide to the future, then it's clear that continued monetary accommodation will lead to unsustainable asset price appreciation disconnected from underlying fundamentals and sustainable organic growth. The correlation between, say, asset purchases by central banks and increases in the value of risks
assets is tighter than it is with changes in either GDP or unemployment.
This asymmetrical relationships provides the answer to the question posed by Mr El Erian: “The big question for 2013 is whether the effectiveness and benefits of unusual central bank policy activism will be undermined by collateral damage and unintended consequences.” While inflation remains a risk and a possible unintended consequence, we should expect collateral damage in the form of bursting asset bubbles.
Sep Personal Income and Outlays: Income +0.4% m/m vs. +0.4% expected, +0.1% prior. Personal spending +0.8% m/m +0.6% expected, +0.5% prior. PCE core price index +0.1% in-line with expectations, +0.1% prior. [View news story]
Weighing The Week Ahead: Premature Verdict On Q3 Earnings? [View article]
In my mind, the larger issue is the reliability of Chinese data and the possibility of sovereign manipulation of data for political purposes. To this point, the folks at Capital Economics note “The speed of the turnaround implied by the official figures is implausible, their analysis of data including freight, electricity output and construction “suggests that conditions on the ground are weaker.”
Capital Economics said its own analysis indicates the economy expanded about 6.5 percent in the third quarter, below the 7.4 percent year-over-year growth reported by the NBS.
Standard Chartered also questioned the acceleration of industrial production in September to a 9.2 percent pace from a year earlier from 8.9 percent in August, a three-year low. A production sub-index of September’s official purchasing managers index “was flat compared to the average reading of the previous two months,” calling into question the increase.
Weighing The Week Ahead: Premature Verdict On Q3 Earnings? [View article]
While Greece and Spain remain huge questions, European political leaders and the European Commission did take halting steps to invest the ECB with regulatory authority for banks across the EMU, promising to develop a framework by the end of the year.
Of more importance is what they did not do, which is set a date at which the ESM may directly inject cash into troubled banks. Not only did they (Germany) waffle on this, but Merkel is on record as saying the ESM may not be used for legacy assets and may only assist banks going forward. Lastly, the FT reported that plans for a centralized banking authority under the auspices of the ECB may be illegal. Europe is very nervous.
The issues weighing on the market and the correlation between the value of the euro and S&P is, well, sometimes scary. And it works in reverse as well, making it a double intertwined helix. When Google prematurely announced disappointing earnings, the euro fell along with the market.
Going into this earnings season we knew it was going to be difficult with revenues flat and earnings down around 2.5%. As it currently stands, the problem is two fold. Of the 98 companies in the S&P 500 have reported revenues and earnings for the third quarter, only 42% have reported actual sales above the mean estimate.
This percentage is well below the average for this stage of the earnings season (20 days after the end of the quarter) and, according to FactSet, is the lowest percentage of companies to report sales above estimates at this point in the earnings season since Q1 2009 (35%).
Of much greater significance is guidance. Of the 22 companies that have issued EPS guidance for the fourth quarter, 21 have issued projections below the mean EPS estimate and just one has issued a projection above the mean EPS estimate. Thus, 95% of the companies that have issued EPS guidance to date for Q4 2012 have issued negative guidance.
The market is really displaying angst about the fourth quarter as ebullient analysts, in the face of horrible guidance and a deteriorating global economy, are still forecasting earnings growth of 9% or more for the quarter of this year. This when big investment houses are warning clients about various fiscal cliff scenarios none of which are pretty.
No wonder the market is spooked.
Weighing The Week Ahead: Will Q3 Earnings Disappoint? [View article]
October 15, 2012, 1:01 PM
.
We’re in the early innings of the third-quarter earnings reports.
Of the 32 S&P 500 companies that have reported through Oct. 12, 63% beat Wall Street’s profit targets. That’s running below the 70% average over the past four quarters, FactSet data shows