MaverickBian

Analysts' Forward-Looking Estimates: Just Plain Nuts

Good Point!

Here post an example to solidate your case.

Today, SONY just haves its earnings outlook, mainly because of the Yen appreciation, the price war and the diminishing demands on its flat TV lines and digital cameras.

In other words, almost all sell-side analysts lost their reputation on such a famous firm of the very stable cash flow, and most of whom are from GS et al.

And the question is, over the downturn, the stock pricing model based on DCF is extremely qestionable for the following reasons:

1. the growth rate, may be negative or just like in the SONY case was cut in half, then the stock price will goes deep deep under water, totally not based on their past outdated estimated forward p/e for S&P at around 10 now. If you factor in this growth rate, current p/e for S&P 500 may be 20, or even higher in the SONY case.

2. Analysts got all the financial info mostly from the firm CEO/CFO, so, they have accepted their assumptions for the most part. In the SONY case, when SONY issue its new balance sheet, they made an assumption that marketable securities(mark-to-mar... issue) is based on Sep 30 number, or the market will not change too much based on this number, yet we all know that so far from Sep 30, the Neikki has sheded by almost 25%, which in financial institutions this balalce sheet should be marked to market on a daily basis for the monitoring purpose, yet in a business like SONY, they don't have to unless SEC asked them to post their quarterly statements in time.

3. Most princing models have a D/E(Debt/Equity in market value) ratio built in. If every stock shed like IBM in the past couple of weeks by 30%, then your bollowing cost - credit spread on risk-free rate will widen significantly, which will also eat into their profits by a very big slice.

Sure, we have a lot of macroeconomic factors that need to be considered.

Add all them together, you'll see over the huge downturn, you better be prepared for a 6~8 forward-looking p/e, which in reality after you have discount all these negative factors may stay at 15~20.

Another way you can predict the market move is for a huge downturn like this, every quarter tons of bad news will push down the whole market by at least 10%, then at the bottom (still 3~5 quarters away), we will see S&P at 600 or so.