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Peak Earnings |
rffrydr
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 Posted: Tue Apr 03, 2007 10:46 am Post subject: Peak Earnings |
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"Peak" is popular: in that spirit, from 10 to 9--how big is that one digit?
The backdrop:
| Quote: | Throughout 2006, investors in global credit markets seemed unflappable. Despite a growing chorus heralding the end of a four-year bull market, corporate spreads just kept on tightening. A good guide to sentiment in credit markets are the heavily traded indices based on credit default swaps, such as Europe's iTraxx, which reflect companies' perceived ability to repay debts. Seemingly without effort, these spread indices pretty much halved last year.
But this trend ended with a jolt in February, when the sell-off in Chinese equities prompted an unwinding of risky positions across all asset classes - including credit. The CDX crossover index, North America's broad-based equivalent of iTraxx, leapt more than 30 per cent. Interestingly, however, it has not weakened much since, despite the rising concerns over US subprime mortgage lending.
But history warns against complacency. Benign conditions in credit markets rarely last more than five years, due to their close alignment with the business cycle. Provided company profits grow faster than debt, both equity and credit markets can rally in unison. Spreads have moved down with corporate leverage for quoted companies, which has been falling relative to profits since 2002. But 2007 forecasts for the S&P 500 show absolute net debt growing at least twice as fast as earnings, probably reaching their cyclical peak. Higher leverage should then mean wider spreads.
This is spookily similar to the picture a decade ago. From 1992-1997, credit markets and equities moved in step. Equities kept rising in spite of deteriorating core profitability, largely because of deals and buy-backs. Today, acquisitions and the leveraging of balance sheets are also being fuelled by private equity.
Peak earnings, coupled with rising gearing as a result of financial engineering, is clearly negative for credit markets - whatever buoyant markets are suggesting. If the corporate profit outlook weakens, conditions for borrowers will really start to slide. February's blip may then prove to have been a turning point for credit markets.
Source Citation: "A nasty inflection.(LEX COLUMN)." The Financial Times (March 30, 2007): |
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rffrydr
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| Posted: Tue Jan 27, 2009 1:59 pm Post subject: |
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rffrydr
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| Posted: Mon Oct 27, 2008 3:20 pm Post subject: |
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Through Monday morning, the 243 stocks in the S&P 500 had released profits. Share-weighted profit growth was down 22.7% y/y. Ex-financials, profits were up 7.9% y/y. The percentage of upside surprises has improved. There have been 146 or 60.3% positive surprises compared to 65.3% a year ago. Negative surprises totaled 68 or 28.1% verses 21.4% a year ago. Profit growth is running negative in five of the ten sectors led by financials. Telecom and utilities are most disappointing after financials. Energy has posted the strongest profit outlook.
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rffrydr
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rffrydr
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| Posted: Sat Jul 12, 2008 10:56 pm Post subject: |
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Mauldin. This has been referenced here before (e.g. Hussman) but bears repeating:
| Quote: |
Earnings estimates are being cut with each passing month. The P/E ratio for the S&P 500 is currently at a sporty 23. Historically, in times of rising inflation, the stock market goes through "multiple compression." That means P/E ratios fall more than earnings. If multiples fell just 20%, back to 18, which is still above long-term trends, the market would see another 20% drop from here. Even with earnings growth, the market is going to have a challenge rising in the current environment.
Sidebar: A number of you have written questioning my source for the P/E ratio, as you read or hear different numbers from what I write. You can indeed find estimates of forward P/E ratios as low as 12 a year from now. That is a lot different than the 23 I cited above.
There are two basic types of earnings that are reported. One is "operating earnings," or what I call EBBS, or Earnings Before Bad Stuff. Then there is "reported earnings," which is what the corporations report on their tax forms. Not all that long ago, in the mid-'90s, operating earnings and reported earnings were generally in line with each other. Companies would deduct genuine one-time, unusual losses from their reported earnings to give us operating earnings. And such a system has a valid basis for existence. If something is truly one-time, maybe an investor should overlook it when evaluating the company's potential.
But then the media and analysts started using the operating earnings as the primary number, and companies began to game the system. More and more items were considered one-time. One of the more egregious examples was when Waste Management Systems declared that painting the garbage trucks was a one-time extraordinary expenditure and should be accounted as such. Today the difference between as-reported and operating earnings can be 20-40% or more! It seems there are many losses that management assures us are just one-time items.
Standard and Poor's has a web page where you can see a spreadsheet of historical data and projections for both types of earnings. That is the source of my data. It is at http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS?GXHC_gx_session_id_=5350992f205e73e4& .
Analysts' estimates do tend to get brighter the further out one looks on the table. But if the growth scenarios mentioned above come about, and banks have to curtail all sorts of lending, the earnings projections are going to be way too high, as they have been for the last 12 months. That is going to mean more pain for the stock market. |
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rffrydr
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| Posted: Sat Jul 12, 2008 8:51 am Post subject: |
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So far....so far.
On earnings, the worst is yet to come. That at least seems to be the guidance from history, if not from brokers’ forecasts.
Analysing the second-quarter earnings season, due to get going in earnest on Friday with General Electric, is complicated by the extreme conditions in the financial and energy sectors.
Click here to update.
Overall, earnings for companies in the MSCI World index, covering the world’s developed nations, have fallen about 3 per cent. There is no reason to expect the earnings decline to stop there.
EDITOR’S CHOICE
The Short View: Recession
Research by Rob Buckland at Citigroup shows that once earnings start to decline, they usually keep doing so for an average of 25 months and fall 25 per cent. They tend to lag behind the economy (which did not happen this time thanks to the losses for financials), starting to fall after activity has begun to slow and only reaching a trough some time after the economy has begun to recover.
Furthermore, the latest earnings expansion was particularly protracted, lasting five years, and seeing MSCI world earnings more than treble from their trough in 2002. This was an unprecedented rate of growth. Global profitability, as measured by return on equity, reached a 35-year high last summer – an effect of the profits that financial companies were extracting from the credit markets.
Excluding the financial and energy sectors, the analysts polled by Thomson Reuters call for a 3.8 per cent earnings gain in the US for the second quarter. That looks optimistic.
If there is cause for optimism, it comes from valuation. Earnings falls this year have been accompanied by a slight contraction in the multiple that the market will pay for those earnings. The current trailing price/earnings ratio for the MSCI World of below 15 times is less than half its level of 2000. That could at least damp the effect of earnings disappointments.
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rffrydr
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| Posted: Fri Apr 11, 2008 3:33 pm Post subject: |
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Divergence between operating and as reported earnings is large and extends into the second half of 2008 and 2009. The divergence is a function of the adverse economy and optimism over profits. Is this mathematically possible? The wide divergence is bearish. It hints that analysts are too optimistic with their profit estimates and ignoring the adverse of the economy. So busy punishing the financials we forgot the economy.
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rffrydr
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rffrydr
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| Posted: Tue Sep 04, 2007 4:45 am Post subject: |
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....Should and Did. It WAS hard to kill--but ding, dong... And just what is our earnings "cushion"?
| Quote: | Byline: JOHN AUTHERS
Is there a buying opportunity in stocks? Many brokers say there is. They argue that earnings are rising, while price/earnings ratios have fallen to their lowest levels in a decade. So, "buy when there's blood on the streets".
The counter-argument is another stock market saw: don't try to catch a falling knife. Timing a decline is dangerous. On balance, it looks as though investors should still stand back from the falling knife.
Why? First, this decline is still nothing to write home about. The S&P 500, the world's most tracked index, was yesterday off about 8 per cent from its peak. From 1996 to 2000, the end of the last big bull market, it had seven separate falls greater than this.
As bull markets progress, they become more volatile, so such corrections become sharper. So, looking at market patterns, it does not look as though there is enough blood on the streets yet.
As for valuation, it is true that the historic p/e ratio on the S&P is at 16.46, almost at last July's low of 16.35, which turned out to be a buying opportunity, and well below the average for the past five years of 21.8.
But it is misleading to look at valuation this way. Earnings are cyclical. So are the multiples investors will pay for them. If earnings are at the top of the cycle (as they are now), multiples should be lower.
If we make a cyclical adjustment by comparing stock prices with a rolling average of the past 10 years' earnings, we get a cyclically adjusted p/e of 29.4. This is almost where it has been for four years, and much higher than its average of 24.56 for the past three decades, according to a Financial Times analysis of Datastream data. It stood at 22.8 on the eve of the Black Monday crash in 1987.
Over history, this measure identifies market peaks and troughs. It shows no compelling buying opportunity now. There are bargains out there for highly selective investors, but it is not yet time to buy the market as a whole.
Source Citation:Authers, John. "THE SHORT VIEW JOHN AUTHERS.(FRONT PAGE - COMPANIES AND MARKETS)." The Financial Times (August 16, 2007) |
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rffrydr
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| Posted: Mon Apr 09, 2007 8:06 am Post subject: |
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We got a taste of this with the Yen last month--credit following a decaying asset. Earnings rather than price here, in the US, is probably where we should be looking for our divergence now. The Credit side is just too hard to kill.
| Quote: | | But 2007 forecasts for the S&P 500 show absolute net debt growing at least twice as fast as earnings, probably reaching their cyclical peak. Higher leverage should then mean wider spreads |
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