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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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Peak Earnings Replies |
rffrydr
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| Posted: Tue Apr 24, 2012 4:34 pm Post subject: |
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....Apple notwithstanding! And Netflix (buy at 70-75) earnings were fine. They sold off because the company dedicated itself to....wait for it....earnings!? No reason why this can't be a good divy payer in a year.
We don't need gains, for we were pricing in collapse via Greece five months ago! Of course it's gonna start being about margins. Productivity loss is one of the best indicators for coming out of the depressionary hole. Look for platform effect and home-front advantage to keep gravity at bay for a some time yet. 
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HenryTo
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rffrydr
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| Posted: Sat Mar 24, 2012 8:35 am Post subject: |
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Of course what's really bothering the bears is peak margins. I concur that there is a peak here (with the wildcard being the banks). My feeling is that the very real "platform economy" and broader labor freeze (of which former, and "peak medicine" is well part of) remains largely in place. Thus higher for longer. I don't know that we'll see a "hiring panic" anytime soon but declining productivity is what we WANT. Then it comes down to multiples: and in a low inflationary environment this should pressure higher.
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rffrydr
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| Posted: Mon Jan 30, 2012 9:29 am Post subject: |
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The "crossover index"...how quaint. This thread begins with a discussion of S&P peak earnings in terms of, or almost an adjunct of, debt. See "Greed
Born of Fear."
Well earnings (after one big fakeout) have neither peaked nor the "great deleveraging" taken anything out of absolute rates. Indeed we now have a FED promising ZIRP for as far as the eye can see--which isnt' that far considering how wide those eyes are. Indeed the lesson has been that off-the-charts leveraging has not matched the good ol' productivity gains of rolling heads and sitting on CapEx. The "platform economy" has made this impossibility all the more possible. There are bigger cycles at work.
What the market has NOT done is given these earnings a fair shake:
http://www.bloomberg.com/news/2012-01-30/longest-s-p-500-valuation-slump-since-nixon-discounting-record-u-s-profit.html
I've been inclined to expect a little give on the (dis)inflationary front and work these multiples up. I'm not looking for any kind of premium however because, a la Hussman, the market sees record profit margins of 8-9% as unsustainable as capital (finally?) cycles back towards labor--even if that work is in china.
It took Microsoft and WalMart a decade to work themselves down to market multiples with steadily rising incomes--how much of current market earnings have been similarly "baked into the cake"?
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rffrydr
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| Posted: Wed Jan 25, 2012 10:57 am Post subject: |
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Low rate leverage was matched (more than?) by the "productivity" of firing and slashing capex. Bubble heal thyself.
Flatlining at record levels, $100ish/share, will matter more on the margin:
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rffrydr
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| Posted: Mon Aug 15, 2011 12:39 pm Post subject: |
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Barcap on earnings via Alphaville:
n] | Quote: | | interesting element of the history of recession-related earnings declines is that the average peak in annualized trailing earnings came five months prior to the beginning of the recession. In other words, for all the talk about the risk of slipping into another contraction, earnings would typically already be falling. In only two cases were they still rising when the recession began: the 1974-75 oil shock and the 1981-82 monetary policy-induced recession. Earnings are, in fact, still rising. For the year-on-year growth rate to fall, 3Q11 earnings would need to miss the bottom-up consensus forecast by 14% (3Q11 would need to come in below the 3Q10 result of $21.75). Keep in mind that earnings this quarter (2Q11) are beating consensus by 5.7% (89% of companies have reported results), so this would be quite a turn in fortunes for an unleveraged corporate sector. In addition, in the 1953-54 recession, earnings actually increased; in the sharp contraction of 1949, earnings fell only a meager 2.5%; the deep energy price shock recession of 1974-75 resulted only in a 7.2% drop (energy is another potential catalyst for a contraction); and in the deep recession of 1981-82 (in which unemployment went even higher than the Great Contraction), earnings dropped 13.4%. So while the ‘E’ in the PE is hardly cast in stone, a stroll down memory lane supports our valuation argument. |
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rffrydr
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rffrydr
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| Posted: Tue May 03, 2011 9:51 am Post subject: |
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This rising tide of CAPE bulls misses the exceptional nature of this cycle. Perhaps its worse...or with world CB united, better. The "embeded call" in cash is a good point and perhaps belies a closet bull?
http://ftalphaville.ft.com/blog/2011/05/03/557586/cash-is-king/
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rffrydr
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| Posted: Thu Apr 28, 2011 4:28 pm Post subject: |
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From the broker:
As of Thursday morning, there was no material change in the earnings trend. 292 companies in the
S&P 500 had released profits. 72.6% had posted a positive surprise, while 16.4% had recorded a
negative surprise. The spread of 56.2 is in line with recent readings. Positive and negative sales
surprises totaled 65% and 21% respectively. The spread of 44% is also consistent with the current
trend.
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rffrydr
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| Posted: Wed Apr 20, 2011 7:13 am Post subject: |
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DB's summary of global earnings at present:
| Quote: | Global earnings expectation continued to remain stable for yet another month as the Q1 reporting season starts to unfold. Over the last three months, the global (MSCI) 1-month earnings revisions for 2011E have been within the narrow interval of +0.1% to +0.4%. While the US has seen a marginal upgrade of 0.3% for 2011E earnings over the last one month (mid March to mid April), the European earnings witnessed a downgrade of 0.4%. Japan was the region with strongest downgrade of 9.2% primarily due to the impact of the catastrophe on Utilities and Consumer Discretionary sectors. In contrast to the developed markets, emerging markets have held up relatively well. Among the global sectors, Energy clearly stands out with upgrades of 4.2% for their 2011E earnings over the last month, while Financials saw the strongest downgrade.
TT
Stoxx 600 earnings have seen small downgrades of 0.5% for 2011E over the last month. The company revision ratio entered the negative territory for the first time since Sep 2009 and reached a level of -0.10 (see second chart on right). European earnings are currently forecasted to grow by 13.2% in 2011 and 13.0% in 2012. The Stoxx 200 small caps have seen clearly stronger downgrades to their 2011E earnings than the Stoxx 200 large and mid caps. In contrast to Stoxx 600, the S&P 500 earnings for 2011E have been upgraded by 0.5%. Interestingly for the US, 2012E earnings upgrades are even much stronger at 1.1%. Further, the company revision ratio declined only marginally to 0.16 from 0.18 last month.
TT
Among the European sectors, Oil & Gas and Autos have seen the strongest upgrades over the last month followed by Media. The European Oil & Gas 2011E earnings have been upgraded by 1.3%, however the Global Energy sector has seen a much stronger earnings upgrades of 4.2%. On the other hand, Financials primarily Insurance and Financials Services are the sectors with the strongest earnings downgrades over the last month. European Banks have seen downgrade of 1.3% over the last month. On a 3-month view, Banks is clearly the sector with the strongest downgrade momentum in Europe of 4.6%. |
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rffrydr
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| Posted: Mon Apr 11, 2011 12:11 pm Post subject: |
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Fakeout:
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rffrydr
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| Posted: Mon Mar 14, 2011 7:32 am Post subject: |
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[img]https://picasaweb.google.com/lh/photo/8CM0qc8UYOaaZq2uuSBdkDh09LvMBx2kLw1QAo4I-zw?feat=directlink[/img]
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rffrydr
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| Posted: Sat Mar 05, 2011 12:15 pm Post subject: |
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Wall of Worry:
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rffrydr
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| Posted: Tue Feb 08, 2011 12:43 am Post subject: |
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Mauldin has us in a sideways market--which is always true if you look broadly enough. He begins with a loaded example, WalMart. Stable and traditional retailer with global footprint and a magnificent machine of penny-pinching. Not hard when we forget the 40X P/E of go-go nineties. And then the 82 bear where of course P/E was ground away under unfettered inflation--itself as prone to the over-excitements of human emotion. The platform economy, demographics and rationalization of industrialization relative to energy consumption all conspires now for the opposite. This secular rally won't end before "goldilocks" is again in the headlines. Nonetheless, the mean IS a magnet:
http://www.johnmauldin.com/outsidethebox/a-sideways-view-of-the-world
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