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The S&P 500, DJIA, and NASDAQ are all up about 40% from their lows on March 9th.  Why?  Has the economy (and earnings) rebounded that sharply?  Or were the March lows an aberration?  It’s been a while since I talked about the stock market or the larger economic picture, so it’s time to revisit those themes.

First, the economy.  From the data to date, it appears that the broad US economy is shrinking less rapidly than it was just a few months ago – but it’s still shrinking.  The GDP shrank at a 6.3% rate in the 4th quarter of 2008, and it shrank at a 6.1% rate in the 1st quarter of 2009.  These are the revised (as of May 29th) numbers straight from the BEA here.

Passenger: “The GDP is better than it was before Captain – can we start the party?”

Captain: “Ummm, let me think….  The ship is still sinking….  But it’s sinking at a slightly slower rate.  Re-arrange the deck chairs again, maybe that will help.  Party on dude!”

Ok, so the economy isn’t growing – what’s behind the 40% rise in stocks?  Could it be earnings?  Maybe companies have laid off enough workers, and streamlined operations enough so that their profits are 40% higher than last quarter?  Let’s look at the numbers….

With 99.43% of the Q1 2009 earnings reported, the total earnings of the S&P 500 adds up to $7.61.  That’s certainly a lot better than the negative $23.25 the S&P 500 earned during Q4 2008!  Keep in mind that Q4 was the first time ever for “negative earnings” for the S&P 500.   And another word for “negative earnings” is “losses”.  Or “deficit”.  As in “the US Government has $1.85 trillion in negative earnings for fiscal year 2009.”

Anyway, $7.61 in earnings must be a good thing if that has caused the stock market to surge about 40% in the past 3 months right?  According to Standard and Poors latest spreadsheet, no.   Except for last quarter’s losses, As Reported earnings haven’t been this low since Q4 of 2002.  And the Operating Earnings (currently $10.15) haven’t been this low since Q4 of 2001.

Ok, so actual earnings aren’t driving the market higher – what if the earnings are low, but beating the estimated earnings?  In other words, what if company earnings suck, but they suck less than investors expected them to suck?  Sorry Charlie, according to Howard Silverblatt, S&P Senior Index Analyst, “actuals are -24.3% off estimates, and -43.5% behind last year”.

Of course, Howard goes on to say that the “Operating vs As Reported (top down vs bottom up) varriance enormus; out of the woods or the Island has moved.”  I’m not sure what it means when the Senior Index Analyst at Standard and Poors can’t spell “variance” or “enormous”, but it can’t be A Good Thing.

In the same note, Howard also says “189 issues beat est, but only 87 beat last years earnings; 290 missed with 72 beating last years EPS” which translates (seriously) to “189 out of the 500 companies in the S&P 500 beat their earnings estimates.”  189 out of 500 is about 38% – that means that 62% of the S&P 500 MISSED their earnings estimates.  And yet the stock market is 40% higher.

Ok, so maybe the forward PE ratio is finally coming down to reasonable levels?  It was at a record 60 to 1 at the end of Q4, it must be better now….  Or at least when we look at the estimates for the rest of the year….  Right?

Wrong.  The current PE ratio for the S&P 500 is 114.77, another record high.  And it gets even worse when you look ahead.  Here are the current estimated PE ratios for the S&P 500 for the rest of 2009.

• Q1 – 132.22
• Q2 – 3513.31 !
• Q3 – Negative 301.52 (first negative annual PE in history)
• Q4 – 33.46

To sum it up, I see no reason for the current level of stocks.  Zero.  The S&P 500 index (currently at 944.74) is too high relative to earnings – and in the long run, stock prices are based on earnings.  This minibull may continue for awhile, but prices WILL eventually adjust to the low earnings.  And from where I sit, that means stocks will drop back down to at least the March low sometime this year.

The only possible way I can see stocks continue to rise is inflation.  Specifically, inflation caused by the enormous amount of money the Fed is printing out of thin air and injecting into the money supply.  In that case, stocks can – and will – go higher.  But the actual price increase will be close to zero when adjusted for inflation.  And if you want to maintain your purchasing power, gold and silver (in your physical possession, not an ETF!) are, in my humble opinion, much better inflation hedges than stocks.

I could go on and on about how Geithner, Helicopter Ben Bernanke, a willing Congress anxious to be seen as “doing something”, and Obama are making the mess worse – just as Greenspan, Bernanke, Bush, and a willing Congress created the problem – but that’s another story for another day.

gk

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It’s been a while since I’ve had time to post any new info, and as I was reading through the news tonight, it occurred to me to close the loop on the dismal S&P 500 earnings in Q4 of 2008.  To sum it up, they sucked.

Standard and Poors has the final numbers for 2008 here.  (Link will open an Excel spreadsheet from S&P.)  Take a look at the “12 month values” tab where you can see the annual earnings of the S&P 500.  In particular, look at columns “C” and “D” which are the operating earnings and as reported earnings.  The 2008 operating earnings came in at $49.51 and as reported came in at $14.88.

Operating earnings are the lowest since June 2003, and as reported earnings are the lowest since – well, they’re the lowest as far back as S&P reports, which is 1987.  As reported earnings haven’t been this low since at least 1987.  The S&P 500 closed 1987 at 247.08, and the DJIA finished that year at 1938.83.  That should give a little perspective on why I think stocks are still way too high.

Want more?  Take a gander at the “Estimates & PE’s” tab.  Look at the estimates for earnings and PE ratios.   Notice anything weird?  Like a negative P/E ratio in cell H33 maybe?  Here’s a clue – there’s NEVER been a negative P/E ratio for the S&P 500.  Negative numbers aren’t good when you’re talking about earnings.  And S&P is estimating a P/E ratio of -465.29 at the end of September 09.

Super high numbers aren’t good when you’re talking about P/E ratios.  With that being said, I give you cell H34 as Exhibit B.  That number is 1951.66.  Go ahead, look through the spreadsheet.  Try to find a P/E ratio anywhere in the past that was that high.  I’ll wait…..

You back?  Cool.  The highest P/E ever in the SP500 was at the end of 2008, when it was 60.7.  Does that give you some perspective?  That tells you that stock prices were way too high at the end of 2008 – and justified the sell-off into the March lows.

The current estimated P/E (for Q1 2009) is 128.  Which is the highest ever so far.  But as I showed above, the forward looking numbers are even worse.  So why do some people think this is the time to buy stocks?

That’s not a rhetorical question, as I don’t see anything that justifies current stock prices.  Even with projected earnings (which I think are still too high) the P/E’s are sky high.

Either the earnings need to soar, or the price needs to drop.  I think the price will drop, because I’ve seen nothing that indicates the recession is close to ending which would cause earnings to skyrocket.

What do you think?

gk

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Standard and Poors finally released an update for the 4th quarter earnings today, and the news is even worse than the last update on February 15th – and keep in mind that this does NOT include the nuclear loss that AIG dropped on the market this morning.  AIG announced the largest loss by any company in history – $61.7 billion.

That’s for  just the 4th quarter.  And we (the US taxpayer) have already spent $163 billion trying to bail them out.  (Hey Geithner, it ain’t working.  Cut your(our) losses and fold.)

Back to the S&P 500.  The latest update (link will open an Excel spreadsheet from S&P’s site) by Howard Silverblatt, S&P’s Senior Index Analyst was released today, with data updated through the close on Friday, Feb 27th.  In it, he says With 96.38% of the market value and 457 issues reported, operating earnings are -70% below Q4,’07.

Earnings per share for the S&P 500 are – well, there ain’t none.  Just losses.  Aggregate “As Reported” losses now total -$12.69/share.  To put that into perspective, there’s never been a cumulative quarterly loss for the S&P 500 until now.  And that’s before the numbers from AIG are added in.  And that’s -$22.95/share.

Operating earnings per share (preferred by some because they leave out “one” time charges) are also down 70% from a year ago.  In Q4 of 2007, they were $15.22 and in Q4 of 08, that number has dropped to $4.59.

If you want to see the numbers behind the headline numbers, click on the tab (in the S&P 500 spreadsheet linked above) labeled “Issue Level Data”.  That’s where you can see all the stocks which make up the S&P 500 (at least those who have reported earnings so far this quarter) and check out their actual numbers.  The “As Reported” column gives the earnings/share for the current quarter (Q4, 2008) and the “Prior Year” column gives the earnings for Q4 of 2007.

S&P doesn’t add them up on this page, but I did.  Here are the results.

Total Q4, 2007 As Reported Earnings/Share = $232.02   and the Total Q4, 2008 As Reported Earnings/Share comes to -$162.71.  Yes, that’s a minus sign in front of Q4, 2008.  get used to it.  I think you’ll be seeing it again in 2009.

Do the same for the Operating Earnings columns.  Q4, 2007 was $304.58 and Q4, 2008 has dropped to $134.06.  About a 56% decrease year over year.

Howard Silverblatt also says Reported quarterly sales are down -9.16%.  And if anyone thinks the 1st quarter of 2009 will be an improvement, I invite you to go into your nearest mall, shopping center, restaurant, or auto dealership.  Check out for yourself if they’re busy.  Do a mental comparison with what you saw at those businesses last year.  Then shut up.

With that in mind, The strangest part to me is that S&P is estimating Q1 2009 operating earnings to be $13.74, just 17% below last year, and a whopping 300% INCREASE from last quarter.  And they’re still forecasting 2009 full year earnings to be $65.56 – $15 HIGHER than the $54.19 2008 is estimated to finish at.  If you believe that number, I’ve got a bridge for you – and some beach front property too.  Cheap.  Trust me.

Whatever they’re smoking at Standard and Poors, I gotta get me some!  If it will allow me to ignore reality that much, that’s some good shit!

gk

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You’d think that the “experts” would eventually learn, but when I scan the news lately, almost everyone and their brother is calling this the bottom of the bear market.  If they’re not outright calling a bottom, they’re saying “near the bottom” or something similar.

Just today I ran across these stories saying that we’re at or near the bottom in various markets.

• CNN – Have banks finally hit bottom?
• Reuters - Calif housing market may be near bottom: JPMorgan
• The Motley Fool – Amazon Calls the Market Bottom
• Zacks.com – Agrium Bid: Bottom for Fertilizers?
• The Wall Street Journal - Have We Hit Bottom? Answers Short and Long

That’s today alone!

I think they’re nuts.  They’re fruitcakes who haven’t actually taken the time to look at the numbers – or even a chart.  And as I see more people calling a bottom, I’m more sure that this isn’t the bottom.  When the bottom is truly here, almost no one will call it.  Including me.

I’m not pessimistic by nature, but I don’t see any signs of a bottom in any of the major markets.  The forward estimated P/E ratios are still sky high, and they need to drop.  P/E ratios go down either by lowering the price of the stock (the “P”) or raising the earnings (the “E”).

Since earnings targets are lower each day and still aren’t being met when companies report, I don’t see a scenario where the “E” is going up anytime soon.  That means the “P” must drop.

My conclusion is that this isn’t the bottom.

gk

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No, it doesn’t make sense to me either.  In a report from the Conference Board today, consumer confidence set a record low this month.  It plunged to 25 from a revised (lower) January number of 37.4.  That’s an all time record.  And yet stocks soared today, with the DJIA gaining over 236 points, to end the day at 7350.

Why the disconnect?  As I see it, it’s mainly because Bernanke didn’t drop any bombs in his testimony today – he told Wall Street what they wanted to hear.  But fiscal reality will eventually sink in, and stocks will resume their downward trend.  At least that’s my opinion.

Earnings are non-existent.  If you total up the S&P 500 stocks earnings and losses, you’re looking at a negative number – somewhere around -$11/share in losses.  Combine that with record drops in home prices, layoffs, and consumer confidence and I’m curious why people think a recovery is at hand.

Stock prices are driven by earnings in the long run.  And earnings estimates are still too high (project that -$11/share out over a year) in my opinion.  How are companies going to increase their earnings without someone willing to buy more of their products?  The answer is that they can’t.

Don’t be fooled by the surge in stock prices today.  They will come back down, and I think they’ll go even lower than the 12 year lows they set yesterday.  I’m estimating about 5000 on the Dow, and 550 on the S&P 500.  And that’s if the future earnings estimates stay where they are today.  My guess is that they’ll be revised downward, and that there’s a lot more downside left.

gk

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I’m not the only one saying the S&P 500 needs to drop.  An article at My Budget 360 has some good information and analysis about P/E ratios and why they matter.

Some are arguing that the fair value of the S&P 500 should be somewhere around 440 if we take a multiple of 15 which would be in line with historical P/E ratios.  That is a stunning number but makes sense.  That means the S&P would need to fall an additional 330 points, a drop of 42% from where we are currently at.  That is hard to imagine yet the math points us in that direction.

Check out the entire story – it’s good stuff.

gk

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While reading through the news today, I saw several articles and stories talking about how now is a good time to buy stocks.  I’ve been reading this same type of story since mid 2007, and there’s one thing they all have in common – they’re all wrong.

They’re wrong because the “experts” the writers quote in the stories have incorrect assumptions about the current situation.  Most all are assuming that this is a typical mild recession, that makes for a quarter or two of bad earnings, then stock prices resume their upward march.  They make this assumption because that’s how stocks have behaved (for the most part) since the early 1980’s.

But this is not a typical recession because the problems with our economy are structural.  It takes much longer to work through structural problems than a typical business cycle downturn where nothing long term is really wrong.  Structural problems go deep, and they require massive destruction of debt in order to re-establish a strong financial base from which to start building again.

Here are a few links to news stories from the past couple of years.

An Alarm Is Blaring: Time to Buy (NY Times, May 18,2008) The S&P 500 index is down over 40% since then.

Why you should be buying stocks now (Money Magazine, Dec 3, 2008) S&P 500 down over 10%.

International experts aren’t faring any better – especially Anthony Bolton in England.

Anthony Bolton: Why now’s the time to buy (UK Telegraph, Jun 10, 2008) FTSE 100 down over 30%.

The same basic story was re-run on Oct 6th.  Anthony Bolton: Why now’s the time to buy FTSE 100 is down over 15%.  Hey Anthony – if you keep saying it, eventually you’ll be right.  And most people will forget all times you were wrong!

Back to the US.

Resist the Impulse to Panic Over Finances (NY Times, Mar 22nd, 2008)   S&P 500 down over 40% since then.  Also, I wonder what Mr Tysk is doing these days?  Anyone who actually took his advice has lost 40% of their money.  He said “Small investors always make the worst timing decisions because emotion is involved,” Mr. Tysk said. “This is precisely the wrong time to move to safer options. The stock market has dropped dramatically and now is the time to invest — don’t close the stable door after the horse has left.”

Just a couple of weeks ago, The NY Times ran a story titled Why Analysts Keep Telling Investors to Buy and there were lots of reasons given.  But basically it boils down to the market goes up long term and you need to be in the market.  That advice is just as wrong  today as it’s been over the past 18 months.

It’s wrong because the market doesn’t always go up, just as people have now realized that housing prices don’t always go up.

I don’t claim to have a crystal ball for stock prices – hell, I bought Nortel 3 years ago at $3 because it was “cheap” and now they’re broke and I lost that money.  But I’m tired of stories saying that “no one predicted this” and “the depth of the financial crisis was missed by everyone” because it’s wrong.

I predicted this back when I first started this blog.  One of my earliest posts was Another Prognosticator Oops! where I gave my opinion on what was going to happen.  That was in January 2008, and I said I think it’s waaay to soon to be looking at this sector.  Personally, I think we’ll see a couple of big bank failures before the financial house of cards has collapsed fully.

We won’t be at the bottom until the losses are all acknowledged and reflected in the balance sheets and earnings.  I’ve lost track of how many times I’ve read where companies are throwing in the kitchen sink in an attempt to get all the bad news out there and move on.  But yet they haven’t.  Losses continue to pile up – in fact, they’re accelerating at this point.

This was the first quarter ever that the S&P 500 had no earnings.  The aggregate losses at this point are over $10/share.  It’s impossible to do a P/E ratio calculation on the S&P 500 because there is no E!

With the benefit of hindsight, it may turn out that right now is an excellent buying opportunity, but I don’t think so.  Based on the predicted earnings for the next 12 months, stocks are still about 40% too high.  The S&P 500 should be about 550 right now in my opinion.  So either earnings have to go up dramatically, or prices need to fall.

What do you think is more likely?   I don’t see higher earnings forecasts for many companies this year, do you?

gk

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CNN seems to think stocks are cheap right now.  Really.  A story this morning is headlined New lessons from the crash and the lead in says  Finally, stocks are cheap. Really. So it may be time to break the rules – just a little – to take advantage of this opportunity.

The story goes on to say that the P/E ratio is now really low, in fact, they say the market crash has made stocks genuinely cheap. In fact, the price/earnings ratio on the Standard & Poor’s 500 has sunk below its historical average of 16 for the first time since 1991, which just so happened to mark the start of one of the greatest bulls ever.

To which I say – WTF are you smoking at CNN?  Right now, it doesn’t matter what the “P” is, because there is no “E”!

As I documented this weekend, earnings for the S&P 500 are – well, there aren’t any.  Only losses.

If you bought one share in each of the S&P 500 companies and added up all the per share earnings, you end up with a negative number – otherwise known as losses.  That number currently stands at -$10.44 per share.  That’s $10.44 of losses when you add up the earnings of 500 of the largest companies in the US.

To be fair, CNN is using a 10 year average for their earnings number, and yes, if you look at it that way, stocks are cheap. But look at it this way – Bear Stearns, Wachovia, and Lehman Brothers all had great 10 year earnings averages last year at this time – would they have been a good buy?  No, they simply provided a fast way to say goodbye to your money.

Hmmm…. Gonna have to use that as the title to a story sometime “Good buy or goodbye?”  Kinda catchy….

But when you use a forward estimated earnings figure (what’s in the past is history and doesn’t matter if the company goes broke next month) stocks are very expensive – as in a P/E ratio of about 30.

As I said in the previous post, I think either earnings need to double (one year trailing earnings) or the price of stocks needs to drop by at least 30% to 40% to get back to a decent ratio.  And this is all meaningless if earnings are still negative next quarter.  In that case, prices are dropping big time.

That’s what I think is happening.

gk

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It’s been about a week since I posted an updated earnings report for the S&P 500, and there are a few new items.

By far the biggest item is that S&P is now recognizing that Q4 earnings – well, there aren’t any.  This will be the first quarter ever where the 500 companies (which make up the S&P 500) total earnings add up to a negative number.  Normal people call this a loss, but brilliant economists say “negative earnings” as a euphemism.  I guess they think it sounds better than saying losses.

The latest update from S&P (link opens an Excel spreadsheet) has this in the notes at the top:  As Reported earnings are negative for the quarter, with or without Financials. Previously, the financial sector was blamed for the losses, but they’ve finally realized that most everyone’s earnings are in the tank, and that aggregate earnings are non-existent – even when you exclude the financial sector.

They also say House cleaning should be massive enough to keep first half of ‘09 clean of ‘items’, after that it depends on the economy.

The problem is that they’ve been saying this since Q4 of 2007.  Every time earnings are lower than expected the analysts have said “this is the kitchen sink quarter” meaning that they think the companies have cleaned house and reported every possible thing that could be bad.  And they’ve been wrong every quarter.

They’ve been wrong because the companies themselves don’t know the extent of their losses, because they don’t know how much more they’ll need to write down because the value of their assets (mainly various derivatives of mortgages) are still declining.

Another note that should give you pause is With 84.8% of the market value and 390 issues reported, operating earnings are -62% below Q4,’07.   So even excluding everything that they claim are one time losses (which show up in the as reported earnings) operating earnings are less than half of what they were the same time last year.

On Dec 31st, 2007, the S&P 500 closed at 1468.  Here’s a fun game to enable you to calculate an equivalent price (based on operating earnings) today.  Simply adjust the 1468 close last year by subtracting 62%.   1468 – (1468 x .62) = 557.97. It isn’t difficult.  Based on this, the S&P 500 should be in the neighborhood of 500 to 600 right now, but yet it closed Friday at 826.

In other words, the S&P 500 index still needs to drop another 260 points (about 30%) from the current level to be priced the same as last year.  I thought the indexes were too high last year, and I think they’re still too high.  We are not at the bottom of this bear market.

Look at the spreadsheet in the link above.  Look at cell H35 where it shows the current trailing P/E ratio.  It’s freaking 30!  Waaay too high.  Either earnings need to double or stock prices need to fall.  Which do you think is more likely in today’s environment?  I think stock prices will fall.  I don’t know when it will happen – but it will happen.

At least S&P has FINALLY lowered their insane $81 estimate for 2009 earnings – dropping it all the way to $32.  Even that’s a jump from the (estimated) $27 the S&P 500 earned on 08.  Just another reason that I think the market still has a ways to drop.

More fun with math – try calculating a P/E ratio for the Q4 earnings alone.  The math is really simple.  Take the closing price on December 31st and divide it by the as reported earnings.  Here’s the formula:  903/-10.44.   Don’t forget the minus sign!

What’s that you say?  You say it shows a negative number?  Weird ain’t it.  It’s never happened before.  If you want to play with the spreadsheet a bit, try this.  Divide the result you just got (-86.52) by 4.  That will give you a P/E ratio closer to numbers that you’re used to seeing, except it’s a negative number of course. -21.63 to be exact.  That’s the current (instant?) P/E ratio of the S&P 500.

Now try it for historic prices and earnings.  When I do this with the S&P spreadsheet going back to 1988, I get a wide range of numbers, with the lowest being 10.65 (in Q3 1988) and the highest being 73.32 in Q4 of 2002, and an average of 23.17.

The current number (-21.63) blows away the previous low.  There are no earnings right now – only losses.

I want to quote another comment from the spreadsheet: As Reported short-term P/E (column H) higher than the bleachers at Yankee Stadium.  And Talk of second half ‘turning the corner’ now second half / early Y2KX (2010)

In other words, prices are too high on a value basis right now, and the estimates for the economy to bottom out have been pushed off into late this year or next year.  They say the stock market is looking ahead 6 to 8 months.  Those who were hoping for a rebound in Q3 are going to be disappointed.

gk

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Here’s an update to a story I wrote this past weekend.  It looks like Standard and Poors has updated some of their earnings estimates, but they also updated the reported earnings since I posted.

Here’s a link to a spreadsheet on Standard and Poors site.  If you read my last post, you’ll notice a few changes they’ve made.  On Jan 30th, they said “With 25.36% of the market value and 93 issues reported, actuals compute to a negative $-1.16 for operating (est $+3.02); -$3.18 for As Reported”

Today they’re saying “With 54.4% of the market value and 227 issues reported, actuals compute to a negative $-2.32 for operating (est $+818); -$8.89 for As Reported”

So over half of the S&P 500 has now reported earnings, and the results so far are even worse than last week.  We now have about 2.5 times more companies to base estimates on, and the actual earnings are twice as bad as just a few days ago.  They are still negative.

There’s another word for “negative earnings” – losses.

S&P also says “Expect charges to continue for Q4, as companies clean house for a better 2009” then, on the very next line they say “Provisions for layoffs should increase, with the actual cash flow charge taking effect in 2009“.

So which is it?  A “better 2009″ or will the charges “take effect in 2009″?  I don’t think we’re going to see both.

When companies lay off workers and tighten their belts and cut back on capital spending, that impacts the other companies that they buy from.  Not to mention that the people laid off won’t be going on any spending sprees.

I’ve read on MarketWatch how the market has discounted all the bad news.  “Yet it is clear that investors attempt to factor in as much future information as possible, and today, with the news uniformly bleak for corporate earnings and economic data, they are factoring in an extremely disappointing future. Anything less than the sum of all of our fears is likely to be a positive surprise, so depressed have our expectations and forecasts become.”

I don’t think they’re depressed enough.  Not when S&P is still predicting earnings increases for 2009.

(The part below was added on Feb 4th, at 8pm)

Just had to add this. It really deserves another entry, but I’m too lazy right now. The latest update to the Standard and Poors spreadsheet (there’s a link at the top of this story) does away with numbers and simply says this:

“As Reported earnings are negative for the quarter; there has never been a AS Reported index level in the red”

That’s with “With 65.25% of the market value and 244 issues reported”

So unless the next 34.75% and 266 companies really blow everyone out of the water with super fantastic earnings, the current estimates are still way off.

Which means that the stock market still has a long way to fall.

gk

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