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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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I was browsing through MarketWatch.com tonight and saw this story from Todd Harrison.  If you’re unfamiliar with Todd, he’s the founder of Minyanville.com, and he caused an uproar in the trading community last year when he announced that he had moved 100% of his long term money into cash.  The Dow was at 11, 346 when he said that.

Back to the story.  Today Todd says that he thinks a chart of 2009 is going to look like a “W”, and that “We’re currently dancing around the middle spike“.  In other words, the current spike in stocks is just a spike, and it’s going to head lower again.  I agree.

To explain his reasoning, Todd says “The market has room to run in the context of the lower highs that define a bear market. The first test will arrive around S&P 950, which is dual resistance in the form of the 200-day moving average and the one-year downtrend.”

The flies in the sustained recovery ointment are two-fold, which is why I’m of the view that this is a bear-market bounce. First, rampant inflation requires legitimate demand for goods and services coupled with the healthy velocity of money, neither of which can be artificially manufactured by the litany of government acronyms or tough talk from the Beltway.

Second is the unavoidable reality that the cure for an imploding debt bubble isn’t the inducement of more debt but rather the destruction of it. That is the single greatest flaw in the “all-clear” thesis; we’re swimming backwards against a growing tide of credit dependency and the cumulative imbalances that have built since the turn of the century.

Employment is still dropping, housing prices are still dropping, earning are still declining.  I see no reason to buy back in at this time.

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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From a story on Yahoo News.

A rising savings rate and an improved housing market, while not completely healed, point to brighter times ahead in the U.S. economy, O’Shaughnessy told Reuters in an interview.

“I do think that as all that coalesces, you see a good chance for the S&P 500 (at) 900 out of the year. What are we right now? 713? That could be a very nice rally,” he said, in reference to Wednesday’s closing level for the S&P 500.

Does he realize that we started this year at 931?  And while I agree with him that we could have “a very nice rally” I don’t think this is the time to be buying.  There’s too much downside risk that isn’t priced into the market.

For example as I detailed a few days ago, Standard and Poors is still estimating 2009 earnings for the S&P 500 to come in at $64.37 – a whopping 31% increase over the 2008 earnings of $49.04.  I just don’t see that happening, so stock prices will adjust lower as the earnings estimates are eventually lowered.

I also disagree with his premise that we’re seeing “an improved housing market”.  Foreclosures have been held down artificially for the past few months as Fannie and Freddie had a foreclosure moratorium in place, as did some states and banks.  Those programs will be ending, and we’ll see the foreclosure rate skyrocket as Obama’s housing bill turns out to be ineffective.

I say it’ll be ineffective because the only thing that will heal the housing market is a bottom being established on prices. And that can not, and will not happen until foreclosures are allowed to go through to establish the true value of houses in each area.  Any government program is bound to fail, because they’re seeking to establish another artificial boom.  And that’s what caused this mess in the first place.

A rising savings rate IS a good thing, but that doesn’t “stimulate” the economy as fast as someone purchasing a new car or remodeling their home.  Savings bear fruit in years, not months.

“The problem with today is everybody’s fighting the ‘Where’s the bottom?’ fight. If you try to keep a relatively longer-term perspective, which is three to five years, you get shouted out … From our point of view the market is even more compelling than it was when we spoke at the beginning of the year.

“Yeah, we could go down some more here in the short term, but it only makes the ultimate valuation more and more compelling.

No doubt about it, “you get shouted out” if you talk about a 3 to 5 year time frame – because it’s wrong.  If you bought and held stocks anytime since 1997, you’ve lost money.  In many cases, a lot of money.  And that’s not an investment.

“The market is even more compelling than it was when we spoke at the beginning of the year.”  He is 100% correct on this – but anyone who listened to his self serving BS at the beginning of the year has lost more than 25% of their money.  Not a brilliant move, no matter how “compelling” the market appeared at the time.

As to making “the ultimate valuation more compelling” he’s correct – but that’s been the case forever.  Look back at the beginning of this blog, where I said Doug Kass was wrong when he said “Buy the Financials. Yes Buy.” back in January of 2008.   The S&P Financial index (XLF) was over $27 back then, and he said it was a good deal with good valuations.  Today XLF closed at $6.24.  That’s definitely a more compelling valuation, but you would’ve lost 77% of you money if you bought XLF because of it’s “compelling valuation” in January 2008.

Long term investors shouldn’t be trying to pick the bottom – leave that to day traders.  Long term (I’ll use the same 3 to 5 year time frame as O’Shaughnessy) you simply buy when the 75 day EMA crosses over the 200 day EMA.  And you sell when the 75 day crosses back below the 200 day.  It’s easy.  And virtually foolproof.

Check out a chart of the S&P 500 with these EMA’s here.  When the red line (the 75 day EMA) is higher than the green line (the 200 day EMA) stocks are trending higher.  You buy as soon as possible after that happens.  The reverse is true in a down trend like we’re in today.  And the distance between the 2 lines is not getting smaller yet, so long term investors shouldn’t be anywhere close to buying back in.

In short, if the earnings are down, the market will follow eventually.  And when earnings rise, the stock market will also eventually rise.  But that ain’t happening now, so stay on the sidelines.

gk

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The latest numbers from Standard and Poors are even worse than yesterday.  Now, even Operating earnings are negative, not just as reported earnings.

Check it out here.  Link will open an Excel spreadsheet.

Notice the Operating earnings for Q1.  The total for the S&P 500 is now negative 56 cents.  As reported earnings are now down to negative $20.73.

And I just noticed that I’m even calling them “negative earnings”.  They are losses.

That’s why stocks are tanking.  Any questions?

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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As if the past few years haven’t been proof enough, the recent plunge in stock prices may finally shut up the chorus of buy and hold investing proponents.  I’ve been saying it for a long time, but maybe hitting people in the pocketbook is the only way to make them understand.

Buy and hold is dead.  It has been dead since the tech bubble popped in 2000, but people just didn’t realize it because Alan Greenspan created the real estate bubble to replace it.

When the S&P 500 index peaked at 1527 in March of 2000, it took until May of 2007 to see those levels again.  7 years of “experts” preaching “buy and hold”, “stay in stocks for the long term”, “you need to be fully invested in stocks if you’re a long term investor”, etc, etc, etc.

The amazing part is that people listened to the “experts” – and followed their advice for 7 years of negative returns on their money.  I’ll put it another way.  If you put $1000 into the stock market in 2000, you didn’t break even until 2007.  0% return.

If you put $1000 into the stock market before or after 2000, you might have had some return on your money depending on when you invested, but you didn’t have much.

With the market close today, you’ve lost money if you bought into the stock market at anytime since April of 1997.  I’m no math wizard, but I know this is February, 2009, and April 1997 was 12 years ago.  That’s a long time to wait just to break even.

Since the late 80’s, I’ve followed a simple strategy that the “experts” kept saying was a losing strategy – I buy when the 75 day EMA crosses above to 200 day EMA, and I sell when the 75 day EMA goes under to 200 day EMA.

It’s an extremely simple strategy for long term investments like 401k’s and other IRA’s.  You don’t move in and out of the market very often, but you’re in the market when stocks are rising, and you’re out when they’re falling.

As a result of following this strategy, I got out of stocks in January of 2008 when the S&P 500 was still over 1300.  I didn’t get faked out by the false bottoms during 2008, and I’m still in cash and bonds.  My money is just setting there, waiting until the 75 day EMA turns back up and crosses over the 200 day EMA.

This strategy will beat the snot out of buy and hold, and it’s extremely easy to follow.  You can check out a chart of it here on Yahoo Finance.

Maybe the “experts” will finally shut up – or better yet – maybe people will learn to make their own decisions about investments.  When you do, don’t be surprised if you start realizing that the “experts” also don’t understand capitalism and free markets.  Read other posts in this blog if you’re curious about those subjects.

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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