http://pragcap.com Wed, 03 Nov 2010 06:27:13 +0000 en hourly 1 http://wordpress.org/?v=3.0.1 http://pragcap.com/election-results-big-win-gop http://pragcap.com/election-results-big-win-gop#comments Wed, 03 Nov 2010 06:26:17 +0000 TPC http://pragcap.com/?p=27878 The country has spoken and they are not happy with the Obama economy.? And rightfully so.? It has been a remarkable disappointment thus far.? President Obama’s biggest mistakes were often highlighted by me in real time:
- He should have chosen to bailout Main Street over Wall Street.
- He never should have appointed Geithner or Summers.? They were merely attempts to rehash the Clinton economic team and unfortunately, due to his ignorance of the economic environment, President Obama had no idea that these men played a significant role in causing the crisis.
- He absolutely never should have reappointed Ben Bernanke.? Mr. Bernanke has rehashed all of Alan Greenspan’s “flawed” policies and has chosen to focus on the banking sector at every twist and turn of this crisis.
- He should have saved his health care plan for term two and focused on helping Americans get the jobs they so badly needed.
- He should have dropped the hammer on Wall Street with harsh regulation.? We have become a nation by the banks and for the banks and the de-regulation of the 90′s is largely to blame.? We need to end the financialization of this country and get back to 3-6-3 banking as opposed to relying on our bankers to generate economic growth while also mis-allocating resources.
- He has had every opportunity to become the champion of Main Street.? Instead, he appears no different than his many predecessors who have been slaves to bank lobbyists.
This election is largely a referendum on the Obama economy.? Unfortunately, I am concerned that the change is not necessarily any better.? Specifically, I am most concerned about a return to the ways that got us into this mess in the first place:
- I am concerned that we are moving back towards a belief that business is efficient and rational and therefore does not need to be regulated.
- I am concerned that gridlock will lead to severe budget constraints.? Like it or not, we are in a balance sheet recession.? And when you’re in a balance sheet recession someone must run a surplus or economic growth will decline.? That is simply an accounting identity.? With the private sector paying down debt they are unlikely to pick up the economic slack.? Therefore, without continued government spending or tax cuts we risk a high probability of sinking back into negative growth and possibly worse.
- While I am not a fan of unemployment benefits we are likely to see 3.5MM people lose their unemployment benefits in January as republicans block passage of any extensions.? In a balance sheet recession this will put an unnecessary strain on the economy.? The government should temporarily hire the qualified of these 3.5MM people and incentivize them to be productive as opposed to paying them to do nothing. ?? The country can certainly afford it and it would put people to work at a time of high private sector unemployment.
- We have a very serious state funding crisis that is now almost guaranteed to get worse as spending is reduced. Meredith Whitney believes the state funding crisis is the next shoe to drop and is being overlooked:
“The level of complacency around this issue is alarming. Most assume, as last week’s Buttonwood panel did, that the federal government will simply come to the rescue of the states without appreciating the immensity of the cumulative state-budget gaps. I expect multiple municipal defaults to trigger indiscriminate selling, which will prompt a federal response. Solutions attempted in piecemeal fashion, as we’ve seen thus far, would amount to constantly putting out recurring fires.
Rather than waiting for more federal intervention, states need to make their own hard decisions and not kick the can down the road. How will taxpayers from fiscally conservative states like Texas or Nebraska feel about bailing out threadbare Illinois or California? Let’s hope we never have to find out.”
This country is not bankrupt.? We are not the European Union.? We are not Argentina.? We are not Zimbabwe.? We most certainly are not Greece.? As the monopoly supplier of currency in a floating exchange rate system we can always afford to spend in our own currency.? Unfortunately, the new Congress is likely to move us closer towards austerity and that is an unnecessary hurdle at a time when the country least needs it.? It’s difficult to see what we accomplished tonight.? And we may have potentially taken a huge step backwards.? Tonight’s outcome has 1937 written all over it.? Let’s hope our political leaders prove smarter than that.
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]]> http://pragcap.com/election-results-big-win-gop/feed 7 http://pragcap.com/high-beta-junkies-die http://pragcap.com/high-beta-junkies-die#comments Wed, 03 Nov 2010 06:14:40 +0000 TPC http://pragcap.com/?p=27729 As of Tuesday’s close the rally in equities has officially lasted 44 sessions.? That’s long by historical standards, but a look under the hood shows some remarkable bullishness.? This persistent bullishness is best exemplified in the Nasdaq 100.? There are a few indices that are notoriously high beta.? This is one of them.? And this is where the high beta junkies come to get their fix.? In the last 44 sessions there have been just 15 negative sessions in total with 29 positive sessions.? That’s a 3:1 ratio – very high by historical terms.? What’s amazing is that the Nasdaq 100 has experienced just ONE 1%+ decline during the last 44 sessions.? And in total, there have really only been three damaging sessions that totaled declines of 2.89%.It’s always amazing to me how investors can be so confident in returns after a rally has occurred and so scared after a market has declined.? If you watch financial TV these days it appears as though everyone and their mother has subscribed to the David Tepper “everyone’s a winner” thesis.? The only two beliefs currently existing are that stocks will either go much higher from here or they will decline briefly before going much higher.? Stocks are seemingly infallible.? Currently, small investors are displaying their highest level of confidence in the market since March of 2008 – just weeks before an epic collapse began.? Today, this unending faith in equities is obvious in the Nasdaq 100 where the high beta junkies have now all hurdled together hoping to get their next fix of higher prices.
The beauty of mean reversion is its simplicity.? If we take a graphical look at the current environment we can visualize the imbalance that occurs in a market.? Market peaks and troughs tend to occur when a market enters a state of disequilibrium with its underlying fundamentals.? This can be due to a number of varying factors, but psychology tends to be the primary driver.? I often say that it is always brightest at the top.? The current environment is not only displaying excessive bullishness, but the general equity mentality has become one of extreme complacency.? You either think the Fed is going to push the market higher or you think the economy is on the path to recovery.? As Tepper said, it’s a “win win”.? The problem with a market and its mean reverting nature is that investors place their bets before the cards are dealt.? This is why markets always peak on good news and bottom on bad news.
The last time I was net short was back in April 2010.? Regular readers from that period will recall similar charts to the one below.? The Nasdaq 100 is currently on a 22.7% tear that sets it on course for a 150% annualized return.? But more importantly, this index, which is an important indicator of risk appetite, is now 8.5% above its 50 day moving average.? This has occurred just two other times in the last 3 years and both events were in the early stages of the incredible move off the 666 lows – an outlier if there ever was one.? At the May high before the flash crash we were just 6.4% above the 50 day moving average and the market had rallied an astounding 20.25% in just 55 sessions.? If you’ll recall the mentality was eerily similar.? Small investor bullishness was at 48.5% (currently 51.1%) and the consensus widely believed that we were in the midst of a sustained economic recovery.
I think the market has now priced in an extraordinary amount of optimism heading into the election and QE2.? Neither will prove to be a panacea.? In fact, I believe gridlock will cause more harm than good during a balance sheet recession due to a move towards austerity and that QE2 remains the greatest monetary non-event.? In addition, investors are largely pricing in an economic recovery.? The price action proves that there is extraordinary optimism about future equity returns.? This has resulted in an extreme disequilibrium and in my opinion creates substantial downside risks.? Unless the Fed is successful in reinflating the equity bubble (which they very clearly have stated they are interested in doing) it appears to me that the market’s natural mean reverting tendencies will dominate price action in the coming months.
* Author is short equities, but not short any securities mentioned in the above piece.
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]]> http://pragcap.com/high-beta-junkies-die/feed 3 http://pragcap.com/eye-long-storm http://pragcap.com/eye-long-storm#comments Wed, 03 Nov 2010 05:33:34 +0000 Annaly Capital http://pragcap.com/?p=27871 By Annaly Capital ManagementIf you’re reading this Salvo on the day it is posted, then you are likely holding your breath on a number of fronts: the outcome of the election tonight, the FOMC announcement tomorrow afternoon and the policy meetings of the Bank of England, European Central Bank and the Bank of Japan and the new jobs numbers, due later this week. It is a day of anticipation and, for some, it is a day of positioning portfolios for short-term volatility based on likely outcomes. Indeed, there may be volatility if market expectations are unrequited, i.e., if the Republicans don’t take the House in convincing fashion, if the Fed disappoints on details for QE2, if foreign central banks decide to be passive or aggressive in the face of Fed maneuvering, or if the non-farm payroll number comes in significantly over or under the consensus of +60 thousand.
If you are holding your breath, exhale and focus on a few longer-term trends that aren’t going to change very much once the immediate questions from this week get answered. First, rates. In case it is lost on anyone pulling a monetary policy lever, rate and liquidity are not holding back the global economy, and haven’t been for some time. Behold the graph below, which is one-month LIBOR. Don’t let the scale fool you, the unsecured inter-bank lending market has been flat as a pancake for many months.
Second, the dollar. The Reserve Bank of Australia was the first central bank out of the gate this week, and it decided at its meeting yesterday to raise its overnight cash rate by 25 basis points to 4.75%. According to the policy statement, the country is experiencing strong labor demand, the effects of stronger-than-expected growth in China and “the prices most important to Australia remain at very high levels, with the result that the terms of trade are at their highest since the early 1950s.” The Australian dollar now flirts with parity to the US Dollar.
Australia may be an outlier, but it’s not alone: The Reserve Bank of India also raised its overnight repo rate by 25 basis points to 6.25%. In its policy statement, the RBI addressed global pressures. “The slowing momentum of recovery has prompted the central banks of some advanced economies to initiate (or consider initiating) a second round of quantitative easing to further stimulate private demand. While the ultra loose monetary policy of advanced economies may benefit the global economy in the medium-term, in the short-term it will trigger further capital inflows into emerging market economies (EMEs) and put upward pressure on global commodity prices.” The so-called advanced economies are engaged in a battle to devalue their own currencies while the rest of the world compensates.
Third—and this is all related—gold vaults in Manhattan, many of which were turned into clubs or shuttered during the ‘80s and ‘90s, are back in demand. JP Morgan recently announced they were re-opening a gold vault that had been mothballed. For the first time in history, according to GFMS, private investors now own more gold (30 thousand metric tons) than central banks, and they have the high-grade problem of finding a place to store it.
The markets may be volatile depending on how things break over the next few days, but longer-term trends may not be deflected by whether John Boehner or Nancy Pelosi is sitting in the Speaker’s chair in January.
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]]> http://pragcap.com/eye-long-storm/feed 1 http://pragcap.com/buy-dip-buy-rip http://pragcap.com/buy-dip-buy-rip#comments Tue, 02 Nov 2010 23:44:30 +0000 TPC http://pragcap.com/?p=27872 Investors who have been waiting for a pull-back have been forced to chase the index in recent weeks as the market has been unable to stay in the red for any longer than a few minutes. This evening’s early polling data shows the GOP making big gains in the House and possibly taking the Senate. Wall Street loves the news as it means a return to the good old days of no regulation, low taxes and essentially all the things that helped cause this situation in the first place. Curiously, this has been just about the most widely anticipated event in months if not years so it’s odd to see this rush into risk assets as the news comes out….This was widely expected to be a “sell the news” event, but the early performance on election night shows a strong appetite to chase the performance up here. S&P 500 futures have ripped almost 7 points higher since the close of trading earlier today.
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]]> http://pragcap.com/buy-dip-buy-rip/feed 5 http://pragcap.com/eurozone-pmi-improves-irish-spreads-hit-record-high http://pragcap.com/eurozone-pmi-improves-irish-spreads-hit-record-high#comments Tue, 02 Nov 2010 18:57:12 +0000 TPC http://pragcap.com/?p=27860 Eurozone PMI came in better than expected this morning, but the region has become a story of two economies.? While the core continues to show robust growth (primarily Germany) the periphery continues to struggle:Chris Williamson, Chief Economist at Markit said:? “An improvement in the PMI for the first time in three months provides much needed reassurance that manufacturing remains an important driver of the
euro area recovery. The final manufacturing PMI data came in stronger than the earlier flash estimate,
suggesting that growth picked up at the start of the fourth quarter, boosted by rising export sales.“However, it is clear that the recovery has moved down a gear. The pace of expansion has eased markedly
from the surging near double-digit annual pace seen earlier in the year to a more modest 3%–4%.“Despite the overall improvement, national divergences will continue to raise tensions for policymaking. Although Greece was the only country to see manufacturing output decline, production continued to barely rise in the Netherlands, Ireland and Spain, contrasting with strong growth in Germany, France and Italy.”
Although equity markets rallied in Europe today the credit markets remain on edge as yields and CDS spreads continued to hit highs:
“Today’s Markit Eurozone PMI continued the trend, the 54.6 October reading well up on the 54.1 flash estimate. As usual, the core eurozone countries drove the expansion but the dichotomy between core and peripheral countries was less distinct. Spain was back above the 50 neutral mark and even Ireland was expanding again.
However, the performance of Ireland’s sovereign spreads didn’t reflect this good news. The country’s spreads hit a record wide level of 530bp today as the problems for the government piled up. The negative sentiment created by a weekend article in the Irish Independent was compounded today by two unrelated pieces of news. Allied Irish Bank (AIB) announced that it had failed to sell its UK operations, meaning that the government’s preference shares could be converted into ordinary shares. Along with a proposed rights? issue, this could take the government’s share to 92% if asset sales aren’t achieved. To make matters worse for the government, one of its Fianna Fail TDs announced he was resigning his seat. This leaves Brian Cowen’s administration with a very slim majority – a delicate situation given the upcoming budget vote. And all of this in a sovereign market uneasy about the EU restructuring mechanism announced last week. The Markit iTraxx SovX Western Europe was over 160bp earlier in the day before recovering in the afternoon.”
I am still having difficulty seeing how this problem doesn’t require real resolution at some point.? It’s clear that austerity is simply not working.? The markets in Europe are confident that the ECB can simply bail everyone out.? It’s really no different here in the states.? After all, the Fed has vowed to crank the printing press up if there are any signs of economic weakness.? But pure common sense tells me this situation can’t last forever.? At some point structural problems need to be dealt with.
Source: Markit
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]]> http://pragcap.com/eurozone-pmi-improves-irish-spreads-hit-record-high/feed 8 http://pragcap.com/giving-meaning-herding-investors http://pragcap.com/giving-meaning-herding-investors#comments Tue, 02 Nov 2010 18:25:25 +0000 TPC http://pragcap.com/?p=27858 We all know the Federal Reserve is trying to herd investors into equities as they keep asset values “higher than they otherwise would be”, but how’s this for herding investors?? One well known hedge fund manager has altered his entire strategy because of the Fed’s persistent actions (via the WSJ):“A former hedge-fund manager who made a fortune shorting stocks has switched to the long side, and is raking in money in the process.
William von Mueffling surprised clients and competitors last June by announcing he would close his hedge funds and return $3.5 billion to investors. His firm, Cantillon Capital Management of New York, kept managing $1 billion in long-only assets, typically considered the unsexy piece of the business.
Now, the 42-year-old stock picker controls more money than he did before he closed his hedge funds. Cantillon has raised billions of dollars from pension funds in the U.S. and abroad, and from sovereign-wealth investors, according to clients and other people familiar with the matter.”
Von Mueffling couldn’t justify running the short end of the book as the Fed was priming the pump:
“After years of “long-short” investing, Mr. von Mueffling and his analysts and traders no longer short, or bet against, stocks at all. Instead, like a typical stock mutual fund, they stick to buying company shares they expect will rise. Mr. von Mueffling said the strategy is “the right long-term decision.”
“I’m not saying there aren’t overvalued stocks out there,” he said in an interview. “There are, but trying to short them when the government is printing money is a very, very challenging game,” he said, referring to, among other things, Federal Reserve programs to buy government bonds, which the Fed is widely expected to announce this week.”
That gives new meaning to “herding investors”.? I think sellers play an important role in the price discovery process.? After all, when the fundamentals of an asset are consistently in disequilibrium with its current valuation it makes the system that much more unstable.? Selling, and thus lower prices, can actually make the system more stable in the long-term.? This is just one more sign that nothing has really changed since the Greenspan Fed ended.? And that was a Fed run by a man who admitted that his model was flawed….
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]]> http://pragcap.com/giving-meaning-herding-investors/feed 9 http://pragcap.com/market-30-overvalued http://pragcap.com/market-30-overvalued#comments Tue, 02 Nov 2010 16:12:53 +0000 TPC http://pragcap.com/?p=27853 Dshort has a great chart showing various valuation metrics. His conclusions are similar to what John Hussman and Robert Shiller’s valuations (see bottom of page) say.? Unfortunately, in a world where asset prices are permanently altered by a government that is insistent on keeping asset prices elevated it’s impossible to know if valuations even matter anymore:“To facilitate comparisons, I’ve adjusted the Q Ratio and P/E10 to their arithmetic mean, which I represent as zero. Thus the percentages on the vertical axis show the over/undervaluation as a percent above mean value, which I’m using as a surrogate for fair value. Based on the latest S&P 500 monthly data, the index is overvalued by 48%, 36% or 31%, depending on which of the three metrics you choose.”
(Source: Dshort.com)
(Shiller PE)
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]]> http://pragcap.com/market-30-overvalued/feed 19 http://pragcap.com/galbraith-qe2-illusion-nothing http://pragcap.com/galbraith-qe2-illusion-nothing#comments Tue, 02 Nov 2010 15:56:52 +0000 TPC http://pragcap.com/?p=27849 The list of credible people who believe QE will do absolutely nothing is growing by the day.? Unfortunately, this bank bailout is going to be passed off as some sort of Main Street stimulant and the system will continue along its misguided pathway.James Galbraith sat down with Tom Keene this morning to discuss the illusion of QE2:
Source: Bloomberg TV
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]]> http://pragcap.com/galbraith-qe2-illusion-nothing/feed 4 http://pragcap.com/australia-opens-monetary-policy-door http://pragcap.com/australia-opens-monetary-policy-door#comments Tue, 02 Nov 2010 14:44:10 +0000 IB http://pragcap.com/?p=27847 By Andrew Wilkinson at IBSomething extremely subtle shifted in the weeks after its October decision causing the Reserve Bank of Australia to change its mind from a steady policy setting. On Tuesday the central bank added a further notch to its belt by lifting interest rates by one quarter of one percent to 4.75%. This is the first time in six months it’s acted and based upon the accompanying verbiage, there could very well be more to come further down the road before it can signal the all-clear.
Aussie dollar – At the time of its October meeting the RBA said that its decision to leave policy alone was “finely balanced.” It also noted that the rising Australian dollar was playing a role in restraining growth. Making today’s move even more unusual is that during the last several weeks a key reading of inflation surprised analysts by turning back down deeper into the central bank’s target range. However, the Reserve Bank appears to have upped the ante somewhat by nudging policy further upwards when it said that there now appears to be “relatively modest amounts of spare capacity” in the economy. It also said that price trends were less comforting with a risk of “inflation rising again over the medium-term.” This tells us that the Bank fears that the economy is moving to a different plane where the risk of policy error is greater. This occurs when resource slack has been utilized and tighter labor markets can create price pressures within the economy. Unlike the rest of the world, the domestic economy merely toyed with recession and as a result of the rebound across Asia, its rate of unemployment is already low at 5.1%. The RBA cited trends in job vacancies as a concern over the tightening labor market.
With few analysts actually calling today’s move right, the Aussie has jumped back through parity against the U.S. dollar on the prospect for a further divergence between local policy and that around the developed world. The Aussie currently buys 99.88 U.S. cents and rose broadly. Against the yen it buys ￥80.84 while it also rose against the pound which today buys A$1.6011. The euro buys fewer local dollars after the rate increase and stands at A$1.3991.
U.S. Dollar – The Australian move broadly encouraged risk appetite sending Asian stocks higher and reviving U.S. dollar sales. The dollar’s trade-weighted value slid by 0.4% to 77.00 as dealers still expect the Fed will announce a large amount of quantitative easing midweek. Stronger manufacturing data around the world released on Monday suggest that commodity demand remains strong, which has a natural effect of maintaining pressure on the dollar given their appeal as an alternative asset to the greenback.
Japanese yen – Finance Minister Noda spoke on Tuesday in Tokyo and again sounded pretty forceful, noting that the government continued to monitor the currency markets. And the central bank is ready to act on its behalf taking bold action if and when necessary. One can’t help but feel that the yen’s gains still amount to little more than dollar weakness rather than a pattern of a more volatile yen that would provide authorities in Japan the rationale to intervene. In early New York trading the yen has started to fall pretty sharply with the dollar now stretching to ￥80.96 according to Interactive Brokers data.
British pound – A slide in activity across the construction sector was enough to unwind much of the pound’s two-day gain that had propelled its value against the dollar towards a none-month high. Dealers had expected the PMI construction index to dip marginally from a September reading of 53.8 to 53.0. In the event the index headed straight towards the breakeven rate and fell to 51.6, which clearly unsettled recent bullish buyers. The pound slumped back to $1.5981 as the euro also made gains against the unit rising to 87.41 pence. In the bigger picture, today’s data vilifies consensus views.
Euro – Manufacturing activity expanded again during October according to the PMI manufacturing survey. The September index of 54.1 was expected to remain unchanged. However, better conditions across European manufacturing expanded activity within the sector pushing the index to 54.6 keeping the euro buoyant against the dollar at $1.3990.
Canadian dollar – The Canadian dollar remains elevated in light of all round weakness in the value of the greenback and ongoing flows into commodities. The Aussie rate rise hasn’t harmed the loonie either and reminds investors that the road to recovery is fuelled by temporarily idle resources that eventually run dry and run the risk of stoking inflation. The Canadian unit today sits towards the top of its early intraday range at 98.90 U.S. cents.
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]]> http://pragcap.com/australia-opens-monetary-policy-door/feed 1 http://pragcap.com/focus-net-margins http://pragcap.com/focus-net-margins#comments Tue, 02 Nov 2010 07:14:50 +0000 Zacks.com http://pragcap.com/?p=27827 By Dirk Van Dijk, CFA at Zacks Research- Focus now on third quarter earnings: 16.3% growth in total net income, 3.79% year-over-year revenue growth expected.? For the fourth quarter, 24.1% earnings, and 2.18% revenue growth expected.
- Just 22 reports in, but off to a good start (for what it’s worth). Surprise ratio 6.00 with a 8.96% median surprise. 81.8% of all firms beat expectations. Total net income grows 26.2%.
- Sales Surprise ratio at 1.10, median surprise 0.01%, 50.0% of all firms do better than expected on top line. Total revenue growth 11.1%.
- New Tables on Net Margins added. S&P 500 net margin expected to rise to 8.63% from 7.75% a year ago, but down from 9.05% in the second quarter.
- Total earnings for the S&P 500 expected to jump 39.0% in 2010, 15.6% further in 2011.? Revenues expected to rise 4.62% in 2010, 5.93% in 2011.
- Autos, Finance, Basic Materials and Energy expected to be earnings growth leaders in 2010. Construction expected to move from the red to the black. No sector expected to see earnings decline in 2010.
- Huge net margin expansion expected to continue in 2010 and 2011. Total net margins grow from 5.85% in 2008 to 6.42% in 2009, 8.61% expected for 2010, 9.31% for 2011.? Ex-Financials, net margins 6.63% in 2008, 7.58% for 2009, 8.72% expected for 2010, 10.51% for 2011.
- Revisions ratio for full S&P 500 at 1.04 for 2010, at 0.89 for 2011, an improvement from last week.?? Ratio of firms with rising to falling mean estimates at 1.11 for 2010, 0.79 for 2011.? Very small sample size, especially for some of the sectors, interpret revisions ratios with care
- S&P 500 firms earned a total of $546.5 billion in 2009, expected to earn $759.8 billion in 2010, $878.4 billion in 2011.
- S&P 500 earned $57.64 in 2009, $79.80 in 2010 and $92.78 in 2011 expected bottom up.? Puts P/E’s at 19.8x for 2009, 14.3x for 2010, and 12.3x for 2011.
- Top-Down estimates:? $79.93 for 2010, $92.01 for 2011.
The official kick-off for the third quarter earnings season starts later this week. We have had a few “preseason games” already, though. Just 22 firms have reported third quarter earnings so far — so it is not much to go on — but so far so good, with 18 beats and only three misses.
One thing to note is that for the Earnings and Revenue Scorecards, as well as the “Growth Reported” tables, are based on only those 22 firms, while the “expected growth tables are based on the other 478 firms. Your main attention should be focused on the “Growth Expected” tables.
The same is true for the new “Net Margin” tables, which I introduce in this edition. The quarterly reported table is only based on 22 firms, but the comparative data is also for just those firms as well. The “Expected” table is based on the remaining 478 firms. The “Annual Net Margin” table is based on all 500 firms.
Tougher Comps
As far as total net income is concerned, year-over-year growth is expected to decelerate to 16.28% growth from the 37.22% reported in the second quarter (among the 483). That is still a very healthy level of earnings growth. A big part of the slowdown can be traced to the fact that third quarter earnings in 2009 were significantly better than second quarter earnings in 2009. Thus we are facing tougher comparisons.
However, it is not all just tougher comps. Sequentially, earnings are expected to drop by 6.42% from the second quarter. In the second quarter, earnings were 8.93% higher than in the first quarter. As far as the sectors are concerned, the list of high-growth sectors in the third quarter (year over year) will pretty much the same as the high growth sectors in the second quarter.
The one exception is Aerospace, which was one of only two negative growth sectors in the second quarter, by will see more than a doubling of net income in the third quarter. The rest of the high-growth sectors are very cyclical, such as Construction, Autos and Transportation.
Early Peek at 4th Quarter
We also get an early peek at expectations for the fourth quarter. Somewhat surprisingly, the analysts are collectively expecting a bit of reacceleration in earnings growth, with total net income rising 24.1% over the fourth quarter of 2009.
Sequentially, earnings are expected to be 7.28% higher in the fourth quarter. The thousands of analysts tracking individual companies are thus not looking for a double-dip recession and implicitly see the third quarter slowdown as more of a pause in the economy rather than the start of a new downturn.
In the second quarter reports, arguably revenues were even more important than earnings. Firms that disappointed on the top line were spanked by the market, even if they did well on the bottom line. Year-over-year revenue growth is expected to decelerate sharply, growing just 3.79% down from 10.59% in the second quarter.
However, most of the deterioration in overall revenue growth is coming from the Financials. Revenue for Financials is notoriously flakey. A big part of it is interest income, which falls when interest rates are low. At the same time, though, interest expense also falls. Thus, don’t read too much into the revenue slowdown. This is one area where the trends in the individual sector are more important than what is going on with the S&P 500 as a whole.
On a sequential basis, revenues are expected to decline by 2.46%. Looking ahead to the fourth quarter, revenues are expected to climb 2.18% year over year and be up 4.62% sequentially. On a year-over-year basis, this implies continued very strong growth in net margins.
Three New Tables Introduced
I introduce three new tables in this issue: quarterly net margins reported, quarterly margins expected and net margins for the full year. Since we are tracking aggregate earnings and aggregate revenues, this seemed to be a logical addition to the coverage.
For the quarter, the firms that have not yet reported are expected to post net margins of 8.63% for the third quarter, up from 7.75% a year ago, but down from the 9.05% net margins they posted in the second quarter. The relative handful of firms that have actually reported have seen their margins expand to 9.78% from 8.72% a year ago, and from 9.03% in the second quarter. For the full year, net margins are expected to rise to 8.61% in 2010 from 6.42% in 2009, with a further rise to 9.31% in 2011. Excluding financials, margins are expected to rise from 7.58% in 2009 to 9.72% in 2010 to 10.51% in 2011.
For the full year, earnings are expected to grow 39.0% in 2010, with further growth of 15.6% in 2011. Next year we should once again set a new all-time record high for S&P 500 earnings. That will be long before employment returns to record levels. These results refer to the S&P 500, which are almost by definition “big businesses,” many of which get a majority of their earnings from overseas.
With interest rates low, they are able to float bonds at very attractive interest rates. Small businesses have not been faring as well, and have had a hard time getting access to capital. An effort to aid small businesses through a package of loans and tax cuts was recently blocked by a filibuster in the Senate, even though many of the senators who voted to prevent a final vote on the bill were co-sponsors of the legislation. Since small businesses are the principal driver of job creation, one can only conclude that those U.S. senators want to keep unemployment as high as possible, at least through November (of 2010; 2012 is an open question).
Full-year revenue growth is expected to be 4.62%, which does not fully make up for the 6.75% decline in 2009. For 2010, a further 5.93% revenue growth is expected. However, revenues for financial firms are flakey, and distort the numbers significantly. Excluding the financials, revenues plunged 10.46% in 2009, but are expected to grow 8.35% in 2010 and 6.96% in 2011. With earnings growing much faster than revenues, it means that net margins are headed higher.
It is important to note, that when we say “2009” in this report, we mean the last full fiscal year to be reported, even if that year happens to end in June 2010. June is one of the largest non-December fiscal year-end months. Thus, as those firms “switch over,” not only the projections for 2010 can change, but so too can the “historical 2009” results.
Earnings Recovery by Mid-2011
Regardless of some of the technical timing issues, it means that earnings will have fully recovered by mid 2011, and that full-year 2011 earnings will be 8.5% above full-year 2007 earnings (before the Great Recession started). That is years before we are likely to see a full recovery in the job market.
Collectively the 500 firms in the S&P 500 earned $546.5 billion in “2009,” and that is going to grow to $759.8 billion this year and $878.4 billion in 2011. Translated into “EPS” for the index, earnings are expected to rise from $57.64 in 2009 to $79.80 in 2010 and $92.78 in 2011.
Stocks Remain Inexpensive
In other words, then, the S&P 500 is selling for 19.8x 2009 earnings, but just 14.3x 2010 and 12.3x 2011 earnings. By historical standards, that is quite cheap. Normally, when interest rates and inflation are low, P/E ratios are higher than average. Well, we currently have some of the lowest rates of inflation in decades, and interest rates are at near record lows.
It only costs the government 2.51% to borrow for 10 years. It is not hard to find good, solid blue chip companies that are providing dividend yields of more than that, and not just a bunch of electric utilities either. One thing is certain, the coupon on a 10-year T-note will not increase over the next 10 years. The odds of the likes of Merck (MRK – Analyst Report, 4.15%), Intel (INTC – Analyst Report, 3.26%) or Procter & Gamble (PG – Analyst Report, 3.20%) increasing their dividend in the next 10 years is pretty high.
Currently 139 S&P 500 stocks yield over 2.55%, and 88 of those have payout ratios of less than 60%. Earnings that are not paid out in dividends are reinvested for future growth, or are used to buy back stock, which also lifts earnings per share. Based on this year’s earnings, the earnings yield is 6.99% and based on next year it is 8.13%.
Scorecard & Earnings Surprise
- Only 22 firms have reported 3Q earnings, all with fiscal periods ending in August. The numbers are thus not particularly meaningful, but we present them anyway. Your focus should be on the “expected” tables, which cover the other 478 firms.
- For what it is worth, we are off to a strong start with a median surprise of 8.96, and a 6.00 surprise ratio.
- Positive year-over-year growth for 18, falling EPS for four firms, a 4.50 ratio.
- Total net income up 26.2%. Pay attention to the % reported in evaluating the significance of sector growth rates and surprise medians.
Historically, a “normal earnings season” will have a surprise ratio of about 3:1 and a median surprise of about 3.0%. Thus this is a very positive earnings season. This is a big enough sample that it would be highly unusual for things to turn around and have the remaining firms turn around an on balance disappoint.
| Scorecard & Earnings Surprise | |||||||
|---|---|---|---|---|---|---|---|
| Income Surprises | Yr/Yr Growth | % Reported | Surprise Median | EPS Surp Pos | EPS Surp Neg | # Grow Pos | # Grow Neg |
| Construction | 181.08% | 9.09% | 166.67 | 1 | 0 | 1 | 0 |
| Finance | -11.03% | 1.28% | 34.29 | 1 | 0 | 0 | 1 |
| Consumer Discretionary | 18.92% | 6.06% | 12.56 | 2 | 0 | 2 | 0 |
| Retail/Wholesale | 20.10% | 15.56% | 11.11 | 7 | 0 | 7 | 0 |
| Industrial Products | -7.58% | 5.00% | 8.11 | 1 | 0 | 0 | 1 |
| Business Service | 6.45% | 5.26% | 5.88 | 1 | 0 | 1 | 0 |
| Computer and Tech | 44.35% | 7.14% | 2.86 | 3 | 1 | 5 | 0 |
| Consumer Staples | -1.47% | 7.89% | 1.59 | 2 | 1 | 1 | 2 |
| Transportation | 109.94% | 11.11% | -0.83 | 0 | 1 | 1 | 0 |
| Medical | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Auto | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Basic Materials | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Conglomerates | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Aerospace | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Oils and Energy | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Utilities | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| S&P | 26.21% | 4.40% | 8.96 | 18 | 3 | 18 | 4 |
Sales Surprises
- Sales Surprise ratio at 1.10, median surprise 0.01%, 50.0% of all firms do better than expected on top line. However, we are only talking about 17 stocks.
- Growing Revenues outnumber falling revenues by ratio of 10.0, 90.9% of firms have higher revenues than a year ago.
- Revenue growth healthy at 11.1% but still greatly lags earnings growth pointing to net margin expansion (see new margin tables below).
| Sales Surprises | |||||||
|---|---|---|---|---|---|---|---|
| Sales Surprises | Yr/Yr Growth | % Reported | Surprise Median | Sales Surp Pos | Sales Surp Neg | # Grow Pos | # Grow Neg |
| Finance | -16.69% | 1.28% | 3.958 | 0 | 0 | 0 | 1 |
| Construction | 14.42% | 9.09% | 2.91 | 1 | 0 | 1 | 0 |
| Business Service | 3.60% | 5.26% | 2.274 | 1 | 0 | 1 | 0 |
| Industrial Products | 3.59% | 100.00% | 0.977 | 1 | 0 | 1 | 0 |
| Computer and Tech | 43.48% | 7.14% | 0.592 | 3 | 2 | 5 | 0 |
| Retail/Wholesale | 6.58% | 15.56% | 0.339 | 5 | 2 | 7 | 0 |
| Transportation | 18.08% | 11.11% | -0.051 | 0 | 1 | 1 | 0 |
| Consumer Discretionary | 7.43% | 6.06% | -0.585 | 0 | 2 | 2 | 0 |
| Consumer Staples | -1.73% | 7.89% | -1.3555 | 0 | 3 | 2 | 1 |
| Medical | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Auto | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Basic Materials | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Conglomerates | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Aerospace | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Oils and Energy | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Utilities | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| S&P | 11.08% | 4.40% | 0.007 | 11 | 10 | 20 | 2 |
Reported Quarterly Growth: Total Net Income
- The first table shows the actual reported growth of those that have already reported, and the second table showing the expected growth for the firms that have yet to report.? The reported numbers are based on a very small sample size and do not reflect what the overall S&P 500 is likely to report.? See comment in the Earnings Scorecard section.
- The total net income of firms that have reported so far is 26.2% above what they reported in the second quarter of 2009. These same firms reported year-over-year growth of 30.9% in the first quarter. Sequential earnings growth is 9.3%.
- Sample sizes are small, and growth rates will shift wildly as more firms report.
- The numbers in the table (and Revenue growth table) below only refer to those firms which have already reported. Refer back to the % reporting in the scorecard to assess the significance of the sector growth numbers.
| Quarterly Growth: Total Net Income Reported | |||||
|---|---|---|---|---|---|
| Income Growth | Sequential Q4/Q3 E | Sequential Q3/Q2 A | Year over Year 3Q 10 A | Year over Year 4Q 10 E | Year over Year 2Q 10 A |
| Construction | -81.51% | -25.00% | 181.08% | 112.06% | 322.22% |
| Transportation | 9.78% | -9.31% | 109.94% | 20.91% | 109.50% |
| Computer and Tech | 7.72% | -26.02% | 44.35% | 20.72% | 39.49% |
| Retail/Wholesale | -10.47% | 14.22% | 20.10% | 8.41% | 7.25% |
| Consumer Discretionary | -66.83% | 143.67% | 18.92% | 10.13% | 3.20% |
| Business Service | -4.98% | 13.79% | 6.45% | -0.45% | 1.75% |
| Consumer Staples | 27.77% | 28.21% | -1.47% | -2.46% | -1.51% |
| Industrial Products | -3.77% | 12.96% | -7.58% | -2.16% | -6.90% |
| Finance | -24.93% | 39.46% | -11.03% | 125.21% | 315.12% |
| Medical | na | Na | Na | Na | Na |
| Auto | na | Na | Na | Na | Na |
| Basic Materials | na | Na | Na | Na | Na |
| Conglomerates | na | Na | Na | Na | Na |
| Aerospace | na | Na | Na | Na | Na |
| Oils and Energy | na | Na | Na | Na | Na |
| Utilities | na | Na | Na | Na | Na |
| S&P | -15.08% | 9.53% | 26.21% | 15.13% | 30.94% |
Expected Quarterly Growth: Total Net Income
- Total net income for the S&P 500 in the third quarter of 2010 is expected to rise 16.3% over third quarter of 2009 levels.
- This marks a slowdown from the 37.2% growth those same firms had in the second quarter. A rebound to 24.1% growth expected in the fourth quarter.
- Total third quarter net income expected to be 6.4% below second quarter levels. However, fourth quarter net income is expected to rise 7.3% over third quarter levels.
- Ten sectors expected to post double digit third quarter year over year growth, only? Conglomerates expected to have negative growth. Eight sectors expected to post growth over 30%. Cyclical sectors in the lead.
- Sequential picture much more downbeat, with only three sectors expected to actually have higher net income in this quarter than in the second quarter. When looking at growth, the base you are growing from matters as much as the levels you are growing to.
| Quarterly Growth: Total Net Income Expected | |||||
|---|---|---|---|---|---|
| Income Growth | Sequential Q4/Q3 E | Sequential Q3/Q2 E | Year over Year 3Q 10 E | Year over Year 4Q 10 E | Year over Year 2Q 10 A |
| Construction | -24.74% | -16.67% | 659.27% | 22.45% | 741.03% |
| Aerospace | 13.16% | -7.94% | 131.61% | -4.64% | -1.73% |
| Transportation | -0.25% | -0.12% | 49.66% | 28.14% | 69.56% |
| Auto | 2.06% | -39.71% | 41.56% | -6.24% | - to + |
| Oils and Energy | 3.54% | -8.05% | 39.64% | 29.90% | 95.23% |
| Industrial Products | -7.60% | -7.46% | 39.27% | 40.73% | 62.41% |
| Computer and Tech | 15.51% | 2.46% | 32.51% | 11.25% | 62.13% |
| Basic Materials | 24.76% | -20.09% | 30.54% | 48.20% | 114.14% |
| Finance | 11.87% | -16.61% | 13.10% | 180.39% | 39.45% |
| Business Service | 13.83% | -0.76% | 12.32% | 15.08% | 21.12% |
| Consumer Discretionary | 20.82% | -6.53% | 5.82% | 4.17% | 29.77% |
| Retail/Wholesale | 38.45% | -9.66% | 5.56% | 7.51% | 9.96% |
| Medical | 0.08% | -8.26% | 2.63% | 3.58% | 16.90% |
| Utilities | -22.05% | 16.06% | 1.58% | 6.36% | 6.87% |
| Consumer Staples | -6.04% | 1.87% | 0.27% | 1.51% | 7.32% |
| Conglomerates | 12.09% | -5.51% | -4.74% | 5.97% | -0.58% |
| S&P | 7.28% | -6.42% | 16.28% | 24.08% | 37.22% |
Quarterly Growth: Total Revenues Reported
- The shows the growth of the 17 firms that have actually reported. Your principal interest should be in the “growth expected tables, which cover the other 496 firms..? See comment in the Earnings Scorecard section.
- The S&P 500 reported revenues up 11.1% year over year in 3Q, up from 10.9% revenue increase the same firms showed in the 2Q. This is a very healthy level of revenue growth, but the sample size is small and un-representative.
| Quarterly Growth: Total Revenues Reported | |||||
|---|---|---|---|---|---|
| Sales Growth | Sequential Q4/Q3 E | Sequential Q3/Q2 A | Year over Year 3Q 10 A | Year over Year 4Q 10 E | Year over Year 2Q 09 A |
| Computer and Tech | 5.53% | -10.52% | 43.48% | 36.04% | 36.43% |
| Transportation | 1.68% | 0.31% | 18.08% | 13.49% | 20.07% |
| Construction | -23.76% | 1.35% | 14.42% | -11.60% | -8.74% |
| Consumer Discretionary | -12.44% | 16.07% | 7.43% | 7.54% | 7.98% |
| Retail/Wholesale | 16.95% | 2.76% | 6.58% | 5.52% | 7.20% |
| Business Service | 1.16% | 4.44% | 3.60% | 2.62% | 0.00% |
| Industrial Products | -2.38% | 1.65% | 3.59% | 3.50% | 3.41% |
| Consumer Staples | 6.93% | -3.82% | -1.73% | 0.67% | -3.52% |
| Finance | -39.56% | -7.41% | -16.69% | -65.45% | -14.39% |
| Medical | na | Na | Na | Na | Na |
| Auto | na | Na | Na | Na | Na |
| Basic Materials | na | Na | Na | Na | Na |
| Conglomerates | na | Na | Na | Na | Na |
| Aerospace | na | Na | Na | Na | Na |
| Oils and Energy | na | Na | Na | Na | Na |
| Utilities | na | Na | Na | Na | Na |
| S&P | 0.65% | 0.63% | 11.08% | 7.55% | 10.92% |
Quarterly Growth: Total Revenues Expected
- Total revenue for the S&P 500 expected to grow 3.79% from a year ago, a sharp slowdown from the 10.6% year over year growth posted in the second quarter. A further slowdown to 2.2% growth expected for the fourth quarter.
- Revenue for the Financials is the principal source of the revenue slowdown.? Low interest rates depress interest income, which is a major part of financials revenue, but also reduce interest expense. As a result, revenues at Financials are notoriously flakey.
- Five sectors expected to post double-digit revenue growth in the third quarter. The same five also posted double-digit growth in the second quarter and are expected to do so again in the fourth quarter. High revenue growth in Energy and Materials is largely a function of commodity prices.
| Quarterly Growth: Total Revenues Expected | |||||
|---|---|---|---|---|---|
| Sales Growth | Sequential Q4/Q3 E | Sequential Q3/Q2 E | Year over Year 3Q 10 E | Year over Year 4Q 10 E | Year over Year 2Q 10 A |
| Oils and Energy | 1.22% | 5.79% | 21.21% | 14.69% | 27.70% |
| Industrial Products | -2.39% | -0.04% | 20.54% | 16.54% | 20.20% |
| Transportation | 3.11% | 1.48% | 16.27% | 12.68% | 20.25% |
| Computer and Tech | 7.78% | 2.75% | 16.21% | 10.03% | 21.25% |
| Basic Materials | 4.61% | -4.73% | 12.62% | 11.18% | 18.54% |
| Medical | 2.63% | -0.16% | 8.96% | 2.65% | 10.09% |
| Business Service | 5.00% | 0.89% | 6.24% | 5.15% | 7.06% |
| Utilities | -0.72% | 10.73% | 4.91% | 5.06% | 0.60% |
| Consumer Discretionary | 9.16% | 2.81% | 3.01% | 4.43% | 7.94% |
| Aerospace | 6.45% | 3.07% | 2.95% | 2.83% | -2.25% |
| Conglomerates | 5.50% | -0.28% | 2.33% | 1.08% | 2.10% |
| Construction | -4.16% | -2.79% | 1.77% | -3.54% | 8.78% |
| Retail/Wholesale | 14.28% | -2.08% | 1.52% | 4.02% | 3.87% |
| Auto | 4.21% | -12.30% | -1.26% | -8.21% | 26.09% |
| Consumer Staples | 2.84% | -7.73% | -2.87% | -4.20% | 7.88% |
| Finance | 1.17% | -21.08% | -21.11% | -18.91% | 3.85% |
| . | 4.64% | -2.46% | 3.79% | 2.18% | 10.59% |
Quarterly Net Margins Reported
- This is only for the 22 firms that have already reported, calculated as total net income for the sector divided by total revenues for the sector. As more firms report, both the reported and estimated net margins are expected to change significantly.
- Net margins for S&P 500 expand to 9.78% from 8.72% a year ago, and 9.03% reported by these same firms in the second quarter.
- Eight of nine sectors with firms reporting seeing year-over-year increase in margins, six of nine see sequential improvement.
- Some sectors will see bigger seasonal swings in margins than others.
- Most focus should be on the “margins expected” table at this point.
| Quarterly: Net Margins Reported | ||||||
|---|---|---|---|---|---|---|
| Net Margins | Q4 2010 Estimated | Q3 2010 Reported | 2Q 2010 Reported | 1Q 2010 Reported | 4Q 2009 Reported | 3Q 2009 Reported |
| Business Service | 24.59% | 25.48% | 23.39% | 24.21% | 25.35% | 24.80% |
| Consumer Discretionary | 7.64% | 19.64% | 9.36% | 8.57% | 7.46% | 17.75% |
| Computer and Tech | 18.75% | 18.68% | 22.59% | 19.49% | 21.13% | 18.56% |
| Finance | 21.81% | 16.79% | 11.14% | -7.21% | 3.35% | 15.72% |
| Consumer Staples | 10.37% | 9.35% | 7.01% | 8.05% | 10.70% | 9.32% |
| Industrial Products | 6.41% | 6.60% | 5.94% | 5.68% | 6.78% | 7.40% |
| Transportation | 4.28% | 4.02% | 4.44% | 2.75% | 4.01% | 2.26% |
| Retail/Wholesale | 3.36% | 3.78% | 3.40% | 4.88% | 3.27% | 3.35% |
| Construction | 0.69% | 3.64% | 4.91% | -1.22% | -5.03% | -5.13% |
| S&P 500 | 8.37% | 9.78% | 9.03% | 7.79% | 7.88% | 8.72% |
Quarterly Net Margins Expected
- Net margins (among the 478 yet to report) expected to rise to 8.83% from 7.75% a year ago.
- Sequentially, margins expected to fall from 9.05% in the second quarter but rebound in the fourth quarter.
- Tech, Staples and Business Service consistently have double-digit net margins.
- Twelve sectors expected to see year-over-year growth in margins, four see declines.
- Only four expected to see sequential improvement in margins, twelve see declines.
- Construction, Aerospace and Finance to see largest year-over-year increases.
| Quarterly: Net Margins Expected | ||||||
|---|---|---|---|---|---|---|
| Net Margins | Q4 2010 Estimated | Q3 2010 Estimated | 2Q 2010 Reported | 1Q 2010 Reported | 4Q 2009 Reported | 3Q 2009 Reported |
| Computer and Tech | 17.87% | 15.74% | 15.51% | 15.17% | 16.39% | 13.56% |
| Consumer Staples | 11.45% | 12.33% | 11.04% | 10.75% | 10.51% | 11.81% |
| Finance | 13.61% | 12.00% | 11.51% | 11.22% | 3.89% | 8.49% |
| Business Service | 13.21% | 11.65% | 11.80% | 11.37% | 11.49% | 10.97% |
| Medical | 9.36% | 9.35% | 10.17% | 10.17% | 9.03% | 9.93% |
| Transportation | 9.18% | 9.20% | 9.35% | 7.15% | 7.83% | 7.15% |
| Utilities | 6.85% | 8.69% | 8.39% | 8.03% | 6.82% | 9.08% |
| Conglomerates | 9.17% | 8.19% | 8.64% | 7.36% | 8.29% | 8.79% |
| Consumer Discretionary | 9.79% | 8.13% | 8.91% | 9.32% | 8.99% | 7.89% |
| Industrial Products | 6.82% | 7.35% | 7.98% | 6.47% | 5.79% | 6.39% |
| Oils and Energy | 7.16% | 6.92% | 7.96% | 7.31% | 6.25% | 6.01% |
| Aerospace | 6.87% | 6.07% | 6.79% | 5.94% | 6.96% | 2.70% |
| Basic Materials | 7.49% | 6.00% | 7.15% | 7.39% | 5.37% | 5.18% |
| Auto | 4.39% | 4.31% | 6.26% | 5.12% | 4.13% | 3.00% |
| Retail/Wholesale | 5.08% | 3.52% | 3.98% | 3.69% | 4.30% | 3.53% |
| Construction | 2.32% | 3.09% | 3.60% | 1.89% | 1.91% | 0.41% |
| S&P 500 | 9.31% | 8.63% | 9.05% | 8.66% | 7.33% | 7.75% |
Annual Total Net Income Growth
- Total S&P 500 Net Income in 2009 was 2.3% above 2008 levels, following a 34.0% plunge in 2008.
- Total earnings for the S&P 500 expected to jump 39.0% in 2010, 15.6% further in 2011.
- Earnings recovery to happen by mid 2011, full year 2011 earnings to be 8.5% above 2007 levels. In other words, the recovery in earnings will occur far before the recovery in jobs, as we are unlikely to return to 2007 job levels until late 2013 at the earliest.
- Autos, Finance, Basic Materials and Energy expected to be earnings growth leaders in 2010.
- Construction expected to move from the red to the black. No sector expected to see earnings decline in 2010.
- Retail, Medical and Business Service the only sectors to post positive earnings growth in every year from 2008 through 2011.
- Ten sectors expected to grow slower in 2011 than 2010, only six to see growth accelerate (all relatively slow growers in 2010).
| Annual Total Net Income Growth | ||||
|---|---|---|---|---|
| Net Income Growth | 2008 | 2009 | 2010 | 2011 |
| Construction | + to - | - to - | - to + | 92.21% |
| Auto | + to - | - to + | 1577.62% | 35.43% |
| Finance | + to - | - to + | 316.95% | 24.71% |
| Basic Materials | -4.86% | -49.89% | 69.26% | 19.73% |
| Oils and Energy | 20.80% | -56.30% | 49.79% | 13.66% |
| Transportation | 1.03% | -30.14% | 39.87% | 19.27% |
| Computer and Tech | 15.50% | -4.24% | 32.80% | 18.25% |
| Industrial Products | 5.33% | -36.71% | 30.73% | 22.26% |
| Consumer Discretionary | 6.28% | -15.84% | 18.58% | 15.99% |
| Aerospace | 13.37% | -14.63% | 13.65% | 10.34% |
| Retail/Wholesale | 1.39% | 2.62% | 12.05% | 13.57% |
| Consumer Staples | -7.73% | 5.64% | 9.58% | 10.37% |
| Business Service | 27.32% | 1.06% | 7.09% | 17.38% |
| Medical | 9.29% | 2.19% | 6.47% | 6.95% |
| Utilities | -1.29% | -13.51% | 1.77% | 6.23% |
| Conglomerates | -9.23% | -23.84% | 0.00% | 15.22% |
| S&P | -34.02% | 2.33% | 39.04% | 15.60% |
Annual Total Revenue Growth
- Total S&P 500 revenue in 2009 6.75% below 2008 levels.
- Total revenues for the S&P 500 expected to rise 4.62% in 2010, 5.93% in 2011.
- Energy to lead 2010 revenue race, Tech and Transports to take silver and bronze, but Materials and Industrials have a chance to make it on to the medal stand.
- All sectors expected to show positive top-line growth in 2011.
- Financials the biggest drag on 2010 revenue growth, Staples the only other sector expected to post lower top line for the year. Revenues for Financials are notoriously flakey — low interest rates depress interest income (but also interest expense).
- Revenue growth ex-financials: -10.46% in 2009, 8.35% in 2010, 6.96% in 2011.
- Medical, Retail and Aerospace only sectors to have positive revenue growth for all three years.
- Looking out to 2011, Energy is the only sector expected to see double-digit revenue growth, although four other sectors expected to have revenue growth over 8%.
| Annual Total Revenue Growth | |||
|---|---|---|---|
| Sales Growth | 2009 | 2010 | 2011 |
| Oils and Energy | -34.49% | 21.01% | 11.92% |
| Computer and Tech | -6.22% | 17.99% | 8.10% |
| Transportation | -13.65% | 13.55% | 8.11% |
| Basic Materials | -19.30% | 13.13% | 7.22% |
| Industrial Products | -19.55% | 12.70% | 9.76% |
| Medical | 6.06% | 9.21% | 3.20% |
| Consumer Discretionary | -9.55% | 6.17% | 5.29% |
| Business Service | -2.35% | 5.89% | 5.94% |
| Retail/Wholesale | 1.25% | 5.21% | 5.46% |
| Utilities | -5.87% | 4.28% | 2.59% |
| Auto | -21.36% | 3.29% | 9.93% |
| Conglomerates | -13.27% | 0.97% | 2.32% |
| Aerospace | 6.30% | 0.46% | 6.31% |
| Construction | -15.92% | 0.20% | 6.87% |
| Consumer Staples | -2.13% | -2.38% | 4.31% |
| Finance | 21.18% | -19.17% | 2.31% |
| S&P | -6.75% | 4.62% | 5.93% |
Annual Net Margins
- Net Margins marching higher, from 5.85% in 2008 to 6.42% in 2009 to 8.61% expected for 2010, 9.31% expected for 2011. Major source of earnings growth.
- Financials significantly distort overall net margins. Net margins ex-financials 6.63% in 2008, 7.58% in 2009, 9.72% expected for 2010, 10.51% in 2011.
- Financials net margins soar from -9.00% in 2008 to 15.39% expected for 2011.
- Thirteen sectors seeing higher net margins in 2010 than in 2009. All sectors expected to post higher net margins in 2011 than in 2010.
| Annual Net Margins | |||||
|---|---|---|---|---|---|
| Net Margins | 2008A | 2009A | 2010E | 2011E | |
| Computer and Tech | 12.36% | 12.62% | 15.15% | 15.54% | |
| Finance | -9.00% | 2.45% | 12.64% | 15.39% | |
| Business Service | 10.77% | 11.14% | 11.42% | 12.49% | |
| Consumer Staples | 9.26% | 9.99% | 10.59% | 11.87% | |
| Medical | 10.16% | 9.79% | 9.65% | 9.89% | |
| Consumer Discretionary | 8.06% | 7.50% | 8.53% | 9.23% | |
| Conglomerates | 9.31% | 8.18% | 8.09% | 9.12% | |
| Utilities | 8.76% | 8.04% | 7.85% | 8.13% | |
| Oils and Energy | 9.13% | 6.09% | 7.54% | 7.66% | |
| Transportation | 7.30% | 5.91% | 7.47% | 8.03% | |
| Industrial Products | 7.48% | 5.88% | 6.91% | 7.60% | |
| Basic Materials | 7.19% | 4.47% | 6.78% | 7.46% | |
| Aerospace | 6.81% | 5.47% | 6.21% | 6.42% | |
| Auto | -2.77% | 0.25% | 4.12% | 4.94% | |
| Retail/Wholesale | 3.55% | 3.59% | 3.88% | 4.12% | |
| Construction | -2.32% | -1.03% | 1.99% | 3.60% | |
| S&P 500 | 5.85% | 6.42% | 8.61% | 9.31% | |
Revisions: Earnings
The Zacks Revisions Ratio: 2010
- Revisions ratio for full S&P 500 at 1.04, up from 0.93 last week, still neutral.
- Retail and Transports very strong, more than six increases per cut. Industrials also strong.
- Seven sectors with positive revisions ratios, nine below 1.0.
- Aerospace, Materials and Energy weak.
- Ratio of firms with rising to falling mean estimates at 1.11, up from 0.99 last week, still neutral reading.
- Total number of revisions (4 week total) down to 1,462 from 1,325 (10.3%).
- Increases down to 744 from 637 (16.8%), cuts up to 718 from 688 (4.4%).
- Total Revisions activity passing seasonal low. They are likely to more than triple from current levels over the next six weeks. Changes in the revisions ratios will be more driven by new estimates being made rather than old estimates dropping out.
| The Zacks Revisions Ratio: 2010 | |||||||
|---|---|---|---|---|---|---|---|
| Sector | %Ch Curr Fiscal Yr Est – 4 wks | # Firms Up | # Firms Down | # Ests Up | # Ests Down | Revisions Ratio | Firms up/down |
| Retail/Wholesale | 0.62 | 25 | 10 | 182 | 28 | 6.50 | 2.50 |
| Transportation | 0.38 | 7 | 0 | 31 | 5 | 6.20 | 9,999.99 |
| Industrial Products | 0.41 | 8 | 5 | 31 | 10 | 3.10 | 1.60 |
| Business Service | 0.12 | 8 | 6 | 41 | 18 | 2.28 | 1.33 |
| Consumer Discretionary | -0.25 | 16 | 8 | 50 | 25 | 2.00 | 2.00 |
| Construction | 4.57 | 6 | 5 | 14 | 8 | 1.75 | 1.20 |
| Conglomerates | -0.29 | 6 | 2 | 3 | 2 | 1.50 | 3.00 |
| Finance | 0.07 | 36 | 27 | 110 | 118 | 0.93 | 1.33 |
| Computer and Tech | -0.76 | 24 | 31 | 106 | 138 | 0.77 | 0.77 |
| Medical | 0.02 | 23 | 18 | 26 | 34 | 0.76 | 1.28 |
| Utilities | -0.19 | 17 | 18 | 30 | 49 | 0.61 | 0.94 |
| Auto | 0.10 | 1 | 5 | 4 | 7 | 0.57 | 0.20 |
| Consumer Staples | -0.17 | 13 | 16 | 27 | 54 | 0.50 | 0.81 |
| Oils and Energy | -3.27 | 11 | 26 | 69 | 161 | 0.43 | 0.42 |
| Basic Materials | -4.05 | 11 | 10 | 17 | 45 | 0.38 | 1.10 |
| Aerospace | -0.40 | 3 | 7 | 3 | 16 | 0.19 | 0.43 |
| S&P | -0.42 | 215 | 194 | 744 | 718 | 1.04 | 1.11 |
Revisions: Earnings
The Zacks Revisions Ratio: 2011
- Revisions ratio for full S&P 500 at 0.89 down from 0.77, now in neutral territory.
- Industrials, Retail and Transportation have at least three increases per cut.
- Several sector revisions ratios based on very thin samples, so treat these with care.
- Eleven sectors with negative revisions ratios, five with ratios above 1.0.
- Ratio of firms with rising estimate to falling mean estimates at 0.79 up from 0.72, still a negative reading.
- Conglomerates and Aerospace sector look very weak for 2011, five or more cuts per increase, but on a very thin sample.
- Total number of revisions (4-week total) at 1,473, up from 1,343 (9.7%).
- Increases up to 692 from 585 (18.3%) cuts rise to 781 from 758 (3.7%).
| The Zacks Revisions Ratio: 2011 | |||||||
|---|---|---|---|---|---|---|---|
| Sector | %Ch Next Fiscal Yr Est – 4 wks | # Firms Up | # Firms Down | # Ests Up | # Ests Down | Revisions Ratio | Firms up/down |
| Transportation | 0.50 | 8 | 0 | 23 | 5 | 4.60 | 9,999.99 |
| Retail/Wholesale | 0.43 | 21 | 18 | 122 | 31 | 3.94 | 1.17 |
| Industrial Products | 0.57 | 12 | 3 | 34 | 9 | 3.78 | 4.00 |
| Consumer Discretionary | -0.12 | 12 | 13 | 48 | 28 | 1.71 | 0.92 |
| Business Service | 0.08 | 7 | 6 | 27 | 17 | 1.59 | 1.17 |
| Finance | -0.63 | 30 | 37 | 110 | 119 | 0.92 | 0.81 |
| Medical | -0.01 | 22 | 19 | 39 | 45 | 0.87 | 1.16 |
| Computer and Tech | -1.36 | 21 | 35 | 110 | 133 | 0.83 | 0.60 |
| Consumer Staples | -0.32 | 14 | 19 | 31 | 39 | 0.79 | 0.74 |
| Basic Materials | -0.09 | 10 | 11 | 22 | 31 | 0.71 | 0.91 |
| Auto | -0.79 | 2 | 3 | 4 | 6 | 0.67 | 0.67 |
| Oils and Energy | -3.50 | 10 | 28 | 80 | 172 | 0.47 | 0.36 |
| Utilities | -0.86 | 13 | 25 | 28 | 77 | 0.36 | 0.52 |
| Construction | -6.64 | 2 | 8 | 8 | 23 | 0.35 | 0.25 |
| Conglomerates | -0.57 | 2 | 7 | 2 | 11 | 0.18 | 0.29 |
| Aerospace | -0.71 | 3 | 7 | 4 | 35 | 0.11 | 0.43 |
| S&P | -0.79 | 189 | 239 | 692 | 781 | 0.89 | 0.79 |
Total Income and Share
- S&P 500 earned $546.5 billion in 2009, expected to earn $759.8 billion in 2010, $878.4 billion in 2011.
- Finance share of total earnings moves from 5.8% in 2009 to 17.3% in 2010, 18.8% in 2011, regains total earnings crown from Tech.
- Medical share of total earnings far exceeds market cap share (index weight), but earnings share expected to shrink from 17.3% in 2009 to 12.3% in 2011.
- Market cap shares of Construction, Retail, Transportation, Industrials and Business Service sectors far exceed both 2010 and 2011 earnings shares.
- Finance, Energy and Autos have rising earnings shares and market cap shares well below 2011 earnings shares.
- Staples, Utilities and Medicals’ shares of total net income falling rapidly.
| Total Income and Share | |||||||
|---|---|---|---|---|---|---|---|
| Sector | Total Net Income $ 2009 | Total Net Income $ 2010 | Total Net Income $ 2011 | % Total S&P Earn 2009 | % Total S&P Earn 2010 | % Total S&P Earn 2011 | % Total S&P Mkt Cap |
| Finance | $31,745 | $132,358 | $165,061 | 5.81% | 17.42% | 18.79% | 15.81% |
| Computer and Tech | $92,708 | $123,120 | $145,588 | 16.96% | 16.20% | 16.57% | 18.02% |
| Medical | $94,652 | $100,778 | $107,777 | 17.32% | 13.26% | 12.27% | 10.86% |
| Oils and Energy | $62,732 | $93,963 | $106,797 | 11.48% | 12.37% | 12.16% | 10.46% |
| Consumer Staples | $57,414 | $62,915 | $69,441 | 10.51% | 8.28% | 7.91% | 8.94% |
| Retail/Wholesale | $51,411 | $57,607 | $65,426 | 9.41% | 7.58% | 7.45% | 8.59% |
| Utilities | $49,742 | $50,623 | $53,777 | 9.10% | 6.66% | 6.12% | 6.54% |
| Consumer Discretionary | $23,219 | $27,534 | $31,936 | 4.25% | 3.62% | 3.64% | 4.33% |
| Conglomerates | $26,275 | $26,275 | $30,273 | 4.81% | 3.46% | 3.45% | 3.76% |
| Basic Materials | $13,459 | $22,781 | $27,276 | 2.46% | 3.00% | 3.11% | 3.20% |
| Aerospace | $13,054 | $14,835 | $16,369 | 2.39% | 1.95% | 1.86% | 1.68% |
| Industrial Products | $10,622 | $13,886 | $16,976 | 1.94% | 1.83% | 1.93% | 2.30% |
| Business Service | $11,532 | $12,350 | $14,496 | 2.11% | 1.63% | 1.65% | 2.07% |
| Transportation | $8,202 | $11,472 | $13,682 | 1.50% | 1.51% | 1.56% | 1.94% |
| Auto | $471 | $7,908 | $10,710 | 0.09% | 1.04% | 1.22% | 1.00% |
| Construction | ($742) | $1,443 | $2,774 | -0.14% | 0.19% | 0.32% | 0.49% |
| S&P | $546,494 | $759,847 | $878,360 | 100.00% | 100.00% | 100.00% | 100.00% |
P/E Ratios
- Trading at 14.3x 2010, 12.3x 2011 earnings, or earnings yields of 6.99% and 8.13%, respectively.
- Earnings yields extremely attractive relative to 10-year T-note rate of 2.51%.
- Medical has lowest P/E based on 2010 earnings. Autos, Finance, Energy, Medical cheapest based on 2011 earnings.
- Construction has highest P/E for 2010 and 2011.
- Auto and Finance high 2009 P/Es to fall dramatically in 2010 and 2011.
- S&P 500 earned $57.64 in 2009: $79.80 in 2010 and $92.78 in 2011 expected.
| P/E Ratios | ||||
|---|---|---|---|---|
| P/E | 2008 | 2009 | 2010 | 2011 |
| Medical | 12.7 | 12.4 | 11.7 | 10.9 |
| Oils and Energy | 7.9 | 18.1 | 12.1 | 10.6 |
| Aerospace | 11.9 | 14.0 | 12.3 | 11.1 |
| Finance | -17.8 | 54.0 | 12.9 | 10.4 |
| Auto | -16.0 | 228.7 | 13.6 | 10.1 |
| Utilities | 12.3 | 14.2 | 14.0 | 13.2 |
| Basic Materials | 12.9 | 25.8 | 15.2 | 12.7 |
| Consumer Staples | 17.8 | 16.9 | 15.4 | 14.0 |
| Conglomerates | 11.8 | 15.5 | 15.5 | 13.5 |
| Computer and Tech | 20.2 | 21.1 | 15.9 | 13.4 |
| Retail/Wholesale | 18.6 | 18.1 | 16.2 | 14.2 |
| Consumer Discretionary | 17.0 | 20.2 | 17.0 | 14.7 |
| Industrial Products | 14.9 | 23.5 | 18.0 | 14.7 |
| Busines Service | 19.7 | 19.5 | 18.2 | 15.5 |
| Transportation | 17.9 | 25.6 | 18.3 | 15.3 |
| Construction | -26.9 | -71.9 | 37.0 | 19.2 |
| . | 20.3 | 19.8 | 14.3 | 12.3 |
Biggest FY1 Revisions
The table below shows the S&P 500 firms with the biggest increases in their FY1 (mostly 2010) mean estimate over the last 4 weeks. To qualify there must be more than 3 estimates for FY1, and have a mean estimate of more than $0.50. In addition to the change in the mean estimate, the net percentage of estimates being raised is shown for both FY1 and FY2, as well as the P/E ratios based on each year’s earnings is shown.
Note that estimate momentum and value are not mutually exclusive. The most interesting of these firms will be where the net revisions percentage (#up-#dn/Tot) is more than 0.50 but less than 1.00. Big mean estimate changes based on a handful of individual revisions are suspect, but could prove to be the most interesting if other analysts follow suit. On the other hand, if all the analysts have raised their estimates already, the mean estimate is less likely to rise again over the next month.
| Biggest FY1 Revisions | |||||||
|---|---|---|---|---|---|---|---|
| Company | Ticker | %Ch Curr Fiscal Yr Est – 4 wks | %Ch Next Fiscal Yr Est – 4 wks | # Up-Dn/Tot %Ch Curr Fiscal Yr Est – 4 wks | # Up-Dn/Tot %Ch Next Fiscal Yr Est – 4 wks | P/E using Curr FY Est | P/E using Next FY Est |
| Discover Fin Sv | DFS | 22.67% | 8.59% | 0.79 | 0.75 | 17.80 | 9.54 |
| Textron Inc | TXT | 11.85% | -3.53% | 0.17 | -0.27 | 41.22 | 15.55 |
| Carmax Gp (Cc) | KMX | 10.25% | 11.06% | 1.00 | 1.00 | 17.40 | 16.41 |
| Eastman Chem Co | EMN | 9.38% | 6.81% | 1.00 | 0.67 | 10.56 | 10.41 |
| Comerica Inc | CMA | 9.26% | -1.35% | 0.17 | -0.05 | 45.32 | 16.93 |
| Pall Corp | PLL | 6.87% | 5.16% | 1.00 | 0.56 | 17.09 | 15.14 |
| Archer Daniels | ADM | 4.37% | 5.94% | 0.44 | 0.57 | 10.30 | 9.71 |
| Best Buy | BBY | 4.27% | 2.90% | 0.96 | 0.68 | 11.40 | 10.44 |
| Altera Corp | ALTR | 4.23% | 4.00% | 1.00 | 0.83 | 12.79 | 12.86 |
| Nike Inc-B | NKE | 4.15% | 3.44% | 0.84 | 0.68 | 18.32 | 16.33 |
| Autozone Inc | AZO | 4.01% | 3.36% | 0.84 | 0.40 | 13.27 | 11.78 |
| Carnival Corp | CCL | 3.90% | 3.66% | 0.72 | 0.71 | 15.72 | 13.56 |
| Family Dollar | FDO | 3.57% | 4.69% | 0.77 | 0.39 | 14.50 | 12.57 |
| Oracle Corp | ORCL | 3.49% | 2.41% | 0.83 | 0.76 | 14.36 | 12.84 |
| Saic Inc | SAI | 3.34% | 0.05% | 0.71 | -0.08 | 11.16 | 10.67 |
| Adobe Systems | ADBE | 3.07% | -0.57% | 0.67 | 0.07 | 16.84 | 14.65 |
With more than 25 years of experience as an analyst and portfolio manager, Dirk is Zacks’ Chief Equity Strategist. He regularly authors market strategy reports and articles, and appears on many investment TV programs. He specializes in blending long-term vision with the short-term Zacks Rank system that, since 1988, has averaged gains of +27% per year.
To get today’s four Zacks #1 Rank “Strong Buy” stocks for free, click here >>
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]]> http://pragcap.com/focus-net-margins/feed 2http://pragcap.com Wed, 03 Nov 2010 06:27:13 +0000 en hourly 1 http://wordpress.org/?v=3.0.1 http://pragcap.com/election-results-big-win-gop http://pragcap.com/election-results-big-win-gop#comments Wed, 03 Nov 2010 06:26:17 +0000 TPC http://pragcap.com/?p=27878 The country has spoken and they are not happy with the Obama economy.? And rightfully so.? It has been a remarkable disappointment thus far.? President Obama’s biggest mistakes were often highlighted by me in real time:
- He should have chosen to bailout Main Street over Wall Street.
- He never should have appointed Geithner or Summers.? They were merely attempts to rehash the Clinton economic team and unfortunately, due to his ignorance of the economic environment, President Obama had no idea that these men played a significant role in causing the crisis.
- He absolutely never should have reappointed Ben Bernanke.? Mr. Bernanke has rehashed all of Alan Greenspan’s “flawed” policies and has chosen to focus on the banking sector at every twist and turn of this crisis.
- He should have saved his health care plan for term two and focused on helping Americans get the jobs they so badly needed.
- He should have dropped the hammer on Wall Street with harsh regulation.? We have become a nation by the banks and for the banks and the de-regulation of the 90′s is largely to blame.? We need to end the financialization of this country and get back to 3-6-3 banking as opposed to relying on our bankers to generate economic growth while also mis-allocating resources.
- He has had every opportunity to become the champion of Main Street.? Instead, he appears no different than his many predecessors who have been slaves to bank lobbyists.
This election is largely a referendum on the Obama economy.? Unfortunately, I am concerned that the change is not necessarily any better.? Specifically, I am most concerned about a return to the ways that got us into this mess in the first place:
- I am concerned that we are moving back towards a belief that business is efficient and rational and therefore does not need to be regulated.
- I am concerned that gridlock will lead to severe budget constraints.? Like it or not, we are in a balance sheet recession.? And when you’re in a balance sheet recession someone must run a surplus or economic growth will decline.? That is simply an accounting identity.? With the private sector paying down debt they are unlikely to pick up the economic slack.? Therefore, without continued government spending or tax cuts we risk a high probability of sinking back into negative growth and possibly worse.
- While I am not a fan of unemployment benefits we are likely to see 3.5MM people lose their unemployment benefits in January as republicans block passage of any extensions.? In a balance sheet recession this will put an unnecessary strain on the economy.? The government should temporarily hire the qualified of these 3.5MM people and incentivize them to be productive as opposed to paying them to do nothing. ?? The country can certainly afford it and it would put people to work at a time of high private sector unemployment.
- We have a very serious state funding crisis that is now almost guaranteed to get worse as spending is reduced. Meredith Whitney believes the state funding crisis is the next shoe to drop and is being overlooked:
“The level of complacency around this issue is alarming. Most assume, as last week’s Buttonwood panel did, that the federal government will simply come to the rescue of the states without appreciating the immensity of the cumulative state-budget gaps. I expect multiple municipal defaults to trigger indiscriminate selling, which will prompt a federal response. Solutions attempted in piecemeal fashion, as we’ve seen thus far, would amount to constantly putting out recurring fires.
Rather than waiting for more federal intervention, states need to make their own hard decisions and not kick the can down the road. How will taxpayers from fiscally conservative states like Texas or Nebraska feel about bailing out threadbare Illinois or California? Let’s hope we never have to find out.”
This country is not bankrupt.? We are not the European Union.? We are not Argentina.? We are not Zimbabwe.? We most certainly are not Greece.? As the monopoly supplier of currency in a floating exchange rate system we can always afford to spend in our own currency.? Unfortunately, the new Congress is likely to move us closer towards austerity and that is an unnecessary hurdle at a time when the country least needs it.? It’s difficult to see what we accomplished tonight.? And we may have potentially taken a huge step backwards.? Tonight’s outcome has 1937 written all over it.? Let’s hope our political leaders prove smarter than that.
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]]> http://pragcap.com/election-results-big-win-gop/feed 7 http://pragcap.com/high-beta-junkies-die http://pragcap.com/high-beta-junkies-die#comments Wed, 03 Nov 2010 06:14:40 +0000 TPC http://pragcap.com/?p=27729 As of Tuesday’s close the rally in equities has officially lasted 44 sessions.? That’s long by historical standards, but a look under the hood shows some remarkable bullishness.? This persistent bullishness is best exemplified in the Nasdaq 100.? There are a few indices that are notoriously high beta.? This is one of them.? And this is where the high beta junkies come to get their fix.? In the last 44 sessions there have been just 15 negative sessions in total with 29 positive sessions.? That’s a 3:1 ratio – very high by historical terms.? What’s amazing is that the Nasdaq 100 has experienced just ONE 1%+ decline during the last 44 sessions.? And in total, there have really only been three damaging sessions that totaled declines of 2.89%.It’s always amazing to me how investors can be so confident in returns after a rally has occurred and so scared after a market has declined.? If you watch financial TV these days it appears as though everyone and their mother has subscribed to the David Tepper “everyone’s a winner” thesis.? The only two beliefs currently existing are that stocks will either go much higher from here or they will decline briefly before going much higher.? Stocks are seemingly infallible.? Currently, small investors are displaying their highest level of confidence in the market since March of 2008 – just weeks before an epic collapse began.? Today, this unending faith in equities is obvious in the Nasdaq 100 where the high beta junkies have now all hurdled together hoping to get their next fix of higher prices.
The beauty of mean reversion is its simplicity.? If we take a graphical look at the current environment we can visualize the imbalance that occurs in a market.? Market peaks and troughs tend to occur when a market enters a state of disequilibrium with its underlying fundamentals.? This can be due to a number of varying factors, but psychology tends to be the primary driver.? I often say that it is always brightest at the top.? The current environment is not only displaying excessive bullishness, but the general equity mentality has become one of extreme complacency.? You either think the Fed is going to push the market higher or you think the economy is on the path to recovery.? As Tepper said, it’s a “win win”.? The problem with a market and its mean reverting nature is that investors place their bets before the cards are dealt.? This is why markets always peak on good news and bottom on bad news.
The last time I was net short was back in April 2010.? Regular readers from that period will recall similar charts to the one below.? The Nasdaq 100 is currently on a 22.7% tear that sets it on course for a 150% annualized return.? But more importantly, this index, which is an important indicator of risk appetite, is now 8.5% above its 50 day moving average.? This has occurred just two other times in the last 3 years and both events were in the early stages of the incredible move off the 666 lows – an outlier if there ever was one.? At the May high before the flash crash we were just 6.4% above the 50 day moving average and the market had rallied an astounding 20.25% in just 55 sessions.? If you’ll recall the mentality was eerily similar.? Small investor bullishness was at 48.5% (currently 51.1%) and the consensus widely believed that we were in the midst of a sustained economic recovery.
I think the market has now priced in an extraordinary amount of optimism heading into the election and QE2.? Neither will prove to be a panacea.? In fact, I believe gridlock will cause more harm than good during a balance sheet recession due to a move towards austerity and that QE2 remains the greatest monetary non-event.? In addition, investors are largely pricing in an economic recovery.? The price action proves that there is extraordinary optimism about future equity returns.? This has resulted in an extreme disequilibrium and in my opinion creates substantial downside risks.? Unless the Fed is successful in reinflating the equity bubble (which they very clearly have stated they are interested in doing) it appears to me that the market’s natural mean reverting tendencies will dominate price action in the coming months.
* Author is short equities, but not short any securities mentioned in the above piece.
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]]> http://pragcap.com/high-beta-junkies-die/feed 3 http://pragcap.com/eye-long-storm http://pragcap.com/eye-long-storm#comments Wed, 03 Nov 2010 05:33:34 +0000 Annaly Capital http://pragcap.com/?p=27871 By Annaly Capital ManagementIf you’re reading this Salvo on the day it is posted, then you are likely holding your breath on a number of fronts: the outcome of the election tonight, the FOMC announcement tomorrow afternoon and the policy meetings of the Bank of England, European Central Bank and the Bank of Japan and the new jobs numbers, due later this week. It is a day of anticipation and, for some, it is a day of positioning portfolios for short-term volatility based on likely outcomes. Indeed, there may be volatility if market expectations are unrequited, i.e., if the Republicans don’t take the House in convincing fashion, if the Fed disappoints on details for QE2, if foreign central banks decide to be passive or aggressive in the face of Fed maneuvering, or if the non-farm payroll number comes in significantly over or under the consensus of +60 thousand.
If you are holding your breath, exhale and focus on a few longer-term trends that aren’t going to change very much once the immediate questions from this week get answered. First, rates. In case it is lost on anyone pulling a monetary policy lever, rate and liquidity are not holding back the global economy, and haven’t been for some time. Behold the graph below, which is one-month LIBOR. Don’t let the scale fool you, the unsecured inter-bank lending market has been flat as a pancake for many months.
Second, the dollar. The Reserve Bank of Australia was the first central bank out of the gate this week, and it decided at its meeting yesterday to raise its overnight cash rate by 25 basis points to 4.75%. According to the policy statement, the country is experiencing strong labor demand, the effects of stronger-than-expected growth in China and “the prices most important to Australia remain at very high levels, with the result that the terms of trade are at their highest since the early 1950s.” The Australian dollar now flirts with parity to the US Dollar.
Australia may be an outlier, but it’s not alone: The Reserve Bank of India also raised its overnight repo rate by 25 basis points to 6.25%. In its policy statement, the RBI addressed global pressures. “The slowing momentum of recovery has prompted the central banks of some advanced economies to initiate (or consider initiating) a second round of quantitative easing to further stimulate private demand. While the ultra loose monetary policy of advanced economies may benefit the global economy in the medium-term, in the short-term it will trigger further capital inflows into emerging market economies (EMEs) and put upward pressure on global commodity prices.” The so-called advanced economies are engaged in a battle to devalue their own currencies while the rest of the world compensates.
Third—and this is all related—gold vaults in Manhattan, many of which were turned into clubs or shuttered during the ‘80s and ‘90s, are back in demand. JP Morgan recently announced they were re-opening a gold vault that had been mothballed. For the first time in history, according to GFMS, private investors now own more gold (30 thousand metric tons) than central banks, and they have the high-grade problem of finding a place to store it.
The markets may be volatile depending on how things break over the next few days, but longer-term trends may not be deflected by whether John Boehner or Nancy Pelosi is sitting in the Speaker’s chair in January.
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]]> http://pragcap.com/eye-long-storm/feed 1 http://pragcap.com/buy-dip-buy-rip http://pragcap.com/buy-dip-buy-rip#comments Tue, 02 Nov 2010 23:44:30 +0000 TPC http://pragcap.com/?p=27872 Investors who have been waiting for a pull-back have been forced to chase the index in recent weeks as the market has been unable to stay in the red for any longer than a few minutes. This evening’s early polling data shows the GOP making big gains in the House and possibly taking the Senate. Wall Street loves the news as it means a return to the good old days of no regulation, low taxes and essentially all the things that helped cause this situation in the first place. Curiously, this has been just about the most widely anticipated event in months if not years so it’s odd to see this rush into risk assets as the news comes out….This was widely expected to be a “sell the news” event, but the early performance on election night shows a strong appetite to chase the performance up here. S&P 500 futures have ripped almost 7 points higher since the close of trading earlier today.
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]]> http://pragcap.com/buy-dip-buy-rip/feed 5 http://pragcap.com/eurozone-pmi-improves-irish-spreads-hit-record-high http://pragcap.com/eurozone-pmi-improves-irish-spreads-hit-record-high#comments Tue, 02 Nov 2010 18:57:12 +0000 TPC http://pragcap.com/?p=27860 Eurozone PMI came in better than expected this morning, but the region has become a story of two economies.? While the core continues to show robust growth (primarily Germany) the periphery continues to struggle:Chris Williamson, Chief Economist at Markit said:? “An improvement in the PMI for the first time in three months provides much needed reassurance that manufacturing remains an important driver of the
euro area recovery. The final manufacturing PMI data came in stronger than the earlier flash estimate,
suggesting that growth picked up at the start of the fourth quarter, boosted by rising export sales.“However, it is clear that the recovery has moved down a gear. The pace of expansion has eased markedly
from the surging near double-digit annual pace seen earlier in the year to a more modest 3%–4%.“Despite the overall improvement, national divergences will continue to raise tensions for policymaking. Although Greece was the only country to see manufacturing output decline, production continued to barely rise in the Netherlands, Ireland and Spain, contrasting with strong growth in Germany, France and Italy.”
Although equity markets rallied in Europe today the credit markets remain on edge as yields and CDS spreads continued to hit highs:
“Today’s Markit Eurozone PMI continued the trend, the 54.6 October reading well up on the 54.1 flash estimate. As usual, the core eurozone countries drove the expansion but the dichotomy between core and peripheral countries was less distinct. Spain was back above the 50 neutral mark and even Ireland was expanding again.
However, the performance of Ireland’s sovereign spreads didn’t reflect this good news. The country’s spreads hit a record wide level of 530bp today as the problems for the government piled up. The negative sentiment created by a weekend article in the Irish Independent was compounded today by two unrelated pieces of news. Allied Irish Bank (AIB) announced that it had failed to sell its UK operations, meaning that the government’s preference shares could be converted into ordinary shares. Along with a proposed rights? issue, this could take the government’s share to 92% if asset sales aren’t achieved. To make matters worse for the government, one of its Fianna Fail TDs announced he was resigning his seat. This leaves Brian Cowen’s administration with a very slim majority – a delicate situation given the upcoming budget vote. And all of this in a sovereign market uneasy about the EU restructuring mechanism announced last week. The Markit iTraxx SovX Western Europe was over 160bp earlier in the day before recovering in the afternoon.”
I am still having difficulty seeing how this problem doesn’t require real resolution at some point.? It’s clear that austerity is simply not working.? The markets in Europe are confident that the ECB can simply bail everyone out.? It’s really no different here in the states.? After all, the Fed has vowed to crank the printing press up if there are any signs of economic weakness.? But pure common sense tells me this situation can’t last forever.? At some point structural problems need to be dealt with.
Source: Markit
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]]> http://pragcap.com/eurozone-pmi-improves-irish-spreads-hit-record-high/feed 8 http://pragcap.com/giving-meaning-herding-investors http://pragcap.com/giving-meaning-herding-investors#comments Tue, 02 Nov 2010 18:25:25 +0000 TPC http://pragcap.com/?p=27858 We all know the Federal Reserve is trying to herd investors into equities as they keep asset values “higher than they otherwise would be”, but how’s this for herding investors?? One well known hedge fund manager has altered his entire strategy because of the Fed’s persistent actions (via the WSJ):“A former hedge-fund manager who made a fortune shorting stocks has switched to the long side, and is raking in money in the process.
William von Mueffling surprised clients and competitors last June by announcing he would close his hedge funds and return $3.5 billion to investors. His firm, Cantillon Capital Management of New York, kept managing $1 billion in long-only assets, typically considered the unsexy piece of the business.
Now, the 42-year-old stock picker controls more money than he did before he closed his hedge funds. Cantillon has raised billions of dollars from pension funds in the U.S. and abroad, and from sovereign-wealth investors, according to clients and other people familiar with the matter.”
Von Mueffling couldn’t justify running the short end of the book as the Fed was priming the pump:
“After years of “long-short” investing, Mr. von Mueffling and his analysts and traders no longer short, or bet against, stocks at all. Instead, like a typical stock mutual fund, they stick to buying company shares they expect will rise. Mr. von Mueffling said the strategy is “the right long-term decision.”
“I’m not saying there aren’t overvalued stocks out there,” he said in an interview. “There are, but trying to short them when the government is printing money is a very, very challenging game,” he said, referring to, among other things, Federal Reserve programs to buy government bonds, which the Fed is widely expected to announce this week.”
That gives new meaning to “herding investors”.? I think sellers play an important role in the price discovery process.? After all, when the fundamentals of an asset are consistently in disequilibrium with its current valuation it makes the system that much more unstable.? Selling, and thus lower prices, can actually make the system more stable in the long-term.? This is just one more sign that nothing has really changed since the Greenspan Fed ended.? And that was a Fed run by a man who admitted that his model was flawed….
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]]> http://pragcap.com/giving-meaning-herding-investors/feed 9 http://pragcap.com/market-30-overvalued http://pragcap.com/market-30-overvalued#comments Tue, 02 Nov 2010 16:12:53 +0000 TPC http://pragcap.com/?p=27853 Dshort has a great chart showing various valuation metrics. His conclusions are similar to what John Hussman and Robert Shiller’s valuations (see bottom of page) say.? Unfortunately, in a world where asset prices are permanently altered by a government that is insistent on keeping asset prices elevated it’s impossible to know if valuations even matter anymore:“To facilitate comparisons, I’ve adjusted the Q Ratio and P/E10 to their arithmetic mean, which I represent as zero. Thus the percentages on the vertical axis show the over/undervaluation as a percent above mean value, which I’m using as a surrogate for fair value. Based on the latest S&P 500 monthly data, the index is overvalued by 48%, 36% or 31%, depending on which of the three metrics you choose.”
(Source: Dshort.com)
(Shiller PE)
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]]> http://pragcap.com/market-30-overvalued/feed 19 http://pragcap.com/galbraith-qe2-illusion-nothing http://pragcap.com/galbraith-qe2-illusion-nothing#comments Tue, 02 Nov 2010 15:56:52 +0000 TPC http://pragcap.com/?p=27849 The list of credible people who believe QE will do absolutely nothing is growing by the day.? Unfortunately, this bank bailout is going to be passed off as some sort of Main Street stimulant and the system will continue along its misguided pathway.James Galbraith sat down with Tom Keene this morning to discuss the illusion of QE2:
Source: Bloomberg TV
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]]> http://pragcap.com/galbraith-qe2-illusion-nothing/feed 4 http://pragcap.com/australia-opens-monetary-policy-door http://pragcap.com/australia-opens-monetary-policy-door#comments Tue, 02 Nov 2010 14:44:10 +0000 IB http://pragcap.com/?p=27847 By Andrew Wilkinson at IBSomething extremely subtle shifted in the weeks after its October decision causing the Reserve Bank of Australia to change its mind from a steady policy setting. On Tuesday the central bank added a further notch to its belt by lifting interest rates by one quarter of one percent to 4.75%. This is the first time in six months it’s acted and based upon the accompanying verbiage, there could very well be more to come further down the road before it can signal the all-clear.
Aussie dollar – At the time of its October meeting the RBA said that its decision to leave policy alone was “finely balanced.” It also noted that the rising Australian dollar was playing a role in restraining growth. Making today’s move even more unusual is that during the last several weeks a key reading of inflation surprised analysts by turning back down deeper into the central bank’s target range. However, the Reserve Bank appears to have upped the ante somewhat by nudging policy further upwards when it said that there now appears to be “relatively modest amounts of spare capacity” in the economy. It also said that price trends were less comforting with a risk of “inflation rising again over the medium-term.” This tells us that the Bank fears that the economy is moving to a different plane where the risk of policy error is greater. This occurs when resource slack has been utilized and tighter labor markets can create price pressures within the economy. Unlike the rest of the world, the domestic economy merely toyed with recession and as a result of the rebound across Asia, its rate of unemployment is already low at 5.1%. The RBA cited trends in job vacancies as a concern over the tightening labor market.
With few analysts actually calling today’s move right, the Aussie has jumped back through parity against the U.S. dollar on the prospect for a further divergence between local policy and that around the developed world. The Aussie currently buys 99.88 U.S. cents and rose broadly. Against the yen it buys ￥80.84 while it also rose against the pound which today buys A$1.6011. The euro buys fewer local dollars after the rate increase and stands at A$1.3991.
U.S. Dollar – The Australian move broadly encouraged risk appetite sending Asian stocks higher and reviving U.S. dollar sales. The dollar’s trade-weighted value slid by 0.4% to 77.00 as dealers still expect the Fed will announce a large amount of quantitative easing midweek. Stronger manufacturing data around the world released on Monday suggest that commodity demand remains strong, which has a natural effect of maintaining pressure on the dollar given their appeal as an alternative asset to the greenback.
Japanese yen – Finance Minister Noda spoke on Tuesday in Tokyo and again sounded pretty forceful, noting that the government continued to monitor the currency markets. And the central bank is ready to act on its behalf taking bold action if and when necessary. One can’t help but feel that the yen’s gains still amount to little more than dollar weakness rather than a pattern of a more volatile yen that would provide authorities in Japan the rationale to intervene. In early New York trading the yen has started to fall pretty sharply with the dollar now stretching to ￥80.96 according to Interactive Brokers data.
British pound – A slide in activity across the construction sector was enough to unwind much of the pound’s two-day gain that had propelled its value against the dollar towards a none-month high. Dealers had expected the PMI construction index to dip marginally from a September reading of 53.8 to 53.0. In the event the index headed straight towards the breakeven rate and fell to 51.6, which clearly unsettled recent bullish buyers. The pound slumped back to $1.5981 as the euro also made gains against the unit rising to 87.41 pence. In the bigger picture, today’s data vilifies consensus views.
Euro – Manufacturing activity expanded again during October according to the PMI manufacturing survey. The September index of 54.1 was expected to remain unchanged. However, better conditions across European manufacturing expanded activity within the sector pushing the index to 54.6 keeping the euro buoyant against the dollar at $1.3990.
Canadian dollar – The Canadian dollar remains elevated in light of all round weakness in the value of the greenback and ongoing flows into commodities. The Aussie rate rise hasn’t harmed the loonie either and reminds investors that the road to recovery is fuelled by temporarily idle resources that eventually run dry and run the risk of stoking inflation. The Canadian unit today sits towards the top of its early intraday range at 98.90 U.S. cents.
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]]> http://pragcap.com/australia-opens-monetary-policy-door/feed 1 http://pragcap.com/focus-net-margins http://pragcap.com/focus-net-margins#comments Tue, 02 Nov 2010 07:14:50 +0000 Zacks.com http://pragcap.com/?p=27827 By Dirk Van Dijk, CFA at Zacks Research- Focus now on third quarter earnings: 16.3% growth in total net income, 3.79% year-over-year revenue growth expected.? For the fourth quarter, 24.1% earnings, and 2.18% revenue growth expected.
- Just 22 reports in, but off to a good start (for what it’s worth). Surprise ratio 6.00 with a 8.96% median surprise. 81.8% of all firms beat expectations. Total net income grows 26.2%.
- Sales Surprise ratio at 1.10, median surprise 0.01%, 50.0% of all firms do better than expected on top line. Total revenue growth 11.1%.
- New Tables on Net Margins added. S&P 500 net margin expected to rise to 8.63% from 7.75% a year ago, but down from 9.05% in the second quarter.
- Total earnings for the S&P 500 expected to jump 39.0% in 2010, 15.6% further in 2011.? Revenues expected to rise 4.62% in 2010, 5.93% in 2011.
- Autos, Finance, Basic Materials and Energy expected to be earnings growth leaders in 2010. Construction expected to move from the red to the black. No sector expected to see earnings decline in 2010.
- Huge net margin expansion expected to continue in 2010 and 2011. Total net margins grow from 5.85% in 2008 to 6.42% in 2009, 8.61% expected for 2010, 9.31% for 2011.? Ex-Financials, net margins 6.63% in 2008, 7.58% for 2009, 8.72% expected for 2010, 10.51% for 2011.
- Revisions ratio for full S&P 500 at 1.04 for 2010, at 0.89 for 2011, an improvement from last week.?? Ratio of firms with rising to falling mean estimates at 1.11 for 2010, 0.79 for 2011.? Very small sample size, especially for some of the sectors, interpret revisions ratios with care
- S&P 500 firms earned a total of $546.5 billion in 2009, expected to earn $759.8 billion in 2010, $878.4 billion in 2011.
- S&P 500 earned $57.64 in 2009, $79.80 in 2010 and $92.78 in 2011 expected bottom up.? Puts P/E’s at 19.8x for 2009, 14.3x for 2010, and 12.3x for 2011.
- Top-Down estimates:? $79.93 for 2010, $92.01 for 2011.
The official kick-off for the third quarter earnings season starts later this week. We have had a few “preseason games” already, though. Just 22 firms have reported third quarter earnings so far — so it is not much to go on — but so far so good, with 18 beats and only three misses.
One thing to note is that for the Earnings and Revenue Scorecards, as well as the “Growth Reported” tables, are based on only those 22 firms, while the “expected growth tables are based on the other 478 firms. Your main attention should be focused on the “Growth Expected” tables.
The same is true for the new “Net Margin” tables, which I introduce in this edition. The quarterly reported table is only based on 22 firms, but the comparative data is also for just those firms as well. The “Expected” table is based on the remaining 478 firms. The “Annual Net Margin” table is based on all 500 firms.
Tougher Comps
As far as total net income is concerned, year-over-year growth is expected to decelerate to 16.28% growth from the 37.22% reported in the second quarter (among the 483). That is still a very healthy level of earnings growth. A big part of the slowdown can be traced to the fact that third quarter earnings in 2009 were significantly better than second quarter earnings in 2009. Thus we are facing tougher comparisons.
However, it is not all just tougher comps. Sequentially, earnings are expected to drop by 6.42% from the second quarter. In the second quarter, earnings were 8.93% higher than in the first quarter. As far as the sectors are concerned, the list of high-growth sectors in the third quarter (year over year) will pretty much the same as the high growth sectors in the second quarter.
The one exception is Aerospace, which was one of only two negative growth sectors in the second quarter, by will see more than a doubling of net income in the third quarter. The rest of the high-growth sectors are very cyclical, such as Construction, Autos and Transportation.
Early Peek at 4th Quarter
We also get an early peek at expectations for the fourth quarter. Somewhat surprisingly, the analysts are collectively expecting a bit of reacceleration in earnings growth, with total net income rising 24.1% over the fourth quarter of 2009.
Sequentially, earnings are expected to be 7.28% higher in the fourth quarter. The thousands of analysts tracking individual companies are thus not looking for a double-dip recession and implicitly see the third quarter slowdown as more of a pause in the economy rather than the start of a new downturn.
In the second quarter reports, arguably revenues were even more important than earnings. Firms that disappointed on the top line were spanked by the market, even if they did well on the bottom line. Year-over-year revenue growth is expected to decelerate sharply, growing just 3.79% down from 10.59% in the second quarter.
However, most of the deterioration in overall revenue growth is coming from the Financials. Revenue for Financials is notoriously flakey. A big part of it is interest income, which falls when interest rates are low. At the same time, though, interest expense also falls. Thus, don’t read too much into the revenue slowdown. This is one area where the trends in the individual sector are more important than what is going on with the S&P 500 as a whole.
On a sequential basis, revenues are expected to decline by 2.46%. Looking ahead to the fourth quarter, revenues are expected to climb 2.18% year over year and be up 4.62% sequentially. On a year-over-year basis, this implies continued very strong growth in net margins.
Three New Tables Introduced
I introduce three new tables in this issue: quarterly net margins reported, quarterly margins expected and net margins for the full year. Since we are tracking aggregate earnings and aggregate revenues, this seemed to be a logical addition to the coverage.
For the quarter, the firms that have not yet reported are expected to post net margins of 8.63% for the third quarter, up from 7.75% a year ago, but down from the 9.05% net margins they posted in the second quarter. The relative handful of firms that have actually reported have seen their margins expand to 9.78% from 8.72% a year ago, and from 9.03% in the second quarter. For the full year, net margins are expected to rise to 8.61% in 2010 from 6.42% in 2009, with a further rise to 9.31% in 2011. Excluding financials, margins are expected to rise from 7.58% in 2009 to 9.72% in 2010 to 10.51% in 2011.
For the full year, earnings are expected to grow 39.0% in 2010, with further growth of 15.6% in 2011. Next year we should once again set a new all-time record high for S&P 500 earnings. That will be long before employment returns to record levels. These results refer to the S&P 500, which are almost by definition “big businesses,” many of which get a majority of their earnings from overseas.
With interest rates low, they are able to float bonds at very attractive interest rates. Small businesses have not been faring as well, and have had a hard time getting access to capital. An effort to aid small businesses through a package of loans and tax cuts was recently blocked by a filibuster in the Senate, even though many of the senators who voted to prevent a final vote on the bill were co-sponsors of the legislation. Since small businesses are the principal driver of job creation, one can only conclude that those U.S. senators want to keep unemployment as high as possible, at least through November (of 2010; 2012 is an open question).
Full-year revenue growth is expected to be 4.62%, which does not fully make up for the 6.75% decline in 2009. For 2010, a further 5.93% revenue growth is expected. However, revenues for financial firms are flakey, and distort the numbers significantly. Excluding the financials, revenues plunged 10.46% in 2009, but are expected to grow 8.35% in 2010 and 6.96% in 2011. With earnings growing much faster than revenues, it means that net margins are headed higher.
It is important to note, that when we say “2009” in this report, we mean the last full fiscal year to be reported, even if that year happens to end in June 2010. June is one of the largest non-December fiscal year-end months. Thus, as those firms “switch over,” not only the projections for 2010 can change, but so too can the “historical 2009” results.
Earnings Recovery by Mid-2011
Regardless of some of the technical timing issues, it means that earnings will have fully recovered by mid 2011, and that full-year 2011 earnings will be 8.5% above full-year 2007 earnings (before the Great Recession started). That is years before we are likely to see a full recovery in the job market.
Collectively the 500 firms in the S&P 500 earned $546.5 billion in “2009,” and that is going to grow to $759.8 billion this year and $878.4 billion in 2011. Translated into “EPS” for the index, earnings are expected to rise from $57.64 in 2009 to $79.80 in 2010 and $92.78 in 2011.
Stocks Remain Inexpensive
In other words, then, the S&P 500 is selling for 19.8x 2009 earnings, but just 14.3x 2010 and 12.3x 2011 earnings. By historical standards, that is quite cheap. Normally, when interest rates and inflation are low, P/E ratios are higher than average. Well, we currently have some of the lowest rates of inflation in decades, and interest rates are at near record lows.
It only costs the government 2.51% to borrow for 10 years. It is not hard to find good, solid blue chip companies that are providing dividend yields of more than that, and not just a bunch of electric utilities either. One thing is certain, the coupon on a 10-year T-note will not increase over the next 10 years. The odds of the likes of Merck (MRK – Analyst Report, 4.15%), Intel (INTC – Analyst Report, 3.26%) or Procter & Gamble (PG – Analyst Report, 3.20%) increasing their dividend in the next 10 years is pretty high.
Currently 139 S&P 500 stocks yield over 2.55%, and 88 of those have payout ratios of less than 60%. Earnings that are not paid out in dividends are reinvested for future growth, or are used to buy back stock, which also lifts earnings per share. Based on this year’s earnings, the earnings yield is 6.99% and based on next year it is 8.13%.
Scorecard & Earnings Surprise
- Only 22 firms have reported 3Q earnings, all with fiscal periods ending in August. The numbers are thus not particularly meaningful, but we present them anyway. Your focus should be on the “expected” tables, which cover the other 478 firms.
- For what it is worth, we are off to a strong start with a median surprise of 8.96, and a 6.00 surprise ratio.
- Positive year-over-year growth for 18, falling EPS for four firms, a 4.50 ratio.
- Total net income up 26.2%. Pay attention to the % reported in evaluating the significance of sector growth rates and surprise medians.
Historically, a “normal earnings season” will have a surprise ratio of about 3:1 and a median surprise of about 3.0%. Thus this is a very positive earnings season. This is a big enough sample that it would be highly unusual for things to turn around and have the remaining firms turn around an on balance disappoint.
| Scorecard & Earnings Surprise | |||||||
|---|---|---|---|---|---|---|---|
| Income Surprises | Yr/Yr Growth | % Reported | Surprise Median | EPS Surp Pos | EPS Surp Neg | # Grow Pos | # Grow Neg |
| Construction | 181.08% | 9.09% | 166.67 | 1 | 0 | 1 | 0 |
| Finance | -11.03% | 1.28% | 34.29 | 1 | 0 | 0 | 1 |
| Consumer Discretionary | 18.92% | 6.06% | 12.56 | 2 | 0 | 2 | 0 |
| Retail/Wholesale | 20.10% | 15.56% | 11.11 | 7 | 0 | 7 | 0 |
| Industrial Products | -7.58% | 5.00% | 8.11 | 1 | 0 | 0 | 1 |
| Business Service | 6.45% | 5.26% | 5.88 | 1 | 0 | 1 | 0 |
| Computer and Tech | 44.35% | 7.14% | 2.86 | 3 | 1 | 5 | 0 |
| Consumer Staples | -1.47% | 7.89% | 1.59 | 2 | 1 | 1 | 2 |
| Transportation | 109.94% | 11.11% | -0.83 | 0 | 1 | 1 | 0 |
| Medical | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Auto | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Basic Materials | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Conglomerates | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Aerospace | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Oils and Energy | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| Utilities | Na | 0.00% | NA | 0 | 0 | 0 | 0 |
| S&P | 26.21% | 4.40% | 8.96 | 18 | 3 | 18 | 4 |
Sales Surprises
- Sales Surprise ratio at 1.10, median surprise 0.01%, 50.0% of all firms do better than expected on top line. However, we are only talking about 17 stocks.
- Growing Revenues outnumber falling revenues by ratio of 10.0, 90.9% of firms have higher revenues than a year ago.
- Revenue growth healthy at 11.1% but still greatly lags earnings growth pointing to net margin expansion (see new margin tables below).
| Sales Surprises | |||||||
|---|---|---|---|---|---|---|---|
| Sales Surprises | Yr/Yr Growth | % Reported | Surprise Median | Sales Surp Pos | Sales Surp Neg | # Grow Pos | # Grow Neg |
| Finance | -16.69% | 1.28% | 3.958 | 0 | 0 | 0 | 1 |
| Construction | 14.42% | 9.09% | 2.91 | 1 | 0 | 1 | 0 |
| Business Service | 3.60% | 5.26% | 2.274 | 1 | 0 | 1 | 0 |
| Industrial Products | 3.59% | 100.00% | 0.977 | 1 | 0 | 1 | 0 |
| Computer and Tech | 43.48% | 7.14% | 0.592 | 3 | 2 | 5 | 0 |
| Retail/Wholesale | 6.58% | 15.56% | 0.339 | 5 | 2 | 7 | 0 |
| Transportation | 18.08% | 11.11% | -0.051 | 0 | 1 | 1 | 0 |
| Consumer Discretionary | 7.43% | 6.06% | -0.585 | 0 | 2 | 2 | 0 |
| Consumer Staples | -1.73% | 7.89% | -1.3555 | 0 | 3 | 2 | 1 |
| Medical | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Auto | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Basic Materials | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Conglomerates | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Aerospace | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Oils and Energy | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| Utilities | Na | 0.00% | Na | 0 | 0 | 0 | 0 |
| S&P | 11.08% | 4.40% | 0.007 | 11 | 10 | 20 | 2 |
Reported Quarterly Growth: Total Net Income
- The first table shows the actual reported growth of those that have already reported, and the second table showing the expected growth for the firms that have yet to report.? The reported numbers are based on a very small sample size and do not reflect what the overall S&P 500 is likely to report.? See comment in the Earnings Scorecard section.
- The total net income of firms that have reported so far is 26.2% above what they reported in the second quarter of 2009. These same firms reported year-over-year growth of 30.9% in the first quarter. Sequential earnings growth is 9.3%.
- Sample sizes are small, and growth rates will shift wildly as more firms report.
- The numbers in the table (and Revenue growth table) below only refer to those firms which have already reported. Refer back to the % reporting in the scorecard to assess the significance of the sector growth numbers.
| Quarterly Growth: Total Net Income Reported | |||||
|---|---|---|---|---|---|
| Income Growth | Sequential Q4/Q3 E | Sequential Q3/Q2 A | Year over Year 3Q 10 A | Year over Year 4Q 10 E | Year over Year 2Q 10 A |
| Construction | -81.51% | -25.00% | 181.08% | 112.06% | 322.22% |
| Transportation | 9.78% | -9.31% | 109.94% | 20.91% | 109.50% |
| Computer and Tech | 7.72% | -26.02% | 44.35% | 20.72% | 39.49% |
| Retail/Wholesale | -10.47% | 14.22% | 20.10% | 8.41% | 7.25% |
| Consumer Discretionary | -66.83% | 143.67% | 18.92% | 10.13% | 3.20% |
| Business Service | -4.98% | 13.79% | 6.45% | -0.45% | 1.75% |
| Consumer Staples | 27.77% | 28.21% | -1.47% | -2.46% | -1.51% |
| Industrial Products | -3.77% | 12.96% | -7.58% | -2.16% | -6.90% |
| Finance | -24.93% | 39.46% | -11.03% | 125.21% | 315.12% |
| Medical | na | Na | Na | Na | Na |
| Auto | na | Na | Na | Na | Na |
| Basic Materials | na | Na | Na | Na | Na |
| Conglomerates | na | Na | Na | Na | Na |
| Aerospace | na | Na | Na | Na | Na |
| Oils and Energy | na | Na | Na | Na | Na |
| Utilities | na | Na | Na | Na | Na |
| S&P | -15.08% | 9.53% | 26.21% | 15.13% | 30.94% |
Expected Quarterly Growth: Total Net Income
- Total net income for the S&P 500 in the third quarter of 2010 is expected to rise 16.3% over third quarter of 2009 levels.
- This marks a slowdown from the 37.2% growth those same firms had in the second quarter. A rebound to 24.1% growth expected in the fourth quarter.
- Total third quarter net income expected to be 6.4% below second quarter levels. However, fourth quarter net income is expected to rise 7.3% over third quarter levels.
- Ten sectors expected to post double digit third quarter year over year growth, only? Conglomerates expected to have negative growth. Eight sectors expected to post growth over 30%. Cyclical sectors in the lead.
- Sequential picture much more downbeat, with only three sectors expected to actually have higher net income in this quarter than in the second quarter. When looking at growth, the base you are growing from matters as much as the levels you are growing to.
| Quarterly Growth: Total Net Income Expected | |||||
|---|---|---|---|---|---|
| Income Growth | Sequential Q4/Q3 E | Sequential Q3/Q2 E | Year over Year 3Q 10 E | Year over Year 4Q 10 E | Year over Year 2Q 10 A |
| Construction | -24.74% | -16.67% | 659.27% | 22.45% | 741.03% |
| Aerospace | 13.16% | -7.94% | 131.61% | -4.64% | -1.73% |
| Transportation | -0.25% | -0.12% | 49.66% | 28.14% | 69.56% |
| Auto | 2.06% | -39.71% | 41.56% | -6.24% | - to + |
| Oils and Energy | 3.54% | -8.05% | 39.64% | 29.90% | 95.23% |
| Industrial Products | -7.60% | -7.46% | 39.27% | 40.73% | 62.41% |
| Computer and Tech | 15.51% | 2.46% | 32.51% | 11.25% | 62.13% |
| Basic Materials | 24.76% | -20.09% | 30.54% | 48.20% | 114.14% |
| Finance | 11.87% | -16.61% | 13.10% | 180.39% | 39.45% |
| Business Service | 13.83% | -0.76% | 12.32% | 15.08% | 21.12% |
| Consumer Discretionary | 20.82% | -6.53% | 5.82% | 4.17% | 29.77% |
| Retail/Wholesale | 38.45% | -9.66% | 5.56% | 7.51% | 9.96% |
| Medical | 0.08% | -8.26% | 2.63% | 3.58% | 16.90% |
| Utilities | -22.05% | 16.06% | 1.58% | 6.36% | 6.87% |
| Consumer Staples | -6.04% | 1.87% | 0.27% | 1.51% | 7.32% |
| Conglomerates | 12.09% | -5.51% | -4.74% | 5.97% | -0.58% |
| S&P | 7.28% | -6.42% | 16.28% | 24.08% | 37.22% |
Quarterly Growth: Total Revenues Reported
- The shows the growth of the 17 firms that have actually reported. Your principal interest should be in the “growth expected tables, which cover the other 496 firms..? See comment in the Earnings Scorecard section.
- The S&P 500 reported revenues up 11.1% year over year in 3Q, up from 10.9% revenue increase the same firms showed in the 2Q. This is a very healthy level of revenue growth, but the sample size is small and un-representative.
| Quarterly Growth: Total Revenues Reported | |||||
|---|---|---|---|---|---|
| Sales Growth | Sequential Q4/Q3 E | Sequential Q3/Q2 A | Year over Year 3Q 10 A | Year over Year 4Q 10 E | Year over Year 2Q 09 A |
| Computer and Tech | 5.53% | -10.52% | 43.48% | 36.04% | 36.43% |
| Transportation | 1.68% | 0.31% | 18.08% | 13.49% | 20.07% |
| Construction | -23.76% | 1.35% | 14.42% | -11.60% | -8.74% |
| Consumer Discretionary | -12.44% | 16.07% | 7.43% | 7.54% | 7.98% |
| Retail/Wholesale | 16.95% | 2.76% | 6.58% | 5.52% | 7.20% |
| Business Service | 1.16% | 4.44% | 3.60% | 2.62% | 0.00% |
| Industrial Products | -2.38% | 1.65% | 3.59% | 3.50% | 3.41% |
| Consumer Staples | 6.93% | -3.82% | -1.73% | 0.67% | -3.52% |
| Finance | -39.56% | -7.41% | -16.69% | -65.45% | -14.39% |
| Medical | na | Na | Na | Na | Na |
| Auto | na | Na | Na | Na | Na |
| Basic Materials | na | Na | Na | Na | Na |
| Conglomerates | na | Na | Na | Na | Na |
| Aerospace | na | Na | Na | Na | Na |
| Oils and Energy | na | Na | Na | Na | Na |
| Utilities | na | Na | Na | Na | Na |
| S&P | 0.65% | 0.63% | 11.08% | 7.55% | 10.92% |
Quarterly Growth: Total Revenues Expected
- Total revenue for the S&P 500 expected to grow 3.79% from a year ago, a sharp slowdown from the 10.6% year over year growth posted in the second quarter. A further slowdown to 2.2% growth expected for the fourth quarter.
- Revenue for the Financials is the principal source of the revenue slowdown.? Low interest rates depress interest income, which is a major part of financials revenue, but also reduce interest expense. As a result, revenues at Financials are notoriously flakey.
- Five sectors expected to post double-digit revenue growth in the third quarter. The same five also posted double-digit growth in the second quarter and are expected to do so again in the fourth quarter. High revenue growth in Energy and Materials is largely a function of commodity prices.
| Quarterly Growth: Total Revenues Expected | |||||
|---|---|---|---|---|---|
| Sales Growth | Sequential Q4/Q3 E | Sequential Q3/Q2 E | Year over Year 3Q 10 E | Year over Year 4Q 10 E | Year over Year 2Q 10 A |
| Oils and Energy | 1.22% | 5.79% | 21.21% | 14.69% | 27.70% |
| Industrial Products | -2.39% | -0.04% | 20.54% | 16.54% | 20.20% |
| Transportation | 3.11% | 1.48% | 16.27% | 12.68% | 20.25% |
| Computer and Tech | 7.78% | 2.75% | 16.21% | 10.03% | 21.25% |
| Basic Materials | 4.61% | -4.73% | 12.62% | 11.18% | 18.54% |
| Medical | 2.63% | -0.16% | 8.96% | 2.65% | 10.09% |
| Business Service | 5.00% | 0.89% | 6.24% | 5.15% | 7.06% |
| Utilities | -0.72% | 10.73% | 4.91% | 5.06% | 0.60% |
| Consumer Discretionary | 9.16% | 2.81% | 3.01% | 4.43% | 7.94% |
| Aerospace | 6.45% | 3.07% | 2.95% | 2.83% | -2.25% |
| Conglomerates | 5.50% | -0.28% | 2.33% | 1.08% | 2.10% |
| Construction | -4.16% | -2.79% | 1.77% | -3.54% | 8.78% |
| Retail/Wholesale | 14.28% | -2.08% | 1.52% | 4.02% | 3.87% |
| Auto | 4.21% | -12.30% | -1.26% | -8.21% | 26.09% |
| Consumer Staples | 2.84% | -7.73% | -2.87% | -4.20% | 7.88% |
| Finance | 1.17% | -21.08% | -21.11% | -18.91% | 3.85% |
| . | 4.64% | -2.46% | 3.79% | 2.18% | 10.59% |
Quarterly Net Margins Reported
- This is only for the 22 firms that have already reported, calculated as total net income for the sector divided by total revenues for the sector. As more firms report, both the reported and estimated net margins are expected to change significantly.
- Net margins for S&P 500 expand to 9.78% from 8.72% a year ago, and 9.03% reported by these same firms in the second quarter.
- Eight of nine sectors with firms reporting seeing year-over-year increase in margins, six of nine see sequential improvement.
- Some sectors will see bigger seasonal swings in margins than others.
- Most focus should be on the “margins expected” table at this point.
| Quarterly: Net Margins Reported | ||||||
|---|---|---|---|---|---|---|
| Net Margins | Q4 2010 Estimated | Q3 2010 Reported | 2Q 2010 Reported | 1Q 2010 Reported | 4Q 2009 Reported | 3Q 2009 Reported |
| Business Service | 24.59% | 25.48% | 23.39% | 24.21% | 25.35% | 24.80% |
| Consumer Discretionary | 7.64% | 19.64% | 9.36% | 8.57% | 7.46% | 17.75% |
| Computer and Tech | 18.75% | 18.68% | 22.59% | 19.49% | 21.13% | 18.56% |
| Finance | 21.81% | 16.79% | 11.14% | -7.21% | 3.35% | 15.72% |
| Consumer Staples | 10.37% | 9.35% | 7.01% | 8.05% | 10.70% | 9.32% |
| Industrial Products | 6.41% | 6.60% | 5.94% | 5.68% | 6.78% | 7.40% |
| Transportation | 4.28% | 4.02% | 4.44% | 2.75% | 4.01% | 2.26% |
| Retail/Wholesale | 3.36% | 3.78% | 3.40% | 4.88% | 3.27% | 3.35% |
| Construction | 0.69% | 3.64% | 4.91% | -1.22% | -5.03% | -5.13% |
| S&P 500 | 8.37% | 9.78% | 9.03% | 7.79% | 7.88% | 8.72% |
Quarterly Net Margins Expected
- Net margins (among the 478 yet to report) expected to rise to 8.83% from 7.75% a year ago.
- Sequentially, margins expected to fall from 9.05% in the second quarter but rebound in the fourth quarter.
- Tech, Staples and Business Service consistently have double-digit net margins.
- Twelve sectors expected to see year-over-year growth in margins, four see declines.
- Only four expected to see sequential improvement in margins, twelve see declines.
- Construction, Aerospace and Finance to see largest year-over-year increases.
| Quarterly: Net Margins Expected | ||||||
|---|---|---|---|---|---|---|
| Net Margins | Q4 2010 Estimated | Q3 2010 Estimated | 2Q 2010 Reported | 1Q 2010 Reported | 4Q 2009 Reported | 3Q 2009 Reported |
| Computer and Tech | 17.87% | 15.74% | 15.51% | 15.17% | 16.39% | 13.56% |
| Consumer Staples | 11.45% | 12.33% | 11.04% | 10.75% | 10.51% | 11.81% |
| Finance | 13.61% | 12.00% | 11.51% | 11.22% | 3.89% | 8.49% |
| Business Service | 13.21% | 11.65% | 11.80% | 11.37% | 11.49% | 10.97% |
| Medical | 9.36% | 9.35% | 10.17% | 10.17% | 9.03% | 9.93% |
| Transportation | 9.18% | 9.20% | 9.35% | 7.15% | 7.83% | 7.15% |
| Utilities | 6.85% | 8.69% | 8.39% | 8.03% | 6.82% | 9.08% |
| Conglomerates | 9.17% | 8.19% | 8.64% | 7.36% | 8.29% | 8.79% |
| Consumer Discretionary | 9.79% | 8.13% | 8.91% | 9.32% | 8.99% | 7.89% |
| Industrial Products | 6.82% | 7.35% | 7.98% | 6.47% | 5.79% | 6.39% |
| Oils and Energy | 7.16% | 6.92% | 7.96% | 7.31% | 6.25% | 6.01% |
| Aerospace | 6.87% | 6.07% | 6.79% | 5.94% | 6.96% | 2.70% |
| Basic Materials | 7.49% | 6.00% | 7.15% | 7.39% | 5.37% | 5.18% |
| Auto | 4.39% | 4.31% | 6.26% | 5.12% | 4.13% | 3.00% |
| Retail/Wholesale | 5.08% | 3.52% | 3.98% | 3.69% | 4.30% | 3.53% |
| Construction | 2.32% | 3.09% | 3.60% | 1.89% | 1.91% | 0.41% |
| S&P 500 | 9.31% | 8.63% | 9.05% | 8.66% | 7.33% | 7.75% |
Annual Total Net Income Growth
- Total S&P 500 Net Income in 2009 was 2.3% above 2008 levels, following a 34.0% plunge in 2008.
- Total earnings for the S&P 500 expected to jump 39.0% in 2010, 15.6% further in 2011.
- Earnings recovery to happen by mid 2011, full year 2011 earnings to be 8.5% above 2007 levels. In other words, the recovery in earnings will occur far before the recovery in jobs, as we are unlikely to return to 2007 job levels until late 2013 at the earliest.
- Autos, Finance, Basic Materials and Energy expected to be earnings growth leaders in 2010.
- Construction expected to move from the red to the black. No sector expected to see earnings decline in 2010.
- Retail, Medical and Business Service the only sectors to post positive earnings growth in every year from 2008 through 2011.
- Ten sectors expected to grow slower in 2011 than 2010, only six to see growth accelerate (all relatively slow growers in 2010).
| Annual Total Net Income Growth | ||||
|---|---|---|---|---|
| Net Income Growth | 2008 | 2009 | 2010 | 2011 |
| Construction | + to - | - to - | - to + | 92.21% |
| Auto | + to - | - to + | 1577.62% | 35.43% |
| Finance | + to - | - to + | 316.95% | 24.71% |
| Basic Materials | -4.86% | -49.89% | 69.26% | 19.73% |
| Oils and Energy | 20.80% | -56.30% | 49.79% | 13.66% |
| Transportation | 1.03% | -30.14% | 39.87% | 19.27% |
| Computer and Tech | 15.50% | -4.24% | 32.80% | 18.25% |
| Industrial Products | 5.33% | -36.71% | 30.73% | 22.26% |
| Consumer Discretionary | 6.28% | -15.84% | 18.58% | 15.99% |
| Aerospace | 13.37% | -14.63% | 13.65% | 10.34% |
| Retail/Wholesale | 1.39% | 2.62% | 12.05% | 13.57% |
| Consumer Staples | -7.73% | 5.64% | 9.58% | 10.37% |
| Business Service | 27.32% | 1.06% | 7.09% | 17.38% |
| Medical | 9.29% | 2.19% | 6.47% | 6.95% |
| Utilities | -1.29% | -13.51% | 1.77% | 6.23% |
| Conglomerates | -9.23% | -23.84% | 0.00% | 15.22% |
| S&P | -34.02% | 2.33% | 39.04% | 15.60% |
Annual Total Revenue Growth
- Total S&P 500 revenue in 2009 6.75% below 2008 levels.
- Total revenues for the S&P 500 expected to rise 4.62% in 2010, 5.93% in 2011.
- Energy to lead 2010 revenue race, Tech and Transports to take silver and bronze, but Materials and Industrials have a chance to make it on to the medal stand.
- All sectors expected to show positive top-line growth in 2011.
- Financials the biggest drag on 2010 revenue growth, Staples the only other sector expected to post lower top line for the year. Revenues for Financials are notoriously flakey — low interest rates depress interest income (but also interest expense).
- Revenue growth ex-financials: -10.46% in 2009, 8.35% in 2010, 6.96% in 2011.
- Medical, Retail and Aerospace only sectors to have positive revenue growth for all three years.
- Looking out to 2011, Energy is the only sector expected to see double-digit revenue growth, although four other sectors expected to have revenue growth over 8%.
| Annual Total Revenue Growth | |||
|---|---|---|---|
| Sales Growth | 2009 | 2010 | 2011 |
| Oils and Energy | -34.49% | 21.01% | 11.92% |
| Computer and Tech | -6.22% | 17.99% | 8.10% |
| Transportation | -13.65% | 13.55% | 8.11% |
| Basic Materials | -19.30% | 13.13% | 7.22% |
| Industrial Products | -19.55% | 12.70% | 9.76% |
| Medical | 6.06% | 9.21% | 3.20% |
| Consumer Discretionary | -9.55% | 6.17% | 5.29% |
| Business Service | -2.35% | 5.89% | 5.94% |
| Retail/Wholesale | 1.25% | 5.21% | 5.46% |
| Utilities | -5.87% | 4.28% | 2.59% |
| Auto | -21.36% | 3.29% | 9.93% |
| Conglomerates | -13.27% | 0.97% | 2.32% |
| Aerospace | 6.30% | 0.46% | 6.31% |
| Construction | -15.92% | 0.20% | 6.87% |
| Consumer Staples | -2.13% | -2.38% | 4.31% |
| Finance | 21.18% | -19.17% | 2.31% |
| S&P | -6.75% | 4.62% | 5.93% |
Annual Net Margins
- Net Margins marching higher, from 5.85% in 2008 to 6.42% in 2009 to 8.61% expected for 2010, 9.31% expected for 2011. Major source of earnings growth.
- Financials significantly distort overall net margins. Net margins ex-financials 6.63% in 2008, 7.58% in 2009, 9.72% expected for 2010, 10.51% in 2011.
- Financials net margins soar from -9.00% in 2008 to 15.39% expected for 2011.
- Thirteen sectors seeing higher net margins in 2010 than in 2009. All sectors expected to post higher net margins in 2011 than in 2010.
| Annual Net Margins | |||||
|---|---|---|---|---|---|
| Net Margins | 2008A | 2009A | 2010E | 2011E | |
| Computer and Tech | 12.36% | 12.62% | 15.15% | 15.54% | |
| Finance | -9.00% | 2.45% | 12.64% | 15.39% | |
| Business Service | 10.77% | 11.14% | 11.42% | 12.49% | |
| Consumer Staples | 9.26% | 9.99% | 10.59% | 11.87% | |
| Medical | 10.16% | 9.79% | 9.65% | 9.89% | |
| Consumer Discretionary | 8.06% | 7.50% | 8.53% | 9.23% | |
| Conglomerates | 9.31% | 8.18% | 8.09% | 9.12% | |
| Utilities | 8.76% | 8.04% | 7.85% | 8.13% | |
| Oils and Energy | 9.13% | 6.09% | 7.54% | 7.66% | |
| Transportation | 7.30% | 5.91% | 7.47% | 8.03% | |
| Industrial Products | 7.48% | 5.88% | 6.91% | 7.60% | |
| Basic Materials | 7.19% | 4.47% | 6.78% | 7.46% | |
| Aerospace | 6.81% | 5.47% | 6.21% | 6.42% | |
| Auto | -2.77% | 0.25% | 4.12% | 4.94% | |
| Retail/Wholesale | 3.55% | 3.59% | 3.88% | 4.12% | |
| Construction | -2.32% | -1.03% | 1.99% | 3.60% | |
| S&P 500 | 5.85% | 6.42% | 8.61% | 9.31% | |
Revisions: Earnings
The Zacks Revisions Ratio: 2010
- Revisions ratio for full S&P 500 at 1.04, up from 0.93 last week, still neutral.
- Retail and Transports very strong, more than six increases per cut. Industrials also strong.
- Seven sectors with positive revisions ratios, nine below 1.0.
- Aerospace, Materials and Energy weak.
- Ratio of firms with rising to falling mean estimates at 1.11, up from 0.99 last week, still neutral reading.
- Total number of revisions (4 week total) down to 1,462 from 1,325 (10.3%).
- Increases down to 744 from 637 (16.8%), cuts up to 718 from 688 (4.4%).
- Total Revisions activity passing seasonal low. They are likely to more than triple from current levels over the next six weeks. Changes in the revisions ratios will be more driven by new estimates being made rather than old estimates dropping out.
| The Zacks Revisions Ratio: 2010 | |||||||
|---|---|---|---|---|---|---|---|
| Sector | %Ch Curr Fiscal Yr Est – 4 wks | # Firms Up | # Firms Down | # Ests Up | # Ests Down | Revisions Ratio | Firms up/down |
| Retail/Wholesale | 0.62 | 25 | 10 | 182 | 28 | 6.50 | 2.50 |
| Transportation | 0.38 | 7 | 0 | 31 | 5 | 6.20 | 9,999.99 |
| Industrial Products | 0.41 | 8 | 5 | 31 | 10 | 3.10 | 1.60 |
| Business Service | 0.12 | 8 | 6 | 41 | 18 | 2.28 | 1.33 |
| Consumer Discretionary | -0.25 | 16 | 8 | 50 | 25 | 2.00 | 2.00 |
| Construction | 4.57 | 6 | 5 | 14 | 8 | 1.75 | 1.20 |
| Conglomerates | -0.29 | 6 | 2 | 3 | 2 | 1.50 | 3.00 |
| Finance | 0.07 | 36 | 27 | 110 | 118 | 0.93 | 1.33 |
| Computer and Tech | -0.76 | 24 | 31 | 106 | 138 | 0.77 | 0.77 |
| Medical | 0.02 | 23 | 18 | 26 | 34 | 0.76 | 1.28 |
| Utilities | -0.19 | 17 | 18 | 30 | 49 | 0.61 | 0.94 |
| Auto | 0.10 | 1 | 5 | 4 | 7 | 0.57 | 0.20 |
| Consumer Staples | -0.17 | 13 | 16 | 27 | 54 | 0.50 | 0.81 |
| Oils and Energy | -3.27 | 11 | 26 | 69 | 161 | 0.43 | 0.42 |
| Basic Materials | -4.05 | 11 | 10 | 17 | 45 | 0.38 | 1.10 |
| Aerospace | -0.40 | 3 | 7 | 3 | 16 | 0.19 | 0.43 |
| S&P | -0.42 | 215 | 194 | 744 | 718 | 1.04 | 1.11 |
Revisions: Earnings
The Zacks Revisions Ratio: 2011
- Revisions ratio for full S&P 500 at 0.89 down from 0.77, now in neutral territory.
- Industrials, Retail and Transportation have at least three increases per cut.
- Several sector revisions ratios based on very thin samples, so treat these with care.
- Eleven sectors with negative revisions ratios, five with ratios above 1.0.
- Ratio of firms with rising estimate to falling mean estimates at 0.79 up from 0.72, still a negative reading.
- Conglomerates and Aerospace sector look very weak for 2011, five or more cuts per increase, but on a very thin sample.
- Total number of revisions (4-week total) at 1,473, up from 1,343 (9.7%).
- Increases up to 692 from 585 (18.3%) cuts rise to 781 from 758 (3.7%).
| The Zacks Revisions Ratio: 2011 | |||||||
|---|---|---|---|---|---|---|---|
| Sector | %Ch Next Fiscal Yr Est – 4 wks | # Firms Up | # Firms Down | # Ests Up | # Ests Down | Revisions Ratio | Firms up/down |
| Transportation | 0.50 | 8 | 0 | 23 | 5 | 4.60 | 9,999.99 |
| Retail/Wholesale | 0.43 | 21 | 18 | 122 | 31 | 3.94 | 1.17 |
| Industrial Products | 0.57 | 12 | 3 | 34 | 9 | 3.78 | 4.00 |
| Consumer Discretionary | -0.12 | 12 | 13 | 48 | 28 | 1.71 | 0.92 |
| Business Service | 0.08 | 7 | 6 | 27 | 17 | 1.59 | 1.17 |
| Finance | -0.63 | 30 | 37 | 110 | 119 | 0.92 | 0.81 |
| Medical | -0.01 | 22 | 19 | 39 | 45 | 0.87 | 1.16 |
| Computer and Tech | -1.36 | 21 | 35 | 110 | 133 | 0.83 | 0.60 |
| Consumer Staples | -0.32 | 14 | 19 | 31 | 39 | 0.79 | 0.74 |
| Basic Materials | -0.09 | 10 | 11 | 22 | 31 | 0.71 | 0.91 |
| Auto | -0.79 | 2 | 3 | 4 | 6 | 0.67 | 0.67 |
| Oils and Energy | -3.50 | 10 | 28 | 80 | 172 | 0.47 | 0.36 |
| Utilities | -0.86 | 13 | 25 | 28 | 77 | 0.36 | 0.52 |
| Construction | -6.64 | 2 | 8 | 8 | 23 | 0.35 | 0.25 |
| Conglomerates | -0.57 | 2 | 7 | 2 | 11 | 0.18 | 0.29 |
| Aerospace | -0.71 | 3 | 7 | 4 | 35 | 0.11 | 0.43 |
| S&P | -0.79 | 189 | 239 | 692 | 781 | 0.89 | 0.79 |
Total Income and Share
- S&P 500 earned $546.5 billion in 2009, expected to earn $759.8 billion in 2010, $878.4 billion in 2011.
- Finance share of total earnings moves from 5.8% in 2009 to 17.3% in 2010, 18.8% in 2011, regains total earnings crown from Tech.
- Medical share of total earnings far exceeds market cap share (index weight), but earnings share expected to shrink from 17.3% in 2009 to 12.3% in 2011.
- Market cap shares of Construction, Retail, Transportation, Industrials and Business Service sectors far exceed both 2010 and 2011 earnings shares.
- Finance, Energy and Autos have rising earnings shares and market cap shares well below 2011 earnings shares.
- Staples, Utilities and Medicals’ shares of total net income falling rapidly.
| Total Income and Share | |||||||
|---|---|---|---|---|---|---|---|
| Sector | Total Net Income $ 2009 | Total Net Income $ 2010 | Total Net Income $ 2011 | % Total S&P Earn 2009 | % Total S&P Earn 2010 | % Total S&P Earn 2011 | % Total S&P Mkt Cap |
| Finance | $31,745 | $132,358 | $165,061 | 5.81% | 17.42% | 18.79% | 15.81% |
| Computer and Tech | $92,708 | $123,120 | $145,588 | 16.96% | 16.20% | 16.57% | 18.02% |
| Medical | $94,652 | $100,778 | $107,777 | 17.32% | 13.26% | 12.27% | 10.86% |
| Oils and Energy | $62,732 | $93,963 | $106,797 | 11.48% | 12.37% | 12.16% | 10.46% |
| Consumer Staples | $57,414 | $62,915 | $69,441 | 10.51% | 8.28% | 7.91% | 8.94% |
| Retail/Wholesale | $51,411 | $57,607 | $65,426 | 9.41% | 7.58% | 7.45% | 8.59% |
| Utilities | $49,742 | $50,623 | $53,777 | 9.10% | 6.66% | 6.12% | 6.54% |
| Consumer Discretionary | $23,219 | $27,534 | $31,936 | 4.25% | 3.62% | 3.64% | 4.33% |
| Conglomerates | $26,275 | $26,275 | $30,273 | 4.81% | 3.46% | 3.45% | 3.76% |
| Basic Materials | $13,459 | $22,781 | $27,276 | 2.46% | 3.00% | 3.11% | 3.20% |
| Aerospace | $13,054 | $14,835 | $16,369 | 2.39% | 1.95% | 1.86% | 1.68% |
| Industrial Products | $10,622 | $13,886 | $16,976 | 1.94% | 1.83% | 1.93% | 2.30% |
| Business Service | $11,532 | $12,350 | $14,496 | 2.11% | 1.63% | 1.65% | 2.07% |
| Transportation | $8,202 | $11,472 | $13,682 | 1.50% | 1.51% | 1.56% | 1.94% |
| Auto | $471 | $7,908 | $10,710 | 0.09% | 1.04% | 1.22% | 1.00% |
| Construction | ($742) | $1,443 | $2,774 | -0.14% | 0.19% | 0.32% | 0.49% |
| S&P | $546,494 | $759,847 | $878,360 | 100.00% | 100.00% | 100.00% | 100.00% |
P/E Ratios
- Trading at 14.3x 2010, 12.3x 2011 earnings, or earnings yields of 6.99% and 8.13%, respectively.
- Earnings yields extremely attractive relative to 10-year T-note rate of 2.51%.
- Medical has lowest P/E based on 2010 earnings. Autos, Finance, Energy, Medical cheapest based on 2011 earnings.
- Construction has highest P/E for 2010 and 2011.
- Auto and Finance high 2009 P/Es to fall dramatically in 2010 and 2011.
- S&P 500 earned $57.64 in 2009: $79.80 in 2010 and $92.78 in 2011 expected.
| P/E Ratios | ||||
|---|---|---|---|---|
| P/E | 2008 | 2009 | 2010 | 2011 |
| Medical | 12.7 | 12.4 | 11.7 | 10.9 |
| Oils and Energy | 7.9 | 18.1 | 12.1 | 10.6 |
| Aerospace | 11.9 | 14.0 | 12.3 | 11.1 |
| Finance | -17.8 | 54.0 | 12.9 | 10.4 |
| Auto | -16.0 | 228.7 | 13.6 | 10.1 |
| Utilities | 12.3 | 14.2 | 14.0 | 13.2 |
| Basic Materials | 12.9 | 25.8 | 15.2 | 12.7 |
| Consumer Staples | 17.8 | 16.9 | 15.4 | 14.0 |
| Conglomerates | 11.8 | 15.5 | 15.5 | 13.5 |
| Computer and Tech | 20.2 | 21.1 | 15.9 | 13.4 |
| Retail/Wholesale | 18.6 | 18.1 | 16.2 | 14.2 |
| Consumer Discretionary | 17.0 | 20.2 | 17.0 | 14.7 |
| Industrial Products | 14.9 | 23.5 | 18.0 | 14.7 |
| Busines Service | 19.7 | 19.5 | 18.2 | 15.5 |
| Transportation | 17.9 | 25.6 | 18.3 | 15.3 |
| Construction | -26.9 | -71.9 | 37.0 | 19.2 |
| . | 20.3 | 19.8 | 14.3 | 12.3 |
Biggest FY1 Revisions
The table below shows the S&P 500 firms with the biggest increases in their FY1 (mostly 2010) mean estimate over the last 4 weeks. To qualify there must be more than 3 estimates for FY1, and have a mean estimate of more than $0.50. In addition to the change in the mean estimate, the net percentage of estimates being raised is shown for both FY1 and FY2, as well as the P/E ratios based on each year’s earnings is shown.
Note that estimate momentum and value are not mutually exclusive. The most interesting of these firms will be where the net revisions percentage (#up-#dn/Tot) is more than 0.50 but less than 1.00. Big mean estimate changes based on a handful of individual revisions are suspect, but could prove to be the most interesting if other analysts follow suit. On the other hand, if all the analysts have raised their estimates already, the mean estimate is less likely to rise again over the next month.
| Biggest FY1 Revisions | |||||||
|---|---|---|---|---|---|---|---|
| Company | Ticker | %Ch Curr Fiscal Yr Est – 4 wks | %Ch Next Fiscal Yr Est – 4 wks | # Up-Dn/Tot %Ch Curr Fiscal Yr Est – 4 wks | # Up-Dn/Tot %Ch Next Fiscal Yr Est – 4 wks | P/E using Curr FY Est | P/E using Next FY Est |
| Discover Fin Sv | DFS | 22.67% | 8.59% | 0.79 | 0.75 | 17.80 | 9.54 |
| Textron Inc | TXT | 11.85% | -3.53% | 0.17 | -0.27 | 41.22 | 15.55 |
| Carmax Gp (Cc) | KMX | 10.25% | 11.06% | 1.00 | 1.00 | 17.40 | 16.41 |
| Eastman Chem Co | EMN | 9.38% | 6.81% | 1.00 | 0.67 | 10.56 | 10.41 |
| Comerica Inc | CMA | 9.26% | -1.35% | 0.17 | -0.05 | 45.32 | 16.93 |
| Pall Corp | PLL | 6.87% | 5.16% | 1.00 | 0.56 | 17.09 | 15.14 |
| Archer Daniels | ADM | 4.37% | 5.94% | 0.44 | 0.57 | 10.30 | 9.71 |
| Best Buy | BBY | 4.27% | 2.90% | 0.96 | 0.68 | 11.40 | 10.44 |
| Altera Corp | ALTR | 4.23% | 4.00% | 1.00 | 0.83 | 12.79 | 12.86 |
| Nike Inc-B | NKE | 4.15% | 3.44% | 0.84 | 0.68 | 18.32 | 16.33 |
| Autozone Inc | AZO | 4.01% | 3.36% | 0.84 | 0.40 | 13.27 | 11.78 |
| Carnival Corp | CCL | 3.90% | 3.66% | 0.72 | 0.71 | 15.72 | 13.56 |
| Family Dollar | FDO | 3.57% | 4.69% | 0.77 | 0.39 | 14.50 | 12.57 |
| Oracle Corp | ORCL | 3.49% | 2.41% | 0.83 | 0.76 | 14.36 | 12.84 |
| Saic Inc | SAI | 3.34% | 0.05% | 0.71 | -0.08 | 11.16 | 10.67 |
| Adobe Systems | ADBE | 3.07% | -0.57% | 0.67 | 0.07 | 16.84 | 14.65 |
With more than 25 years of experience as an analyst and portfolio manager, Dirk is Zacks’ Chief Equity Strategist. He regularly authors market strategy reports and articles, and appears on many investment TV programs. He specializes in blending long-term vision with the short-term Zacks Rank system that, since 1988, has averaged gains of +27% per year.
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