Is Earnings Optimism for the S&P 500 Justified?
by ilene - August 30th, 2010 4:18 am
Is Earnings Optimism for the S&P 500 Justified?
Courtesy of Doug Short
Regular visitors to dshort.com know I follow Howard Silverblatt’s earnings spreadsheet on the Standard & Poor’s website. Free registration is required to access this data. I’ve received several requests for more specific details on where to find the spreadsheet. It is fairly well hidden. Here are two links to help frustrated seekers: step one and step two.
I follow the "As-Reported" earnings and top-down estimates for future earnings (see column D in the spreadsheet). The chart below shows the higher estimates of future earnings from the most recent spreadsheet, dated August 24th, and three earlier spreadsheets (February 17th, April 28th, and July 15th).
The latest earnings estimate for 2Q 2010 is 67.20. Friday’s close gives us a P/E ratio of 15.84, which is close to the average trailing 12-month P/E of 15.48. Beyond the 2Q, the chart illustrates increasing optimism about next year’s earnings. The August 24th estimate of $80.20 for 4Q 2011 at today’s P/E would put the S&P 500 at 1,270 at the end of 2011. That’s a gain of 19.3% from the latest close.
But will as-reported earnings really live up to these estimates? Last month Howard Silverblatt pinpointed the problem for earnings in a Bloomberg article No Sales Means No Jobs Means No Recovery. His concluding remarks are worth repeating here:
I look to sales as a future indicator. On this basis, earnings are running ahead of Q1 2010, but sales are flat, and that’s the problem. It’s great that companies have improving earnings, but those improvements are due to high margins, which were the product of cost cuts — specifically job reductions, the very thing that we need to improve now. Until companies and consumers start to spend more, the job front will not get better, but they won’t spend more until they believe things are getting better. The stimulus programs were supposed to jump start the economy and break the downward cycle by convincing both groups that better times were here. But so far we’re not seeing the sales or the jobs; but earnings are good, at least for now.
Companies in the S&P 500 sell across the world. But consumption in the US, which remains critical for sustained earnings growth, has been undergoing a sustained contraction —, a fact that…
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DiggOutsourcing Unemployment To China
by ilene - September 16th, 2009 2:04 pm
Outsourcing Unemployment To China
Courtesy of Mish
As goes the US consumer so goes Chinese manufacturing. Here is a long but educational video produced by Vanguard on several Chinese manufacturing cities and what the economic downturn has meant for them. It’s well worth a play.
That video is more confirmation of the Chinese manufacturing and unemployment woes outlined in How Will China Handle The Yuan? and over a year ago in Is China’s Growth Story Coming Unglued?
Yet the myth of Chinese decoupling still persists.
Some day China will be far less dependent on the US but that day is not in the immediate foreseeable future. The videos are proof enough. Moreover, a strong case can be made that Obama Risks Global Trade War With Misguided Tariffs.
For now, stock are rising along with the biggest global reflation in the history of the world, by central bankers in nearly every country in the world, including China.
However, such stimulus is not infinite and is not without cost. Nor can temporary increases in demand caused by massive give-away programs be cause for permanent celebration. At best, stimulus programs shift demand forward stretching out the recovery period.
At worst, such programs add to malinvestments in housing, commercial real estate, and other areas. Government programs seldom, if ever, allocate resources effectively. The wildly popular cash-for-clunkers program actually destroyed productive assets, a repeat on a small scale of misguided efforts by FDR in the great depression to drive up prices of goods.
Yet for all these efforts unemployment is still rising, and even Fed officials admit the outlook for employment and consumer spending is far from rosy. Please see The Problem with Janet Yellen’s Recovery Outlook for details.
Government Bailouts and the Stock Market – The Seen and the Unseen
by ilene - August 11th, 2009 1:29 pm
Government Bailouts and the Stock Market – The Seen and the Unseen
Courtesy of Mish
Inquiring minds are reading Cash for Clunkers Is Just a Broken Windshield by Caroline Baum. It’s the best trashing to date of the "cash for clunkers" program.
Transferring money from taxpayers to car buyers is a transfer. The money taken from taxpayers can’t be used for something else.
This is the lesson of Frederic Bastiat’s essay, “That Which is Seen, and That Which is Unseen.” Bastiat, a 19th century French political economist, tells the story of a shopkeeper who has to hire a glazier to repair a broken window, providing work and income for him in the process. That’s what is seen.
What is unseen is what the shopkeeper would have done if he didn’t have to pay the glazier. He might have bought shoes for his children, providing income for the shoemaker, who in turn could buy leather to produce more shoes. The glazier’s gain is the shoemaker’s loss. There is no net gain, no job or income creation, from this transaction.
Broken Window Fallacy
The “broken window fallacy,” as it is known, can be applied to all government spending. The $787 billion fiscal stimulus enacted in February transfers money from taxpayers to the government to allocate as it sees fit. The effect of the government’s expenditures shows up as growth in gross domestic product. Auto manufacturers produce more cars to meet the juiced demand, adding to GDP. This is what’s seen.
What is unseen is what would have been produced by the private sector had the government not confiscated future revenue via taxation.
Cash for clunkers requires that trade-ins be scrapped, whether they are fully depreciated or not. How is destroying something good for the nation?
James Hamilton, professor of economics at University of California, San Diego, says cash for clunkers adopts the worst of the New Deal policies and adapts it to today’s circumstances.
The Agricultural Adjustment Act of 1933 “paid farmers to slaughter livestock and plow up good crops, as if destroying useful goods could somehow make the nation wealthier,” Hamilton writes on his blog. “And yet, here we are again, with the cash for clunkers program insisting that working vehicles must be junked to qualify for the subsidy.”
Caroline touched on several key issues. The first is is money taken from taxpayers can’t
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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