Earnings Estimates Fall
If you missed John Mauldin’s weekend piece (2008: Annus Horribilis, RIP), have a look at these estimates for earnings in 2008. They started at $92 (early ‘07) and came down to $48:
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Not exactly confidence inspiring when it comes to stock analysts.If you want to understand why we prefer to rely on objective data rather than analysts, this is the precise reason.
On a trailing one-year basis, that puts the Price to Earnings Ratio (P/E) at over 19 as of today. This does not make the market cheap.
And what about 2009? Again, the analysts are in a race to find the bottom.
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The current projections are for $42.26 for 2009. That makes the forward P/E 22. That doesn’t look like value at all, when the historical average is closer to 15.
In 2001, as-reported earnings were $24.67. Operating earnings in 2002 were $27.57. Does anyone think the current recession will be milder than the last one? Or shorter?
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Source:
2008: Annus Horribilis, RIP
John Mauldin
http://www.ritholtz.com/blog/2009/01/2008-annus-horribilis-rip/
January 6th, 2009 at 12:51 pm
They completely failed in 2008 and missed it by 50%.
What makes you think their 2009 estimates will be anywhere close?
i think it is bullish that the analysts have finally capitulated…
January 6th, 2009 at 1:03 pm
I still cant figure out where he gets $42.26 from
January 6th, 2009 at 1:10 pm
Can you break out both 2001-2002 and 2008-2009 without energy & commodities?
January 6th, 2009 at 1:38 pm
In 2008 some spending was still based on home equity. That boosted earnings early in the year. That won’t happen in 2009. The most pessimistic estimate is still too high.
January 6th, 2009 at 1:38 pm
SanFranHobo,
$42.26 comes from here, specifically. Perhaps you were asking the rhetorical question, “how do you get $42.26?” (ans: “Yeah, and pigs might fly out my butt”).
Barry,
I see the “historical P/E is 15″ meme touted over and over again (I’ve repeated it myself). Looking at the link I posted above, I’m hard-pressed to find many quarters where P/E was below 15. Looks more like the average is high teens to low twenties. Caveat: the data are only provided post-1989 — so only the current credit cycle is included. Tacking a (very optimistic for a bear market) 12x onto 2009E puts the S&P500 in decidedly fugly territory. I’m inclined to say we’re NOT in a “bear” market for this very reason. Yet, at least. Also, I’m young and inexperienced . . .
p.s. I’ve started completely skipping Hoffer’s posts because of his overzealous gerund, dependent clause and generally excessive comma usage but I think may have been channelling him when I wrote the above.
January 6th, 2009 at 1:40 pm
The geniuses making these guesses are like tarot card readers… they don’t have a f**kin’ clue.
Any number can appear to be right… $200 a barrel for oil…. anyone????
January 6th, 2009 at 1:42 pm
@ Mike J:
With this: “p.s. I’ve started completely skipping Hoffer’s posts” we begin, so to speak, FWIW, a new, and entirely introspective phase, as it were, of homage to the King of Commas. Long, may he punctuate, herein.
January 6th, 2009 at 1:44 pm
I’m suffering from some cognitive dissonance.
If the S&P 500 dropped to the 800s in 2002 with trailing earnings of $25/unit, then it never bottomed out at “8-10x earnings” multiple. S, why do some people talk of “600 or maybe lower” on the S&P this time around?
Why do they expect a lower multiple? Or do they expect earnings to in 2009 to be materially worse?
January 6th, 2009 at 1:45 pm
…that is, materially worse than 2001-2002?
January 6th, 2009 at 1:53 pm
Materially worse.
January 6th, 2009 at 2:12 pm
Materially, substantially, meaningfully AND perceptibly.
January 6th, 2009 at 2:29 pm
Earnings expected to fall. Stop the Presses! Let’s kill a few helpless electrons and spread the news about this fantastic claim. The Amazing Criswell Lives!
Psssst. Thanks for helping out.
Analysts appear to always underestimate earnings. This allows pundits and pollyannas to proclaim that things are ‘better than expected’ as the new quarter progresses. It always gooses the quarterly markets upwards for a spell, also. Next time, add a little excitement to the message by using words and phrases such as crushing, speeding up and ready to splat, primed for a dirt nap, one of the seven signs, give up and start drinking, or buy ammunition and food now.
I think we’ll see S&P 1000 before we see S&P250. There should be at least a month or two between them. Then, Q2 will arrive.
January 6th, 2009 at 2:50 pm
ArticPup sez “the geniuses making these guesses are like tarot card readers…”
…and one of the great economists of our day agrees. The late John Kenneth Galbraith wrote, “The only function of economic forecasting is to make astrology look respectable.”
http://mast-economy.blogspot.com/2009/01/making-astrology-look-respectable.html
January 6th, 2009 at 3:45 pm
cinefoz said “Analysts appear to always underestimate earnings” – that’s funny, that’s the exact opposite of what I determined from the 2008 data presented in Barry’s post.
January 6th, 2009 at 4:09 pm
The “analysts” do a credible job — so long as nothing is changing, and the companies they cover are operating essentially the same as they have in the past. Throw a little change into the works, and it turns out that they do no better than monkeys with darts at predicting the future. Which is as it should be expected. The Real World future is, as it always has been, unpredictable.
And that’s what gives this game of investing a little spice, pitting feeble-minded humans and their puny inadequate models against the unbounded, unpredictable nature of a Changing Reality. That’s what Black Swans are all about.
It’s pretty clear that we have not begun to resolve the structural problems in the global and our American economy (principally too much debt, we are ‘way over-leveraged, with no perceptible relief in sight), total debt-to-GDP has not yet begun to plummet. Yet such a resolution might not occur at all in this business cycle, presidential cycle, or even generation. We could shuffle along as the Japanese have (and it’s looking more like that every day) for several decades, or we could see something crack and have the whole house of cards thrown into disarray tomorrow.
You could have some whacko attempt to assassinate Obama (Lord knows there are plenty of nutjobs out there who would do so), you could have the Yellowstone caldera explode and bury half the nation in several feet of ash, or some sneaky comet or asteroid could plop down in the Pacific, coming at us from out of the sun, undetectable visually, and wipe out all the cities on the Pacific rim, from Seattle to Melbourne. All of these things are highly improbably, and would have catastrophic consequences on the tiny microcosm of the markets.
As stressed as investors are, it wouldn’t take many more Black Swans to spook them and have the Fed’s attempts to glide (smash?) us in for the proverbial “soft landing” go straight into the dumpster, and have all that unsustainable debt resolve itself. I am frankly surprised that the Madoff business has not had a larger impact. I guess all the talk of trillions has made a mere $50B not worth fretting over.
So it’s not terribly surprising that we get lesser unpredictable events which blow all the analysts’ projections into the weeds. Of course, it makes it easier that they do such a lousy job of predicting, and always go for the last decimal place rather than identifying trends in a company’s performance.
January 6th, 2009 at 4:25 pm
@constantnormal: “I am frankly surprised that the Madoff business has not had a larger impact. I guess all the talk of trillions has made a mere $50B not worth fretting over.”
This one really amazes me. If you have a large portion of your net worth with a single money manager, any money manager, why would you leave it there right now? Particularly if said money manager didn’t even really perform for you last year.
The biggest story out of the Madoff situation for me is that so many people appeared to do due diligence before investing, cross referenced statements, etc and still didn’t find it. It brings into question the trust of the entire system. I just flat out don’t understand why anyone with their money managed by someone else would leave it there right now. Chances are 99%+ of them are legit and your money is safe (other than standard market losses), but right now, why take the risk? Add to that the hedge funds that closed their doors for redemptions – sooner or later they have to open them again. Who would leave their money with a fund that arbitrarily told them they couldn’t have it?
I don’t think redemptions are done yet.
In the meantime, I didn’t get out fully on the first temporary Obama rally, it’s nice to get a second chance.
Oh, and add another 13,500 employees, 1,700 contractors + a hiring and salary freeze to the tally – that just out from Alcoa.
January 6th, 2009 at 5:01 pm
I was around in the 70’s. PE’s were high over 12. PE’s under 6 were available for good companies. It could be a long way down, especially if as and when emerging inflation cannot be controlled and leads eventually to rocketing rates.
January 6th, 2009 at 5:47 pm
the market would have continued to contract in 2002 2003 had it not been for the new bubble perculating under the surface called housing. the entire bull market from 2003 2007 was phantom growth based entirely on the increase of debt. this process is now in reverse. second half recovery is pure fanatsy
January 6th, 2009 at 6:03 pm
E Says:
cinefoz said “Analysts appear to always underestimate earnings”
Is DEAD HOBO really CINEFOZ?
January 6th, 2009 at 8:23 pm
Neither trailing nor forward earnings are particularly useful as a gauge of market valuation; earnings need to be normalized over an entire cycle or two to provide the appropriate benchmark. As a ‘classic’ value investor John Hussman has a lot to say about this and his standard methodology can be found at http://tinyurl.com/d2gn7 with a more recent article using that methodology here at http://tinyurl.com/5nkzsl
(Much) shorter version: For the first time in over a decade the S&P is not overvalued but that doesn’t mean it is now super cheap nor incapable of going lower, only that the probability of being rewarded rather than punished over the next decade is better than it has been in a long time.
January 6th, 2009 at 11:51 pm
Mike J – as far as the “historical PE of 15″ meme, there are two likely explanations. First, that you haven’t found the data going back far enough. To address that, look up Shiller’s website by googling “irrational exuberance.” He has the series going back into the 19th century free for downloading. The other explanation is that it depends on “operating” vs. “as reported” earnings. The latter includes all the write-offs/downs, one-time stuff, etc. and is lower. Lately, it’s been A LOT lower because of the bad asset problem.
I do have one quibble with Barry’s comments here and that is with use of the forward PE. From what I’ve gathered historical forward PE estimates (relying on Cliff Asness via Hussman) is around 11. This is for operating earnings since the historical data doesn’t really provide “as reported” values. Right now, SPX is sitting with a forward PE(oper. earnings) of 11.36. Still not a bargain, more like average.
January 7th, 2009 at 7:27 am
E said
January 6th, 2009 at 3:45 pm
… that’s the exact opposite of what I determined from the 2008 data presented in Barry’s post.
reply:
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First, let me say I like your channel. There’s something relaxing about watching fatuous self absorption.
Second: It doesn’t matter where earnings are headed, up OR down. Analyst will always underestimate them, providing commentators, pundits, and the like with material to to say “It looks like earnings estimates are being beat once again”. It’s just a form of soft corruption, plus it’s an easy way to fill air time.
Don’t get me wrong. I think a little corruption is ok, providing I am on the beneficial side of it and I can’t get in trouble. I know how to work with this, and the rubes fall for it every quarter.