$65 Earnings on S&P500 for 2009?
Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).
This is his most recent commentary:
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I don’t have much to add this morning but I will say that the thesis concerning equity fragility as February progresses is coming to pass. I hate to sound like a broken record but it’s clear that equities simply are not pricing in the type of economic contraction that is increasing in probability with each passing day. Doubt lingers regarding the stimulus plan and how it is implemented is going to be crucial to whether the government can play a role in jumpstarting aggregate demand.
Some would say that simply isn’t the case (economic theory which I wont get into) and others simply say there is no evidence for a Keynesian based stimulus plan having worked. That may be the case but we’re going to find out. The stimulus bill is going to be a drag on longer term growth thanks to, among other things, higher interest rates from the high debt levels that is the new reality but of course the hope is that in the short term, we can arrest the economic decline that seems to be gaining strength rather than abating.
With all that said, let’s get to equities. $65 earnings, which I have maintained since October, no longer seems likely and while I don’t have a firm grasp on what that number should be (who does?) we can do some basic math to see where we’re at. To repeat, historically equities have found a bottom anywhere from 11x-13x earnings. I have used 12x earnings in the past for my price targets but seeing as how this recession and contraction is longer and more violent than normal, let’s take it down a step and slap an 11x multiple on various price targets. Below is a quick little chart on where the S&P should trade based on an 11x multiple of earnings at various points. Following the price target is the percentage the S&P would need to fall from last night’s closing level of 778.94 in order to get to “Fair Value” assuming the multiple and price target hold.
$60 x 11x = 660 15.27%
$55 x 11x = 605 22.33%
$50 x 11x = 550 29.39%
$45 x 11x = 495 36.45%
$40 x 11x = 440 43.51%
I am in no way endorsing any of those price targets at this time but again, its clear that $65 isn’t going to happen. I continue to believe that buying certain stocks at their current levels and the S&P as a whole in the 700 range remains attractive but one must be ready to bear further losses in the short term as we ride out the equity decline.
Protective puts and covered calls continue to reward investors and I beg anyone who is *not* using these options to run their P&L WITH the options. The difference is going to be striking.
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February 20th, 2009 at 8:56 am
w/this: “its clear that $65 isn’t going to happen..”
and, this: “Protective puts and covered calls continue to reward investors and I beg anyone who is *not* using these options to run their P&L WITH the options. The difference is going to be striking.”
w/o Doubt.
People need to get past the FUD proffered by the FinServ/MutFund de-vestment Industries, and clothe themselves with a working knowledge of those valuable Tools: Options. They, just, may keep a roof over your head, as opposed to a dark cloud of uncertainty..
February 20th, 2009 at 9:12 am
From posting above
Some would say that simply isn’t the case (economic theory which I wont get into) and others simply say there is no evidence for a Keynesian based stimulus plan having worked. That may be the case but we’re going to find out.
comment
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You’re right. It’s not a magic bullet. This plan is not a 1 stop cure-all, or a 90% fix that only leaves nonessential details to deal with.
It’s real life.
There are no magic bullets. In real life with a problem this big, you can only chip away at it, not wave a Keynesian or monetary or astrological magic wand. Building a bad bank is a fantasy plan … all imagination that this new implementation of trickle down will somehow make it all go away.
Rants like Santelli’s are good because they are a first step. While Santelli may be outraged that the Bush / Republican fantasy magic wand is out of business, his cluelessness will eventually wake people up. As he continues whining, some who hear him will will realize that he is still living on the fringes of a fantasy land where his view of the economy doesn’t coexist with real people and real problems and real economics. This is not unexpected. Give an average intellect with above average communication skills and a big mouth a microphone and you will always get intelligent sounding noise. Put him on with a half dozen heads and it will be loud noise, as loud noise is the only noise capable of being heard when 5 other heads are talking at the same time. He’s a part of the growth process, part of the mess. (He’s also a reason Bloomberg looks better and better)
Mr. Astrology above, who speculates about a precise relationship between earnings and S&P, is just background noise. If he were as smart as he thinks, he’d be so rich he wouldn’t have to speculate on possible S&P levels. All I read above is speculative hand wringing, probably caused by the need to sound smart without sounding committed to an idea. Plus, S&P Astrology math gives the rabble something to pray to.
Only liars, thieves, idiots, and lazy intellectuals claim to have magic solutions to problems this large. Or claim there should be magic solutions to problems this large.
Government will spend a lot chipping away at it. Santelli may be mad that Joe Average is getting free government money. But how many of his friends got out of the market with profits based on balloons and hype? Should they give back the cash? I think he would say no, they ‘earned’ it. He’s just a greedy man who is using his position to protect greedy people.
February 20th, 2009 at 9:22 am
Multiple will match lowest ever seen…7…estimates are around $35 as reported…7X35=245.
February 20th, 2009 at 9:36 am
245?!?!???!
February 20th, 2009 at 11:09 am
Yes – believe it – it can and will happen. Look at trailing P/E – right now – on S&P. It is at 23 – do the math and that calculates to $33 earnings… Well below $65 estimates. The LOWEST analysts expect around $50.00… Even at that – that gets us to 500 on S&P at a 10 multiple.
Now, what has happened in the last 16 months – at the APEX, the DOW traded at $89.00 trailing P/E which gave earnings at $158.00 on the Dow 30… Talk about overpriced. Now, it is as 17 P/E – still not “cheap.” There isn’t any mystery to the market, it is ALL about earnings. As earnings come down, the market will come down. When the trailing 12 months get into that 7-12 range – AND – when analysts predict earnings BELOW actual earnings – begin legging into equities. But, not until then. Everything else you may hear is NOISE. Government stimulus, market pundits, et al – make for good entertainment, and I find it reprehensible to hear the bottom callers out telling us it is a good time to buy stocks…
We are headed down – you know it – now prepare. Bond funds that pay 4-5% per year (or cash) will look like gravy while the market (S&P 500) may go down another 50% from here. When Cramer was yelling to buy stocks at 14,100 – I was buying puts. Following the market down while watching trailing earnings has gifted me with being up 258% in CY 08 in my trading account (options on S&P 500) and up 17% in my 401K due to being in bonds.
Don’t make this tough – and don’t argue – when companies make money, the market goes up (even ficticious earnings based on derivatives). When they aren’t making money, they market goes down. The whipsaws are only due to short term movement predicated on expectations that have failed thus far.
February 20th, 2009 at 12:40 pm
Does anyone know if Dan Greenhaus is referring to “as reported earnings” or “operating earnings”. The delta is significant. I think SB is referring to “reported earnings”, which are 32.41 according to S&P. I also think Greenhaus is referring to operating earnings, which are currently 66.61.
Does anyone know what the industry standard metric is? reported or operating?
February 20th, 2009 at 12:56 pm
Agree with Steve B although magnitude of which I can’t say— [and have no idea where Greenhaus is getting the factoid that markets bottom at P/E ~ 11-13. If you look at the data, NO SECULAR bull market has started without single digit P/E.
Also to comment on this statement "and others simply say there is no evidence for a Keynesian based stimulus plan having worked." My work on analyzing the '29-33 period to now [which I've shared with Barry], shows that Keynesian approaches were in fact tried by Hoover [despite popular rhetoric to the contrary]. Pecans it should have been more “ginormous” the critics would likely say–maybe–but then we were a net creditor nation not the biggest debtor on the planet with a greater debt than the GDP of all other countries combined…
February 20th, 2009 at 1:09 pm
Im willing to bet he’s referring to the Bloomberg median estimate of $63.39 for eps from continuing ops.
February 20th, 2009 at 4:31 pm
I’m not so sure that this is the way to value the index. Under this model, stocks of money-losing companies are valued at (multiplier * (- loss/share)); that is, having a negative share price.
Just an idle thought: why not value the forecasted-to-be-still-profitable companies at 11x estimated earnings, and value the forecasted-to-be-losing-money companies at book value (maybe minus some discount, maybe minus next year’s loss per share). Then calculate market caps, add, divide to normalize, done. I must be going wrong with this analysis, but how?
February 21st, 2009 at 1:58 am
Mousebender, you are sane. That’s how the market SHOULD be valued if you are only looking at the NOW. However, you are only looking at snapshot-deep recession-trough earnings.
I get a kick out of the people who want to value the market at 7 x deep recession trough earnings. They’re just talking their ‘book’ and typing it so they can self-believe it.
They keep thinking about a 7 p/e in the 70′s or Volcker-82 when the long bond was at 14% and fed funds at 20%. And they compound the error by multiplying an absurd p/e times trough earnings in a deep recession instead of avg. cycle earnings. That’s second grade arithmetic with first grade logic.
Take earnings for the last 10 years or so, factor them into 2009 $ and figure the average. Give them a p/e of 12 or so and voila!
February 21st, 2009 at 8:24 am
Look at any long term–I mean >100 year chart of earnings and equity prices in macro cycles –confirms a singe digit PE at the beginning of secular moves.
As to the comment: “convert 10 years of earnings into today’s dollars, and …”–nice. You get yourself a nice little decade’s worth of inflation pop to help that case. Now that’s 2nd grade math. Earning and price needs to be calculated at the time they were “discovered”–obviously. It’s the equivalent of saying gold is near its all time high today when in fact it was in 2009 dollars, $2300 in the 70′s.
There is absolutely no reason not to look at trough earnings–at least they’re real, and the point it to have an accurate gauge. I’m not saying the market turns up then, it obliviously turns before the absolute trough, but it’s still single digit.