Posts filed under “Analysts”
Morgan Stanley Research channels our prior discussion on earnings during recessions:
“We have heard investors suggest $80 in EPS was a fair bear case for 2012. We decided to look at history as a guide in assessing the bear case EPS. The 2001 recession saw a 13% revenue decline and a 57% EPS drawdown. The 2008 recession saw a 14% revenue decline and a 51% EPS hit, peak-to-trough. For 2012, bottom-up estimates (excluding financials) embed a 5% revenue INCREASE and just over 10% year-over-year EPS growth. If prior recessions prove relevant to next year’s economy, $54 to $68 in EPS in 2012 would be a more likely range than the $112 that the bottom-up consensus estimates currently embed.”
What should SPX prices be? Depends upon how much earnings fall during the coming slow down/recession. If we get a pre-2000 recession drop of 15%, then we are priced fairly. A 2001-recession like drop of 25% means more downside. Of course, the 2008 outlier — earnings plummeted 44% during the credit crisis — well, that means a whole lot more downside work in equities . . .
Hat tip Sam Ro
The investor’s dilemma: Earnings, valuations and what to do next (September 11th, 2011)
Is the S&P500 Cheap? (August 29th, 2011)
McKinsey: Equity Analysts Are Still Too Bullish (June 2nd, 2010)
From Andrew Horowitz of the (The Disciplined Investor:
Last week I attended the Bloomberg Markets 50 Summit in New York. The setting for the event was the transformed Great Hall of the Community House at St. Bartholomew’s Church. The room was full of “jackets and ties” from all of the major brokerages, hedge funds and others involved in the fine art of investing.
The Bloomberg Staff were more than accommodating, friendly and informed. Everything was on a tight schedule as the event was being televised, so timing was to the second for the start at 9:55am. First a few words from Dan Doctoroff, president and CEO of Bloomberg to start off the morning and then he introduced the moderator and first panel of speakers.
The even was structured as a panel discussion, where the various speakers were comfortably seated on a lush white couches. Each panel had a topic and the moderators would ask for their insights on a specific topic. Overall the day was full of excellent and topical commentary and opinion focused on items that ranged from the European Crisis to Hedge Funds.
I was able to get some one-on-one time with Carson Block of Muddy Waters to discuss some of his recent findings in China. Nassim Taleb, famed author of Black Swans was not so kind and only could spend a minute or two. Stephen Roach, who just about tells you that he is always right, spared some time to talk with me about the rampant food inflation in Asia. I congratulated the John Chambers, the Managing Director and Chairman of Standard & Poor’s Global Sovereign Rating Committee for the work they are now doing in keeping the world’s government’s honest. We spoke about the continuing problems and specifically addressed the outlook for France. I asked about the recent AAA rating and what is the outlook. Of course he could not provide specifics, but mentioned that everything is up for review and nothing is permanent. I got the feeling that there is more to this story…
After the formal discussion/panel with Gary Gensler, Chairman of the Commodity Futures Trading Commission, I was able to have a few moments to ask him about the oversight of the CME. In particular, I questioned him about the recent plunge in Gold and Silver prices for no apparent reason, when later that same day a margin hike was announced. Was this leaked and is the CFTC looking at these? He replied that he was unfamiliar with the specific situation that I was referring to (was he kidding I thought?) but that they are “more interested” with leaks of government data prior to the official release. Take a listen to the actual recording of that conversation – HERE.
As for an overview of the day, it was interesting to see that there was a high level of disapproval of what the White House and Congress has been up to. That makes sense as this was a group of business and investment pros and they are in the cross-hairs of the government’s ambitious business-unfriendly programs.There was also a rather palpable negativity about the U.S. equity markets due to the current financial crisis unfolding in Europe. While there were a few panelists that had some upbeat comments, overall there was a lack of bullishness that I had expected from this group.
What follow are the notes that I took during the day. These are in no way a complete transcript of the panel discussions, but provide highlights of what I believed were the important points.
9:00am – 9:40am -Bernanke’s Balancing Act
Bernanke may not have much that he can do and that getting the committee to move will be a process. The next meeting with surely give us TWIST and then SHOUT, which is a more vocal communication. The FED is on the move it has a lot of problems in the economy it is dealing with. Expect more, not less in the future
The economy is clear. What should be done… Fed needs to be accommodative, but perhaps temporize too much, The big problem is that the transmission mechanism, is dysfunctional. That is typical after this kind of banking crisis. Better to get something that gets under the car and fixed the transmission The most evident is the need to get the banks lending. Region banks have not been as easy going as they would like to be. Maybe the foot soldiers should be listening to the Generals more closely. Somehow we need to get the banks to lend
Glen Hubbard: Fiscal or? Bernanke policies are limited. It is a fiscal need at this point. Investment has been slowed down due to regulations, no housing boom and the markets. there is a clear need to have a fiscal policy that allows for the benefit to
When asked; Is Fed trying to boost stocks? Mr. Doll replied that Fed is trying to install confidence. We need to get out of this confidence bear that we are in That is why in Jackson Hole he tried to extend the confidence by putting in a long term interest rate assumption so that some of the questions are cleared up.
General discussion about whether it is fiscal or monetary policy, generally all see that that there is a combined effort and that interest rates have low enough at this point. We are in a time that there is a slippery slope if we hope that Congress comes in and does what they have to. Communications tools need to be used and can me quite powerful as Congress and the Administration is impotent. All appear to agree that we are in need of stimulus and help.
Perhaps the biggest issue is the lack of leadership and the inability for them to lead. The most concerning is that there is also a crisis of confidence that started and is continuing. It is the combination of the lack of leadership as well as the concern that the FED is not doing all it can (?really). The things that are being down are not helping. There is a general agreement that the plans and other stimulus measures have not done anything and are not going to do much in its current forms. If nothing is done on the fiscal side, there will be a drag of about 2% of GDP.
Demand is weak as there is no confidence but also because there is not enough stimulus on a short term basis. There are things that can be done, but are not. The overall political situation at this time is at best, un-encouraging.
9:40am – 10:20am – Euro Breakup or The United States of Europe
Discussion about the the coordinated action and that is the coordinated action is the news This is perhaps why Juergen Stark resigned last week. This is a really big deal. It also calls into question of depth of the problem. In other words, is the situation so deep that there needed to be a coordinated action. This is clearly a liquidity problem.
Austerity is supported by governments but the evidence is that Austerity has failed as confidence is collapsed, growth has failed and there is discontent. Riots and a great deal of increased unemployment has shows that there has been the wrong path followed.
Is there a way to have an orderly default of a sovereign nation? If Greece can leave the Euro quickly is unlikely. There are basis problems as little as the inability for Greece to transact. There will be major lawsuits etc. Leaving the Euro will be unlikely for Greece in the short term. Default is more likely and that may need to be done.
When you have banks that are unable to get funds and in particular US dollars that is a problem. Banks have been seeing a liquidity problem and the amount f swap lines between the US and Europe and therefore it is already available. For right now, this was a necessary liquidity problem, though it is not a final solution. The action today was a short term fix to somewhat recapitalize the banks, for a period. Perhaps months. There needs to be another mechanism to bring these banks up to the Basel standards.
What needs to happen next? Has the ECB overstepped it bounds.
The ECB is going to have to do something and the move today was helping the markets short term, and in the end they may look to put together treaties. In the near future they need to cut rates to help confidence. In the next few months the ECB etc will need to buy Spanish bonds as well as other over the next couple of years. The Euro is under pressure but no one can afford a breakup of the Euro. Any country that will leave would be hurt terribly. Asia could not afford to have a breakup of the Euro or the EuroZone. This is a long-term project to save the area and this will take years.
There is no growth in EuroZone and the fiscal austerity needs to be done in individual countries an then the stimulus for area can
John R. Taylor
This does not get at any of the major problems underlying the situation. Just yesterday there was a few of the banks that could not get funding. So the was more a requirement.
With the recent coordinated action in Europe, what to do? STAY AWAY. This is a horrifically poisonous environment. If your strategies have to be in Europe, it is difficult as we really have not grappled with the true solution. They cannot create growth if there is austerity and no growth. The Swiss will be able to do well with the caveat that the Swiss believe that Europe will solve their problems, but that is unlikely.
10:20am – 10:40am – A Conversion with Ray Dalio
If it was not unexpected that we saw this last crisis, what is next? The biggest problems is that we are not having a conversation at the highest level that discusses the machine. Even though that the we make decisions, we need to know how the economic machine works. We need to have a quality conversation about how the economic and political machines work and then we can create better decisions.
Even though there will be choices made, even after choices are made, they may not be the best for everyone. For example lets imagine that you earn $100,000 per year and have no debt. You can go to a bank and get $10,000 loan. That is okay and you can spend and then if you do it over and over again and then there will be a time that you can no longer pay the debt service. Then you can lower interest rates and when there is no more room there… problems.
Credit can be created in countries and the same cycle as above will persist. How much of the money that is being spent by ECB to do a restructuring and other measures to fix things. One of the most important things now is to understand what is going on and make some important plans, rather than waking up every day to a new surprise.
On printing money: It is quite a handy thing to have. If you are a creditor with a linked policy then you have problems in that there are extremes that are created. For example Greece is a creditor and they cannot adjust and they are their economy is going to crash, if on the other hand you have those that are linked and needs to print then you have a bubble like China.
What is working for Bridgewater? Dalio says the he writes the daily so that he knows that he knows what he is doing wrong. If you diversify and don’t rely on only one things to make your year, but many ideas go into the Ray Dalio code and his template for the economy is available to download HERE. (pdf).
On Friday the Federal Reserve released its quarterly Flow of Funds data, current through June 2011. One of the more popular headlines from this data concerns the record amount of “cash on the sidelines“. Through Q2 2011, nonfarm nonfinancial corporate businesses held $2.05 trillion in liquid assets on their balance sheets. As the argument goes,…Read More
Italy Downgraded by S& P S&P just downgraded Italy’s credit. I’ve been warning about Italy since 2008. The Problem Will Spread Because NONE of the Fundamental Problems Have Been Fixed None of the fundamental economic problems in Italy or Europe or anywhere else have been addressed … let alone fixed. So the problem will only…Read More
> My Sunday Business Washington Post column is out. This morning, we look at earnings, analysts forecasting track record, and what that means for stock valuations if we have a recession. I actually like both headlines today: The online version is Market action a ‘conversation’ between investors very much sums up a philosophical view I…Read More
“Wow, that was a sobering meeting.” -Western Asset Management, Stephen Walsh, CIO > Did S&P leak US credit downgrade info to specific bond firms in advance of it occurring? That is the subject of a WSJ article today, and should be a question the SEC is investigating: “Standard & Poor’s Corp. officials held private meetings…Read More
Today’s Dick Bove wannabe is the once respected Paul Miller of FBR Capital Markets & Co. In a note to clients that revealed a stunning ignorance of fiduciary and legal obligations, Miller said FHA, FHFA, and GSEs were “acting in their own self-interest as opposed to that of the broader U.S. economy.” The details of…Read More
I always laugh whenever I hear anyone say eejit hack claim “No one saw it coming!” This video — featuring a thinner, less gray version of your humble blogger — discussing the coming housing storm in 2005 gives lie to that claim. The advice: Sell banks, Sell Home Builders, Sell Home Depot and Lowes. Video…Read More