Posts filed under “Valuation”

S&P500 Profits Ex 3 Oil Cos = Awful

Last week, Larry Kudlow wanted to look at the SPX earnings ex-Financials. My response: This was like looking at my own baseball hitting record, ex strikeouts. Doing so turned me into a 400 hitter!

Bloomberg poses the opposite question today: How do the Yankees look minus their biggest hitters: Matsui, Jeter and Posada?  In market terms, the question Bloomie asks is "How does the S&P500 profits look minus the three largest Oil stocks?

The answer? Not so good:

"Take away Exxon Mobil Corp., Chevron Corp. and ConocoPhillips and profits at U.S. companies are the worst in at least a decade.

Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor’s 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998.

Energy companies made up almost half the income growth reported by S&P 500 companies in the first three months of 2008 as oil prices surged past $100 per barrel, the data show." (emphasis added)

If profits are the "mother’s milk of corporate gains," then thank goodness for $125 Oil. Otherwise, corporate America would be suffering from an enormous profit recession.

Now for the reason I am less sanguine about S&P500 intermediate term gains than my peers: Consider what this means in terms of (non-energy) valuations. The trailing 12 month earnings of the S&P 500is ~21, — way above its 60-year average of ~16.


UPDATE: May 199, 2008 2:43pm

Why is this important? Because if you are relying on SPX profits to demonstrate the strength of the economy, it matters who and what is the source of those profits.

If, as Bloomberg demonstrates, only 3 firms out of 500 are resposible for all fo the gains, that is quite telling…


Oil Producers Mask Decade’s Worst S&P 500 Profit Drop
Michael Tsang and Darren Boey
Bloomberg, May 19 2008

Category: Earnings, Energy, Valuation

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Category: Earnings, Valuation