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Monday, July 27, 2009

All signs for a top are gathering

The recent substantial upgrades of analysts for earnings is ironically a typical signal that we are close to a top. Even Goldman who was one of the most bearish at the bottom has raised its 2010 earrings for the SPX to 72 with 70 being the average call these days. They get paid very good for making in average bad calls that's another cynical truth about Wallstreet.
By all means there is no way that earnings can surge as we are in the twilight zone where the strongest part in the chain squeezes the weaker ones namely his suppliers to lower prices. The real economy is not within the biggest stocks but in tier 2 and 3 companies who supply them they produce around 2rd of the GDP and employ the real critical mass of people. The better bottom line earnings we see now are a clear sign of that effect since the topline is in average weaker as thought and all is negative still.
We still are in a credit crunch only banks get the benefit of lower rates and have even reduced credit drastically, all over participants get less credit for higher rates. The economy has no other positive input than a temporary stimulus which keeps the patient alive but does not cure his disease. The most basic things are not done at all the system is not cleared from the cancer actually the government lets the cancer grow again as banks get free money to screw Mainstreet even more that's the very cynical status quo.

The foreseeable astrological effect that made this wave of euphoria possible will be gone in a few weeks and replaced by quite ugly patterns - so do not get carried away as we saw this events coming the positive ones right now as the ones which will shatter all optimism in a few weeks and bring reality back on track. Use the SPX over or at 1000 to get rid of your stock holdings as you will be able to buy them far cheaper in 6-9 months. Just use your common sense to see the picture we had in the 2000- 2003 bear market the same price magnitude and now things are far worse as just to give one example the jobless effect is almost double of what we had back then.

You may want to read the weekend thoughts of John Mauldin in the link below

http://zerohedge.blogspot.com/



Excerpt from Bloomberg

Surging Profit Estimates Signal 26% Rally for S&P 500

July 27 (Bloomberg) -- Analysts are raising U.S. profit estimates for the first time since credit markets froze two years ago, reducing valuations even after the steepest rally since the Great Depression.

Wall Street firms raised forecasts on Standard & Poor’s 500 Index companies 896 times in June and lowered 886, according to data compiled by JPMorgan Chase & Co. The last time analysts were bullish on a net basis was in April 2007, before more than $1.5 trillion of bank losses tied to subprime loans spurred the first global recession since World War II, the data show.

The failure to anticipate Goldman Sachs Group Inc.’s record second-quarter profits or Freeport-McMoRan Copper & Gold Inc.’s tripling of bullion sales forced analysts to boost 2010 projections. Wall Street firms estimate the S&P 500 will earn $74.55 a share next year, up from $72.54 in May. Stocks now trade at 13.13 times estimated profit, indicating a 26 percent increase in the S&P 500 should the index return to its five- decade average of 16.54 times annual income.

“There’s a sea change of opinion and it all goes back to the improving economic data,” said Fritz Meyer, the Denver- based senior market strategist for Invesco Aim, which oversees $348 billion. “Expectations got pushed too low in the depths of the recessionary mentality. That translates into upward revisions in earnings estimates and drives stock prices.”

Earnings Revisions

Analysts lowered profit forecasts at a record pace after the failure of Lehman Brothers Holdings Inc. in September caused overnight borrowing costs for banks to hit an all-time high of 6.88 percent, tipped the U.S. economy into the worst recession in half a century and sent the S&P 500 to a 38 percent decline, the biggest annual retreat since 1937.

Four out of five of the 4,716 earnings revisions in October were decreases, the most ever, JPMorgan data show. Analysts have raised estimates amid growing signs that the global economy has bottomed.

The turnaround in June from October was the biggest since the JPMorgan data started in 2000. The second-largest swing was in October 2002, the beginning of a five-year bull market that doubled the value of U.S. equities.

Futures on the S&P 500 rose 0.2 percent as of 2:18 a.m. New York time. The gauge rose 4.1 percent to 979.26 last week and has rallied 45 percent since falling to a 12-year low on March 9, pushing its price-earnings ratio to 13.13 based on 2010 estimates. The measure would have to rise to 1,233.06 for the multiple to equal its historic average since 1959, according to data compiled by Bloomberg.

‘Quick Snapshot’

The estimates indicate S&P 500 corporate earnings will rise 25 percent from this year’s projected $59.80 a share, which would be the biggest increase since 1995, the data show.

Revisions are a “really quick snapshot of whether people are becoming more or less optimistic,” said Jack Caffrey, an equity strategist at JPMorgan Private Bank, which oversees $380 billion in New York. “We expect the world to get better, so we wouldn’t be surprised to see stocks move higher.”

Second-quarter earnings announcements indicate analysts may need to change even faster. Of the 204 companies in the S&P 500 that have reported results, 75 percent have beaten consensus estimates, data compiled by Bloomberg show. No more than 72.3 percent have ever beaten analysts’ estimates for a full quarter since at least 1993, the data show.

Equity analysts remained too bullish last year as the economy shrank 6.3 percent in the fourth quarter and 5.5 percent in the first three months of 2009, the biggest six-month contraction since 1958.

Cost Cuts

Forecasters predicted fourth-quarter profit would fall 19.7 percent on Jan. 9, according to consensus estimates compiled three days before the earnings season began. Instead, earnings plummeted 61 percent, the biggest decline since at least 1998, according to data compiled by Bloomberg.

Analysts are being deceived by second-quarter results that were boosted by cost reductions, according to Christopher Sheldon, the Boston-based director of investment strategy at BNY Mellon Wealth Management, which oversees $142 billion globally. Only half of the S&P 500 companies that reported exceeded forecasts for sales, data compiled by Bloomberg show.

“When you look at bottom-up estimates, we would say that’s going to be dependent on a lot of things continuing to go right,” Sheldon said. “As we’ve moved away from the worst-case scenario, people have embraced this idea of a V-shaped recovery, and to us that’s a challenge.”

Invesco Aim’s Meyer says it is “perfectly reasonable” for stocks to rise as much as 25 percent through next year because the economic recovery will boost profits.

‘Grow Into Sequoias’

Economists doubled projections for third-quarter economic growth to 1 percent in July from 0.5 percent in June, according to a Bloomberg survey of 57 analysts this month.


1 comment:

bbars said...

10 Members Send Letter to Fed on Goldman Sachs Gambling with Bailout Money

http://www.ritholtz.com/blog/2009/07/letter-to-fed-on-gs/

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