Here's what is still bothering me:
According to Briefing.com: Two months ago, the 2009 bottoms-up operating earnings estimate (adding all the estimates company by company) for the S&P 500 was $79.09, according to Standard & Poor's. Today, it is $55.81 for 2009. For the forward four quarters of the second quarter of 2009 through the first quarter of 2010 it is $62.37. Two months ago, the top-down earnings forecast (making economic assumptions and then backing out total earnings projections) for the S&P 500 was $45.78. Today, it is $43.03 for 2009. For the forward four quarters of the second quarter of 2009 through the first quarter of 2010 it is $44.00. In other words, the market rebound has occurred despite any improvement in the earnings outlook as forecasted by Standard & Poor's. Granted consensus estimates have risen from their nadir, yet the earnings outlook itself hasn't improved from where it was just two months ago.
Unfortunately, there is a huge difference between operating earnings and "as-reported" earnings, which include all charges. Those charges have been huge and the as-reported earnings estimate for the next 4 quarters is just $31.07, less than HALF of the operating earnings. So we have an apparent p/e of 16.1, which is high in itself but can be argued to be fair assuming low interest and forward growth. What we can't justify is the as-reported p/e of 35.6, that is way overvalued, even if every single stock in the S&P was a biotech with a successful stage 3 trial!
While many companies have come in ahead of estimates this quarter, very few have done so on revenue growth. What we are seeing is a lot of companies who have done a tremendous job cutting costs – at the expense of 6M jobs, 4M foreclosed homes, 2M individual bankruptcies and $3Tn in government aid. Yesterday's loss of 546,000 jobs indicates those jobs aren't exactly coming back and the problem with "celebrating" earnings based on cost cutting is the same problem you have celebrating that a person has stopped bleeding because they have run out of blood – if you don't replace it soon, he's still going to die. Getting worse more slowly is not the path to market prosperity.
We had a very poor retail report and ANF just reported this morning a pretty big miss (-.30 vs -.07 expected) on 23.3% less revenues. We're waiting for JCP, who are, appropriately, expected to lose a penny this quarter but look at some of this week's "winners:" SSP beat on 27% less revenues, MDR beat on 13% lower, AMAT was flat – beating a loss estimate of -0.8 with a 38.7% drop in revenues and that sparked a rally! WES did 45% less business but squeezed out a 4 cent beat. ETH was in-line with a .23 loss on 41% less furniture sales. LIZ found 29% less buyers but has come back 10% from that announcement. MIPS is a good indicator of how many DVD player and game systems will be shipping this holiday season and they are down 40% from last year and gaming specialist CRYP was also off 40%. Cramer favorite ELOS saw revenues fall 63% as even the rich are cutting back on elective surgery while ADSK was off 33% and DAR, who service the food industry, saw sales drop 30%.
Let's keep in mind that the average price of a barrel of oil in Q2 was $57.50. Oil opened July 1st at $60 and ran straight up to the $70s and is averaging $10 more per barrel. Productivity and wage reports indicate that there weren't any raises being handed out in Q3 so far so we can look at that $10 per barrel price increase passed on to the US consumers at a rate of $200M per day. Globally (and 50% of the S&P 500s revenues are global), that's $1Bn per day out of the pockets of consumers going into the same barrels of oil that they burned for $90Bn less in Q2. Perhaps we can project some profit growth in the energy sector for Q3 but that money had to come from somewhere and the horrendous Retail Sales report we got yesterday shows that the money was clearly drained from Electronics (down 1.4%), Food and Beverages (down 0.3%), Liesure (down 1.4%), Building Materials (down 2.1) and General Merchandise (down 0.8%). One bright spot – increased drinking caused Bars to rise 0.4% so party on markets!
Which reminds me – Yesterday, the GE-owned energy pushers at CNBC had the nerve yesterday to spin the slowdown in retail sales on Cash for Clunkers, making the premise with their "expert analysts" that people buying cars in this program made less other consumer purchases. What total nonsense! 250,000 cars were sold under this program in total and 95% of those sales were financed with average deposits of $1,000 so, at worst, we're looking at about $250M less consumer spending power while the 119,750,000 (99.8%) other families in this country were completely unaffected. OIL HOWEVER, is used by 100% of those 120M American families and they had to fork over an extra $6Bn to the US energy cartel in July and that is direct, after tax money, right out of the wallets of the US consumers.
We got a lot of very rosy outlooks from our reporting companies but WHERE'S THE HIRING? The average reporting company raised guidance by 5% for Q3 yet, during the past 4 weeks of earnings, they handed out pink slips to 2.2M workers. I've mentioned before that frightened workers do make for productive workers but that only works until you burn them out and then they get sick and they make mistakes and problems occur and then your company can't meet production targets and by the time they hire and train they often miss the cycle. There's a lot of optimistic talk out there, but show me a single company who is putting their money where their mouths are?
It was pointed out by Gluskin-Sheff's Chief Economist, David Rosenberg yesterday that:
We actually just got the retail sales data for July and in a word, they were simply awful. We can have all the inventory building in the world but it can’t last without a revival in final sales. Retail sales were supposed to be up 0.8% MoM, according to the consensus, but instead fell 0.1%. The breadth of the decline was amazing — only autos (+2.4% — due to Cash for Clunkers), clothing (+0.6%, but that only partially reversed the 1.5% slide in June), restaurants (+0.4%, after a 0.2% drop in June) and drug stores (+0.7% — the third increase in a row, so this is an area of retail sales is worth being excited about).
"Retail control", which is the headline excluding gasoline, building materials and autos, and goes into the consumer spending segment in the GDP data, fell 0.2% MoM and is flat or down in each of the past five months, and this was in the face of some pretty massive fiscal stimulus. So far in 3Q, retail control has declined at a 1.3% annual rate. So for the current quarter, GDP gets a boost from inventory building but 4Q could be flat or negative in the absence of a consumer pickup
A lot of bullish sentiment lately has been based on the logic that we are "burning off" inventory and therefore we must be heading into an upswing in production because GOOD MUST BE PRODUCED! But do they? Let's say that we don't need 100M single-family homes in the US for 320M people. What happens if sky-high medical costs and loss of retirement savings send retired parents back to live with their children. Perhaps loss of job opportunities for college grads sends millions of those potential homeowners back to their old bedroom for a few extra years? Let's say the average number of people per family (and in a home) goes up from 3.2 to 4, that's a 25% increase and would eliminate the need for 25M homes. Those homes are already built – people were living in them just 2 years ago. We won't need that inventory to be "rebuilt" for many many years if that happens.
What about cars? Does the average American family need 1 car per licensed driver? When I was a kid, we were lucky to share a car with just 2 people. Why does everyone think it's so impossible for consumer habits to change back. When I got my first car (1979), the car was $800 and insurance was $300 a year. Now a ratty used car is $3,000 and insurance is over $1,000 for a teenaged driver. That's 4 times but I used to make $200 a week so the whole thing was 6 week's work work – there are not too many 16-year olds pulling in $2,000 a month these days and not many Dads with an extra $4K plus gas to toss at kids who are about to go to college. So what if American families go from 3 cars to 2 as a lifestyle change? There's 50M cars worth of inventory we won't need replenished.
Do we NEED a TV in every room in the house, an IPod for everyone in the family, multiple laptops, new furniture, carpeting, year-round indoor temperatures of 72 degrees? These are all things we've only had for the past generation – they are luxuries from a luxurious age, don't let people make you believe we CAN'T give them up, our grandparents gave up far more in WWII and their parents gave up nearly everything in the Great Depression. Consider the possiblity that it's excess consumerism that is the fad in the grand scheme of things, not conservation…
Those are my underlying concerns as we may, in fact, be at a bottom but I think it may be a bottom we need to get used to. S&P 1,000 may be the new 1,200, which was the top of a normal range before the market got irrationally exuberant way back in 2006 when there was going to be an HDTV in every home in America and a Hummer in every Chinese driveway as we all refinanced $25Tn worth or real estate to pay for it all. Now the value of that real estate has fallen to $18Tn and about $20Tn of it is financed, leaving the average home in America 20% underwater and there are 6% less people working and the wages for those who are still working are down 10%, making it much harder to service that $20Tn debt load.
What is going to fund the next wave of buying? Where is the growth money coming from? The average US household is currently almost $125,000 in debt and ONLY artificially low interest rates are keeping that debt load from eating up the 25% of their paychecks in interest alone that would be happening at 10%, which is much less than the 15-18% interest we had in the recession of the '70s. The dollar has been falling considerably since the March market crash, when it was used as a "safe haven" by international investors and those dollars are worth 12% less (worthless?) than they were in March so your stocks BETTER be up 12% or they are losing ground to the dollar.
Is your home up 12%? Are your wages up 12? If not, you, along with hundreds of Millions of other Americans, are losing ground and that means that one day, you too may choose not to buy that extra car or new TV or 4th IPod – Yes, IT COULD HAPPEN TO YOU! And, when it does, then we will know that our generation can change. Just like "The Greatest Generation" we may end up sacrificing just a small portion of our $13Tn of very conspicuous consumption as we attempt to get real about our future.
Needless to say we will be maintaining a bearish stance into the weekend. The market has still not broken our upper levels though it has come very close but this simply smells like June 12th all over again, when day after day after day of relentless optimism simply turned into disaster on options expiration week. The market fell the week of June 15th from 600 points above the May expiration to finish within 60. The Dow finished July 17th at 8,743, down 650 points from where we are now, the same percentage fall will take us to right around 8,800 next week – kind of makes those DIA puts very attractive doesn't it?
We're out at the top (we think) and looking forward to the opportunity to buy into the next dip but we will continue to watch out levels and stay ready for anything because anything is exactly what we've been getting the past two weeks – just like the two weeks leading up to June 15th…
Have a great weekend,
– Phil
