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Do Earnings Mean Anything Anymore?

  • Written by Syndicated Publisher No Comments Comments
    January 14, 2014

    Time was when corporate earnings were of significant importance to the market, which cycled between bull and bear markets with the price/earnings ratio being of some importance. 

    Time was when investors would pay particular attention to the earnings growth trend and prospects for upcoming earnings.

    That hasn’t been the case for a couple of years, the only concern being how much more stimulus the Federal Reserve would provide, and whether it could be depended on to come to the rescue with more if the economy stumbled.

    With the Fed having announced its intentions to taper back its five years of stimulus over the next nine months or so, will earnings eventually return to being of importance?

    Perhaps it’s still too soon with the Fed still pumping liquidity even if tapered back some. We may find out if it’s still too early for earnings to matter again over the next four weeks as 4th quarter earnings come in.

    Meanwhile, if earnings were to return to being of importance there are some interesting conditions. For instance:

    Overall U.S. corporate earnings, including those from global operations, grew by $39 billion in the third quarter compared to $66 billion in the second quarter.

    Earnings from their domestic operations grew by only $12.7 billion in the third quarter, down from $37.8 billion in the second quarter.

    S&P 500 earnings for the full year of 2013 are forecast to have grown 7.7%. Meanwhile, the S&P 500 gained roughly 30% for the year. The gain was obviously not driven by earnings but by investors paying an increasingly higher Price/Earnings ratio.

    Since the market looks forward, perhaps there is the potential that Wall Street expects earnings growth to return.

    Or maybe not, at least anytime soon.

    Corporations have been scrambling to issue warnings about sales and earnings shortfalls going forward, and Wall Street has been scrambling just as fast to lower its estimates to make it easier for reports to “beat the estimates”.

    As I noted in Thursday’s blog, as of mid-December earnings-tracker Thomson Reuters reported that for every S&P 500 company that pre-reported it would top Wall Street’s estimates, ten warned of weaker than previously expected earnings that would not beat estimates. The 10-1 ratio was on track to beat the previous worst record of 6.8 warnings for every positive one set in the first quarter of 2001 in the midst of the 2000-2002 bear market. A spokesman for Thomson Reuters said “I’ve never seen a ratio like this. It’s off the charts.”

    And yet, even with the warnings, and the lowered estimates, so far a surprising number of the early companies reporting have still fallen short of the estimates.

    Even Alcoa (AA), usually so good at guiding Wall Street so low that even its recurring dismal reports manage to beat the estimates, failed to do so this time. It reported 4th quarter earnings of 4 cents a share, versus Wall Street’s forecast of 6 cents. Of course it showed a profit at all only due to the ability to exclude a write-down of $1.7 billion in the excess value of ‘goodwill’ it had been carrying on its books, and charges incurred from a bribery scandal. According to Forbe’s, without excluding those costs it would have reported a loss of $2.3 billion, or $2.19 a share.

    But as an example of how earnings have not mattered of late, Alcoa’s stock had a great year, particularly off its July low.

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    Based on the market’s positive response to the dismal jobs report yesterday, which raised prospects that the Fed will taper back more slowly, while ignoring the disappointing earnings reports, it’s still all about the Fed, and earnings still don’t matter.

    Other Voices:

    Steven Sears, Barron’s: I love January on Wall Street. It’s like campaign season in Washington. Hope is everywhere and accountability is nowhere. . . . . Sell-side banks and brokers puff about with reasons the market will advance, and why you should give them your money . . . . . . The trick in January is take it for what it is (not much) and look toward “known unknowns” like earnings and mid-term elections, and then factor in cold, hard data points like stock prices near record highs and related options prices near record lows. . . . . . . . . This approach is in keeping with the Rothschilds’ famous discipline, oft mentioned here: Take things as they are and profit off the folly of the world. . . . . I know much is made of market homilies like, as goes January, so goes the stock market’s year, but it is hard to be too confident in the past when so much depends on the future. I suspect the market will go higher, and feel bullish for a key reason. The economy is improving, and many sophisticated investors who missed last year’s advance will want to buy. What is harder to discount is that the stock market is in the fifth year of an advance. Every five years, history shows, bull markets are born, only to die, and be reborn again. Five years is an aged bull.”

    Wall Street Journal: ‘Fed Unlikely To Alter Course’: Friday’s disappointing jobs report is likely to curb the Fed’s recent enthusiasm about the U.S. economic recovery, but it seems unlikely to convince officials they should alter the policy course Bernanke laid out..”

    Financial Times: ‘US Jobs Data Puncture Recovery Hopes’: ‘New year hopes for an accelerating recovery in the US in 2014 were punctured on Friday after December saw the slowest pace of growth in new jobs in three years. Jobs growth, at just 74,000, came in far below expectations of a 197,000 increase. The data highlight the ongoing vulnerability of the US labour market, although the most likely cause of the recent weakness was miserable winter weather. The news is unlikely to put the US Federal Reserve off a further slowing of asset purchases next  month, from a pace of $75bn to $65bn. But it all but rules out a faster taper for now.”

    Another caution regarding annuities.

    Excerpts from Market Watch article: Click to read entire article: Angry annuity clients seek damages

    When stock markets are humming along nicely, customers are less likely to complain about their brokers and financial advisers. . . . . . . But complaints about one kind of investment remain stubbornly high: Variable annuities.

    Variable annuities usually offer a retirement saver a guaranteed future payout, along with a chance of increasing the value of the saver’s initial investment depending on how markets perform . . . . . But they’ve long exasperated consumer advocates because of their relatively high commissions and fees, along with their often-impenetrable rules about what, exactly, an investor’s account is worth at any given time. . . . .

    The variable annuity was the only class of security for which arbitration claims increased last year . . . . . . Many of the complaints involve situations where variable annuities were sold to already-retired people who learned, only after buying them, that they couldn’t withdraw money from the investments without paying hefty “surrender charges.”

    To read my weekend newspaper column click here:  The Jobs Report Rained On New Fed Chair Yellen’s Honeymoon Period

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more. 

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