Earnings Risk / Hussman

This should come as no surprise..... Here are more examples of how smart "Wall Street Finest" have acted in the past.... Keep this in mind when you here "the market is cheap based on our 2009 earnings estimates".....

Sollte keinen wirklich überraschen..... Hier ein paar weitere Beispiele für den Scharfsinn von "Wall Street Finest" . Kann nicht schaden sich diese Prognosesicherheit in sGedächnis zu rufen wenn es wie so oft zu hören mal wieder heißt " Auf Basis unserer Gewinnschätziungen für 2009 sind Aktien billig"......


Earnings Risk / Hussman

On the earnings front, we continue to expect significant pressure on profit margins and resulting cost-cutting pressures to weigh on employment. Given that Wall Street analysts continue to build a major second half recovery into earnings projections, it is important to ask whether those earnings estimates are likely to be reliable.

Since analyst estimates of earnings are almost invariably higher than current operating earnings, and earnings tend to grow over time, it is easy to assume that analyst estimates usefully “lead” earnings. Unfortunately, this isn't true, particularly at turning points when earnings trends are slowing or improving.

via FAZ Germany Analystenprognosen sind mit Vorsicht zu genießen

In q4 more than 1800 Analystst had predicted a 7.9 percent increase in earnings. In reality the earnings crashed 22.6 percent. This large divergence marked a new record.....

Was im vierten Quartal 2007 passiert ist, war kein Ruhmesblatt für die Branche. Denn mit ihren Prognosen für die amerikanischen Unternehmen in diesem Berichtszeitraum haben die 1800 Analysten der Wall Street um mehr als 30 Prozentpunkte zu hoch gegriffen. Konkret wurde mit Gewinnsteigerungen von 7,9 Prozent gerechnet, letztlich sanken sie aber um 22,6 Prozent. Damit lagen sie so weit daneben wie noch nie.

James Montier at Societe Generale demonstrates this nicely by subtracting the upward linear trend from both operating earnings and analyst estimates. What remains are the deviations of earnings and estimates from their long-term trends.

If analyst estimates anticipate subsequent earnings, the “forecasts” line (black) should turn upward or downward before the “earnings” line (red) turns. But as James notes, “The chart makes it transparently obvious that analysts lag reality. They only change their minds when there is irrefutable proof they were wrong, and then only change their minds very slowly.”

Moreover, as Tim Hayes of Ned Davis Research points out, the difference between GAAP earnings (based on generally accepted accounting principles) and operating earnings “has reached its second widest level on record. What all this means is that the greater the focus on operating earnings, and especially forecasted operating earnings, the greater the vulnerability to disappointment on the GAAP earnings reality. And it supports giving the cyclical bear market downtrend the benefit of the doubt.”

Bad-News Bulls / Economist

This piece from the Economist sums it up. It´s always amazing to watch how quick sentiment can turn either way. It will be interesting to see what will be the trigger for the next "minor correction". I´ll bet that it has something to do with the coming CPI numbers....... One more chance for the bulls to "buy the dip"......

Dieser Bericht vom Economist faßt die Lage recht gut zusammen. Ich bin jedesmal wieder erstaunt und fasziniert wie schnell sich die Stimmung drehen kann. Ich bin gespannt welche Meldung der nächste Auslöser für eine erneute "kleine Korrektur" sein wird. Ich denke das es evtl. etwas mit den kommenden CPI Zahlen zu tun haben könnte.... Das wird den Bullen eine erneute Chance geben um nachzuladen. Evtl. mehr als Ihnen lieb sein wird..... ;-)

Bad-News Bulls / Economist
THE news seems to go from bad to worse. In late September figures showed that the American housing market was in free fall, with both sales and prices plunging. On October 1st Citigroup and UBS, two of the world's biggest banks, said they were writing down $9.3 billion of debt between them because of the credit crunch.

Global stockmarkets have reacted not with dismay but with euphoria. Wall Street marked the Citigroup write-downs by driving the Dow Jones Industrial Average to a record high (see chart). The MSCI emerging-markets index has soared to new highs. This summer's turmoil seems to have been completely forgotten.

What explains this apparent insouciance? It seems that investors reckon they cannot lose. “Take your pick,” says Gerard Minack, a strategist at Morgan Stanley: “Equity markets are either behaving as if the worst is over for credit and housing problems or they remain convinced that the [Federal Reserve] can offset whatever bad news may unfold.” In other words, bad economic news means the Fed will cut interest rates and good news means recession will be avoided.

There are some signs to support the idea that the worst might be over in the credit markets. After strenuous effort, banks have managed to find buyers for $9.4 billion of the $24 billion needed to finance the takeover of First Data, a payments processor, by Kohlberg Kravis Roberts, a private-equity firm. According to JPMorgan, even the structured products that caused so much disquiet during the summer are moving again—$6.2 billion of collateralised-debt obligations were issued in the last week of September.

Risk appetite is resurfacing in currency markets, too. The “carry trade”, the borrowing of low-yielding currencies to buy higher-yielders, is back in full swing; the Australian and New Zealand dollars have been surging. Having reached a 27-year high on October 1st, gold (often seen as a safe haven for nervous investors) suddenly lost 2.5% of its value in a day.

The bullish case seems fairly simple. The American economy may be slowing but the rest of the world, particularly emerging markets, can make up for it. As a result, corporate profits can continue to be strong. Profits forecasts are being revised down, but not dramatically so. The dollar's decline has added impetus to the earnings of American exporters and multinationals with overseas subsidiaries.

In this light, the credit crunch seems like old news. Even bank write-downs can be spun in a good light. Much of the panic in August was caused by fear of what banks had on their books; now the bad news is out, investors can relax.

In addition, many investors are looking back to 1998 when the Fed cut rates in response to a previous crisis in the finance industry—the collapse of Long-Term Capital Management, a hedge fund. The markets recovered quickly and the dotcom bubble reached its apogee. This time round, emerging markets (or even alternative energy stocks) might be the big winners.

> Here comes a slightly different view Emerging markets: an exhilarating, but potentially lethal, ride

> Hier eine leicht andere Einschätzung Emerging markets: an exhilarating, but potentially lethal, ride

And in the short term at least, money that was pouring into the credit markets is now being invested in shares.

But not everyone buys the bulls' arguments. Experienced observers of the debt market, such as Tom Jasper of Primus Guaranty, a credit insurer, think the crunch is far from over. According to Moody's, a rating agency, the spread (excess interest rate) of high-yield debt over Treasury bonds has fallen from the crisis peak but is far higher than it was in June.

In the quick-to-rollover money markets, there is still a much wider spread than normal between the rate governments must pay to borrow money and the rate which big banks have to pay. That indicates investors remain nervous about the extent to which banks are exposed to losses from subprime mortgages, or large private-equity borrowers.

Problems in the housing markets are far from over, too. The latest gloomy statistic to emerge was a 21.5% annual fall in pending American home sales, a figure that is a leading indicator for actual sales. House prices will surely fall further and defaults increase, as homeowners struggle to cope with higher mortgage rates from “teaser” loans taken out in 2006.

That may well have a depressing effect on consumer sentiment, something which the Fed's rate cut last month may do little to help. Normally, interest-rate moves take 12-18 months to work their way through the economy. In any case, mortgage rates are barely lower than they were a month ago. The American economy could yet slip into recession, an event on which Goldman Sachs now places a 40% probability.

Even the argument that corporate profits are still strong does not look completely convincing. American profits are close to a 40-year high relative to national output, according to Longview Economics, a financial consultancy. That suggests they should return to the mean, especially as the profit numbers taken from national-accounts data look a lot weaker than those reported by quoted companies. The last time such a gap appeared was in the late 1990s, an era of much creative accounting.

And while the weak dollar may be good news for American exporters, it is bad for European companies. Having been strong in the early part of this year, the latest data on European economies have weakened sharply; Nicolas Sarkozy, the French president, is not the only one concerned by the euro's strength. There is the potential for turmoil in the currency markets, either because Europe takes a stand against the rising euro at the Group of Seven finance ministers' meeting on October 19th, or because international investors, who have to finance the American trade deficit, become alarmed by the weakness of the dollar. Stockmarkets might be able to rise above the problems of the credit markets. But whether they could gain ground in the face of foreign-exchange market turmoil as well seems a lot more doubtful.

$ Impact on Corporate Profits / Berner

this report from Richard Berner gives a good estimate how us profits benefit from the weaker greenback. it also shows that the big multinationals are almost the only big profiteers. in the meantime import prices are driving inflation ..... and unfortunately the theory that a weaker us$ should boost exports hasn´t worked out yet. and that despite a quite significant decline in the currency over the past years...... the opposite is true for germany. despite a very strong € exports are soaring to new records......maybe it´s related to the product mix ........click on the headline to read the entire good report.

dieser bericht von Richard Berner zeigt eindrucksvoll wie sehr sich der verfall des greenback auf die gewinne der unternehmen auswirken. es zeigt auch das hier im wesentlichen die großen multis den rahm abschöpfen. dummerweiwse hat die therorie das eine schwächere währung zu höheren exporten führen wird sich für die usa nicht bewahrheitet. und das bei einem wahern rutsch der währung....da es deutschland trotz starkem € gelungen ist neue exportrekorde aufzustellen liegt es evtl aber an so unwichtigen sachen wie den zu exportierenden produkten...... klickt bitte auf die überschrift um den ganzen bericht zu lesen.

But globalization means that global factors now matter relatively more than in the past. Indeed, according to our US equity strategy team, the top 25 companies in the S&P 500 derive more than half of their sales from overseas operations, and S&P 500 companies as a whole obtain 27% or more of their sales from abroad. Thus, a weaker dollar and stronger growth abroad could be powerful offsets to fading domestic support for margins.
A weaker dollar, if sustained, could support earnings through three channels. First, it is already translating US companies’ overseas results in euros or yen into more dollars. On a trade-weighted basis, the dollar has declined by 3.4% from a year ago, and our empirical work suggests that a 10% decline would boost US earnings from abroad by at least 3% and as much as 6%, boosting overall earnings by 150 bp. So the 3.4% decline in the dollar may have boosted overall earnings by 50 bp. But the effect could be larger, because the fixed weights in the trade-weighted dollar may mask regional shifts in the currency’s impact.

Notably, half of US foreign affiliate income originates in Europe, and the dollar has declined by 10.4% against the euro over the past year. It’s reasonable to expect those effects to continue over the remainder of 2007.

A weaker dollar is also helping the top and bottom lines by combining with domestic factors to promote stronger pricing power for US companies (see for example, “The Dollar and Inflation,” Global Economic Forum, May 5, 2006). The effect of a weaker dollar has begun to show up in US import prices; excluding fuels, such prices rose by 2.7% in the year ended in April.

The effect on domestic prices is less visible. But because there is comparatively little slack in the economy, I’m confident that, while it likely will be modest, it is on the way. Finally, a weaker dollar at the margin will help US companies recapture market share. The recent deceleration in real US exports, which rose by 5.2% in the year ending in March, is not encouraging in that regard, but I think that improvement in market share will come soon.

Of course, stronger global growth is also a factor lifting both US exports and US earnings; in fact, in my judgment, global growth is more important for both than the slide in the dollar. Empirical work has long supported the idea that improving growth is several times more powerful for exports than a similar-sized percentage-point change in relative prices. And earnings are increasingly leveraged to global growth as US direct investment spreads abroad. Our work suggests that the leverage factor could be 5 to 1 or more; that is, a percentage point improvement in global growth would yield an extra 5 percentage points of US earnings growth.

The outcome of this tug of war between domestic factors restraining earnings and global factors boosting them is obviously critical for financial markets. Yet many investors aren’t worried about the earnings slowdown. They believe that a slower US economy will ultimately bring about declines in longer-term yields, which would permit earnings multiples to expand. But they seem to forget that the same global factors that are a cushion for earnings are also driving up global, and to a lesser extent, US yields (see “The Conundrum Unwinds,” Investment Perspectives, May 24, 2007). For US equity markets, the global boom is thus a mixed blessing.

To be sure, equity-market valuations aren’t stretched, but my colleague Henry McVey’s COV analysis underscores that stocks aren’t as cheap as they were in February. And what about the risks to growth? It’s certainly possible that non-US growth could remain healthy even if the pace of US economic activity slowed significantly. But what are the risks to earnings if it does not? That would expose the downside of operating leverage: Simultaneously slower growth in both the US and overseas economies would promote a significant deceleration in US earnings.

Some of the risks associated with this scenario have to do with the character of these global factors. The combination of a rebound in US growth and still-strong global business conditions implies clear-cut upside risks to earnings growth. In that context, however, there are also upside risks to both inflation and interest rates, both of which could pressure risky assets. A benign decline in the dollar will likely be a boost to earnings and a plus for US equities. But a decline in the currency associated with escalating inflation expectations, a loss of confidence in US policies, or protectionism would make US assets less attractive to global investors. And of course, threats to growth, such as supply-induced energy shocks, would promote concern over future earnings gains.

>lets hope that the us gains the long promised export momentum very soon. i doubt it...

>bleibt zu hoffen das die usa bald die seit jahren versprochene exportdynamik entwickeln. ich habe da meine leichten zweifel....