BIZARRO MARKET
21 July 2009 by Cullen Roche
23 Comments
CNBC, Bloomberg, Yahoo Finance, etc are all reporting that companies reported “better than expected” earnings this morning. Let’s take a look at these great earnings:
Coke – $8.27B in revenues vs estimates of $8.66B. A $400MM MISS.
Caterpillar – $7.98B in revenues vs estimates of $8.86B. Nearly a $1B MISS.
DuPont – $7B in revenues vs estimates of $7.15B. A $150MM MISS.
United Technologies – $13.2B vs estimates of $13.92B. A $700MM MISS.
I can’t ever remember a market where investors turned such a blind eye to top line growth. It’s truly astonishing. These are phenomenally bad revenue figures. There is just no two ways around it. This trend of rising stock prices on poor underlying earnings cannot and will not last.
The market consensus (or at least some, with others just on the momentum trade)seems to be that with a recovery these revenues will turn up and with the “new found cost savings” the companies’ profit margins will be larger and they’ll just be raking in the profits.
I’m amazed at how so many people can completely ignore the facts of the huge debt overhang, the deleveraging that must be done, the anemic job market and prospects for job growth, and the consequent higher savings rates and lower spending (etc.).
It’s truly astonishing to see how deluded these “professionals” can be.
TPC
Have you seen this guy’s blog:
http://capitalobserver.blogspot.com/
He sounds just like you. It’s not you is it?
Maybe it’s not investors that are driving the market?
“Maybe it’s not investors that are driving the market?”
It’s just computers trading with each other – they don’t care about fundamentals.
Pick up those pom-poms, we’re going straight up to 1060 on the S&P500 without stopping at GO. The supercomputers have been programmed & we’re ready to roll!
Seriously though, my question is whether GS wants the market up to lure in the dumb-money just in time to rip them off as we “double-dip”, or is there a co-promotion agreement between GS/USA to keep the confidence level up to avert another near miss of a systematic meltdown?
It’s all about the P/E multiplier baby!
This isn’t a market anymore. It’s a manipulated nut house. I wish I could say “lol.”
TPC:
A small but, I think, salient point. Since “Earnings = Revenue – Expenses”, we can have a theoretical situation whereby revenues are down but earnings could look o.k. due to aggressive expense cuts.
So, I think, you are on the right track. The issue we need to focus on is not earnings, rather declining revenues which seem to be affected by the general state of the economy.
BTW, this market seems to be completely unconcerned about fundamentals.
They missed the revenue numbers but I think the market psychology right now is that if the numbers are so bad, they can only get better. Afterall, we’re going to recover in 2H aren’t we? Buy the dips is what they will tell you.
Dean,
It’s rather alarming to see the price action in some of these names. Not that I have a crystal ball or anything, but I’ve been reading balance sheets for years and these reports are not nearly as strong as the market would have you think. I know the market is irrational, but this skew between reality and real earnings is getting to the point of being ridiculous. I would have expected a pull-back today, but investors are wildly bullish. I will likely be 100% neutral by the end of the week and possibly 100% cash. Something just doesn’t feel right about this whole reaction.
Ahh yes, the second half rally. That has been predicted every year since, well, forever.
For conspiracy theorists and Marc Faber fans:
http://www.gloomboomdoom.com/gbdreport/download/GBD0602.pdf
The Financial Times of March 25, 2002 ran an article titled “Fed Considered Emergency Measures to Save Economy.” The paper reported: The US Federal Reserve in
January considered a variety of “unconventional” emergency measures to be taken if cutting short-term interest rates failed to arrest a US recession and prevent Japanese-style deflation. One of those steps may have been a plan to buy US stocks. According to the reporter, an unnamed source was quoted as follows:
the Fed “could theoretically buy anything to pump money into the system” including “state and local debt, real estate and gold mines — any asset.”
A comparison of Q1 and Q2 2009 (of course there are seasonal differences in revenue, but a comparison to the most recent quarter is also useful), as well as againt Q2 2008.
2008-Q1 2009-Q2 2008-Q2
CAT 9.92 7.98 -1.94 -20% 13.62 -5.64 -41%
DD 7.15 7.0 -0.15 -2% 9.38 -2.38 -25%
UTX 12.25 13.2 +0.95 + 8% 15.67 -2.47 -16%
KO 7.17 8.27 +1.10 +15% 9.05 -0.78 – 9%
Sum 36.49 36.45 -0.04 +0% 47.72 -11.27 -24%
Sales for these 4 companies combined were in total flat versus Q1 2009 and down -24% Q2 2008. CAT’s revenue only dropped by -$1.94 billion (-20%) versus Q1 2009, hence the euphoria seen in the market today. Cokes sales are seasonal (people drink more when it is hot) so overall Q2 2009 sales of these 4 companies appear to be down about 2% versus Q1 2009 if you make a rough seasonal adjustment.
Also it appears the at least for these companies same quarter Y-o-Y decline in sales is increasing rather than decreasing.
Coke’s sales dropped more in Q2 2009 versus Q2 2008 -9% than in Q1 2009 versus Q1 2008 only -3%.
UTX’s sales were down -16% this quarter versus a sales decline of -12% Q1 2009 versus Q1 2008. DD was down -24% versus a Y-o-Y decline of -19% in Q1.
Sales are declining not only year-over-year but also quarter over quarter. You can of course see how the increasing pace of Y-o-Y decline can be interpreted as a green shoot.
Apple just reported:
Revenues are up 12% versus prior year. Last quarter they were up 9% versus prior year so the rate of increase is improving somewhat. On the other hand, sales were only up 2.2% versus Q1 2009 and that with a weaker USD versus Q1. Did sales increase at all over Q1 excluding currency translation? After all the green shoots no big sales increase for America’s premier cutting edge tech company? Shocking.
Profits over grew 1.5% versus Q1 2009. Margins seem to be flat to a little bit down versus Q1 2009. Pricing power doesn’t appear to be improving much even for a company with a cult following like Apple.
P.S. Sorry that my table above is difficult to read. The spaces between the columns went missing when I posted my comments.
Good stuff Rob. Keep it coming. Apple’s quarter was impressive. I’ll admit that, but it shouldn’t surprise anyone.
57 positive surprises to just 17 disappointments. You can question quality of earnings etc. and there is no end to that, but a so far earnings have been solid
How do you get a rally on unimpressive revenue? Just say the magic words: “Seeing signs of stabilization”
In many cases, estimates for Q2 as reported in the media were actually set BELOW Q1 2009 earnings. Most estimates should have been easy to beat. That won’t necessarily translate into S&P 500 earnings above the current bottom up estimate of $14.06.
In Q1, earnings for the S&P500 as a whole came in at $10.11 which was 25.5% below the $13.39 bottom up estimate. They also came in below the top-down estimate which S&P publishes. Nevertheless, most companies beat the estimates reported in the media. Strange. Many Q2 estimates set below Q1 2009, but the bottom up forecast is for a 30%+ increase in earnings versus Q1 2009. The highest quarter to quarter S&P500 earnings growth since 1988 was 12.5% with the exception of Q4 2008 (when earnings were negative) to Q1 2009.
TPC regarding AAPL,
I was not very impressed with Apple’s earnings. Bottom line growth versus Q1 2009 was less than top line growth (margins did not improve versus last quarter). Sales were only up 2.2% versus Q1. Apple is a premier company. A high “growth”, high multiple company. The revenue growth was good by normal standards, but not by Apple standards. Maybe good for the new normal.
Apple’s revenue growth from 2006 to 2007 was 24% and 2007 to 2008 growth was 35%. Y-o-Y growth of 9% in Q1 209 and 12% in Q2 2009 is in comparison quite low. Apple is a great company but growth is no longer what is used to be. The multiple it trades at assumes that 2006-2008 growth levels will come back in the near future.
The whole stock market trades as if growth will be returning soon. The stock markets around the world have declared the recession over. But then again the stock markets predicted that there would be no recession as they rose to new highs in October 2007.
I know the market is irrational, but this skew between reality and real earnings is getting to the point of being ridiculous.
I think what you’re seeing are numbers that aren’t good enough to justify Dow 12,000, but ensure that it also isn’t justifiable to value it at Dow 7000, either. Not bull, not bear, but something else.
I would suggest that what we’re seeing is neither a bear market rally (which would imply that the market should be far below this and that S&P 666 was somehow rational or optimistic) nor a bull market rally (the beginning of the beginning), but a correction of this spring’s massive overcorrection to the place where the market would have gone in the first place had it not been for a few extraordinary events that shocked the markets.
I would offer a SWAG that the current trading band may be the new normal, and that a few specific events, most notably Lehman, the last days of old GM, and Geithner’s poorly phrased comments last spring about the dollar’s reserve status, are what led to things being temporarily worse. Those spring lows were buying opportunities, and barring some disastrous news to the contrary, those are probably not levels that we’ll be seeing again.
If you buy that theory as I see it, then hedge your downside with stop losses, but don’t be too aggressive and look for specific sectors and cycles to trade, instead of focusing on too many long-term holds or a general bull/bear index strategy. The neutrality play is a good one, in my opinion; things may turn out over the medium run to be choppy, and not easily or accurately described by the usual animals.
great post, thanks!
Angry MBA,
I think that if S&P 500 quarterly operating earnings continue at about $10 to $11 and as reported earnings don’t improve quickly from the $7 to $8 level, then 700 or so on the S&P 500 (6,500 on the DOW) is an appropriate level. Stagnation following the collapse. Lower multiple.
On the other hand, if sales and earnings get back to the $14-$16 dollar range and as reported earnings follow, then the S&P500 could easily trade at 1,200 in short order on optimism that the upward trend will continue. Rapid recovery and higher multiple.
I agree that the most probable scenario is somewhere in the middle.
Earnings and valuation clearly do matter, but no one has a good overall handle on what earnings will be this quarter or in future quarters. There are simply too many unknown variables. Even Government Sachs said that the economy is a wild card (or weak leg or something like that) in their revised forecast of S&P 500 at 1,060 for year-end.
The Trade Tomorrow–I agree with your thesis on Eaton–as you said most overlooked the conference call and comments–But tomorrow is another “big day” in the markets–not because of Apple–thats allready old news–sure you will get a good opening move—but whats important is the Old Economy stocks BNI and UNP–
I suspect that UNP will say the cost-cutting programs are working and that the economy has “stabilizzzed” on the other hand I believe you will get a better take on rail traffic from BNI–Sober and Somber—True to form CNBC,Fox and Bloomberg will be pimping these earnings results from BNI and UNP. Tomorrow’s closing around 961 on the S&P500 will be the TOP for this move!–I don’t believe in these Fib ratios that some TA use its just a coincidence that 961 is about a 38% retracement!–Fox today reported that 80% of the companies beat their earnings estimates– This reminds me of the comedian “Justin Wilson” He was out in a duck blind with his partner when a group of mallards came swooping in –both raised up and let both barrels of their shotguns go—his partner looked over and said Justin we have just seen a miracle– what miracle Justin said? “How all those Dead Ducks got up a flew away!”
As Henny Youngmen said– take these “fundamentals” please.
Don’t anyone miss the conference calls with BNI and UNP–Tomorrow!!!
Earnings and valuation clearly do matter, but no one has a good overall handle on what earnings will be this quarter or in future quarters.
My theory is that barring some disaster, you’ll see top-line revenue growth in Q3 or Q4 as the 85% +/- of fully employed workers finally calm down to start spending and the financials start expanding credit in order to generate earnings, the combination of which will provide a real momentary pop. But that pop would probably be followed by a jobless recovery, which leads to a “now what?” market response thereafter, leading to a choppy plateau that might be better for corporate bonds and for day trading than for buy-and-hold equities.
Yet despite the upside forecast, there is also still enough room for disaster that you can’t just throw caution to the wind and disregard the odds of some horrible string of events that result in economic conditions that deny them the revenue growth and inspire more cutting.
Hence, my own personal mildly bullish but neutral stance. The world is not ending. There are some people who are heavily invested in the Apocalypse mentality for personal and psychological reasons, and we would be best to avoid listening to them — their voices are currently far too trendy for their own good, enough to make any good contrarian nervous. TPC here seems to keep a level head, and as far as I can tell, he’s often on the right track.