IT’S EARNINGS THAT MATTER
Following up on our previous note about the importance of corporate earnings and the potential peak in the earnings cycle – David Rosenberg had some pertinent facts from this morning’s note:
“It must be extremely frustrating for the bulls to see the market down 12% from
the April peak even with 12-month trailing EPS rising 18% since then. So what’s changed for the worse?The answer is analyst earnings revisions. The Thomson IBES 12-month forward
earnings estimates have been trimmed more than 7%, to $87.89 from $94.79
back in April. Come to think of it, the peak in earnings forecasts coincided with
the peak in the market.And guess what? The forecast peak in the last cycle was in October 2007, again
right when the S&P 500 was hitting its highs. Before that, earnings estimates
were starting to get cut in August 2000, just ahead of the peak in the market. If you are just watching the earnings themselves, on average they are off six
months from the time the stock market rolls off the peak. Earnings estimates
seem to be a perfectly good timing device.The same holds true at bottoms. Forward estimates hit their trough in March
2009 right at the same time the market bounced off the lows. If you waited for
the actual earnings to revive, which they did in November 2009, you would have
missed eight months of 65% gains in the S&P 500.Go back to the cycle before that one and you will see that earnings forecasts
only began to rise in January 2003 — right when the equity market was carving
out a bottom. If you decided to jump in when actual earnings bottomed, which
was much earlier at December 2001, you would have been clocked by the huge
correction that occurred just under a year later.”
This could very well be the most important juncture in the cycle. If earnings have peaked and margin expansion has been maxed out by corporate cost cutting and a lack of revenue growth then there’s a high potential for excessive optimism should the earnings begin to disappoint to the downside.
Source: Gluskin Sheff
TPC,
I have a post recommendation for you. The bond bubble meme managed to get boring in about 48 hours thanks to the unfortunate fact that there is no bond bubble. HOWEVER, while there may no bond bubble for the immortal (like Harvard’s Management Corporation, or Calpers – yes, off 25% in 2008 is the new immortal), the rest of us invest in bonds through a bond fund like LQD or AGG. Holding a T-Bill to maturity will preserve all your capital, though your real return will vary depending on rates. But how will rising interest rates (when they come….eventually) impact bond funds. That’s the real question. I suppose it depends on the fund, but I highly doubt that joe six-pack/201-K has any idea that his/her bond fund has more (or less?) interest rate sensitivity than an actual bond.
Jon,
That’s a very good question. I am not going to sit here and pretend to be an expert on the way these funds all work, but they should (generalizing here) represent the underlying performance of the bonds they own. The portfolio manager is simply rolling over the debt depending on the duration. So the performance should reflect the actual bonds. This can be scary for some because you see the very real intra-day volatility in these funds, but over the life of the underlying portfolio those funds should perform relatively close to their underlying assets. So, if you’re holding a fund like IEF and you hold it for 5 years you’re owning the underlying assets for the duration of their life.
Bonds, for the little guy, should be viewed as investing assets. Diversify, reinvest the dividends, collar cost average, and get some sleep. You might not be getting the best deal in the world here at 2.6% 10 year, but that’s why you ladder up bond portfolios and reinvest over time.
Keep in mind that none of this applies to corporate bond funds….When I discuss the bond bubble I am referring only to US govt bonds.