THE EXPECTATION RATIO SURGES TO A NEW 2 YEAR HIGH
The expectation ratio has surged to a new two year high in what is an obvious sign of corporate earnings strength. Of course, as we all know by now, there is a distinct difference between strong underlying fundamentals and low expectations. This surge in the ER represents more the latter. Analysts have been miserably slow to catch-up to the pace of bottom line growth. As we have detailed here over the course of the last few earnings seasons, margins are expanding at a pace not seen in 25 years as cost cutting far outpaces top line deterioration.
For our purposes, the ER has largely lost its predictive usefulness since we turned bearish last week at the market highs, but we will continue to track it closely as the rally morphs. In all likelihood, we will see the ratio deteriorate from here as it is difficult to imagine that the analyst community will remain so far behind the curve. As expectations catch-up to reality we would expect the ratio to narrow substantially and stock gains to become more difficult going forward.
I wouldn’t say you turned ‘bearish’, you turned more cautious. Turning bearish is totally different. If you were that bearish you would have piled on the shorts but you were worried that earnings season could propel the markets higher.
Fair enough.
Either way, it was the right call. As you’ve said before, I tend not to be aggressive enough with my calls. I could probably swing that bat harder, but that’s not really my game. I’m perfectly fine with 200 doubles every season….
Agree with James
TPC you should be nuanced with your writing
you turned neutral and I saw some ask you what it would take to short etc.
Please dont turn into Rosenberg with revisionist calls.
Still waiting for the anticipated model portfolio thats been “in process” for 3 months … should tell us a lot more.
One more thing
You said the Expectations Ratio, a proprietary thing of yours, was the #1 most important tool for you.
Or has been the best help – I cannot remember how you worded it
But now, you seem to arbitrarily throw out what it is telling you (to be bullish) for reasons I cannot see. If its your number 1 tool, but you randomly disavow it… then how it can be your top indicator? or what is your explanation for why you choose to ignore it. What would cause you to ignore it in the future or go back to utilizing it? etc
thanks
You’re nit picking a bit Joe. Whether I turned bearish or neutral is not what’s important. What is important is that I was RIGHT. And if you read the comments which you so conveniently excluded, you’ll notice that I was in fact short Yen and Can$ over the last week (which has resulted in further upside for me).
So, while you like to focus on the equity markets and nothing more I have been bearish via other instruments. But if you’d like to misconstrue that please be my guest.
As for the ER, it is a read on corporate earnings (which I believe are the primary driver of prices). As I clearly explained when I turned bearish, I believed the earnings rally had been priced in and the ER was likely to turn down. That’s pretty cut and dry. Just because an indicator continues to rise doesn’t mean I am going to be bullish and continue to believe it rises higher….
TPC, no need to justify or explain the nuances are numerous and your guidance and commentary are very relevant. For the back benchers, why don’t you create your own blog and stick your neck out there everyday? be curious to see how prescient you could be on a daily basis.
Keep up the good work TPC !
Thanks EL. I honestly don’t mean to mislead. I have been very wrong before and call myself out for it. I was in cash from SP 950 all the way to SP 1050. I liked nat gas earlier this year. I bought the dollar when I moved out of stocks at SP 950. I’ve been lucky to be correct far more times than I’ve been wrong, however.
But trying to imply that my latest move out of stocks is in some way wrong or misleading is totally incorrect.
If it was so easy and we could always make the right call, we certainly would not be spending time collectively educating ourselves.
TPC, first of all let me say that I’m a great supporter of your blog and it provides a condensed view of Wall St and expert opinions, as well as your analysis and calls and is one of the best sources of market and economy related information for me.
But I would say I have to agree with some of the above comments that your call the other day was not bearish but merely neutral. Fact is, I have been patiently waiting till you issue your bearish call so that I can pile up on all the shorts that I have been watching shoot up since the last few days while I have been on the sidelines.
In the interests of everyone concerned, it would greatly help if you could just put a small table at the top of your blog which would give your short-, mid- and long-term outlook on stocks, currencies, bonds and anything else that you care about.
Just a simple “underweight / neutral / overweight” or “buy / hold / sell” signal that serves as a guidepost for people following your blog and preferably the date you made that call (that cannot change ex post facto).
Not only will that enable your calls to be judged in a better light, but more people will click the donate button that you will place conveniently below it
Thanks and keep up the good work!
I don’t disagree, but we’re certainly nit picking here. I was pretty clear about my Yen and C$ short as well as moving entirely out of cash.
However you want to describe that is fine by me. Bearish, neutral, etc. I describe it as “right”.
Thanks for compliments everyone and thanks for keeping me honest.
Entirely INTO cash in the equity portion….
I don’t know why people try to tear down TPC’s calls. This has to be one of the most informative and honest market websites I have ever seen. We should all be thanking TPC for his efforts and honesty even if his market calls suck.
I for one just want to say thanks TPC.
I am a regular reader since a few weeks and I think TPC is a very useful website, every call is reasoned out, also I like the very patient and prudent way he manages the positions. Under certain aspects I have a similar way to trade the mkts with multiple positions, mainly on European indexes, FX, and IR future.
TPC, you did make the right call to take things off the table. I think you have a very intuitive streak in you, and you could be very very rich if you were more aggressive. But if that isn’t your style then that is okay too. I still like this blog for the news you post if you become more aggressive or not and come here many times a day. In any case, I am not going to nit pick as you said, I’ve already said my peace. I still don’t think this is THE downward spiral. I say we see over 1100 S&P shortly for a bounce. Stocks are still technically and fundamentally weak but we are still in a strong bear market rally and this down trend will be bought up soon enough…