Q4 earnings are finished and boy was it a disaster. Total net income fell 20% in 2008. The devastation was broad based and expected to worsen in 2009. Analysts are still expecting earnings of $60 for 2009 which I believe is far too generous. $45-$50 is a more likely outcome. That means expectations have a lot further to fall. There is almost zero visibility into the coming quarters. Companies are cutting guidance or suspending guidance almost across the board.
On the bright side my proprietary expectation ratio does continue to improve, which is a welcome development. This shows that the gap between analyst’s expectations and actual earnings is beginning to close. We will need expectations to get very low before corporations can begin to beat the analysts at the game they are so perfectly terrible at – guessing estimates. This is a vital ingredient in every bull market. The ER is a leading indicator. It forecasted the profit recession almost a year before the major declines so take the improvements with a grain of salt. It is not a market timing indicator. I prefer to think of it as a cycle timing indicator.
As always, bear in mind that it is practically impossible for a sustainable bull market to form without earnings visibility and improvement. There is nothing more foolish than investing money in something if you can’t confidently form some sort of long-term opinion about it and institutions and big money players are unlikely to make big long-term bets on stocks until this changes. As of now the earnings outlook is as bad as I have ever seen it. Long time readers know we nailed the big bull move yesterday just a day before it occurred, but that is no reason to fall in love with the upside. Although short-term rallies can run for weeks or months you have to remember that the recession in corporate earnings is still very real and unlikely to abate in the next quarter or two. The bear market is as alive as ever.
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Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.