Customize Consent Preferences

We use cookies to help you navigate efficiently and perform certain functions. You will find detailed information about all cookies under each consent category below.

The cookies that are categorized as "Necessary" are stored on your browser as they are essential for enabling the basic functionalities of the site. ... 

Always Active

Necessary cookies are required to enable the basic features of this site, such as providing secure log-in or adjusting your consent preferences. These cookies do not store any personally identifiable data.

No cookies to display.

Functional cookies help perform certain functionalities like sharing the content of the website on social media platforms, collecting feedback, and other third-party features.

No cookies to display.

Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics such as the number of visitors, bounce rate, traffic source, etc.

No cookies to display.

Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.

No cookies to display.

Advertisement cookies are used to provide visitors with customized advertisements based on the pages you visited previously and to analyze the effectiveness of the ad campaigns.

No cookies to display.

Loading...
Most Recent Stories

THE EXPECTATION RATIO CONTINUES TO DECLINE

Our proprietary expectation ratio continues to decline despite remaining at rather robust levels.  The ratio measures a number of different financial statement indicators and compares them to current and future expectations.  Thus, the ratio is not simply a backward or forward looking indicator, but an intuitive and predictive indicator.  By comparing actual income statement performance to expectations we are able to gauge where stock prices might head based not on the underlying strength of income statements, but the strength of those income statement compared to expectations.  After all, as we’ve seen over the course of the last 6 months it doesn’t take robust organic earnings growth to drive prices higher.  It simply takes very depressed expectations and an improvement in the level of deterioration.  Stocks move based on reality compared to expectations – not just reality.

er

As we predicted in mid-October with the S&P at 1,100, the expectation ratio was likely to peak as analyst’s expectations couldn’t possibly be much farther from the earnings reality.  We said analysts upgrades and price target increases would likely keep a floor under the market and like clockwork we’ve seen dozens of upgrades every day as analysts play catch-up and boost their earnings estimates.  This is reflected in the declining expectation ratio which is now forecasting more strong earnings, but at a lesser rate compared to expectations.  The latest reading of 1.31 shows that income statements remain robust compared to analyst expectations.  This is likely to support the market heading into the next earnings season, but gains are likely to become more and more difficult.  I very much agree with Teun Draaisma at Morgan Stanley who believes the earnings picture will get substantially more challenging in 2010 and likely lead to sub-par equity growth.  For now, however, short positions remain risky propositions in our opinion.  In fact, I would look to implement tactical long positions in the beginning of January as earnings begin to roll out in the latter half of January.   Investors are certain to bid up prices into and during the upcoming earnings season, which, based on my early analysis, will likely be very similar to the previous 3.

Comments are closed.