Earnings estimates fall sharply again this week - 12-Jan-08 - Generational Dynamics

Generational Dynamics Web Log for 12-Jan-08

Earnings estimates fall sharply again this week

The falling stock market is reflecting the reality of the earnings estimates.

Updating the table of falling fourth quarter corporate earnings estimates that I posted earlier this week, here's the summary from Friday from CNBC Earnings Central:

"As of Friday, January 11th:

31 companies in the S&P 500 have reported earnings for Q4, 64.52% have beaten estimates, 16.13% were in-line, and 19.35% have missed. (Data provided by Reuters Estimates)The blended earnings growth rate for the S&P 500 in fourth-quarter 2007, combining actual numbers for companies that have reported, and estimates for companies yet to report, fell to -11.3%, down from -9.5% the previous week, attributed in part to downward estimate revisions in Financials, including Citigroup and Merrill Lynch.

At the start of the quarter, the growth rate for Q4 was 11.5%. (Data provided by Thomson Financial)"

We can now update the table of the changes in fourth-quarter earnings estimates since the beginning of the fourth quarter, as follows:

  Date    4Q Earnings estimate as of that date
  ------- ------------------------------------
  Oct  1:             +11.5%
  Dec  7:              -1.3%
  Dec 14:              -3.8%
  Dec 31:              -6.1%
  Jan  4:              -9.5%
  Jan 11:             -11.3%

So the Q4 earnings estimates have fallen significantly again, in just one week.

The stock market is reflecting the falling earnings estimates, as you can seem from the bottom of my Dow Jones historical page. As of Friday, January 11, the Dow Industrials stood at 88% of the October 7 high, meaning that the index had fallen 12%.

On CNBC on Friday, the anchors provided more information than in the paragraph summary above. They provided current official analyst estimates of earnings growth in the 2008. Here's the table they displayed:

  Period  Earnings growth estimate (Thomson Financial)
  ------- --------------------------------------------
  Q4 2007      -11.3%
  Q1 2008      -12%
  Q2 2008      -14%
  FY 2008      +25%

Is this even possible? According to Thomson, earnings growth will fall 12% and 14% for the first two quarters of 2008, respectively, but then will rise so rapidly in the last half that the average for the year will be 25% growth. These people are in fantasyland.

The fantasy is that, as I've previously explained: When financial institutions announced their REAL fourth quarter earnings in the next couple of weeks, they'll have the "mother of all writedowns," and then all the writedowns will be over. As I explained, that's impossible.

The 25% growth figure is also impossible.

Instead, earnings growth is most likely to continue falling. Why? Because of the Principle of Mean Reversion. Earnings growth has been well above average -- at bubble levels -- for the last 12 years, and now we'll see "reversion of the mean," which requires that earnings growth be well BELOW average for another 12 years.

The trend that's displayed in the first table above -- showing a progressively lower estimate of fourth-quarter earnings growth -- that trend is going to continue, and earnings growth will continue to be low.

Generational Dynamics predicts that, with the stock market overpriced by almost 250% (same as in 1929), we're headed with absolutely certainly for a generational stock market panic and crash, leading to a new 1930s style Great Depression. (12-Jan-08) Permanent Link
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Generational Dynamics Web Log for 12-Jan-08 Earnings estimates fall sharply again this week

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Generational Dynamics Web Log for 12-Jan-08
Earnings estimates fall sharply again this week