Bad news: Continually falling earnings keep price/earnings ratios stratospheric - 23-Jul-2008 - Generational Dynamics

Good news: Disastrously low financial services earnings are still "better than we feared"

As regular readers know, every week or two I post the table of S&P 500 average corporate earnings estimates, based on figures from CNBC Earnings Central supplied by Thomson Reuters.

Once again, earnings have taken a very big hit; during the last week, earnings growth estimates went from -14.7% to -17.1%.

As usual, a fall in earnings estimates means an increase of price/earnings ratios estimates. Here's the latest version of the graphic that appears on the bottom of the home page of this web site. Here's last Friday's version:

S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 18-July-2008. (Source: MarketGauge ® by DataView, LLC)

Price/earnings ratios are maintaining a stratospheric level of 21 or 22, far above the already extremely high level of 18 that investors have been targeting for the preceding four years. Assuming that investors continue to follow the same formulas that they've been following, market indexes will have to fall another 15% to bring P/E ratios down to 18.

However, that didn't happen on Tuesday or Wednesday. We said last week that the short-term direction of the market would probably depend on the actual earnings for financial services firms.

Well, those earnings have been pouring in, and they're absolutely devastating -- often -40% or -50% compared to second quarter of last year.

But guess what? Investors had been expecting -60% or -70%, and so the actual earnings are better than expectations!! So investors have concluded that the worst is over, and that it's time for the stock market bubble to start growing again!

Listening to the babble on CNBC, all I can do is repeat my usual total astonishment at the stupidity and obliviousness of the analysts, journalists, investors and politicians.

I'm not the only one who's noticing it this time. The Financial Times blog notes: "Five of the largest US financial institutions, led by Wachovia and Washington Mutual, reported combined quarterly losses of more than $11bn but their shares jumped an average of 14% on rising hopes that bank stocks have fallen about as low as they can go."

In fact, here's an article from Wednesday's New York Times that would be absolutely hilarious if it weren't describing a disaster:

"Can the bad news for banks get any worse?

After the last week brought another round of woeful quarterly results from the industry, capped by news on Tuesday of multibillion-dollar losses at the Wachovia Corporation and Washington Mutual, that question is nagging banking executives and their investors.

Kenneth D. Lewis, the chief executive of Bank of America, insisted this week that the industry was turning the corner, after his company reported a mere 41 percent drop in profit. Many investors seem to see signs of hope in red ink that once would have shocked them.

But it has now been a year since the credit crisis erupted, and, so far, the optimists have been proven wrong time and again. Skeptics say it could take years for banks to recover from the worst financial crisis since the Depression. And even when things do improve, the pessimists maintain, banks’ profits will be a fraction of what they were before.

There are many reasons for caution. Home prices continue to decline, and defaults are accelerating on a wide range of loans. As lenders struggle, loans are becoming even more scarce for hard-pressed consumers and companies. That, in turn, could slow any recovery in the broader economy.

For now, at least, some investors seem to have become so inured to the bad news that results that would have once been viewed as disastrous are now seen as good, or even great. The sober phrase often used on Wall Street to describe solid corporate results — “better than expected” — has been replaced by “not as bad as feared.”"

Even now, after all this time has passed, there's no hint here of any understanding of the world global situation from a system point of view, or how something that occurred decades ago could be affecting us today. There's no grasp of the fact that the stock market is overpriced by a factor of over 200%, as I described in "How to compute the 'real value' of the stock market."

With these people at the New York Times or CNBC or Wall Street Journal, history always begins this morning, and 99% of the time they don't have the vaguest clue what's going on. At least the Times finally acknowledges that they've been wrong over and over again.

The Telegraph's Ambrose Evans-Pritchard, who says that the European economic situation is worse than America's, now says, "The global economy is at the point of maximum danger. It feels like the summer of 1931. The world's two biggest financial institutions [Fannie and Freddie] have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution."

And we might as well throw in the fact that the super-high prices for energy and food have thrown the economies of Vietnam, Bangladesh and Pakistan and other Asian countries into a near-crisis situation.

Generational Dynamics Web Log for 23-Jul-2008
Bad news: Continually falling earnings keep price/earnings ratios stratospheric

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Generational Dynamics Web Log for 23-Jul-2008 Bad news: Continually falling earnings keep price/earnings ratios stratospheric

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Generational Dynamics Web Log for 23-Jul-2008
Bad news: Continually falling earnings keep price/earnings ratios stratospheric