	Generational Dynamics
	Forecasting America's Destiny ... and the World's

\| HOME \| WEB LOG \| COUNTRY WIKI \| COMMENT \| FORUM \| DOWNLOADS \| ABOUT \|

Generational Dynamics Web Log for 29-Oct-2008
Stocks soar worldwide as corporate earnings plummet

Web Log - October, 2008

Stocks soar worldwide as corporate earnings plummet

Panic buying pushes indexes up 10-11%.

Market summary, 28-Oct-2008

Market summary, 28-Oct-2008

The girls were all giggly today on CNBC and Bloomberg tv, as investors poured money into the market, pushing the Dow Industrials index back above 9,000 that really took off furiously in the last hour of trading.

There was an 11% surge two Mondays ago, and since then there have been several large falls. The volatility and wild swings seem to be growing. I've been expecting these wild swings for some time, as they occurred just prior to the 1929 crash.

There was plenty of bad news around on Tuesday.

According to one report, U.S. consumer confidence has dived to the lowest reading since the survey was started in 1967. According to another report, housing prices fell at the fastest pace on record, as foreclosures continue to climb.

There was one piece of news which some might interpret as very good news: Sales of long-term commercial paper soared to a historic record on Monday, as companies sold 1,511 issues totaling a record $67.1 billion of the debt due in more than 80 days, compared with a daily average of 340 issues valued at $6.7 billion last week,

Commercial paper (CP) is the most common way for a corporation to lend money to another corporation. The corporation issues CP notes, and a purchaser loans money by purchasing the CP. Later, the purchaser sells the CP back for cost plus interest.

Sales of commercial paper have plummeted since the credit crisis began in August, 2007, since no one wanted to buy it. Thus, the Fed began buying CP on Monday, as part of the $700 billion bailout. The program was spectacularly successful, at least for one day, and investors showed their pleasure on Tuesday. It remains to be see whether the credit crisis continues to soften.

Crashing corporate earnings

However, the long-term trend that I've been reporting on for a long time took a nose-dive on Tuesday.

As regular readers know, for the last few quarters I've been posting the table of S&P 500 average corporate earnings estimates, based on figures from CNBC Earnings Central supplied by Thomson Reuters. These tables have shown sharp falls in corporate earnings estimates from week to week.

Actual earnings have been pouring in since mid-October. For a while, it seemed that third quarter earnings growth estimates were stabilizing around -10% (that is, 10% lower than third quarter earnings for last year).

However, the estimate posted on Tuesday suddenly fell off a cliff:

  Date    3Q Earnings growth estimate as of that date
  ------- -------------------------------------------
  Mar  3:              25.0%
  Apr  1:              17.3%   Start of previous (2nd) quarter
  Jul  1:              12.6%   Start of quarter
  Sep  5:               0.8%
  Sep 12:              -1.6%
  Sep 19:              -0.3%
  Sep 26:              -1.7%   End of quarter
  Oct  3:              -4.8%
  Oct 10:              -7.8%
  Oct 15:              -9.8%   Wednesday
  Oct 16:             -10.3%   Thursday
  Oct 17:              -9.1%   Friday
  Oct 20:              -9.6%   Monday
  Oct 21:              -9.9%   Tuesday
  Oct 22:             -10.0%   Wednesday
  Oct 23:             -10.9%   Thursday
  Oct 24:             -11.0%   Friday
  Oct 27:             -11.3%   Monday
  Oct 28:             -23.8%   Tuesday

Investors had been particularly hopeful that the third quarter would be the end of the falling earnings. Third quarter earnings had fallen in 2007, and so there was a lower base to build on this year. Investors had hoped that, because of the lower base, earnings would actually grow 25-50% above last year's depressed earnings.

But no such luck. In fact, earnings growth has been negative for several quarters in a row now, and this quarter is turning out to be among the worst.

As usual, a fall in earnings estimates means an increase of price/earnings ratios estimates.

There's a price/earnings ratio chart at the bottom of this web site's home page, and it gets updated automatically every Friday. Here's last Friday's version of the chart:

S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 24-Oct-2008. <font face=Arial size=-2>(Source: MarketGauge ® by DataView, LLC)</font>

S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 24-Oct-2008. (Source: MarketGauge ® by DataView, LLC)

As you can see, the P/E ratio index was at 18 for several years, which is well above the historical average of 14. In fact, the index has been above average for 13 years, since 1995, and by the Law of Mean Reversion, this means it has to be equally below average for roughly the next 13 years.

Starting in March, however, the P/E index is spiked upward again, to astronomical levels in the 20s. This was when first quarter actual earnings were coming in. But investors believed that they should be ignored; the common wisdom was that the credit crisis would be over by the fall (i.e., now), and that earnings would grow in the third and fourth quarter by 25% and 50%, respectively.

Because of that widely held belief, investors pushed the P/E index up into the 20s. Finally,

It's only in the last three weeks that it came back down to 18. This was thanks to the stock market losing 25% of its value in the last three weeks.

Tuesday's events -- a 10.8% increase in the S&P index, and a fall in earnings growth estimates to -23.8% -- will push the P/E index temporarily into the astronomically high 20s again, until a new collapse brings it down again.

The pundits don't see it that way, however. "This may be the sign of a turnaround. Maybe people are coming out of the woodwork again, and buying stocks." Idiots.

(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (29-Oct-2008) Permanent Link
Receive daily World View columns by e-mail
Donate to Generational Dynamics via PayPal

Web Log Pages

Current Web Log

Generational Dynamics Web Log for 29-Oct-2008 Stocks soar worldwide as corporate earnings plummet

Crashing corporate earnings

Web Log Pages

Generational Dynamics Web Log for 29-Oct-2008
Stocks soar worldwide as corporate earnings plummet