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Generational Dynamics Web Log for 15-Mar-2009
Analysts and journalists freak out as Q4 2008 earnings turn negative.

Web Log - March, 2009

Analysts and journalists freak out as Q4 2008 earnings turn negative.

Wrong so many times, what do they make of last week's stock market rally?

Last week on Bloomberg TV (or was it CNBC?) I heard a discussion of the latest corporate earnings reports for Q4 of 2008. The analyst said, "Those figures can't be right. That would mean that the S&P index should be around 300." (That's roughly equivalent to a Dow Industrials index of 3000.)

Welcome to the new world of financial journalism and analysis. The folks at CNBC and Bloomberg TV and the Wall Street Journal and other financial media have been using fudged figures for years to justify the bloated stock market bubble, and now they completely believe their own lies.

There's a feeling of total chaos in these media outlets these days, because no one knows what to say about the price/earnings ratios (also called "valuations"), as Q4 earnings have turned negative.

I've complained many times on this web site about the out and out lies of analysts, advisors and journalists. Even today, you still hear about "valuations being at historic lows," which is total crap.

These analysts, who make 6 and 7 digit salaries by collecting fat commissions from their clients, use a variety of techniques to lie about valuations.

The most common is to use "forward earnings" to compute the P/E ratio. That means you divide the stock price by the bloated estimates for earnings in the following year. By making earnings as high as possible, the P/E ratio becomes lower.

But something has happened in the last few weeks. After several quarters where actual earnings turned out to be far lower than earlier estimates, investors don't automatically believe the bloated "forward earnings" estimates any more.

As we wrote last month, fourth quarter reported earnings are crashing. The actual reported earnings are far below the analyst estimates of only a few weeks earlier. This means that people who use "forward earnings" to compute P/E ratios now have to face the reality that "forward earnings" estimates are crashing along with reported earnings.

The same is happening with another form of dishonesty - the use of "operating earnings." Once again, the objective is to bloat the earnings estimates up as much as possible, so that the P/E ratio is as low as possible.

"Operating earnings" came into fashion during the dot-com bubble of the late 1990s. Analysts and brokers and financial advisers needed a way to justify recommendations to buy stock during the dot-com bubble, even though valuations were extremely high. And so they invented a form of earnings that doesn't count "one-time expenses" and whatever else they felt they could get away with excluding. This boosted the earnings figures, and lowered the P/E ratios.

But now analysts are confounded again, because even "operating earnings are crashing, along with reported earnings.

Since I posted my article last month on the crash in reported earnings, several web site readers have written to me, asking where they could get price/earnings ratio figures. This question has been heavily discussed in the Financial Topics thread of the Generational Dynamics forum, where a number of suggestions have been posted.

Here are several places that regularly provide price/earnings ratios:

At the bottom of the home page of this web site is a chart from DataView, LLC, that's updated weekly. This is an EXCELLENT chart -- the best around, in fact. It shows both current and historical data at a glance.

The Wall Street Journal P/Es & Yields on Major Indexes page can be accessed without a subscription. It gives the P/E ratios based on both "reported earnings" and bloated "forward earnings." It currently lists 15.44 as the S&P 500 P/E ratio, which is apparently computed based on "operating earnings."

The Decision Point Earnings Summary is updated every week. They report both "reported earnings" and "operating earnings." Their latest report is discussed further below.

The Comstock Funds page, Boom times were a mirage, describes the difference between reported earnings and operating earnings. The data files are updated roughly once a month, giving current and historical earnings and P/E indexes. Click on "S&P 500 Earnings Estimates (Reported and Operating)--past year" and "NDR Chart of historical P/Es of Reported Earnings."

The Standard & Poors earnings and P/E computations can be found in this XLS spreadsheet, updated every week or two.

Let's take a look at the last item, because it contains some shocking news. If you download the spreadsheet and load it into your spreadsheet program, you'll see the following:

Earnings and price/earnings ratios for past and future quarters (Source: Standard & Poors)

Earnings and price/earnings ratios for past and future quarters (Source: Standard & Poors)

The data shown on this spreadsheet is as of 2-March-2009. The S&P500 index on that day was 700.82. Please note the following points, indicated by the balloons in the above graphic:

Column A gives the ending date for each quarter. The data for quarters up to Q3 of last year (ending date: 09/30/2008) are "ACTUALS," while the data since then are "ESTIMATES." The data for Q4 (ending date: 12/31/2008) is 98% complete.

Column B shows the S&P 500 index as of the end of the quarter. Columns C and D show operating earnings and reported earnings, respectively, and columns G and H show the corresponding P/E computations.

As actual earnings come in for Q4, they're turning negative (see cells C36 and D36). I'm not even sure how you compute a P/E ratio when earnings go zero or negative.

If you look at columns G and H in the "ACTUALS" portion, you can see that the P/Es based on operating earnings are consistently lower.

If you look the the "ESTIMATES" portion, the results are eye-popping. The estimates based on operating earnings are around 15 for this year, and drop as low as 10 for Q4 of 2009. But the estimates based on reported earnings spike up to 181 (!!!!!!) in Q3, based on the current S&P index of 700.

Your eyes are not deceiving you. The earnings crash that we've been discussing indicates an astronomical P/E later this year, assuming that the S&P index remains at 700.

The Decision Point Earnings Summary that I described above is updated every week. Here are their summaries in their 13-March-2009 report:


|----------------------------------------------------------|
|                   |    Price/Earnings Ratios based on    |
|      Quarter      | Reported Earnings |Operating Earnings|
|-------------------|-------------------|------------------|
|Q4 2008            |     43.5          |       15.4       |
|Q1 2009 (Estimated)|     74.0          |       16.5       |
|Q2 2009 (Estimated)|    134.9          |       17.0       |
|Q3 2009 (Estimated)|    296.0          |       16.5       |
|Q4 2009 (Estimated)|     23.3          |       11.8       |
|----------------------------------------------------------|

Here is the graphic accompanying Friday's report showing historical data from 1926 to the present:

Earnings, price/earnings ratios, yields and prices -- 1926 to the present (Source: Decision Point)

Earnings, price/earnings ratios, yields and prices -- 1926 to the present (Source: Decision Point)

Notice the sharp spike in P/E ratios in the third graph, thanks to the crash in reported corporate earnings.

In practical terms, what all this means is the following: The S&P 500 index is going to have to fall much further, to the 300 range or lower. This means that the Dow Industrials index will fall to the 3000 range or lower.

That's why journalists and analysts are freaking out. They're looking desperately at any way to avoid talking about those figures. Instead, they point to last week's market rally, and say, "Let's hope and pray that it continues."

I guess a P/E ratio of 181 isn't good enough for them. Perhaps they'd prefer to see it go up to 1000.

(To understand why it can't continue, see "The outlook for 2009" and "How to compute the 'real value' of the stock market.")

The Obama administration is evidently feeling exactly the same kind of desperation. On Sunday morning on Meet the Press, Dr. Christina Romer, head of Obama's Council of Economic Advisers, was asked "What is the responsible thing for consumers to do at the height of this global crisis?" Here's her response:

Dr. Christina Romer, head of President Obama's Council of Economic Advisers (Source: NBC's Meet the Press)

Dr. Christina Romer, head of President Obama's Council of Economic Advisers (Source: NBC's Meet the Press)

"The truth is that consumers have not done a lot of spending for the last 14 months. So I would predict that would be a perfectly reasonable thing is that you go out and you buy that car that you've been thinking about for the last 14 months, and you do some of the spending, and over the long haul I'm hoping we'll come back to probably a higher savings rate, cause we know we're at kind of a historic low before this all happened."

Regular readers of this web site, who understand my sense of humor, will not be surprised to know that I couldn't stop laughing when I heard this moronically stupid statement. But this is what passes for common sense among the politicians, analysts, journalists, winners of the Nobel Prize in Economics, and others in Washington.

Several web site readers have asked me recently whether last week's modest Wall Street rally means that things have turned around -- or will the market fall again below the levels of two weeks ago?

You won't get a straight answer to this question from any of the financial blogs or from the mainstream financial media, and certainly not from the politicians. They'll all hem and haw, and argue about "U-shaped" and "L-shaped" recessions, and make sanctimonious statements blaming everyone but themselves for not seeing what was coming.

So let me make this as clear as possible to readers of this web site: If you've been staying in the market because you continue to believe the crap that you continue to hear from the financial media and the Obama administration, and from ideologues like Paul Krugman (on the left) at the New York Times, and Larry Kudlow (on the right) at CNBC, then you're going to face further financial disaster.

The economy has been in a sharp deflationary spiral for over a year. The market WILL fall well below Dow 3000 with near 100% certainty. and almost certainly will fall sharply from current levels within the next few months, and will not recover for many years. (Paragraph corrected - 16-Mar)

(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.) (15-Mar-2009) Permanent Link
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Generational Dynamics Web Log for 15-Mar-2009 Analysts and journalists freak out as Q4 2008 earnings turn negative.

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Generational Dynamics Web Log for 15-Mar-2009
Analysts and journalists freak out as Q4 2008 earnings turn negative.