Knife Grabbers (cont.)

TW: We have set out this rally and still will for now. We are not alone, but can certainly empathize with these sentiments.

From the Reformed Broker blog:
"I talk to a ton of traders, portfolio managers, brokers and high net worth investors, both on and off Wall Street. Most of them have engaged in a bit of panic buying at some point this summer as the 50% rally in US stocks surprised many smart players...The quotes below are real, if paraphrased, and came from a variety of my contacts and friends:

The Five Stages of Panic Buying!
1. Denial (Late March/ Early April)
“Ha, another Bear Market rally…wait til the foreclosure/ new home sales/ confidence data comes in! Right back to 6500, maybe lower…bagholders”

“Dude, the stress tests are coming out next month. B of A may be done-ski. Sell the May 10 calls, you’ll never have to cover.”

2. Anger (Mid-April)
“What the f@&% do you mean the goddamn banks are cheap based on normalized earnings? They will never ever earn anything again, ever! Idiot!”

“You gotta be kidding me with these retailers running now. RETAILERS? Are you nuts? They’re FINISHED!”

“If one more consumer discretionary name rallies on a less-than-expected loss, I’m gonna kick this Bloomberg down a flight of stairs.”

3. Bargaining (May-June)
“Okay, I can stomach picking up some large cap tech and I’ll nibble – NIBBLE! – at discount retailers, but I will absolutely NOT buy Goldman Sachs at 130.”

If China would just pull back 5 to 7% I’d get in, but I can’t chase it here…except Sohu, and I guess a little Baidu and I’ll just take a quarter position in China Mobile just in case. But I’m not chasing here.”

“(whispered) Dear market god, please stop the tape. Just give me one crack at the Nazz and some banks and I will never doubt the solvency of the US balance sheet or the wisdom of the Troubled Asset Relief Program ever again.”

4. Depression (July)
“I can’t believe I missed it. Those D-bags next to me are high-fiving after every earnings report. Hate those f@&%ing guys.”

“How could Las Vegas Sands do this to me? I’ve been watching this stock go up for 900% now. Couldn’t just give me one chance to get in. I suck.”

5. Acceptance (Early August)
“That’s it! I don’t give a damn anymore, GET ME IN NOW! Forget the big ones, they’re already up too much, are there any $5 stocks left that haven’t done anything yet?

“I gotta blow out this stupid GLD, it does nothing, sick of it and sick of hearing about inflation. Even Paulson blew it out. Get me some $2 biotechs and some midwest regional bank stocks, I gotta get poppin’ over here! We’re going to 10,000 baby!”

If hearing these words and phrases from somewhere outside of your own inner monologue was at all cathartic or helpful, then you’re welcome... "
http://thereformedbroker.com/2009/08/27/the-five-stages-of-panic-buying/#more-5307

Knife Grabbers (cont.)

TW: I remain highly skeptical about the economy and the markets. Recall personal consumption exceeds 70% of the total economy, if it is declining 5%ish then the recession will continue.

In addition to being concerned about the markets I am very concerned that the political environment will get extremely difficult if the economy continues to splutter and perhaps locks up again over the winter. We cannot seem to get any rational governance now, what would happen in that circumstance I do not even want to contemplate.

From Floyd Norris at NYT:
A good measure of retail sales growth, or lack thereof, is total retail sales less spending at gasoline stations. Here are the year-over-year figures for that measure, starting last September, the month the economy started to plunge.

September, 2008, -4.3%
October, -6.6%
November, -7.5%
December, -8.7%
January, 2009, -7.0%
February, -6.3%
March, -7.6%
April, -8.0%
May, -7.7%
June, -6.8%
July, -5.9%

You can take encouragement from that, if you want to do so. The year-over-year decline is the smallest since September. But it turns out that all of that improvement comes from a modest increase in auto sales, caused by the “cash-for-clunkers” program..."
http://norris.blogs.nytimes.com/2009/08/13/consumers-arent-spending/

Yes This Is a Great Recession

TW: I will not digress into the tedious memes now circulating. The "green shootists" (the happy talk about economic stats usually based on the dreaded 2nd derivative or rate of change improving) are being overtaken by the "brown weeders" (the grumpy talk about the economic stats in absolute and other terms still being quite nasty).

The above graph though portrays in one (relatively) simple graph the depth of this Great Recession. As one can see, the duration and depth of the plunge in employment (in % terms not absolute so the population growth over the past 60 years is equivalized) during this recession is the worst since WWII or more specifically since GD 1.0. One can also see that the declines will almost certainly continue. One does not need to understand calculus (i.e. 2nd derivatives) to eyeball how the lines on the graphs for employment do not just turn on a dime, they change gradually. The current line has a while to run yet.

Btw, I posted last month on how the birth/death model is softening the job loss number. The BLS threw in +185K jobs this month. The real numbers are likely at least that much worse.

Bah Humbug

(click on graphs to enlarge)

TW: These graphs via the Big Picture blog, hit two of our themes. One, earnings generally suck and two the "reported" earnings are particularly bad. For those concerned about inflation and still talking about V-shaped rebounds and return to normalcy, I say "bah humbug". Earnings have cratered, much of what has passed for "earnings" year-to-date are accounting gimmicks related to mark-to-market etc.

Truer Words Are Rarely Said

TW: Am obviously skeptical of the recent market rallies. We are all ruled to a certain degree by our biases.

ps- I suspect the whiplash will make the 2010 elections very tough on the Dems.

From the Big Picture Blog:
"Andy Xie, former Morgan Stanley star economist, wrote:
'While rational expectation is returning to part of the investment community, most are still trapped in institutional weaknesses that make them behave irrationally. The Greenspan era has nurtured a vast financial sector. All the people in the business world need something to do. Since they invest with other people’s money, they are biased towards bullish sentiment. Otherwise, if they say it’s all bad, their investors will take back the money, and they will lose their jobs. Governments know that and create noises to give them excuses to be bullish.”
This institutional weakness has been a catastrophe for people who trust investment professionals.

In the past two decades, equity investors have done worse than owning bonds in the U. S. market, lost big in Japan and emerging markets in general. It is astonishing to see how a value-destroying industry has lasted for so long. The bigger irony is that the people in this industry have been 2-3 times as well paid as in other industries. The key to its survival is volatility. As markets collapse and surge, it creates the possibilities for getting rich quickly. Unfortunately, most people don’t get out when markets are high like now. They only go through the ride.”

Spraying Pesticide On Those Green Shoots

TW: I had never heard of the Bureau of Labor Statistics "Birth/Death" model until maybe a year or so ago. It is one of those arcane inputs into our economic stats that should interest economists and sophisticated investors but not your normal citizen. The model has nothing to do with folks living or dying but with the "birth/death" of new businesses.

The model has gained notoriety because of the above, where as you can see the BLS keeps plugging in new jobs to reflect "new businesses" at the same rate as they have since 2004. The plugs are not immaterial they were over 200K in May and are over 700K cumulatively since February.

Recall on Friday most of the headlines said something to the effect of "jobs losses less than forecast" because 300K+ were lost instead of 500K+ or just about the amount of the BLS "birth/death" adjustment. The jobs' numbers drive markets but is the jobs number accurate.

Intuitively one would think the "birth/death" number should be worse this year than say 2005 when the economy was growing but that is not the case, perhaps it should even be negative. I would feel much better if this were a long-standing model input that has been tweaked to reflect business cycles over decades, but no. As I learned from Ritholtz it was created by...W. Bush in 2001 because he thought the BLS was under-reporting new jobs..at which point I am like "oh shit". Assessing the actual import of this model is far beyond my expertise but others are voicing concern as well. Something to keep in mind, if the model if off a negative adjustment will be forthcoming at some point or else we are just living in gagaland.

From Barry Ritholz' Big Picture blog:

"A quick refresher on the Birth Death adjustment: In 2001, the Bush administration directed the BLS to compensate for the tendency of the Establishment Survey to miss new business formation and the impact on employment. Previously, BLS tended to under report new jobs in the beginning of a a cycle turn. What the new B/D Adjustment series did was take new incorporation filings per state, and deduce from them that new jobs were being created. (That took effect around 2003).

This improved somewhat the ability to capture new jobs at the start of the cycle. But the flaw in the adjustment was that the model radically overstated job creation at the end of the cycle. Say a firm goes out of business, or lays off 100s of workers. They form new shops, incorporating these start ups. According to the BLS, that is job creation.

But in reality, a steady paycheck with benefits has now been transformed into a start up with none of the above. And as we know, 90% of all new businesses eventually fail.

How misleading is the BD adjustment at the end of the cycle? Consider that in 2007, 75% of the BLS newly created jobs were due to the B/D adjustment. That did a nice job masking the actual problems beneath the surface."

Knife Grabbers: Watching the Jobs

(click on image to enlarge)
TW: This is a somewhat busy graph but to me informative. It shows job losses by % across all of the post WWII contractions. The current one is in red. One always gets into chicken and egg discussions regarding various economic metrics but without jobs economic growth just will not happen unless some sort of financial bubble is blown. Our economy just having come off the tech and credit bubbles is not likely to enter another one. So we need jobs, what on the horizon will generate profound job growth?

Bottom Pickers And Other Rude Acts (cont.)

Above from John Maudlin-

From David Rosenburg at Bank of America/ML:
"...we continue to hold the view that investors are confusing an ‘improvement’ relative to the post-Lehman shock when the economy was literally falling off a cliff to an actual
improvement that would lead us to believe that a renewed upturn is at hand."

TW: The market is up from its lows, but were they new lows or THE low? Who knows. But our guy David Rosenburg remains skeptical and the earnings estimates keep changing in one direction- down. The above estimates are reported earnings as in the real earnings (or as real as they are given the exigencies of GAAP etc.). You may see higher estimates based on "operating" earnings which do not reflect "extraordinary" items. In normal times operating and reported earnings differ (operating higher) but not by much. In these extraordinary times though, not surprisingly extraordinary items are rocketing upward creating a large gap (50-100%) between the two types of earnings. In normal times it did not matter too much whether a pundit based her analysis on operating or reported earnings, now of course it matters greatly. Not surprisingly the bulls are throwing around P/E multiples using "operating" numbers, the bears tend toward the "reported".

At current prices the P/E for 2009 using "operating" earnings is about 30, using "operating" more like 15-20ish. Both numbers in this environment seem pretty high (long-term average being about 15). We shall see.

Knife Grabbers An Update

TW: On 1/9/09 I posted John Maudlin's original summary of S&P earnings estimates. At that time the analysts were forecasting CY2008 earnings at $42. With the actual results about 75% in the likely outcome will be $30. Giving the S&P a backward P/E multiple of about 29 (long-term avg. is 15). The market obviously is a forward looking tool though.

Those same analysts are holding their 2009 S&P estimates at about $42 (they were at the same level on Jan 9) or an implied forward P/E multiple of the same at 29. So if you are bullish, you are assuming either more multiple expansion (from 29 to ???) or earnings growing faster than estimates (despite those estimates for the past two years being wildly optimistic). Your call.

Knife Grabbers (cont.)

TW: I posted yesterday on how one might want to be cautious grabbing the potential falling knife known as our stock market. The piece focused on the rapidly declining earnings estimates for 2009 (and likely beyond).
http://treylaura.blogspot.com/2009/01/for-you-knife-grabbers.html

Today I add a little more meat (courtesy of Mish's blog) with some numbers outlining valuations if the earnings come in even lower. Why would earnings get down to $25 for the S&P, that is where they were during the very mild recession in 2001. As you know P/E ratios tend to converge around 15ish over time. So while this is merely a simple math exercise, one can see some pretty tough numbers unless earnings stage a miraculous rebound or P/E ratios skyrocket (out of speculative fever or expectations of a massive earnings rebound in 2010 and beyond).

I do not look at those numbers and think a 300 S&P is imminent but I do look at them and understand just to keep the market flat will require either significant multiple expansion (in a severe recessionary environment) or fairly unbelievable earnings performance. On the other hand if multiple remains flat to even slightly more bearish and earnings continue to drift down then there is another 20% drop coming at least.

S&P Earnings/PE ratio/Value of S&P
$25.00/12/300
$35.00/12/420
$45.00/12/540
$55.00/12/660
$25.00/15/375
$35.00/15/525
$45.00/15/675
$55.00/15/825
$25.00/18/450
$35.00/18/630
$45.00/18/810
$55.00/18/990

Actual 2008 SP earnings will be roughly $45-50. Where would earnings growth come from in 2009?

For You Knife Grabbers

TW: To anyone out there pondering an aggressive move into the markets early in the new year.

From John Maudlin on the Big Picture Blog:
"...earnings estimates are dropping for the S&P 500, as analysts try and catch up with the reality on the ground. They are still behind the curve.

Let’s look at their estimates for earnings in 2008. They started at $92 in early 2007 and are now down to $48. This chart is not something to inspire confidence in stock analysts.

On a trailing one-year basis, that puts the Price to Earnings Ratio (P/E) at over 19 as of today’s close at 925, which does not make the market cheap. But last year’s earnings are history. What about 2009? Again, the analysts are in a race to find the bottom.

The current projections are for $42.26 for 2009. That makes the forward P/E 22. That doesn’t look like value at all, when the historical average is closer to 15.

Bulls would argue that the market is forward-looking and that all the bad news has been priced into the market. I would counter that the market has so far done a bad job of pricing in bad news, given the fall of the markets last year in the face of a recession. As I repeat incessantly, the US stock market falls an average of 43% during recessions. The stock market was not discounting a recession last January or even in May, even after a very serious financial crisis.

But how bad can it get? Analysts must surely by now have lowered their estimates to more realistic numbers. Shouldn’t we start to price in the recovery from here? Well, no, not if you look at the last recession.

In 2001, as-reported earnings were $24.67. Operating earnings in 2002 were $27.57. Does anyone think the current recession will be milder than the last one? Or shorter?"

http://www.ritholtz.com/blog/2009/01/2008-annus-horribilis-rip/