7.27.13: SP 500 Earnings: The Growth Rate of the Forward Estimate Continues to be Key Tell

July 28, 2013 at 3:53 pm | Posted in AA, AGG, Bond Funds, Bond Market(s), Earnings, Facebook (FB), FB, Financials, INTC, Japan and Nikkei, S&P 500, SCHW, TBF - inverse Treasury, Uncategorized | Leave a comment

Per ThomsonReuters, the “forward 4-quarter” estimate for the SP 500 slipped a little this week to $116.14, from $116.74 last week.

The forward estimate remains close to an all-time high and continues to follow the normal quarterly pattern.

The p.e ratio on the forward estimate is 14.57(x).

The “earnings yield” on the SP 500 slipped to 6.87%.

The growth rate of the forward estimate remains close to its 2013 high at 6.54% year-over-year growth. In English, this means that the current $116.14 estimate is now 6.54% higher than the forward 4-quarter estimate, 52 weeks ago.

The forward estimate must continue to expand in order for the market p.e to expand (in my opinion). This could be one reason this bull market has caught so many asleep.

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2nd Quarter, 2013 Results

Roughly half of the SP 500 have reported earnings for Q2 ’13, with the most telling statistic this week being that the percentage of those companies beating the consensus revenue estimate increased from 49% to 56%.

Finally, we are seeing at least a little bit of top-line improvement. Q2 ’13 revenues are still projected to grow at a 1.6% rate. Ex the Energy sector, SP 500 revenue growth is closer to 2.5% – 3%.

In terms of Q2 ’13 earnings results, the biggest improvement in the numbers since the quarter started is the sharp jump in Financial’s y/y earnings growth from 17.5% on July 1 to 26.9% as of Friday, July 26th. Financials have looked good for some time, but I dont think anyone had predicted a 50% upside Q2 ’13 earnings surprise in the sector. Financial’s expected revenue growth of 6.5% is the highest in the SP 500 as well. Financial sector strength is truly amazing given all the chatter about Glass-Steagall, higher capital ratio’s, and more regulation for the industry, particularly the large banks. Washington and the regulators are just trying to beat the snot out of Financial’s, and the sector keeps outperforming.

The three sectors with better-than-expected Q2 ’13 earnings growth since July 1:

Financials: 26.9% vs 17.5%;

HealthCare: 3.4% vs 0.2%;

Consumer Discretionary: 8.0% vs 5.9%;

The remaining sectors of the SP 500 have all experienced lower-than-expected growth in q2 ’13, versus their July 1 estimates.

Forward estimates:

Q3 ’13 is lapping the weakest quarter from 2012, although we will not get the next round of earnings until mid-October ’13. Here is the trend in recent quarters as well as a look at forward expectations:

q4 ’13: +11.8% (est)

q3 ’13: +6.6% (est)

q2 ’13: +4.2% (current estimate after 1/2 of SP 500 has reported)

q1 ’13: +5.4%

q4 ’12: +6.3%

q3 ’12: 0.1%

q2 ’12: +8.4%

q1 ’12: +8.1%

It is our opinion that the 3rd or 4th quarter of 2013 will have one quarter with at least 10% y/y earnings growth, and forward quarters should continue to reflect improved growth as the global economy improves.

One interesting stat (per Factset), is that the 4-year average growth rate of earnings for the SP 500 is roughly 7%. Starting with 2012′s Q3, we’ve been under the “average” growth rate, but the SP 500 is up 25% since June 30, 2012. Go figure…

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  • We are awaiting signs of life in Basic Materials to lift client’s portfolio allocation to the 3% – 5% range, but – at least from the sector earnings data – there is little indication that analysts have quit cutting revenue and earnings estimates. We remain long Alcoa (AA), with smaller positions in Freeport (FCX) and US Steel (X). Actually US Steel (X) looks to be basing the best of all, in terms of technical action. We posted a blog note about Basic Materials this week, with some technical commentary from Gary S. Morrow.  The technical action will always improve before the fundamentals, so we watch the charts and the weekly earnings data. Neither the technicals or the earnings data is indicating that there should be strong commitment to the sector (yet). Bullish news out of China could change that though… The XLB or SPDR ETF is one way to play the sector. Monsanto and Dupont (DD) are the two largest holdings. A trade above the 2008 of $44.47 for XLB and the sector has game. We prefer the deep value plays like the aforementioned metals (for now), although we do own some XLB. (Long all of the above, except MON and DD.)

 

  • Good article by Ryan Detrick at Schwaffer’s Investment Research. Still bullish… Ryan has had one of the best beads on this market for some time…With this chart, Ryan thinks the bull continues…

 

  • Halliburton (HAL) is our only energy exposure right now. Good day on Friday. Here is Gary Morrow’s chart.

 

  • When I look at different 52 week low lists from different services, municipal bond closed-end funds keep popping up in numerous quantities. We bought one fund on Friday which we will talk about later, but I do worry that IF significant tax reform gets passed later in 2013, the tax-favored status of muni’s might get thrown under the bus. I’ve been in the business since the late 1980′s and the muni exemption keeps cropping up every couple of years. I do worry, that this time, there is some conviction to eliminating the tax-favored status of muni’s.

 

  • Great chart of the 10-year Constant Maturity Treasury (CMT) by Norm Conley, portfolio manager at JA GLynn in St. Louis.  We went long some TLT and IEF here on July 14th, and wrote about it on the blog. I wouldn’t want to see the 10-year Treasury yield get much below 2.39% – 2.40% with our current position in TBF, which is a substantial hedge in our balanced and bond accounts.

 

  • High-yield has tightened back up again. Tough to hold that sector, from a total-return perspective. It is one of the few places with yield though. We have been reducing mutual fund exposure to high-yield.

 

  • The yen has been strong of late, which has held back our EWJ and DXJ exposure. These are two Japan ETF’s that will benefit from the Japan recovery. We need to see the yen weaken, and break out above 102.50 to reinvigorate that trade.

 

  • Finally, last but not least, Jeffrey Kleintop of LPL and the always-insightful Josh Brown (@ReformedBroker) on how this year’s SP 500 is the strongest bull market in 65 years. Climbing a wall of worry… Ryan Detrick draws numerous parallels between 1995, when the SP 500 rose over 30% and 2013. In 1995, I believe the only negative month for the SP 500 was August. We could have had our August in June, 2013.

 

  • Another great missive from Jeff Miller, at “A Dash of Insight”. Towards the bottom is a chart from Josh Brown, on the Great Rotation from the retail perspective, with retail investors coming back into the market. Schwab (SCHW) is a bigt beneficiary of this rotation as is Ameritrade (AMTD). (Long SCHW). Interesting that AMTD has taken out its 2007, and 2008 highs, while SCHW has not.

 

  • Facebook was a very rewarding trade for clients this week. We never go “all in” or “all out” on a position, without a very good reason. We’ve been picking away at FB for 8 months, since last November. Here is the history from the blog.

 

  • Intel (INTC) had some interesting action this week. Someone was buying, given the chart. Something going on there…

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Conclusion: we remain overweight equities in client accounts, although we have taken a long Treasury position in the IEF and TLT in some balanced and bond accounts given the technical action in the Treasury market. Friday, August 2nd, we get the July Payroll Report and the one estimate I’ve seen is looking for roughly 185,000 net new jobs created in July ’13. Certainly the weekly jobless claims data supports that action. The longer-term outlook for the Treasury market might be determined by Friday morning’s number. If Treasuries crack that 10-year chart as demonstrated in Norm Conley’s link above, the complex is likely broken for years.

Personally, we have clients invested for a return to global growth, higher interest rates (eventually) and for stock returns to outperform bond returns for an extended period of years. Within client’s equity allocation, we do have exposute to small-caps, via the IWM or Russell 2000 ETF, but we think the large-cap universe offers a better risk reward for clients, with less volatility and better valuations. We have no direct non-USA exposure with the exception of Japan.

(None of this is to be construed as advice, but rather as a reader’s guidepost for how we are managing client money. Our outlook and positions can change at any time, based on a  myriad of economic and market factors, with no obligation to update this forum.)

This week, we think the market action is all about continued strong job growth, i.e. the July payroll data, due out at 7:30 am central, Friday, August 2nd.

Thanks for reading and stopping by. It is a privilege to do what we do for clients and write about it as we do. Hopefully readers are seeing some benefit from the perspective.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

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