8.15.13: SP 500 Earnings Update: Ignore Pundits, Forward SP 500 Growth Rate Continues Ascent

Per ThomsonReuters, “This Week in Earnings”, the forward 4-quarter estimate for the SP 500 slipped $0.06 last week to $115.89, from last week’s $115.95.

The p.e ratio on the forward estimate is now 14.3(x).

The earnings yield is now back over 7% to 7.00% even.

Most importantly, the year-over-year growth rate of the forward estimate rose to 7.24%, from last week’s 7.19%, and the estimate of 4 weeks ago at 6.56%

(Given the earnings data this week, and the hand-wringing that followed Cisco (CSCO), Wal-Mart (WMT) and others, you’d think the earnings sky was falling. The pundits have gotten SP 500 earnings wrong, and not by a little, for over a year now.) (Long small amount of CSCO, and decent amount of WMT.)

The SP 500 earnings data is actually improving. The glitterari and paparazzi, are just watching the wrong metric.

Sector data:

Two weeks ago, 80% of the SP 500 was trading above it’s 50-day moving average, and was considered overbought. As of Friday, 8/16/13, only one sector is considered “overbought” and that is Basic Materials, and the rest of the SP 500 is considered “neutral”, with the exception of Telecom, which is the only sector now considered “oversold”.

Verizon is getting very interesting right here from a long-term trend perspective. $1 – $2 lower would be ideal from a buy-point perspective. T gets more interesting near $31 – $32.

The dividend trade is over, which means that companies with little growth with healthy dividends, that saw p.e. expansion in 2010, 2011 and through late 2012, have come in in price, but some of these are still very good companies.

Today, there is 57% of the SP 500 trading above their respective 50-day moving averages, versus 80% two weeks ago.

Despite all the hand-wringing about the SP 500 and stock market, in my opinion we are simply working off an “overbought” condition in an orderly fashion.

Right now, gold, and basic materials look to be encountering a “counter-trend” rally. As the SP 500 has weakened the last few weeks, gold, silver, steel, and copper stocks (like GLD, X and FCX) have rallied. Have they rallied because a return to global growth will improve earnings and revenue growth ? Not enough evidence is in yet. We are long AA, FCX and X, for now. Hard to say if the rally is sustainable. I would like to see it start to show up in Basic Materials earnings estimates. From a sentiment perspective, it is hard to believe Basic Materials could get much worse than the sentiment and trading action we saw late June, early July.

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It is probably a perfect time for the market to correct, given that so much of the Street seems to be on vacation.

The 10-year Treasury broke down through the early July lows this week, with the 10-year yield rising above its 50-month moving average this past week for the first time since 2007. The 10-year Treasury yield peaked at a 5.32% in June, 2007. Foreign or “indirect” buyers at the auctions, now seem to be the biggest sellers. (Long TBF).

One final point: we’ve written over the past few months how Bespoke tracks “Domestic” SP 500 stocks, or those companies with 100% of their revenues from the US, versus “International” companies, which, per Bespoke, get roughly 50% of their revenues from Non-US countries.

In late April, 2013, the performance gap was 610 bp’s favoring Domestic over International within the SP 500;

In late July, 2013, the performance gap was 300 bp’s favoring Domestic over International within the SP 500;

Today, that performance gap has shrunk to just 51 bp’s, as International continues to narrow the lead over Domestic.

In our opinion, part of this can be due to Europe starting to bottom, and a resurgent Japan, and part due to the valuation on some US sectors like retail drug stores, and retail in general, as well as “taper” talk. Europe has rallied smartly since July 1.

We are going to keep it short and sweet this week, and end the blog post here.

Home Depot (HD), Lowe’s (LOW), and Hewlett-Packard (HPQ), are the three names we currently own for clients that report this coming week.

We still believe the 4th quarter, 2013 will be very strong, and the SP 500 will be up in the 20% range (above 20% by year-end). Our original forecast for 2013 was an increase in the SP 500 of +5% – +15%. Way wrong on that prediction.

Market technicals:

The SP 500 bottomed in June, 2013 at 1,560, and then rallied to 1,709 in early August, 2013.

A re-test of 1,560 would be an 8.5% (or just perfect) correction: enough to worry the nattering nabobs, and take the overwhelming positive sentiment out of the market.

The May to June ’13 correction was 7%.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

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