8.3.13: SP 500 Earnings: Lapping Weakest 2012 Earnings Growth in Q3 ’13 / Municipal CEF’s Are Getting Stupid Cheap

Q3 ’12, earnings growth for the SP 500 was just 0.1%, the lowest year-over-year growth for the SP 500 since the 2nd quarter of 2009.

In my opinion, Q3 ’12 really marked the end of the huge productivity boom off the 2008 – 2009 recession, and was the transition quarter, as the SP 500 started to shift from productivity-driven earnings growth to organic and revenue-generated earnings growth.


According to ThomsonReuters, This Week in Earnings, the forward 4-quarter estimate for the SP 500 slipped this week to $115.96, from last week’s $116.14.

The p.e ratio on the forward estimate is 14.7(x) as of Friday’s, August 2nd market close.

The SP 500 earnings yield is 6.78%.

The year-over-year growth rate of the forward estimate has risen to 7.14%, the highest growth rate in the last year, and about even with what Factset thinks is the “average” 4-year growth rate of SP 500 earnings at 7%. In fact, it was the first week of August in 2012, that saw the slowest year-over-year growth rate for the forward estimate at just 1.08% on  August 3rd, 2012.

With 384 SP 500 companies having reported q2 ’13 earnings, the y/y growth rate has risen to 4.3%, versus the 2.9% as of July 1, and revenue growth has ticked up to 2.1%.

So far there is nothing unusual about q2 ’13’s earnings save for the gigantic contribution of the Financial sector, +28.5% y/y earnings growth when a still-robust but far lower 17.5% was expected on July 1.

Basic Materials as a sector is still getting crushed. Metals & Mining stocks are the worst subsector of the sector. Per FactSet, Metals & Mining earnings growth is down 59% year-over-year. One interesting technical item to note: despite horrid 2nd quarter’s by Alcoa (AA), Freeport (FCX), and US Steel (X), the stocks have NOT made new lows below their June, early July prints.

At just 3% of the SP 500 by market cap, Basic Materials are not a big influence on the index, but I do like to watch these heavily pessimistic, very cheap valuations, for opportunity.

How do Q3 ’13 and Q4 ’13 look from earnings perspective ?

The expected Q3 ’13 earnings growth rate has fallen 2.5% from July 1 to 6.0% y/y growth from 8.5%. Part of that sharp drop is Telecom, which is down from an expected 17.3% to 9.1%. ThomsonReuters told me that Sprint (S) has been removed from the SP 500. At the rate analyst’s are cutting estimates q3 ’13 should come in at +1% – 2% expected growth by early October, which has how the last 4 quarters have tracked.

The expected q4 ’13 earnings growth has fallen 13% on July 1 to 11.6%. Again, Telecom is down from an expected earnings growth rate in q4 ’13 of 47.8% to 20.8%.

Financial sector estimates continue to be a Rock of Gibraltar for both quarters, with slightly upward revisions.

Basic Materials, Telecom and Utilities stocks each represent about 3% of the SP 500, by market cap.

Owning Financial’s (18% of SP 500 by market cap), Technology (18% of SP 500), and Industrial’s (10% of SP 500) gets you about 46% exposure to the SP 500.

Healthcare was the best performing sector in both July ’13 and year-to-date, with the sector being 7.09% and 27.90% per Bespoke’s data. Interesting that Pfizer (PFE), Merck (MRK) and AMGN haven’t made new highs in a while. AMGN hit its $115 high in the 3rd week of April, MRK hit $50 in early June, and PFE’s $31 high was all the way back in the 3rd week of April. Only JNJ keeps chugging along. JNJ’s chart looks a lot like Home Depot’s did in 2012.

JNJ is up 36% year-to-date as of Friday, which is just capital gain.

Healthcare is 13% of the SP 500 and we are probably underweight the sector, with closer to a 10% weight in client accounts.

The fact is long-term average earnings growth is just now returning to “average” and is actually a little below average currently. SP 500 earnings growth SHOULD continue to improve.


Municipal closed-end funds: we will be out with charts on Sunday and Monday, with technical commentary on a few positions from Gary Morrow, but we’ve added the Nuveen Municipal Value (NUV) closed-end fund to client accounts in the last week, as well as the Blackrock Muni Enhanced (MEN) closed-end fund to get both yield and technical support for clients taxable bond portfolios. We will save the fundamental write-up for the blog specific post, but we are finding a whole lot of muni closed-end funds at weekly oversold readings on our charts. What I do worry about is meaningful tax reform, which reduces or eliminates the favored tax exemption of municipal bonds for individual investors, given Congress’ and the President’s penchant for screwing the wealthy investor AND trying to boost tax revenue, BUT the catch is that current muni yields on some of these funds, rival the current investment-grade bond yield, which if you’ve followed muni’s for a while, means muni yields are trading at 100% of investment-grade corporates, which is truly cheap. If we used taxable-equivalent yields on the muni CEF’s, the muni market is approaching yields closer to taxable high-yield or 7% 8%, even as high as 10%. These tax-exempt yields discount a lot of potential trouble with an 8% to 10% taxable equivalent yield. Some of these closed-end funds could start to see “cross-over buying”, which means that they could get bought in IRA and tax-deferred accounts simply for absolute yield purposes. I know I’ve thought about it for some large IRA and Foundation accounts we manage, which are tax-advantaged already.

Selling mutual bond and fixed-income funds: part of the above interest in closed-end funds is that we are in the process of selling all of our taxable and municipal bond funds and moving more towards individual bonds, closed-end fund’s and ETF’s. Part of the strategy or methodology is that with the undefined maturity, mutual funds could very likely struggle with redemptions in the next few years, and we are looking more to trade for shorter-time period’ s and to generate “absolute-return” within client fixed-income and balanced accounts to minimize loss, and maximize total return. I think the bond markets of the next few years will be very different from the 2010 – 2013 market, where you simply bought mutual funds of various duration and credit spectrums and then sat on them for a while. We sold some more Friday, August 2nd, as we tried to catch a Treasury rally.

Treasuries saw a little rally on Friday on the weaker jobs report. I thought Rick Santelli, the CME CNBC reported that covers Treasuries, currencies and such from Chicago, made a very astute point: The June payroll report in realy July, which was stronger-than-expcected, saw 10-year Treasury yields spike 24 bp’s, or 3/4ths of a point. The rally Friday, August 2nd on the weaker July jobs report was just a 1/2 point. Per Rick, the Treasury risk-reward remains skewed toward higher rates. It is only a matter of time before these technical levels get trashed in my opinion. We are still long a little IEF and TLT for an off-season trade in August. We could end up selling at a loss, too.

Facebook (FB) was our best July ’13 performer. So glad we stayed with the stock, after bulling it on the blog a few times. Stock was up 48% in July ’13 and jumped to our #2 position on appreciation alone.

My budy, Ryan Detrick out of Schaeffer’s in Cincinnati, writes how the RUT needs to take out 1,060. Key level – Closed Friday at 1059.86.

We are keeping it short and sweet this week. The SP 500 remains overbought and August is typically a weak period for stock returns, but we could have seen our correction in June.

We are still overweight Financials in client equity accounts, (3 of top 5 positions, which has been the case for a while), with Consumer Discretionary and Retail in the Top 10 too. The inverse Treasury is a large position in balanced, and fixed-income accounts.

We are long Japan ETF’s and like the Treasury ETF’s IEF and TLT for a counter-trade in what could be a blah and slow August ’13.

We have a found a couple of oversold stocks due for a trading bounce, so check back on the blog Monday or Tuesday.

Thanks for reading and stopping by:

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager









Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.