Sp 500 Earnings Update: Shades of Long-Term Capital Crisis from September, 1998 ?

Factset didnt have the “Weekly Earnings Insight” this week or last, but we still have the Thomson Reuter’s weekly missive, “This Week in Earnings” to run through the earnings numbers as of Friday, August 21, 2015.

By the Numbers (per Thomson Reuters): 

Forward 4-quarter earnings estimate for the SP 500 fell to $124.01 this week, down from $124.06 last week and $125.10 as of the week of July 24, 2015.

The P.E ratio on the forward estimate is 15.9(x).

The PEG ratio is still negative.

The “earnings yield” on the SP 500 jumped to 6.29% this week from last week’s 5.93%, thanks to the 5.5% drop in the SP 500 this week.

The y/y growth rate of the forward estimate remains negative at -1.80%, up from last week’s -1.82%.

The y/y growth rate of the forward estimate has now been negative for 17 straight weeks, a fact that is rather discomforting.

Analysis / conclusion: In investing, correlation is not always causality, but I wondered this week if the recent Chinese yuan devaluation(s), isn’t causing some -under-the-surface disruptions, much like the Malaysian ringgit and Thai bhat collapse did in July, 1997. It took almost a full year for that disruption to show up in the US capital markets, with the eventual bailout of LongTerm Capital Management, but surface it did. Back then the currency “contagion” spread throughout the Southeast Asian tiger economies, and they fell like domino’s, through the 2nd half of 1997, and then early 1998. The price of crude oil collapsed to under $10 per barrel, ( I think it traded as low as $8 in late 1997, 1998), as about 1/4 of the world’s GDP was decimated in a 6 – 9 month time period.

China was never a big direct investment within client accounts, since i always felt that it was a house of cards and I could get indirect exposure to China owning the top half of the SP 500 for clients, given the size of that market. Plus, after listening to Jim Chanos on China for the last few years, I thought he had it exactly right.

Is this a repeat of late 1997, early 1998 currency contagion ? My first impulse is to say no, given the problems with Greece, and Western Europe, in 2015, not to mention Russia and Ukraine last year, all of which have already weakened those economies, and currencies, and thus the China yuan devaluation might not necessarily provide the “shock value” that the rolling currency contagion did nearly 20 years ago. The other reason I suspect this “currency contagion” might not in fact be as serious, was that the LongTerm Capital Management Crisis was exacerbated by the major Wall Street firms like Lehman, Goldman and Morgan Stanley, shooting at the LTCM “book” once they knew Meriwether was in trouble. After 2008, Dodd-Frank, and FSOC, you would have to think Street trading desks, and trading “risk” are greatly diminished today, and that Wall Street won’t be found “out over it’s ski’s” like it was in past contagions.

Bespoke, in their typical 40-page weekly market and economic summary published last night, had an interesting stat: of the 19 countries in the G20, only two of the 20 major indices are trading above their 200 day moving averages, and that is Japan and Russia. (Why there are only 19 countries in the G20 is the subject of another post, but that is a direct quote from Bespoke’s Weekly Report.)

Earnings-related: Thomson Reuters did note in this week’s missive that “ex-Energy”, the SP 500 was scheduled to grow Q3 ’15 earnings +3.9%, which given the typical trend in estimates, will likely decline as we near October 1. That +3% growth is typical where we started the 2nd quarter, 2015 on July 1 ’15.

Crude oil “comp’s” get easier starting in q4 ’15, but that hasn’t helped the Energy sector as the forward quarters into 2016, are still showing eroding Energy estimates (i.e. progressively lower revisions for the energy sector) which will be the subject of a separate post.

Technology and Financial sectors remain client’s two largest sector overweight’s headed into the fall of 2015, which has been the case for a while. Financials look quite good on the charts, although the sector finally started to crack late last week.

The VIX hit a high of 31 last October, 2014 and closed right near its daily high of 28 on Friday, August 21, as the SP 500 is not yet as oversold as October, 2014.

Globally there is a lot of bad news discounted in the global indices.

Personally, I don’t think we are anywhere close today, to the kind of secular bear or even “flat” market that we saw with the SP 500, Nasdaq, and Dow 30, from 2000 through 2009.

Stock market corrections are healthy, and I still think the SP 500 is one of the most attractive asset classes in the world at current valuations.

As Mr. Buffett always says, “be greedy when others are fearful”.






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