Earnings/Market Update – December 8, 2012: In a Sea of Uncertainty, Earnings Remain a Net Positive

The “forward 4-quarter earnings estimate” (per ThomsonReuters) for the S&P 500 as of Friday, December 7th was $109.20, down from $109.42 last week, and still stuck in the 3-month range between $107 and $112.

The p.e ratio on this forward earnings estimate is 12.9(x).

Expected year-over-year earnings growth for the S&P 500 in 2012 is roughly 4%, while 2013 is expected in the 10% range.

The S&P 500 is probably pretty fairly valued on a p.e basis at its current level.

There is little new news on the S&P 500 earnings front and likely won’t be until early January, 2013 when we roll into the new quarter.

The big thing to watch for between now and the end of the year, is negative earnings pre-announcements. Personally given the state of market sentiment and reasonable sector valuations, it is not as if negative pre-announcements will have a tremendous and deleterious effect on the stock market in general, in our opinion.

The real surprise would be positive pre-announcements, which most pundits would view as a complete shock, but that possibility seems remote too.

However, the “special dividend” splurge we have seen the last 3 weeks seems to have lost its luster. Stocks that declare a special dividend get a one day pop and then seem to fade. We are keeping an eye out for how this group has performed in December since the announcements. Surprised Bespoke hasn’t published something performance-related on the special-dividend stocks yet.

On balance, we believe that S&P 500 earnings remain a “net positive” for the stock market, despite recession talk, and Fiscal Cliff worries.

The key unknown is how forward earnings estimates will be impacted once we do have a deal from Washington. However, you would think if analysts were getting some guidance from management’s on how sequestration and fiscal policy was going to impact earnings, it would have started to show up in estimates by now.

We won’t post our “Stat of the week” since I was too lazy to gaze at my navel for too long, but I will say “Basic Materials” earnings estimates for 2013 were looking pretty decent (China recovery, anyone ?), and by that I mean the forecasts were trending higher, but I wonder if Freeport’s ill-fated and scathingly-reviewed acquisitions this week, will put a cork in that sector. Freeport Copper (FCX) is a big basic-materials sector component.

Also worth noting is that S&P 500 earnings for 2013 are currently expected to be up 10% y/y, while the Financial sector is expected at +15% in 2013, and estimates have been stable. I still think financials are a safe(r) place to be in this market.

Market/sector/security update:

* Apple (AAPL) had another brutal week. Per Bespoke, in the history of AAPL corrections though, this correction is still “normal”, even though the weekly drop was 9%. Still like it and remain long AAPL;

* Johnson & Johnson (JNJ), Procter & Gamble (PG) and Home Depot HD) are all nearing all-time highs. Of the three we like JNJ the best, given its large-cap pharma exposure and the new CEO Alex Gorsky, who also just ascended to the Chairman-ship of JNJ. We will have an article up shortly over on www.seekingalpha.com, analyzing these three stocks in one column.

* http://allstarcharts.com/equity-allocations-fall-to-fresh-lows/. Good chart here from Ryan Detrick found on Twitter. He is a former Schaeffer’s technician I’ve followed for a while. Retail stock investors have the lowest allocation to equities all year. When there is lots to worry about, start picking stocks.

* Three excellent charts by Gary Morrow, a long-time friend, and current contributor to www.thestreet.com. Crude oil could be breaking down, which we’ve long wondered might happen given the slowly growing adoption of hybrids and electric cars. http://twileshare.com/zun. However just because crude might break a few bucks doesn’t mean it is done permanently. Starbucks held their annual analyst love-in this week and Gary Morrow posted this chart http://twileshare.com/zrr, on the stock, showing the breakout. SBUX is one of our top 10 holdings. (Long SBUX)

* Toll Brothers (TOL) reported earnings this week and our preview noted that we thought the first leg of the big stock move might be over and Gary Morrow notes the chart here http://twileshare.com/zoz. We’ll be looking to buy TOL in the $20’s. We posted our TOL earnings preview last week. (long TOL)

* High yield (i.e. junk bonds) have held in quite well despite worries about the economy. We cut our exposure about a month ago, but still carry an overweight. We worry that owning high yield in the search for “yield” is now as commonly accepted paradigm as being long AAPL stock, but nothing tells us yet to trim more, although we can get out quickly since we own a lot of our exposure in the HYG and JNK (long HYG, JNK).

* Could Europe be stabilizing ? Seemingly better news on Greece this week and the Greek debt announcement and the 10-year yields in Greece, Italy and Spain have really rallied nicely this year. Jeff Miller told his blog readers to watch that 10-year, particularly the Italian 10-year for a one-metric gauge on Europe’s health. Tiffanys (TIF) reported their European comp’s rose 8% in the October quarter, the best of any geographic region in the world.

* Here is a great chart from Norm Conley, a friend who runs JA Glynn Investment Advisers in St. Louis: http://twileshare.com/zrj. Puts the homebuilder bounce in perspective, no ?

* Here is another chart from Norm on transfer payments as a % of the federal budget: http://twileshare.com/zsg. Maybe Boehner wanting to extract spending concessions from the President, isn’t such a bad thing.

* Outside of AAPL, our favorite stock into year-end is IBM. Earnings estimates actually went up slightly after the October eranings reports, but the stock is down from $210 to the $190 area. Too cheap. Great cash-flow generation and a lot of bad news cooked into prices in our opinion. (Long IBM)

* A lot of Treasury supply scheduled to be auctioned this week, with 3’s, 10’s and the 30-year maturity on the block. Bond ETF’s like AGG, IEF and TLT look vulnerable technically. The bull market that just won’t end – how long has it been since we’ve had a negative year in terms of Treasury price returns – 2003 ? I need to refresh my Ibbotson data.

* One thing that struck me in terms of the mortgage interest deduction and the Cliff, is that with interest rates so low, the deduction is already diminished anyway. Whoever hasn’t refi’ed to a reasonably-low mortgage rate, must be living in a cave;

* With the mess that is now Freeport (FCX), we hope that Alcoa (AA) attracts some of this “basic material” sector flows. AA’s chart looking a little better. Already took some tax-loss selling in taxable accounts. One of our bigger dogs off the ’09 lows.

* Costco (COST) reports earnings this coming week, Wednesday morning. Check for our earnings preview.

* All CNBC can talk about is Apple’s correction and the Fiscal Cliff. Have to turn it off after a while.

Thanks for stopping by and thanks for reading. We’ll be out with some topical articles on this site before year-end.

Trinity Asset Management, Inc, by:

Brian Gilmartin, CFA

Portfolio manager




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