I was at first thinking of not publishing today but changed my mind - judging from last two days responses that readers are still coming back. I suppose many of you must be die hard investors that will never give up no matter what circumstances. I'm confident that we will outlast this bear market, depression or whatever the mainstream media wants to call it. Enough of small talk, let's get down to business. The earning releases from the US corporations have not been very encouraging as you can see on the front page of WSJ. Funnily, the DJIA seems to be able to hold above 8,000 despite of many companies reported earning down by 70%, 80%, 90%, etc. A bulk of them are related to restructuring and etc which could be one-off(I hope) and yield long term saving.
(WSJ)Operating earnings for companies in the Standard & Poor's 500-stock index probably slid by 28% compared with fourth-quarter 2007 results. And the start of 2009 doesn't look much better. Analysts think earnings will decline by 20% in the first quarter and by 18% in the second, according to forecasts collected by Thomson Reuters.
If those estimates prove to be accurate, the total drop would be 35% since profits peaked in mid-2007. Since 1950, the only other decline approaching such magnitude has been the 32% falloff from September 2000 through December 2001 (a stretch that included the terrorist attacks of 9/11). The average peak-to-trough earnings decline during downturns in the same period was 18%, according to Strategas Research Partners.
Earnings estimates may continue to come down for 2009. "Bottom-up" analysts -- those who cover individual companies -- are expecting members of the S&P 500 to post combined earnings of $70.73 a share this year. "Top-down" analysts, who look at broad economic forces, see just $63.78.
Assuming finacials, information technology, industrial, materials and energy contributes about 60-70% to S & P 500 and other defensive sectors like health care, consumer staples, etc contribute the rest. A conservative estimate of 50% down from 2008 non-defensive companies earning while defensive companies hold up their earning, S & P 500 earning will have to decline by 30-35%. In this case 2009 S & P 500 earning should be around $45 - $ 50. This has been the basis of many of perma bears to call for S & P for 500 - 600 ( PE 10 to 15 X). If we go back to 1974 level of pessimism, at 6 times PE, S & P worths only 270 - 300, I think I'm really scaring you now.
For those who are more optimistic, I think they are looking for recovery in 2H 2009, earning to rebound by 30-50%. Or some sectors will have to expand by that much from Obma stimulus plan. [Don't ask me how I derrive every $ 1 stimulus spending to translate into corporate profits. My tool is simply too primitive to do this at the moment]. In that case, S & P earning could be around $ 85, this will give them a basis of arriving S & P target at 850 - 1,275, which many will find it a more sensible number to believe.
A bit of historical pespective, prior to 1987 crash, the peak of DJIA was around 2,700 and bottomed out around 1,766. When the market improved by about 200 plus points or so to around 1,900++ in December 1987, the bearish camp kept calling for DJIA 1,000 but the market rallied a bit by bit climbing wall of worries until level of 2,700 level was taken out around September 1989. By the time Dow 1,000 dissapeared from investors minds, more people convinced the worst market crash in human civilization will have ZERO chance of returning and they started pouring in their money in the stock market. The usual familiar plot ended, the market peaked around 2,900 plus and crashed to 2,300++. History does not repeat itself, but it does ryhm. I find that this time, most of the old folks that lived through many cycles are a lot more calmer and optimistic than young guys. I expect Dow 6,000 or S & P 500 target of 500-600 to be around for a while until Dow 14,000 - 15,000 is taken out. I also expect people to argue super cycle bear market yet to be here.
Enough of history, back to 2009. The judgement day will be Q3 2009 - failure to show any recovery by at least 30%, equity market will be thrashed. Just as simple as that.
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