Last week, Larry Kudlow wanted to look at the SPX earnings ex-Financials. My response: This was like looking at my own baseball hitting record, ex strikeouts. Doing so turned me into a 400 hitter!
Bloomberg poses the opposite question today: How do the Yankees look minus their biggest hitters: Matsui, Jeter and Posada? In market terms, the question Bloomie asks is "How does the S&P500 profits look minus the three largest Oil stocks?
The answer? Not so good:
"Take away Exxon Mobil Corp., Chevron Corp. and ConocoPhillips and profits at U.S. companies are the worst in at least a decade.
Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor’s 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998.
Energy companies made up almost half the income growth reported by S&P 500 companies in the first three months of 2008 as oil prices surged past $100 per barrel, the data show." (emphasis added)
If profits are the "mother’s milk of corporate gains," then thank goodness for $125 Oil. Otherwise, corporate America would be suffering from an enormous profit recession.
Now for the reason I am less sanguine about S&P500 intermediate term gains than my peers: Consider what this means in terms of (non-energy) valuations. The trailing 12 month earnings of the S&P 500is ~21, — way above its 60-year average of ~16.
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UPDATE: May 199, 2008 2:43pm
Why is this important? Because if you are relying on SPX profits to demonstrate the strength of the economy, it matters who and what is the source of those profits.
If, as Bloomberg demonstrates, only 3 firms out of 500 are resposible for all fo the gains, that is quite telling…
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Source:
Oil Producers Mask Decade’s Worst S&P 500 Profit Drop
Michael Tsang and Darren Boey
Bloomberg, May 19 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aB50jeKPl7gE#
Holy Conundrum…higher oil will crush the consumer…lower oil will hurt S&P profits.
If they install a windfall tax on oil company profits and oil continues to rise, they will manage to remove the only benefit of higher oil.
Profits don’t matter.
Look at the 4 year Dow chart.
We have another bubble developing.
I find it very interesting that Goldman came out with a “conviction buy” rating on Amazon today:
http://www.bloomberg.com/apps/news?pid=20601110&sid=afILpBARBv.g
While at the same time, they are on record predicting oil at $150 – $200 per barrel this year.
It seems to me that these two predictions are mutually exclusive – I am not buying the fairy tale that we don’t drive to the mall anymore so we will start buying everything from Amazon.
Since it’s understood that GS “talks its book”, but also understood that they shorted subprime while recommending it to their clients, I’m curious if they are “talking their book” long, with oil, and ramping up Amazon to unload it befo
re it cuts in half.
Ski-slope drops in consumer sentiment and self-professed $200 oil targets have never led me to a “convicted buy” of a retailer that only sells non-essentials…
Comments ?
skeptical:
Just look at the market today. It seems there are a lot of people that want to continue drinking the Kool-Aid. Anything to get their hopes up.
let’s tax the hell out of the oil companies–that will keep the differences low
This blog entry is very telling. What is the problem with looking at earnings minus a certain sector? It’s clearly not the same as looking at a ballplayer’s stats ex-strikeouts. You can’t put a hitter in the line-up without his strikeouts. The player is the entire “market”. If you are going to assess his abilities, you need to take everything into account. But Indexes can (obviously) be separated out easily. For example, a person can say, “I think bank earnings are in danger, but I think earnings elsewhere, like at Honeywell, will do nicely.” I’m not a Kudlow fan, but this blog entry is hypocritical.
If you’re going to take Earnings Ex-Something, maybe take out the Good Outlier (energy producers) and the Bad Outlier (Financials).
Then what would S&P earnings growth be?
My guess is it’s flat to somewhat down, but that’s just a guess.
russell
Woah woah woah…
Matsui, Jeter, and Posada?
No A-Rod?
~~~
BR: Injured . . .
I been trading this as a bear market rally for the past month. It has the feel though of a mkt that is begging to go higher for any reason.
I suspect that if oil ever starts ticking down, they’ll use that as an excuse to buy the mkt.
If oil stays the course, it’s just evidence of “strength” and that this recession is over, thus, they buy the mkt.
Talk to anyone actually out in the channel (salesmen, managers, CFOs, etc) and they’ll tell you business activity has slowed to a crawl. When that shows up in the stocks is the tough call.
Call it what it is…the largest organized game of chance ever recorded in history! In my opinion, this market is only for the very most connected market-players and no one else. What’s going on now is nothing more than a big game of L#ar’$ Pok_er.
It absolutely blows my mind that the market is going up against the current backdrop of oil, inflation and financials. Myself…I am sticking with my convictions, right or wrong. I still plan on sleeping at night regardless of what this crazy market does. Anybody who calls this investing is smoking way too much weed!
Overall earnings are down 28%, straight from the WSJ.
http://online.wsj.com/mdc/public/page/2_3024-industryearn.html?mod=WSJBlog
If you really want to see what is happening to earnings look at the broader market earnings. The small companies earnings are getting hammered. The S and P with the exporting getting a boost from the flakey dollar is doing better apparently. Smaller companies not so much.
Now if you want the earning to look better exclude financials, if you want them to look worse exclude energy. It is amazing how you can rationalize anything and fool yourself into poverty, by spinning data. But the problem is if you spin data, you don’t know what reality is, and you sure aren’t going to make good decisions, but the numbers can look better, the biggest fool is the person that picks and chooses data to make the numbers look better to fit their reality.
Eric,
The only way to see if you are correct would be to chart S&P earnings by industry group and
1) compare group earnings to total earnings
2) Compare group earnings to prior period group earnings.
Thus we could compare industry earnings to total earnings currently and over time and see how the mix has changed over time.
Unfortunately, I have no access to this information and probably wouldn’t even if I did. Maybe Barron’s or the WSJ can put it together. It would make pretty good reading.
It’s pretty obvious that things in the economy are not going well due to recent troubles in housing and the increasing drag from commodities at this time. Commodity prices are a slow acting poison. They are a dead weight cancer.
those of you looking at the So. Cal Housing surge, you have to read the whole story:
From Calculated Risk:
“A total of 15,615 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in April. That was up 21.9 percent from 12,808 the previous month but down 19 percent from 19,269 in April last year, according to DataQuick Information Systems.
Sales from March to April have risen on average 1.2 percent since 1988, when DataQuick’s statistics begin. Although last month’s sales total was the highest for any month since August 2007, when 17,755 homes sold, it was still the weakest April since April 1995, when 15,303 homes sold, and the second-lowest April on record. Last month was 38 percent below of the April average of 25,311 sales.
Post-foreclosure homes continued to play a major role in the Southland market. Of all the homes that resold in April, 37.5 percent had been foreclosed on at some point in the prior 12 months…”
That’s pretty easy – That was up 21.9 percent the previous month but down 19 percent April last year. You have to look at it year on year. That’s like being shocked that a Halloween costume store had great sales in October vs. September.
Troll,
You are seeming more clueless than ever. The source of the data, DataQuick, is very reliable; however, the headline is very misleading. You may see the bigger picture at the following links:
http://lansner.freedomblogging.com/
http://mortgage.freedomblogging.com/
In other words, the sales being reported for Southern California are still shocking low and this is the high season. Further, it took home prices dipping to a 4 year low to generate this miserable sales data.
GS called a buy on INTC with a PE of 21 too. Now I know you guys don’t like reading by PEs but still. How much higher can a mega corp like INTC really run?
As for those earnings on oil Barry, I’m glad I’m holding XLE! It serves as a hedge against the gas station (;
This article showing profits are from oil may be the nail in the coffin for the market the way it’s starting to look.
Glad I held onto my puts.
I did this analysis last week:
YoY S&P 500 profits were down 23.4%
Without Financials profits were up 7.1%
Without Financials or Energy profits were up 4.3%
profits are the “mother’s milk of corporate gains,”
– more like crack for wall street.
“Now for the reason I am less sanguine about S&P500 intermediate term gains than my peers”
I detect a new, more bearish tone in this statement.
I think you missed the top by about an hour.
How about S&P trailing PE based on EX oil & Financials? If you are taking out High Performaers (oil), you need to take Low Performers(Financials) too ….. Is PE still 21?
The money that the Fed is loaning the financial sector has to go somewhere. It isn’t going into new mortgages. It isn’t going into expansion of plant. It isn’t going into Research and Development. Hell, it isn’t even going into expanded oil exploration – Exxon made very clear that they had no intention wasting money on actually looking for new oil. So it goes into an equities and commodities bubble. Unlike the assets bubble, though, this is like expecting the caboose to pull the train. Eventually, the bubble will burst out of its own pure illogic. You can’t feed on yourself forever.
So the S&P Index looks better with three outliers thrown in. That meets my expectations. Isn’t the S&P just a form of weighted average?
I guess Bloomberg is asking what is the median profits of the 500 companies in the index. Isn’t this kind of info readily available for the SP500? I would think you could take the 500 records with all the publically reported finacials and do quite a bit of exploratory statistics.
New to finacial stuff, so take it easy on me for ignorace.
This is a little off topic, but I was just blinded by an insight into the obvious. I know why the stock market is going up.
The market is right now at about break even year to date. Over 1/2 of last year was equal to or above this level. I would imagine that a lot of active stock holders bought what they are holding during the last half of the year. Therefore, if they sold now, they would lose money. They are waiting it out. These people are not sellers at this time and are substantially out of the market.
The market is rising simply because there are more buyers than sellers. The buyers are in a feedback loop and chasing the market upwards. Many if not most holders are temporarily out of the market because they would sell at a loss if they sold today and they have enough sense to know this is a sucker rally for those who buy for the long term.
Possibly, the sellers are those who had cash when the market was down and the are giving the buyers a hot potato. If this is true, then eventually buyers will have a hard time finding stocks at low prices or selling their hot potatoes at higher prices.
but barry you have to “normalize” financial segment earnings. while things will continue to deteriorate in that sector, i don’t think we will continue to have 150+ bn per quarter in losses come 2009. that’s why almost everything i read on s&p eps is useless. sure, back out oil profits (btw, even as oil price soars, major oil companies eps aren’t following due to a number of factors).
If you look at all the major QQQQ names, there is very little short interest…except AMZN. So all GS did was look to see who they could squeeze. It is that simple. QID is a screaming, pound the table buy here.
Here’s (yet) another view:
Ex-oil, the S&P looks flat, and if you take oil out of the inflation numbers, but adjust the S&P returns for inflation ex-oil, it is down even more since the printing presses got cranked last August. (No, I haven’t done the number crunching, but if someone wants to pay me…?)
W/ oil, the S&P profits look good, but not if you adjust them for inflation numbers that include the doubling of the oil prices, and you give oil and its products the appropriate weight in the inflation index.
The bottom line: The S&P profit numbers are mostly fantasy, reflecting an overall inflationary period in the economy. In fact, w/ oil prices going up 0.5-1.5% seemingly every day, there is no way to know what the hell is really going on. You can’t accurately measure anything. The dollar is quickly losing its value as a medium of exchange, i.e., arbiter of value. It has already failed as a store of value.
And even if you don’t buy all that, just turn to the last page of Money and Investing in the WSJ today. There you will find that “marking to market” for a company’s liabilities, i.e., when the company estimates how much its liabilities are worth based on its financial strength, can yield the absurd result that a company nearing bankruptcy reports ever larger profits, as its liabilities decline in value. This financial system truly is bizarro world.
I’m not a strong follower of technical analysis, but one of the big broad graphs I’ve found worrying is the ten year trailing (moving average) P/E for the S&P 500 versus the following decade’s returns.
Mankiw points to the still high P/E today.
If earnings are buckling that makes things that much worse, obviously.
the market is rising because Bush, the Treasury and Bernanke are throwing money at it hand over fist to make Amurricans think everything is rosy, when 80% of them are only now beginning to wake up to the hoodwinking they’ve received the last quarter-century. as long as the market is at or near recent highs they think their house problem and gas problem and healthcare problem and disintegrating family prospect problem is their individual problem alone. Big Ben just has to keep it at this level for another 6 months as cover for another stolen election and continued low taxes on the rich and perpetual war in the Middle East. he might just pull it off.
you may enjoy this take on S&P 500 valuation.
http://nickgogerty.typepad.com/designing_better_futures/2008/05/get-rid-of-your.html
So what, I am maxed out on energy stocks,
so the SP index does not do justice to how
well my portfolio is doing economically.
Long live peak oil
cinefoz if you have it right … how will things go down when folks start cashing in stocks for something else? probably in a frenzy hoard? and the timing? baby boomers need it when?
The stock market sans oil isn’t doing too well either. If you strip away Chevron and Exxon from the DJIA 30, you would see a massive bear pennant, meaning the “rally” we’ve seen the past three months is not headed in a very positive direction.
“Holy Conundrum…higher oil will crush the consumer…lower oil will hurt S&P profits.”
Quid?
Lower oil price to 60 and consumers may be able to have some discretionary income for a change, re. food and energy would stop eating the average American alive.
Think this would hurt corporate profits?
I don’t think so.
3 out of 500 account for most of the profit ? that nicely corresponds to the income growth pattern of America over the last decade…
As to the sustainability of the pattern…
http://www.billakanodoodahs.com/2008/05/sp-500-earnings-ex-what/