4.7.09 Market Commentary

Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).

This is his most recent commentary:

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As we enter earnings season, I thought it would be instructive to just take a quick moment as assess where we are in terms of expectations. We all know what our respective companies are expected to earn but how about the market as a whole? Right now, expectations are for YOY earnings to contract 37.3% for the S&P while excluding financials, earnings are supposed to contract about the same. As the year progresses, expectations are for earnings to continue to contract however the contraction is expected to mitigate by the fourth quarter where S&P earnings are expected to growth 76% YOY while excluding financials, earnings are expected to contract a modest 4.5%. If inline, that would make this earnings recession one of the worst in history with nine consecutive quarters of contracting earnings. At the same time, we shouldn’t lose sight of the absolute disaster that has been the expectations game. While the above estimates may indeed be accurate, we cannot forget that as recently as the start of the year, first quarter expectations were for a contraction of 10.7% with the first positive quarter being the third. Expectations at the time were for a gain of 12.1% whereas now we are looking for a contraction of 17.7% for the third quarter, a swing of 3,000 bps. That’s not a small miss. And if we go back just a bit further, to the beginning of October 2008, expectations were for the FOURTH QUARTER of 2009 to show earnings growth of 30.3%.

My friends, that’s not just wrong, that’s REALLY wrong. Now, I don’t point this out to embarrass anyone; after all, this has been a nearly unprecedented time with unprecedented price action. I can’t blame people for getting it wrong. But it does underscore the difficult environment in which we find ourselves and it should call attention to those individuals who assert that they have a handle on what is going on. One thing I do know though is that companies, as always, are on the front lines and will be able to tell us first hand what they are seeing from their customers and such information will go a long way to helping us get a better handle on the business environment going forward.

–The IMF is now saying that toxic assets could top $4 trillion globally. It goes without saying that this is a giant problem and as long as people want to skirt around the core issue, non performing loans and these toxic assets, we’re going to get nowhere.

–S&P is noting that default rates are going to move much higher from current levels despite the belief that the economy will rebound.