Earnings Forecasts Drive Stocks, Not Earnings

The Bear's bear, David Rosenberg, opines that it is not earnings but changes in earnings expectations that drives the market: 

[T]he peak in earnings forecasts coincided with the peak in the market [in April]. 

And guess what?  The forecast peak in the last cycle was in October 2007, again right when the S&P 500 was hitting its highs. Before that, earnings estimates were starting to get cut in August 2000, just ahead of the peak in the market.

In Ahead of the Tape this morning, the WSJ supported this point of view. Q2 earnings were strong across the S&P: up 38%, well above the expected 27% YoY increase. Yet the market is dropping - and began to fall just as earnings forecasts began to be revised downward for 2011 (see chart). 2011 earnings estimates started in January at 25% growth, were reduced to 20% in April, and now are hovering at under 15%. The change of view:

[T]allies with the outlook for broader economic growth, which has weakened considerably.

Even the 15% prediction may be revised downward, as it is nearly triple the expected GDP growth for 2011, which itself is being revised downward. Goldman this morning is urging analysts to cut GDP estimates even further, to the range of 1.5% in 2H10 and early 2011. Yet as recently as the last week of June, before the poor GDP report, the WSJ was touting only modest decrease in earnings expectations:

 

At the time earnings were expected to rise in the second half of 2010. No longer. 

We may be at "Peak Earnings": 

If the macro economic data continues to disappoint to the downside (as JP Morgan suggests) then it’s clear that analysts have been fooled into believing that the stimulus and 80% rally are self sustaining.

Clearly analysts have not yet fully embraced the economic slowdown. Why not? Using an expectations model from The Pragmatic Capitalist, they may have overshot mean reversion on expectations too much to the positive, and are due for a double dip there, too:

Comments

[Mamma Boom Boom]

With appropriate stops, use of leverage on the long side, is now warranted.

[Hockthefarm]

Y:

I suspect that a revised gdp print of 1.1 is baked in the market. Not so sure about the jobs number.

We are getting oversold so may get a nice bounce on Friday after 10 am. Especially if we print 9700 - 9800 before then. What do you think?

Hock

[yelnick]

Hock, isn't Fri the GDP revision day? I am sure a technical bounce is due at some point, and maybe it jinks a nit on the report, but right now I am watching a close below Dow10K and what happens the next day.

[Hockthefarm]

Y:

Yes the gdp revision is friday but most folks expect quite a revision down I think. I don't think a print of 1.1 would shock anyone.

Japan is hovering over a pocket to 8000 so it could get interesting tonight.

I do expect more down on wed/thurs but all bets off after that.

Thanks,
H

[Hockthefarm]

The other day we bought 36 eggs from city market. I get home, log on and see this egg scare note on Yahoo.

I googled it to determine if we needed to take them back. I had to read about a dozen notes on the subject because I couldn't find anyone with the writing ability to effectively communicate the current status of the situation. Finally, I jumped in the truck, went back to the store and verified that the eggs were OK.

A few months back I flew all over China. The planes were packed but I never stood in line once. Then I landed at O'Hare. It was such a cluster fluck I will never do it again. Chicago is out for me. Period. I don't care how cheap it gets.

I think we have some fundamental problems in this country that we can no longer paper over with rising RE prices. They are going to bite us hard, hard, hard in the not too distant future.

Hock

[Hockthefarm]

Bernie's new home. Bingo at 1 pm, popcorn at 8 pm. Sorry, no 3d tv's yet:

http://tinyurl.com/2fp8arf

Not bad for a guy who got to live a pretty rich life. I wonder if the guy that got 25 years for stealing a pizza in CA (3 strikes rule) lives as well?

Hock

[Hockthefarm]

Will it be Uncle Ben to the rescue?

Economy Caught in Depression, Not Recession: Rosenberg
On Tuesday August 24, 2010, 2:38 pm EDT
Positive gross domestic product readings and other mildly hopeful signs are masking an ugly truth: The US economy is in a 1930s-style Depression, Gluskin Sheff economist David Rosenberg said Tuesday.

Writing in his daily briefing to investors, Rosenberg said the Great Depression also had its high points, with a series of positive GDP reports and sharp stock market gains.

But then as now, those signs of recovery were unsustainable and only provided a false sense of stability, said Rosenberg.

Rosenberg calls current economic conditions "a depression, and not just some garden-variety recession," and notes that any good news both during the initial 1929-33 recession and the one that began in 2008 triggered "euphoric response."

"Such is human nature and nobody can be blamed for trying to be optimistic; however, in the money management business, we have a fiduciary responsibility to be as realistic as possible about the outlook for the economy and the market at all times," he said.

The 1929-33 recession saw six quarterly bounces in GDP with an average gain of 8 percent, sending the stock market to a 50 percent rally in early 1930 as investors thought the worst had passed.

"False premise," Rosenberg said. "And guess what? We may well be reliving history here. If you're keeping score, we have recorded four quarterly advances in real GDP, and the average is only 3%."

Rosenberg's warning comes as a slew of major analysts-Goldman Sachs and JPMorgan among them-have slashed GDP projections for 2010 to the 1.5 to 2 percent range.

Chicago Federal Reserve President Charles Evans said in a speech Tuesday that the risk of a double-dip recession has escalated. He said government programs to help distressed homeowners have been ineffective and aren't helping the pivotal housing sector recover.

The dour outlooks come on the same day that the National Association of Realtors said home sales reached a 15-year low in June, dousing hopes that the industry had reached a bottoming point.

Rosenberg points out that the "overall economic malaise" has come despite aggressive efforts by the Federal Reserve to stimulate the economy through rate cuts. The central bank itself has scaled back its economic projections, has held steady on its balance sheet, and could be announcing another round of quantitative easing measures at its Jackson Hole summit this week.

"How's that for a reality check," Rosenberg said. "It's not too late, by the way, to shift course if you have stayed long this market

Hock

[Hockthefarm]

Or HS:

--------------------------------------------------------------------------------

The Hindenburg Omen -- Omen-ous or Not?
By: Elliott Wave International | Tue, Aug 24, 2010 Share Print Email Elliott Wave International Chief Market Analyst Steve Hochberg Sheds Light on a Feared Technical Indicator

On Aug. 12, volatile market action coincided with a technical signal called the Hindenburg Omen, whereby a relatively high number of new highs and lows in individual stocks occur at the same time.

This indicator instantly gained an enormous amount of media attention. So we sat down with Steve Hochberg, EWI's chief market analyst and close colleague of Robert Prechter, to ask him about the now-infamous Hindenburg Omen.

EWI: Steve, recently a market indicator called the Hindenburg Omen has been in the news, what is going on?

Steve Hochberg: Discussion of this indicator certainly has been everywhere. Someone emailed us and said they even saw it mentioned on the front page of the Drudge Report! Look, headline-grabbing names grab headlines. Essentially it measures the fractured nature of market action. Over the years, we've discussed numerous times in our publications how a fractured market is oftentimes an unhealthy market. The multiple non-confirmations registered at the recent August 9 stock high, which we talked about in the Short Term Update, are another manifestation of this bearish behavior. The message is consistent with how we view the Elliott wave structure.

EWI: Why are people interested in this particular indicator?

SH: That's a good question, and it speaks to a broader issue, viz., the "re-emergence" of technical analysis into the mainstream consciousness of market participants. In Prechter's Perspective, Robert Prechter discusses the timing of the popularity of technical analysis, of which Elliott waves, or pattern recognition, is the highest form:

"In long term bull markets, no one really needs market timing because the market is always going up. This was true during the 1950s and 1960s, a period of market strength. And it has been mostly true since 1982. From 1966 to 1982, though, the market was very cyclic, so investors couldn't sleep like babies with a buy-and-hold blanket like they do today."

The S&P 500 has a negative return over at least the past 12 years, so investors are naturally questioning the "broadly diversified, buy and hold" stance advocated by 90%+ of investment advisors. EWI subscribers are way ahead of the mass of investors because as the bear market progresses, the media should show increased focus on technical analysis, including patterns such as head-and-shoulders as well as trendlines, moving averages and, yes, even Elliott waves, just as they did during the last great bear market from 1966 to 1982. It will be an exciting time for those with even a cursory knowledge of the technicals.

EWI: So, what are you seeing now?

SH: Obviously we cannot give away our analysis, but the wave structure is clear, the myriad indicators we keep offer compelling confirmation and the market is accommodating our forecast. If readers have any interest in what this means for not only the stock market, but also all other markets, please give us a read to see if our work might be useful in helping to formulate your investment portfolio. We think it will be a worthwhile endeavor.

Hock

[twitter.com/DrBubb]

Funny thing.
A very common opinion here and elsewhere seems to be:
"Everyone is too Bearish, so I am going to be bullish."
That way of thinkiing seems very dangerous now to me.

[upstart]

Clear 4th wave flat in CMHYX from Jan.-June, now in 5th wave already above April high.

[twitter.com/DrBubb]

"I think we have some fundamental problems in this country that we can no longer paper over with rising RE prices. They are going to bite us hard, hard, hard in the not too distant future."

RIGHT.
When you have people like Obama listening to people like Krugman, you are going to see things get worse. Fortunately, not everyone who wins a Nobel prize is a dangerous moron. You should read some material by Vernon Smith. Here's a good one: http://www.thedailybeast.com/blogs-and-stories/2010-07-19/please-no-more-government-spending/

I especially like this line:
"Our best shot at increasing employment and output is to reduce business taxes and the cost of creating new start-up companies."

BTW, I "got the 'Ell out", and live in Hong Kong now. An increasing number of economic refugees from the USA are showing up here. It is nice to live in a free economy.

[Jose]

Mamma,

Look at the Apple chart, dailies, weeklies and monthlies. No paralyisis by too much analysis, just use your standard TA indicators that you know and trust. Do this stone cold sober.

Now have a couple glasses of fine wine. Relax. Relax. Then do it again.

What do you think?

Being stubborn Mamma in these times on the long side, could be a bad thing. No?

Price. You said 'Price'. Yes it is all about price. I see some recent red sticks on Apple, in all time frames. Potentially a big big red monthly stick forming. And Sept is historically the worst month of the year I believe, not October as is classically advertized. Will Apple form a bigger red monthly stick in Sept. Once they start they are hard to stop.

But Price ... what about time? Has time ran its course for Apple?

ns

[Pat Riley Operator #136]

Roger needs to bring back his charts.

[Hockthefarm]

Hello Bubb:

HK, my favorite city. I have been there several times and still love it.

I'll check out Vernon Smith. Thanks,

H

[nspolar]

edit

[Les]

Support at 9,980 Dow and 1040 SPX at top trendline from April's high. Most indices are testing this trendline with the Russell 2000 and Equal-weight S&P 500 (RSP ETF) having broken back inside the declining channel.

[Mamma Boom Boom]

ns, not ready to give up yet.

[Mamma Boom Boom]

Here's a, highly technical, explanation on the destination of the Euro:

http://www.youtube.com/watch?v=3E-mTXSYTm8&feature=related

[JohnEBGoode]

Diehard!

[Trader123]

Hock,

You must be getting awfully desperate if you are posting quotes by Steven Hochberg.