General Market Comment: October 26, 2009
The earnings season continues beat estimates . . . 81% of the 199 S&P 500 companies that have reported have beaten estimates! One would have easily bet that the percentage would have declined this week from the 79% reported last week. The average percentage “beat” is up 18.1%. This data is courtesy of Thomson Reuters. (by the way – Thomson mislabeled this table that I included in last week’s market comment as “Q2”)
Here is an update on the record of companies beating earnings estimates as provided once again from Bespoke Investment Management. Their data encompasses all public companies and so it varies a bit from the Thomson data in the above table. One can see that Q3 is a standout quarter so far.
Here is another one of their charts which is remarkable. It overlays the net percentage of upside revisions to earning estimates on top of the S&P 500 price. Earnings revisions are likely to incorporate increasing earnings as we proceed into Q4 if this picture portrays the true trend..
This is what Bespoke had to say about the two charts . . .
In conclusion, the data shows that companies have been beating raised estimates and not lowered ones during this bull market, and the direction of quarterly “beat” rates is a trend that investors should definitely follow.
The strength in earnings and the strength in the stock market is confounding many pundits. After all, everyone knows that the U.S. consumer is broke and not consuming and therefore the global economy is doomed – just doomed . . . well, maybe not.
My friends at GaveKal wrote an eloquent and short appraisal of the apparent contradiction of the rising stock market and lackluster consumer market which I include for you here. I have highlighted comments that I liked the most.
GaveKal Checking the Boxes 10-23-09
The stream of strong results announced in the current earnings season is a reminder that we are in the midst of a very different type of recovery. In fact it is a rather old-fashioned recovery. We have come in the modern era to be accustomed to Keynesian cycles, in which consumption is the engine that drives economies back to growth after recession. This has been especially true in the past two decades, when nearly every tough patch in global output was cured with a widening of the US current account deficit as the US consumer came to the rescue every time. Yet, this time around, we have a recovery blooming even as the US current account deficit narrows, and while consumers nearly everywhere hunker down. In other words, this is an Austrian cycle, not a Keynesian one, and one where corporate profits, not consumption, will lead the way. Indeed, the companies that have weathered the storms of the past 18 months are emerging leaner and meaner, and ready to fight. They are enjoying a rebound in profits, and will need to re-invest those profits to stay ahead of the competition. As such, the next step in the recovery will be a classic capex-led restructuring, followed by a rise in employment and, later, a recovery in consumption. We are already seeing signs of this trend, with the rebounds in industrial production that are beginning to emerge across the global landscape, even as consumption data remains depressed. The US has seen three straight months of increases in industrial production, while China, for instance, just announced a +13.9% YoY jump in industrial production for September. And this is even before we have seen any meaningful restocking of inventories in the US….
This change from a Keynesian to an Austrian cycle poses several challenges for investors. After all, indices in the past decade have been structured to reflect a Keynesian world, but portfolios should now be tilted towards an Austrian-cycle world. This is already starting to happen, as reflected in the strong performance of the tech sector, one that is capex-intensive and thus has tended to be a late-cycle performer in the recent consumption-led recoveries.
We should also keep in mind the longer-term effects of the coming period of investment-led economic growth: increased efficiency. Tech investments always pay off in the long run by offering businesses and consumers cheaper and cheaper access to productivity-enhancing tools, gadgets and instruments. But tech is only one part of the current capex story. There will also be an immense amount of capital that will be flowing into alternative energy sources in the years ahead, as countries with dependencies on oil (e.g., the US) or other “climate-change” fuels such as coal (e.g., China) search for new technologies in wind, solar, nuclear and battery power, etc. The UN, for instance, has estimated that up to US$10 trillion in additional energy investments will have to be made over the next 20 years (see our write-up on p. 4 of the Oct. 13 Daily). The process will not only provide grist for the mill of a knowledge-based economy, but will lead to lower energy costs and greater energy efficiency (see Peak Demand?).
In the past, “Austrian cycles” have often been associated with tough-luck, painful, even brutal economics. But this is a short-sighted characterization. Instead of a recovery led by overconsumption and mindless leverage by everyone from subprime-mortgage holders to investment banks that think they are hedge funds, we will have a recovery led by investments in the type of technologies that will make life smarter, cleaner and better. And this can only be good news.
You are welcome to disagree with any or all of the above sentiments. The facts as I continue to see them persuade me the market has more upside than downside.