Stocks Seen Unchanged; Profits DebatedPosted on 07/27/2004 7:03:13 AM PDT by expat_panama
| Business - Reuters |
| Stocks Seen Unchanged; Profits Debated |
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NEW YORK (Reuters) - U.S. share indexes were set to open little changed on Tuesday with investors seen returning to beaten-down stocks even as they worry about the profit outlook for the second half. Stocks have been under pressure in recent weeks on fears the powerful improvement in earnings seen over the past year will run out of steam as interest rates rise and economic growth slows. Yet, after months of losses, investors are debating if stocks have become cheap relative to future earnings prospects and whether to bet on a rally any time soon. "The market remains focused on earnings even though we are sitting at year lows on the Nasdaq," said Barry Hyman, equity market strategist, Ehrenkrantz King Nussbaum. "The one negative holding the market back is oil." S&P 500 futures for the September contract rose 1.6 points to 1084.8, or 1.1 points above fair value, accounting for dividends, interest rates and time to expiration on the contract. Dow Jones industrial index futures rose 8 points, while Nasdaq 100 futures gained 3.5 points. Second-quarter earnings to date have been an improvement on a year ago but investors are worried about the outlook for the second half. |
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"We expect that limited capex growth, current record profit margins, rising materials costs, and growing compensation expenses will all restrain profits growth going forward," said Tobias Levkovich, chief U.S equity strategist at Smith Barney in a note to clients. CRUDE OIL The big drag on the market on a daily basis remains the price of crude, Hyman said. Crude oil, a basic ingredient to most manufacturing and transport, has closed above $40 a barrel for nine straight days in New York. U.S. light last changed hands at $41.50 in electronic trading in New York, leading investors to wonder if it will close above the $40 level for a 10th day. "Oil above $40 a barrel is starting to weigh on economic growth," said Hyman |
| The broad S&P 500 (^SPX - news) closed at its lowest point since December on Monday, while the tech-laced Nasdaq Composite Index (^IXIC - news) saw its lowest close since October. "As long as these lows hold firm then we could see some bargain hunting if consumer confidence (data) lends a hand this afternoon," said Angus Campbell, head of sales and marketing at Finspreads in London. Consumer confidence is expected little changed at 102 for July when the data is released at 10 a.m. EDT. VOLUME DROPS The number of shares traded on the New York Stock Exchange (news - web sites) has been below its 90-day average on 41 of the 59 trading days since the beginning of May when the S&P 500 tested its most recent low. The Nasdaq has seen volume drop below average on 48 days over the same period. |
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(Excerpt) Read more at story.news.yahoo.com ...
This is the key. Sure there are some panic sellers trading out there, but the overwhelming consensus is that the shares will go for higher prices soon.
Selling occur because the investors expected much higher earnings. Their expectations were too high. All the key companies came in with profits and revised projections. None of them reported losses or profits lower then last quarter. I think the market will be flat and will take off after the election. This is the time to buy on a down tick.
Your opinion please.
As of 10:30 EST, CNN-Money says "Major indexes add to gains after strong consumer number, bounce after Monday's selloff. ", with the DJIA up 66.66, Nasdaq up 15.51
That really says it all and is really all we can say for sure. The Kerry Kamp wants to paint this like some kind of crash but the fact is that most indexes are up.
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NASDAQ, Dow, and S&P all up between 5 to 10 percent over the past year. Amex Composite is up about 25 percent. Kerry will spin this as being bad and that we'd have been better off earning 2 percent in the bank. Sure there's always the chance that this is the beginning of a prolonged slump, but I'm sure as hell not about to short all my positions just yet. |
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As to earnings, there are not any. Take the annual report and the 10Q for any public company (I did this in September of 2002 for about 25 companies I was following at that time) and restate the reported earnings to Generally Accepted Accounting Principals (charge real current period costs to income; recognize only current period income) and you find that few have any real earnings.
Exceptions? Sure. Berkshire Hathaway--Buffet's earnings are real. But for the most part, reported earnings are a fiction and stock prices have little to do with real operating results.
Oil? The energy focus on Crude Oil is too narrow--the issue is twofold: Crude Oil and Natural Gas. Both are commodities in short "deliverable" supply. There is lots of supply out there but it is located in geographical areas of the world where access is very difficult. And Natural Gas is difficult to move around. Until you get a pipeline to move Oil out of the Caspian Sea area and construct Liquification facilities and transport capabilities to move Natural Gas around, supplies will remain short. And the cost of creating access will get delivered US prices up in the area of $60 for oil and $10 for gas.
So what? Those are still relatively low prices for both commodities in terms of the historical purchasing power of the dollar and neither should have any real long term impact on either the equity markets or the economy.
So what is the problem with the economy? We are in a deflationary economic environment--when the fed expands the money supply through the bank debt process faster than the economy is expanding, the result is too much debt for which the liquidity flow is insufficient to provide for current debt service. So an increasing share of current liquidity flow (at every level--disposable individual income; corporate profit; tax revenue) is applied to debt service on prior period debt rather than to new purchases. So no one buys anything and the economy goes in the tank.
When you see stock market rallys initiated by significant movements in the S & P Futures market, you should understand that the fed is supporting the stocks because if the stock market falls, foreign investors will sell stock and withdraw funds, selling dollars to do so, and causing the dollar to decline in value. Nothing illegal or conspiratorial about this--within the fed's power to support the dollar. But based solely on earnings, or the market, everyone should understand that if the fed were not supporting the market, it would tank.
At present, stocks are selling at 55-60 times earnings and equally unheard of multiples of dividend payout. The only way this could make any sense would be if earnings go up equally unprecidented amounts. In the current deflationary environment, that is not going to happen; not now; not after the election; probably not at any time in the foreseeable future. So publically traded common stocks, other than oil and gas producers, are probably not a very good buy.
What would be the draw to pull the $ zillions into the market from the sidelines? Improved quarterly reports and increased dividends, I suppose, anything else?
Now, I can see how the Fed nudges interest rates by setting the discount rate, and interest rates are one of the factors that affect the value of the dollar in currency markets, and that the value of the dollar is one of the things foreigners consider when buying a few shares of some US company.
[whew!]
Please fill me in as to whether you mean the "fed is supporting the stocks" or whether you're saying there's some kind of secret subsidy price support-- kind of like farm subsidies but run by the CIA instead or something.
One other thought, if you're sure you know where stock prices are going (either up because of gov't control or down because you found out the true value) you've probably already bought the appropriate futures contracts so as to make trillions in profits. We'd love to know how you see it going next week.
The way I like to verify a company's glowing earnings report is to wait a year and you see things like insiders buying up stock, the company expanding operations, sales soaring-- let's say those things go on for a few years. Those things really convince me that the reports were valid. I've been pretty happy buying companies that consistently have that kind of track record. Please let us know if you've had a chance to try out your economic theories in your investment strategy too.
Don't think I said anything about interest rates.
Offshore investors own a significant fraction of outstanding publically held equities. When offshore investors have historically sold US stocks, they repatriate the proceeds into offshore currencies, causing the dollar to weaken. The legal theory is that the fed has the power to "stabilize" the dollar and can thus support the US equity markets to avoid this consequence.
"Please fill me in as to whether you mean the "fed is supporting the stocks" or whether you're saying there's some kind of secret subsidy price support-- kind of like farm subsidies but run by the CIA instead or something."
Not much secret about it. The futures traders are well aware of what is happening. Nothing to do with the CIA or farm supports--the fed's primary mission is stabilize the dollar and that is what their objective is here.
As to the range in which this is happening, you can look at the stock charts and draw your own conclusions. It looks as though the support range is somewhere just above 10,000 on the Dow. Again, so what? The stocks are down since 2000; they are down for the year; the fed obviously thinks further decline is adverse for the dollar so it is supporting stocks in the current range. I don't know whether there are practical limits on the fed's ability to continue this policy or not.
I don't trade stocks at this time, I don't think you can make enough money doing that to justify the time investment. Underlying fundamental values are declining so over the long term, I see stocks declining in real dollar terms.
"The way I like to verify a company's glowing earnings report is to wait a year and you see things like insiders buying up stock, the company expanding operations, sales soaring-- let's say those things go on for a few years."
Insiders are not buying stock, they are selling; few if any companies are expanding operations; few companies have soaring sales; none of those things are going to go on at any time in the foreseeable future because we are in a contracting economy caused by general deflationary monetary conditions and there is nothing in sight that seems likely to reverse this trend.
Historically, and as a textbook proposition, deflations continue until sufficient debt has been liquidated by default to free up liquidity flow in the hands of consumers and investors to cause spending increases. We are many years from that end.
Mostly I have made a living doing this for the last forty years and am content with the consequences.
It is no secret that Kerry will be bad for stocks as he threatens to take away the dividend tax cut and Edwards and his trial lawyer buddies will regulate and sue the pants off business.
My guess is that the smart guys decided that the democrat convention bounce would panic the public and they have been selling for weeks waiting to cover their shorts when the convention is over. I look for a big turn around any day now.
Thanks for your insights and pinging me as well. I read your post re: mortgages and gold as well and cannot help but to pick your brain again. Where is a good place to invest?
A direct answer is that there are not very many good investment opportunities out there. I am comfortable drilling holes in the ground. The problem is that there are few opportunities for a non-industry average investor to do that on any reasonable basis.
Public company energy industry enterprises do not own much production--they are in the transportation and retail marketing business. Some exceptions own production but not in sufficient quantities to support the value of their companies.
The quasi private energy industry investments carry such a high promote and operating cost load that the investor does not make much money even if the deal is one of the few that actually finds oil or gas.
The usual answer is that "cash is a position". Which is true. But where do you put the cash? You need to be very careful about the money funds and bank fund deals because most, even of the conservatively managed funds, are invested in Fanny Mae and similiar deals which expose both principal and interest to loss from any kind of contraction in the markets in which those entities are invested.
Treasury bills are in theory safe but yield no real after tax return--and you need to manage the mechanism by which you invest in them.
To recap the gold and mortgage points, the gold stocks are exposed to a general sell off in the stock markets which we expect to materalize in the fall. Deflationary contractions see liquidation of all classes of assets and I do not see any reason to expect gold and silver will be different in this phase of the cycle.
After a significant investment asset liquidation, you might expect that in a period of dollar weakness, physical gold and silver may have some merit but that is not in the immediate future.
These considerations are of course a good part of the reason why the stock market has not gone down significantly. There are not many buyers so a minor fed support effort in the futures market holds the trading range where it is because there are few sellers--most individual investors leave their assets in mutual funds and sit hopeing that a bottom is at hand which will protect long term value. Facts are the bottom is about to fall out.
Why?
The best indicator of the condition of the economy is tax revenue. It is the one economic number the fed cannot manipulate--tax revenues are down at every level, state, federal, and local, for the reason that economic activity is down; incomes and spending are down; limited liquidity flow will be the cause of the ultimate breakdown of the investment markets as investments are liquidated to pay immediate cash requirements.
Thanks for your encouragement.
Just to preserve my own record, notwithstanding my views about the prevailing trend in the investment markets, everyone should note that the current short cycle is up for the next two to four weeks in which we may expect a stock market rally.
Thanks for the ping!
"You need to be very careful about the money funds and bank fund deals because most, even of the conservatively managed funds, are invested in Fanny Mae and similiar deals which expose both principal and interest to loss from any kind of contraction in the markets in which those entities are invested."
I've been pretty silent lately because I have no idea where to seek shelter from the coming storm. In late November 2003 I fled my short-term bonds because of the "Fannie Mae problem" and went short the market (Prudent Bear Fund) with 40% of my cash. It's lost 15%...Ouch...
Good luck to you my friend, I believe your forcast is right, although I still don't have a feel for when things are going to break, as you know I had predicted a bottom by the end of 2003...I guess I get an "F"...
Although, I am not an economist or any sort of financial scholar, my gut has been telling me pretty much the same thing for a while now. I guess the thing to do is look at the things that will go up in value or increase in demand during an economic upheaval (ummm beer, cheap rentals, :-)
At present, stocks are selling at 55-60 times earnings
I would love to see where there are a significant number of stocks that are selling this high. I am under the assumption that the average P/E is around 15-16. Even Price to Future Earnings doesn't really support your statement. Do share.
Historically when there is a democrat in the White House during the second half of a decade the market does well. For some reason I don't think this is going to occur this time around.
True, most of the easy money in this stock market mini-bull has already been made. In the long term, we are still moving sideways because of the tremendous growth in the market in the Clinton era. (Not due to Clinton, as his policies were a drag on the stock market, but due to the growth in the internet and computer related businesses.)
If energy commodities come down in price, the market will rise in response to higher proffits. I don't see oil companies as a good buy because they are already bought up. This is a good time for investors to secure their capital, maybe dollar cost average lightly into the market, see how the election goes, and see where the Fed is going with interest rates.
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