Monday, April 14, 2008

Goldman: Early S&P Earnings Season looks "awful"/Wachovia reports loss

Happy Monday everyone. Well as I write to you right now the market is bouncing from red to green and seemingly looking for direction. I wanted to talk about S&P 500 earnings today.

Goldman came out with a report today saying that early signs of S&P earnings look "awful", and they expect the earnings season to be full of disappointing results and lowered guidance going forward.

How will these "awful" earnings effect the stock market well here is a prediction from one of the Goldman analysts:

``Early signs are awful,'' a team led by David Kostin, Goldman's New York-based U.S. investment strategist, wrote in a report today. ``We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor's 500 Index lower in coming weeks.''
Kostin, 44, said last month that the S&P 500 may fall to 1,160 in the ``near term'' before rebounding to 1,380 by December, making Kostin among the most bearish Wall Street strategists tracked by Bloomberg"

My Take:

OK so lets do a little math here. If the S&P falls from the 1360 level that its at today down to 1160 you are talking about an additional 18% or so drop in the S&P 500. Add this to the 14% or so drop we have already from the highs we will officially be deep into a bear market. Bear markets are defined by a 20% drop in the markets. This would put us at about a 30% drop.

This is a prediction from Goldman Sachs folks, and everyone knows they are the premier firm on Wall St. So why is their forecast so bearish. Earnings expectations are simply too high. Some more from Goldman's Dave Kostin and other:

"Goldman said worst-than-expected earnings from General Electric Co. and Alcoa Inc. are a harbinger of more to come. Analysts have reduced expectations for S&P 500 earnings growth during the second half of 2008 ``only slightly'' even after cutting first-quarter projections by 17 percent, Kostin wrote. Forecasts for a ``speedy recovery'' in profits are too optimistic, and stocks will drop when investors start viewing estimates with ``appropriate skepticism,'' he wrote."

My take:

Now here is where I disagee with Mr. Kostin. Why does he predict an 18% rise in the S&P back to 1380 in the second half of the year when he thinks earnings projections are too optimistic? This seems to be a contadiction in thinking doesn't it?

I realize stocks are forward looking but what catalyst down the road does he see to make such a bold prediction? The $150 billion in stimulus checks? That's about the only positive catalyst that I see going forward and I expect most of this to go towards paying off debts versus being spent in the economy.'

Other analysts have the same ridiculous estimates for the second half of 2008. From Bloomberg:

"Analysts surveyed by Bloomberg have cut their projections for first-quarter earnings at S&P 500 companies every week since Jan. 4. They now predict a 12.3 percent drop, compared with an estimate for an increase of 4.7 percent at the start of 2008.
Analysts are currently estimating 2008 profit growth of 11 percent for S&P 500 companies, down from 15 percent at the start of the year, according to Bloomberg data."

OK so let me get this straight the analysts are now expecting a 12% drop in the first quarter but still predict 11% growth for the year?? Based on what? Is inflation going away soon? Is oil going back to $40 a barrel? Is housing going to drop 50% by the second half of 2008 which will then get the consumer going again? These earnings projections are are a joke and the street still is not pricing them into stocks.

Wall St. needs to come to the reality that this recession will be long and protracted. Housing is a mess, Wall St. is in bad shape, and the consumer is tapped. I see none of these issues turning around anytime soon. It will be at least a couple years in my opinion.

Speaking of the consumer I picked this up off of Itulip. How tapped are they? Take a look(click to enlarge):

The first graph shows us what our little friend inflation has done to our wage growth...or should I say wage loss. Pretty dramatic change since October isn't it? This is what happens when the dollar gets killed from the Fed cutting rates. Things like gas, food, and other imported goods all rise in cost. Its hits us right in the wallet.

The second graph shows us that the average American has enough cash saved to live only 18 days versus an average of 30 days in 2000. This is further evidence that the consumer it tapped out and inflation is making things worse. This is a frightening thought. Imagine losing your job and having 18 days of money to live. This is why saving and paying off debt must be your number one priority.

Well I ended up getting long winded as usual so a quick note on Wachovia which is our 4th largest bank. They had a huge earnings miss today and were forced to cut their dividend and raise capital. The financials continue to get beaten down. A quick piece from the article:

" Wachovia Corp., the fourth-largest U.S. bank, reported an unexpected loss because of bad California home loans, and disclosed plans to bolster capital by selling $7 billion of stock and cutting the dividend.

The first- quarter loss of $393 million, or 20 cents a share, compared with earnings of $2.3 billion, or $1.20, a year earlier, the Charlotte, North Carolina-based company said in a statement today. Analysts had estimated Wachovia would earn about 40 cents a share, according to a survey by Bloomberg. "

My quick take:

Ok so the analysts expected about an $800 million dollar profit and Wachovia lost about $400 million. This is a perfect example of how earnings estimates are way out of whack with reality. Until reality comes back to the stock market I would stay away.