Gee, wonder why it took so long for someone to connect the dots. Scarce credit, high commodity prices, and a economy that’s weakening despite the Fed pulling out all stops do not bode well for corporate earnings. Yet consensus earnings forecasts predicted a rise in profit for the S&P 500 in 2007 and and an appreciation in the index by year end. The disappointing earnings announcement by GE has finally punctured the illusion that the impact of the credit crunch will be limited to Wall Street.
From Bloomberg:
Goldman Sachs Group Inc. strategists say the U.S. corporate earnings season got off to an “awful” start and shares will drop as companies slash forecasts for the rest of 2008.
“We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor’s 500 Index lower,” a team led by David Kostin, Goldman’s New York- based U.S. investment strategist, wrote in a report today…
Kostin, 44, said last month that the S&P 500 may finish the year at 1,380, down 6 percent from the end of 2007. The forecast is the most bearish since at least 2000 by Goldman, which profited as other investment banks lost money on subprime mortgages. Morgan Stanley, the second-biggest securities firm, said today that profits are too high relative to the size of the U.S. economy.
The forecasts conflict with estimates by Wall Street analysts that earnings at S&P 500 companies will rise 14 percent in the third quarter and 55 percent in the fourth. Predictions of a “speedy recovery” are too optimistic and stocks will drop when investors view estimates with “appropriate skepticism,” Kostin wrote.
Goldman said worse-than-expected earnings from GE, the world’s fourth-largest company by market value, and Alcoa, the third-biggest aluminum producer, are harbingers. 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….
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. The index has declined 15 percent since reaching a record in October…
After-tax corporate profits relative to U.S. gross domestic product are “well above sustainable levels,” Morgan Stanley strategist Gerard Minack wrote in a report today. He said a U.S. recession and increased competition will cause earnings to decline.
“If profits fall as much as I think they could, then markets are not cheap,” Minack wrote.
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I continue to enjoy the notion that Goldman has a unit which attempts to sell subprime auto loans, which I’m sure has a place somewhere, somehow.
IMHO, the days of lending cash to unqualified people that are in debt and then suggesting that (as a result) you have high quality Level 3 Assets which connect to your overvalued and over-leveraged stock valuations is a fantasy no one will buy (anymore)! However, The Hearing the other day with Dodd does lend credit to the possibility that accounting fraud and manipulation will be tolerated at the highest levels, so maybe trickle down supply side economics will remain as a hedge against inflation and reality?
Typical earnings pullback in historical deep cycle recessions is ~30% and multiples high single digits. Using a $95 (2007) would suggest $65 (grow it 10% for ’09) gets you 700ish on S&P which would be a draconian scenariso admittedly. That said, even more sangune projections get you monsetr downside to this market. GS saying 1150 – he is being generous – unless the fed starts taking equity. Can’t decide if it is the Almighty or the treasury that deserves credit.
Also note article on bloomberg that treasuries have lost luster as Fed has opened windo to all sorts of garbage. (http://www.bloomberg.com/apps/news?pid=20601009&sid=aei_CcWOfeDo&refer=bond)
Re: “Fed has opened windo to all sorts of garbage”
This has been in the news for weeks, but when you look at collateral and what the fed is willing to take, there is still a fair amount of mystery as to how this exchange impacts treasury notes and perhaps the dollar.
Is there any thinking out there as what terms and conditions may be connected to this collateral, i.e, will The fed have to disclose any of this if there are defaults. or is this a complete bail out where anything goes?
Bottom line, maybe there are terms or disclosure issues that would make banks think twice before jumping in and looking insolvent and obviously one would think The fed wouldn’t want to look too retarded in accepting pure garbage which is connected to drug dealers or blackmail, etc??
Yves?
watch the replay of the Congress hearings and NY Fed president obfuscate when asked to disclose the cusips of the Bear securities. Note the Lehman deal to repackage LBO debt (ironically called Freedom – funny that is what passes for clever on Wall Street these days). The Fed publsihes its haircuts at discount window website. They will just endlessly roll the auctions hoping the horizon pushing takes care f itself. Bad strategy
s,
Right, why would they have a contract one day and then modify it? They would be illegal…(cough)
(1) Structural information- factual information regarding the asset-backed securities being offered and the structure and basic parameters of the securities, such as the number of classes, seniority, payment priorities, terms of payment, the tax, ERISA or other legal conclusions of counsel, and descriptive information relating to each class (e.g., principal amount, coupon, minimum denomination, price or anticipated price, yield, weighted average life, credit enhancements, anticipated ratings, and other similar information relating to the proposed structure of the offering);
(2) Collateral information- factual information regarding the pool assets underlying the asset-backed securities, including origination, acquisition and pool selection criteria, information regarding any prefunding or revolving period applicable to the offering, information regarding significant obligors, data regarding the contractual and related characteristics of the underlying pool assets (e.g., weighted average coupon, weighted average maturity, delinquency and loss information and geographic distribution) and other factual information concerning the parameters of the asset pool appropriate to the nature of the underlying assets, such as the type of assets comprising the pool and the programs under which the loans were originated;
(3) Key parties information- identification of key parties to the transaction, such as servicers, trustees, depositors, sponsors, originators and providers of credit enhancement or other support, including information about any such party;
(4) Static pool data- static pool data, as referenced in Item 1105 of Regulation AB [17 CFR 229.1105], such as for the sponsor’s and/or servicer’s portfolio, prior transactions or the asset pool itself; and
(5) Issuer computational material- to the extent that the information is provided by the issuer, depositor, affiliated depositor, or sponsor, statistical information displaying for a particular class of asset-backed securities the yield, average life, expected maturity, interest rate sensitivity, cash flow characteristics, total rate of return, option adjusted spread or other financial or statistical information related to the class or classes under specified prepayment, interest rate, loss or other hypothetical scenarios. (Where such information is prepared by an underwriter or dealer, it is not issuer information, even when derived from issuer information.)
It looks as if the mainstream may finally be recognizing that corporate profits are abnormally high, and likely to revert to trend. For several years now, folks like Grantham of GMO have been arguing this point, and other people like Bill Miller have been saying this particular reversion to mean story is wrong.
One point the Bernanke/Greenspan and the mainstream press still hasn’t picked up on is that, although corporate balance sheets are strong overall, there are large numbers of corporations with high financial and/or operational leverage.
C’mon, that’s a no-brainer- then again, theyt probably have information filters that have been filtering out the less than complimentary talk that’s been thrown around these days.
Yves, what’s a lot more worrying is the “selective” element that has been introduced into Citi’s sale of its LBO issues. This reeks of desperation and ensures that Citi will be left with whatever no one wants, even at “sale” prices. What would they do with it? “Pawn” them to the FED?
The tranche war over CDOs have finally come into the limelight, would that just prolong the mess?
Equities aren’t just in denial, they’re smokin’ somethin’. We see a long hard crash of home re values back which are widely expected now to revert to historic trend line levels—but over in equities they expect to continue to levitate on their carry trade and hot credit air cushion?? Not hardly. Profits will be bad; credit can’t be had; debt (of which there’s mucho) is a lead balloon rate. This one’ll be ugly when the day comes. , , , I rather suspect that money is staying in equities because there is nowhere to run. Pension funds can’t all run off and buy they yuan under the ‘dome of silence’ like the hedgies.