As a famous dog once said, "Ruh Roh!"
The attached article is about Oracle's earnings report this afternoon.
http://finance.yahoo.com/news/Oracle-misfires-fiscal-2Q-apf-2124910865.html?x=0
As we've discussed recently, these rosy earnings projections just may be too rosy.
Tuesday, December 20, 2011
Monday, December 19, 2011
Crumbling Foundation?
Will the S&P 500 2012 earnings projections start to show some cracks in the foundation?
In a recent post, you probably picked up on my position regarding the fact that things must be so good in today’s economy that S&P is projecting record earnings for 2012. I read recently that Barclays Capital has two thoughts as to how earnings have been so good, yet the economic environment feels so terrible. “In our view, there are two primary explanations: 1) an increased reliance on overseas sales (particularly emerging markets) relative to prior business cycles; and 2) reasonable leverage in the nonfinancial corporate sector prior to the crisis, which allowed for a symmetrical recovery…”
I’m not going to elaborate on the second point (its technical balance sheet type stuff and frankly not as much fun to write about), but I do want to make some comments on point number one. First of all, I agree fully with them. Secondly, I can’t help but to believe this is the same reason, which will keep the S&P 500 companies from meeting these ambitious 2012 targets. A quick review of revenues from some of the bigger companies in the S&P500 show percentages ranging from 15% to 55% of revenues generated from international sources. In my world, the dots are easy to connect. Europe will be in a recession, emerging markets sell to Europe, and so emerging markets will be affected in some manner negatively. In summary, US company earnings have been strong on the back of overseas sales (i.e. emerging markets) and emerging markets have a good probability of being impacted negatively by the European crisis. Once again, all of this adds up to earnings disappointments in 2012.
Now let’s take a look at some of these bigger companies influencing the S&P500. First, ExxonMobil and Chevron. Both are related to oil and with projections (my own) that we will see lower oil prices at least in 1H 2012; this will have a negative impact on their stock prices. Next, let’s look at Apple and IBM. Apple earnings have grown at a ~65% annual clip the past 5 years. IBM has also grown at a ~17% clip over this same time period. Imagine if your salary grew at these same rates year after year. Life would be good, but you couldn’t expect that kind of a pace to continue. Please don’t misunderstand me here, I am by no means saying these are bad companies with bad products and services, I just don’t think it’s possible for any company to continue on this kind of a pace and without some kind of correction. It just might be the global issues that serve as the catalyst.
As I’ve said before and you will hear me say many more times, I like to stack the odds in my favor and right now I just can’t see a high probability that the S&P500 as a whole can meet these optimistic forecasts. Since I don’t like to take unnecessary chances with my money, I would be underweight stocks in any portfolio.
I had some more data and statistics, but an unfortunate loss of the information has caused me some heartburn this week. I’m hoping to start sharing some more opinions in upcoming articles about specific investments and still plan to share what I believe is going to be one of the best bets for the next several years.
Happy Holidays!
Joel Fink
Joel.fink@yahoo.com
In a recent post, you probably picked up on my position regarding the fact that things must be so good in today’s economy that S&P is projecting record earnings for 2012. I read recently that Barclays Capital has two thoughts as to how earnings have been so good, yet the economic environment feels so terrible. “In our view, there are two primary explanations: 1) an increased reliance on overseas sales (particularly emerging markets) relative to prior business cycles; and 2) reasonable leverage in the nonfinancial corporate sector prior to the crisis, which allowed for a symmetrical recovery…”
I’m not going to elaborate on the second point (its technical balance sheet type stuff and frankly not as much fun to write about), but I do want to make some comments on point number one. First of all, I agree fully with them. Secondly, I can’t help but to believe this is the same reason, which will keep the S&P 500 companies from meeting these ambitious 2012 targets. A quick review of revenues from some of the bigger companies in the S&P500 show percentages ranging from 15% to 55% of revenues generated from international sources. In my world, the dots are easy to connect. Europe will be in a recession, emerging markets sell to Europe, and so emerging markets will be affected in some manner negatively. In summary, US company earnings have been strong on the back of overseas sales (i.e. emerging markets) and emerging markets have a good probability of being impacted negatively by the European crisis. Once again, all of this adds up to earnings disappointments in 2012.
Now let’s take a look at some of these bigger companies influencing the S&P500. First, ExxonMobil and Chevron. Both are related to oil and with projections (my own) that we will see lower oil prices at least in 1H 2012; this will have a negative impact on their stock prices. Next, let’s look at Apple and IBM. Apple earnings have grown at a ~65% annual clip the past 5 years. IBM has also grown at a ~17% clip over this same time period. Imagine if your salary grew at these same rates year after year. Life would be good, but you couldn’t expect that kind of a pace to continue. Please don’t misunderstand me here, I am by no means saying these are bad companies with bad products and services, I just don’t think it’s possible for any company to continue on this kind of a pace and without some kind of correction. It just might be the global issues that serve as the catalyst.
As I’ve said before and you will hear me say many more times, I like to stack the odds in my favor and right now I just can’t see a high probability that the S&P500 as a whole can meet these optimistic forecasts. Since I don’t like to take unnecessary chances with my money, I would be underweight stocks in any portfolio.
I had some more data and statistics, but an unfortunate loss of the information has caused me some heartburn this week. I’m hoping to start sharing some more opinions in upcoming articles about specific investments and still plan to share what I believe is going to be one of the best bets for the next several years.
Happy Holidays!
Joel Fink
Joel.fink@yahoo.com
Sunday, December 11, 2011
The European Union Saga
I'm going to give my best efforts here to outline in simple terms this ongoing situation in Europe.
To start, you may have heard the European Central Bank lowered interest rates on Thursday to make lending easier. First, this is like using a bandaide on a gunshot wound. Second, the issue in Europe is too much debt and not enough revenue to support it, so they lowered interest rates to continue enabling money to be lent out to the folks who can't pay it back. Huh? This is what's called "buying some time".
There really are no good solutions. It's a choice between a bad outcome and a horrible outcome. Greece is a fairly easy example. They struggle to pay their debts, so they are receiving money to help out. In return for receiving the money, there are certain requirements. Greece is expected to improve the receipt of taxes owed them (in some instances people and business don't pay their taxes and aren't held fully accountable), many of their citizens won't be able to retire in their mid 50's, and the government will have to sell off some of the assets they own (Greece gov't owns a railroad company with about $250mm in revenues and roughly $1.25 billion in various expenses... Ouch!). What crazy demands!
I know I'm really simplifying this, but normally a country would just print more money. This has some other consequences, but it's the luxury of having your own currency. Oops, that's right, Greece uses the Euro, so they don't have any control over that option. I'm sure moving to the Euro sounded like such a good idea in the beginning.
At the end of the day this all boils down to decreased spending, whether by consumers, governments, or both. And when you have decreased spending, there is decreased, if not negative, growth. It is the same outcome for Greece, Italy, Portugal, Spain... The list goes on and on. I just can't see how this doesn't have a bigger effect on the earnings projections of companies, yet the forecast in 2012 is for record corporate earnings. The question to try and answer is how does this affect the US stock markets (and our retirement accounts) if these forecasts prove to be too ambitious.
I may have to unleash my research department to see where these earnings are projected to come from. I'll get myself right on it!
In my upcoming posts I want to share with you some more thoughts on the S&P500 (including these record earnings projections) and what I think will be one of the best investment moves of the next several years.
Cheers!
Joel Fink
joel.fink@yahoo.com
Note: There have been some new developments recently (nothing that improves the situation. Just some more promises with no action). I will comment on these in future posts.
To start, you may have heard the European Central Bank lowered interest rates on Thursday to make lending easier. First, this is like using a bandaide on a gunshot wound. Second, the issue in Europe is too much debt and not enough revenue to support it, so they lowered interest rates to continue enabling money to be lent out to the folks who can't pay it back. Huh? This is what's called "buying some time".
There really are no good solutions. It's a choice between a bad outcome and a horrible outcome. Greece is a fairly easy example. They struggle to pay their debts, so they are receiving money to help out. In return for receiving the money, there are certain requirements. Greece is expected to improve the receipt of taxes owed them (in some instances people and business don't pay their taxes and aren't held fully accountable), many of their citizens won't be able to retire in their mid 50's, and the government will have to sell off some of the assets they own (Greece gov't owns a railroad company with about $250mm in revenues and roughly $1.25 billion in various expenses... Ouch!). What crazy demands!
I know I'm really simplifying this, but normally a country would just print more money. This has some other consequences, but it's the luxury of having your own currency. Oops, that's right, Greece uses the Euro, so they don't have any control over that option. I'm sure moving to the Euro sounded like such a good idea in the beginning.
At the end of the day this all boils down to decreased spending, whether by consumers, governments, or both. And when you have decreased spending, there is decreased, if not negative, growth. It is the same outcome for Greece, Italy, Portugal, Spain... The list goes on and on. I just can't see how this doesn't have a bigger effect on the earnings projections of companies, yet the forecast in 2012 is for record corporate earnings. The question to try and answer is how does this affect the US stock markets (and our retirement accounts) if these forecasts prove to be too ambitious.
I may have to unleash my research department to see where these earnings are projected to come from. I'll get myself right on it!
In my upcoming posts I want to share with you some more thoughts on the S&P500 (including these record earnings projections) and what I think will be one of the best investment moves of the next several years.
Cheers!
Joel Fink
joel.fink@yahoo.com
Note: There have been some new developments recently (nothing that improves the situation. Just some more promises with no action). I will comment on these in future posts.
Tuesday, December 6, 2011
Friday's Employment Report
The employment report came out last Friday and as I’m sure you may have heard, unemployment dropped to its lowest level in almost three years. Wow, that feels good to hear doesn’t it? Warms the heart. Well actually, only for most of us.
What I’m wondering is how those people feel that we stopped including in the calculation. The unemployment rate is a simple calculation; it’s the # of employed people divided by the civilian labor force. Simple, elementary math, eh? Here’s one of the rubs, the civilian labor force calculation does not include those folks, which have been looking for work longer than 12 months (I believe this is the correct timeframe; regardless, the point is that it excludes certain potentially available persons looking for work in the calculation). That’s right, if you couldn’t find a job in 12 months, you’re not included anymore. In November, 315,000 less people were considered part of the labor force as compared to October.
Ok, so let’s look at it a bit differently. What if we just simply looked at the current number of employed civilians compared to the population of the nation. It should be a much more consistent number since it doesn’t exclude anyone. Well, in November 58.5% of the population was employed. This statistic has been in the 58% zone since September of 2009 and before that, the last time we saw this number in the 58% zone was January of 1984 (which at the time was an improvement over the 57% in 82’).
I don’t even want to tell you what I was doing back in 1984, but I sure wasn’t worried about the fact that interest rates were above 11% and the unemployment rate was north of 7% (over 10% in 82’).
The bright side, the early 80’s was the start of one of the greatest bull markets ever. That’s not to say now is the time to jump in with both feet, but when things are at their worst, there is nowhere to go, but up.
Cautious Investors!
Someone help me understand what this article from Reuters is really saying: http://finance.yahoo.com/news/stock-futures-gain-hopes-euro-124607096.html
Here is a section from the article, “
I’m not sure who these “investors” are, but I sure hope they have no impact on my well being. By the way, one of my favorite sayings, “hope is not a strategy”.
I’m a simple guy, so with that being said, here’s where I need help. If European governments tighten their budgets, doesn’t that mean they will be spending less on buying stuff (this is a technical term) and potentially spending less on programs for their citizens? If so, that means the citizens will be buying less stuff because they have to save more due to the reduction in any benefits (a person’s pie is only so big, you have to cut from one place to spend in another, unless you have access to borrow even more money…), and so that means businesses are selling less stuff because the citizens and government are buying less stuff.
If I recall from one of my Finance classes, this means earnings for these businesses will most likely drop and not be as rosy as currently projected (S&P is projecting record earnings for S&P500 companies for 2012, times are that good!), and I believe this is what is called a recession (or even worse the dreaded “D” word) if they are not as rosy as previous reports.
Now if I put two and two together, this means “investors” are hoping the S&P warning puts the euro zone into a recession because that will be a good thing? Maybe it is only the “cautious” investors hoping for this, the rest don’t care. I may need to go back to school because I must have missed something the first time around…
I have more opinions on this stuff yearning to come out, but enough for now.
Joel Fink
joel.fink@yahoo.com
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