The Economist who was right – Market Musings and Data Deciphering

Posted by David Rosenberg - Gluskin Sheff

Share on Facebook

Tweet on Twitter



• How do we get to peak earnings in the S&P 500, let alone “normalized”?

• Global growth dominated by government initiatives

• Equity market valuation not compelling

• U.S. consumer credit — neither a lender nor a borrower be

• Manpower Inc. employment outlook survey for 4Q not looking good

• Small business optimism



Okay, let’s get this straight.  We are now being told by the pundits that the reason why Mr. Market is managing to so readily shrug off adverse data is because Mr. Market is discounting “normalized” 2011 earnings of $80.  That is behind the latest round of S&P 500 estimates of 1,200.  After a momentous 50%+ surge from the lows, anything is certainly possible.  But let’s see if it makes sense.  First, with household net worth down $14 trillion, employment down 7 million since the start of the recession and consumer credit down $110 billion from last year’s peak, it would seem to us as though there are too many gaping holes to believe we are going to be seeing anything remotely close to “normalized” earnings any time soon.  But even if that were the case, it would suggest that the market is trading near a 12x two-year forward multiple.  Go back 80 years worth of data, and the mean two-year forward multiple is 7x.  Too rich for our liking.


We did some digging and found that all of the world economic rebound in 2009 — that is, 100% and then some — is being accounted for by fiscal stimulus.  There is still nary a sign that the global recovery is being sustained by organic private sector activity.  Oh yes, for 2010, we calculate that 80% of the growth that the consensus is penning in is derived from the public sector.  Even FDR would blush over this unprecedented government incursion into the economy.  Since the impact from government spending is a second-round effect on corporate profits, it will be interesting to see the extent to which earnings growth come into line with today’s lofty expectations.


With earnings AND revenues down over 20% YoY, it can hardly be said that the fundamentals are very constructive.  Current quarter EPS estimates are also down 30% from where they started the year.  The technicals and liquidity backdrop are quite positive; however, these give you sharp tradable rallies, but you have to know when to leave the poker table. Valuation metrics are not positive.  At the lows in March, the stock market was trading at 13x ten-year trailing earnings.  That was the first time since 1991 that the S&P 500 managed to cheapen below the long-run average on so-called “normalized” earnings of 16x (courtesy of Robert Shiller).  Fast forward to today — we are back to just around 18x.

….read pages 2-4  HERE.