Earnings in the States

Earning season is almost done with 88% of all companies in the S&P500 having reported now for the second quarter of 2009. Earnings have declined over 98% since peaking in the third quarter of 2007.
Real earnings have dropped to a record low.
Why is this reality not captured by investors?
Because reported earning are beating the estimations set by various analysts. This is a relative performance. Versus expectations
But in absolute terms the situation is just horrendous.
Given the decidedly lackluster expectations, it’s relatively easy for a company to “outperform" those expectations. Secondly, much if not all of any gains in profitability are the result of slashing overhead (read "workers") and not a pick-up in sales. Finally, as you can see in the chart, in no sense are the earnings being posted anywhere remotely close to prior levels.

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Expiration week

It is an expiration week. The fan club of the Max Pain theory (where pro’s try to let expire as many puts and call worthless) will be delighted to know that the inflection point for most indices in order to obtain this result is lower.
Will this result in a down week?

In the mean time we read a report from Ned Davis Research handling the question if stocks are cheap.
We report

“Ned Davis Research looked at market valuations after bear markets since 1929. The firm found that in the first three months after bear markets, the market’s P/E tends to climb by about 10 percent. And the multiple has traditionally expanded 22 percent in the first six months after a major market downturn.

But since March 9, when the recent rally began, the P/E of the S.& P. 500 has jumped nearly 40 percent. Such a surge in P/E ratios may be warranted if the recession ends soon and profits recover quickly. While there are some signs that the worst of the recession may be behind us, few analysts expect profits to stage a major rebound. And, of course, it’s still unclear whether the recession and the bear market have ended.”

What’s the problem here? Earnings.
Nobody has a clue what earnings will be for this quarter and the remaining of 2009.

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Relaxing

Chart of the Day publishes a chart a day. The most recent one was very interesting. This chart depicts the earnings growth. We know that earnings of one quarter always are compared with the earnings of the same earnings twelve months earlier.
The stocks of the S&P500 – Americans finest – have imploded over the last 20 months (almost two years). Real earnings (adjusted after inflation, that is) have dropped to a record low.
The ‘better than expected’ mantra is very deceitful if we look to a longer time frame. And of course, it is the financial sector responsible for this huge fall.
But anyway…

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