Monthly Archives: November 2013

Standard & Poor’s S&P500 Earnings Estimates For 2013 & 2014 – As Of November 14, 2013

As many are aware, Standard & Poor’s publishes earnings estimates for the S&P500.  (My posts concerning their estimates can be found under the S&P500 Earnings tag)

For reference purposes, the most current estimates are reflected below, and are as of November 14, 2013:

Year 2013 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $107.19/share

-From a “top down” perspective, operating earnings of N/A

-From a “top down” perspective, “as reported” earnings of $97.82/share

Year 2014 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $120.80/share

-From a “top down” perspective, operating earnings of $112.92/share

-From a “top down” perspective, “as reported” earnings of $108.11/share

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1795.85 as this post is written

St. Louis Financial Stress Index – November 21, 2013 Update

On March 28, 2011 I wrote a post (“The STLFSI“) about the St. Louis Fed’s Financial Stress Index (STLFSI) which is supposed to measure stress in the financial system.  For reference purposes, the most recent chart is seen below.  This chart was last updated on November 21, incorporating data from December 31,1993 to November 15, 2013, on a weekly basis.  The November 15, 2013 value is -.82:

(click on chart to enlarge image)

STLFSI_11-21-13 -.82

Here is the STLFSI chart from a 1-year perspective:

STLFSI_11-21-13 -.82 1-year

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed November 21, 2013:

http://research.stlouisfed.org/fred2/series/STLFSI

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1792.06 as this post is written

Is The Stock Market Experiencing A Bubble?

Recently there have been a variety of discussions as to whether the stock market is experiencing a bubble.  Among the main drivers of such discussion is the stock market’s seemingly near-constant price advancements, frequent record-high closes, and the duration of the advance, all of which are against the backdrop of the (at best) slow-growth economy.  For reference, here is a daily chart of the S&P500 from 2009, with the 50dma and 200dma:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 11-21-13 SPX daily since 2009

One such article discussing whether the stock market is experiencing a bubble is the Saturday, November 16 Barron’s article titled “Bubble Trouble?”  An excerpt:

The S&P 500 is valued at 16 times projected 2013 operating profits of $109 and at 15 times estimated 2014 earnings of $120. Those price/earnings ratios are about equal to the long-run average. Even if next year’s earnings growth is closer to this year’s projected 5% than to the aggressive current estimate of 10%, the S&P 500 forward P/E is 15.6, which doesn’t look excessive at a time of near-zero short-term rates, a 2.71% yield on the 10-year Treasury note, and sub-6% average yield on junk bonds. The S&P 500 dividend yield is 2%, but the earnings payout ratio is historically low at about 35%, meaning companies have room to further boost dividends.

As well, Janet Yellen, during her testimony on Thursday, was asked about asset bubbles.  Here is what she said (as seen in the Bloomberg article of November 14 titled “Yellen Signals Continued QE Undeterred by Bubble Risk”) concerning the stock market:

“Stock prices have risen pretty robustly but if you look at traditional measures,” such as price-earnings ratios, “you would not see stock prices in territory that suggests bubble-like conditions,” she said.

My comments:

My posts concerning the existence of the stock market being an asset bubble date back to 2011.  I view the argument as to whether the stock market is experiencing a bubble based upon two general areas:  technical analysis and fundamental analysis.

While I believe there to be many reasons to believe stocks are in a bubble based upon technical measures, in this post I will focus on fundamental measures.

In particular, the common (and seemingly predominant) argument made that stocks are fairly or attractively valued is based upon a (forward) PE basis.  Various year 2014-2015 S&P500 earnings forecasts continue to portray attractive growth in earnings.  While, as indicated by the Barron’s article mentioned above, stocks don’t appear to be in a bubble based upon (forward) PE-based valuation measures, current levels of earnings are, in many ways, favorably impacted by various factors.

Even if one assumes that EPS is – or should be – the primary stock market valuation metric – these numerous benevolent factors within the current earnings environment seem to lack general recognition.  Whether these factors will persist – and whether they “deserve” to be accorded full valuation – should perhaps be the focal issue.

While a full discussion of these factors would be exceedingly lengthy and, at times, very complex, below are some of the more notable factors:

(Ultra) Low interest rates –  While, due to numerous factors, it is difficult to accurately quantify how much the (ultra) low interest rate environment has directly and indirectly bolstered earnings, the (ultra) low interest rate environment has had a (very) significant impact on earnings.  I discuss this in the ProfitabilityIssues.com posts of September 25, 2013 (“Corporate Interest Cost Savings“) and the July 29, 2013 post (“Impact Of Low Interest Rates On Corporate Profitability.”)

Lagging Revenue Growth – While S&P500 earnings have no doubt been robust, corporate revenue growth has consistently lagged.  This is problematical in many ways, both from a corporate performance standpoint as well as a general economic standpoint.  From a corporate performance standpoint, it raises many issues, including both the “quality of earnings” as well as to the sustainability of earnings.  From a general economic standpoint, it strongly appears as if employment growth, among other factors, would likely be considerably higher if revenue growth was higher.

Share buybacks – While, from an overall perspective, share buybacks aren’t a predominant factor, this is yet another area in which EPS has been significantly bolstered. (note:  this share buyback factor, as well as others, is also discussed in Lance Roberts’ post titled “Analyzing Earnings As Of Q3 2013.”)

Also of note is that various levels of profitability – including the S&P500′s operating margins, operating profits, and After-Tax Corporate Profits as a Percentage of GDP – are at or near record-high levels.  Cumulatively, these levels raise questions about the sustainability of corporate earnings growth.  As well, they raise the issue of what a decline in corporate earnings may look like.  These “decline” scenarios, although estimates, often look rather precipitous, especially if one starts thinking about such issues as long-term mean reversion as well as a “reversal” of the positive earnings factors mentioned above, such as the ultra-low interest rate environment.

As to the valuation of the stock market, when one uses stock market valuation measures other than PE, one often sees the stock market as either being (very) expensive or in “bubble” territory.  These other valuation measures include the Q-Ratio, market capitalization to GDP, CAPE (“Shiller PE”), etc.  (note:  these factors are discussed in Doug Short’s “Market Valuation Overview” updates as well as various of John Hussman’s commentaries, including that of November 11, 2013 titled “A Textbook Pre-Crash Bubble.”)

Cumulatively, on an “all things considered basis,” my analysis continues to indicate that not only is the stock market experiencing a bubble but – although it doesn’t necessarily outwardly appear as such – also that this stock market bubble is enormous.  While some choose to use (forward) PE ratios as the main determinant of whether the stock market is a bubble, I believe this is misleading.  

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1781.37 as this post is written

Recession Measures – Updated

This post is the latest update to a series of blog posts seen on the CalculatedRisk.com blog.  The original blog post of April 12, 2010, is titled “Recession Measures.” In it, Bill McBride discussed key measures that the NBER uses to determine recoveries, and posted four charts.

Here are those charts, updated in his November 17, 2013 post titled “Update:  Recovery Measures.”  The charts are constructed in a fashion different than most – in a “percent of peak” fashion.  As defined, “The following graphs are all constructed as a percent of the peak in each indicator.  This shows when the indicator has bottomed – and when the indicator has returned to the level of the previous peak.  If the indicator is at a new peak, the value is 100%.”  Periods of recession, as defined by the NBER, are shown as blue bars.

Here are the four charts, updated through the dates shown:

(click on images to enlarge)

Real Gross Domestic Product, above its pre-recession peak:

CR 11-17-13 - RMGDPQ32013

Real Personal Income Less Transfer Payments, above its pre-recession peak :

CR 11-17-13 - RMPersonalIncomeLessTransferQ32013

Industrial Production, still .8% below the pre-recession peak:

CR 11-17-13 - RMIPNov2013

Payroll Employment, still 1.1% below the pre-recession peak:

CR 11-17-13 - RMEmployOct2013

 

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1791.53 as this post is written

Yellen Testimony Concerning Whether Stocks Are Experiencing A Bubble

I found various of Janet Yellen’s comments during her confirmation hearing on Thursday (November 14) to be notable, although I don’t agree with many of them.

For reference purposes, here are a few of the comments.  Unfortunately, the official transcript is not yet available.  The following excerpts are from the Wall Street Journal post of November 14, 2013, titled “Yellen on Stocks:  This Isn’t a Bubble.”

“Stock prices have risen pretty robustly,” she told lawmakers Thursday. But looking at several valuation measures — she specifically cited equity-risk premiums — she said: “you would not see stock prices in territory that suggest…bubble-like conditions.”

also:

“At this stage, I don’t see risks to financial stability” from current policies, she says, while noting limited evidence of “reach for yield” among investors or a buildup of leverage.

She says it’s important for the Fed to “attempt to detect asset bubbles.” For now, however, she doesn’t see any bubbles that need to be popped.

Another source is the Bloomberg article of November 14 titled “Yellen Signals Continued QE Undeterred by Bubble Risk.”  Here is an excerpt, slightly different than that seen above:

“Stock prices have risen pretty robustly but if you look at traditional measures,” such as price-earnings ratios, “you would not see stock prices in territory that suggests bubble-like conditions,” she said.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1798.96 as this post is written

Chicago Fed National Financial Conditions Index (NFCI)

Each week I have been posting two charts of the St. Louis Fed’s Financial Stress Index (STLFSI), which is supposed to measure stress in the financial system.

Of course, there are a variety of other measures and indices that are supposed to measure financial stress and other related issues, both from the Federal Reserve as well as from private sources.

Two other indices that I regularly monitor include the Chicago Fed National Financial Conditions Index (NFCI) as well as the Chicago Fed Adjusted National Financial Conditions Index (ANFCI).

Here are summary descriptions of each, as seen in FRED:

The National Financial Conditions Index (NFCI) measures risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.

The adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions.

For further information, please visit the Federal Reserve Bank of Chicago’s web site:

http://www.chicagofed.org/webpages/publications/nfci/index.cfm

Here are the most recently updated charts of the NFCI and ANFCI, respectively.

The NFCI chart below was last updated on November 14, incorporating data from January 5,1973 to November 8, 2013, on a weekly basis.  The November 8, 2013 value is -.90:

(click on chart to enlarge image)

NFCI_11-14-13 -.90

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed November 18, 2013:

http://research.stlouisfed.org/fred2/series/NFCI

The ANFCI chart below was last updated on November 14, incorporating data from January 5,1973 to November 8, 2013, on a weekly basis.  The November 8, 2013 value is -.38:

(click on chart to enlarge image)

ANFCI_11-14-13 -.38

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed November 18, 2013:

http://research.stlouisfed.org/fred2/series/ANFCI

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1798.18 as this post is written

Long-Term Charts Of The ECRI WLI & ECRI WLI, Gr. – November 15, 2013 Update

As I stated in my July 12, 2010 post (“ECRI WLI Growth History“):

For a variety of reasons, I am not as enamored with ECRI’s WLI and WLI Growth measures as many are.

However, I do think the measures are important and deserve close monitoring and scrutiny.

The movement of the ECRI WLI and WLI, Gr. is particularly notable at this time, as ECRI publicly announced on September 30, 2011 that the U.S. was “tipping into recession,” and ECRI has reiterated the view that the U.S. economy is currently in a recession, seen most recently in these nine sources :

Other past notable year 2012 reaffirmations of the September 30, 2011 recession call by ECRI were seen (in chronological order) on March 15 (“Why Our Recession Call Stands”) as well as various interviews and statements the week of May 6, including:

Also, subsequent to May 2012:

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Below are three long-term charts, from Doug Short’s blog post of November 15, 2013 titled “ECRI Recession Watch:  Weekly Update.”  These charts are on a weekly basis through the November 15 release, indicating data through November 8, 2013.

Here is the ECRI WLI (defined at ECRI’s glossary):

(click on charts to enlarge images)

Dshort 11-15-13 ECRI-WLI 131.1

This next chart depicts, on a long-term basis, the Year-over-Year change in the 4-week moving average of the WLI:

Dshort 11-15-13 ECRI-WLI-YoY 3.9 percent

This last chart depicts, on a long-term basis, the WLI, Gr.:

Dshort 11-15-13 - ECRI-WLI-growth-since-1965 2.2

_________

I post various economic indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1798.18 as this post is written

Recession Probability Models

There are a variety of economic models that are supposed to predict the probabilities of recession.

While I don’t agree with the methodologies employed or probabilities of impending economic weakness as depicted by the following two models, I think the results of these models should be monitored.

Please note that each of these models is updated regularly, and the results of these – as well as other recession models – can fluctuate significantly.

The first is the “Yield Curve as a Leading Indicator” from the New York Federal Reserve.  I wrote a blog post concerning this measure on March 1, 2010, titled “The Yield Curve as a Leading Indicator.”

Currently (last updated November 4, using data through October) this “Yield Curve” model shows a 1.54% probability of a recession in the United States twelve months ahead.  For comparison purposes, it showed a 1.07% probability through September, and a chart going back to 1960 is seen at “Probability Of U.S. Recession Charts.” (pdf)

The second model is from Marcelle Chauvet and Jeremy Piger.  This model is described on the St. Louis Federal Reserve site (FRED) as follows:

Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. This model was originally developed in Chauvet, M., “An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching,” International Economic Review, 1998, 39, 969-996. (http://faculty.ucr.edu/~chauvet/ier.pdf)

Additional details and explanations can be seen on the “U.S. Recession Probabilities” page.

This model, last updated on November 13, 2013, currently shows a .56% probability using data through August.

Here is the FRED chart (last updated November 13, 2013) :

RECPROUSM156N_11-13-13 .56 percent

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Marcelle Chauvet and Jeremy Piger; U.S. Recession Probabilities [RECPROUSM156N]; accessed November 14, 2013:

http://research.stlouisfed.org/fred2/series/RECPROUSM156N

The two models featured above can be compared against measures seen in recent blog posts.  For instance, as seen in the November 12 post titled “The November 2013 Wall Street Journal Economic Forecast Survey“ economists surveyed averaged a 13% probability of a U.S. recession within the next 12 months.

Of course, there is a (very) limited number of prominent parties, such as ECRI (most recently featured in the November 8 post titled “Long-Term Charts Of The ECRI WLI & ECRI WLI,Gr. – November 8, 2013 Update“) that believe the U.S. is currently experiencing a recession.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1790.62 as this post is written

Walmart’s Q3 2014 Results – Comments

I found various notable items in Walmart’s Q3 2014 management call transcript (pdf) dated November 14, 2013.  I view Walmart’s results and comments as particularly noteworthy given their retail prominence and focus on low prices.  I have previously commented on their quarterly conference call comments; these previous posts are found under the “paycheck to paycheck” tag.

Here are various excerpts that I find most notable:

comments from Bill Simon, president and CEO of Walmart U.S., page 10:

Net sales grew to $67.7 billion, up approximately $1.6 billion or 2.4 percent, while comp sales declined 0.3 percent, driven by a 0.4 percent decline in traffic. Comp traffic was up slightly from the second quarter. Operating income increased 5.8 percent to over $5.1 billion.

comments from Bill Simon, president and CEO of Walmart U.S., page 11:

Let me share more details about our financial results for the third quarter. Our gross profit rate was up slightly at 9 basis points, with gross profit dollars up 2.7 percent. This was less than the 23 basis points increase in the second quarter. We continued to strategically invest in price, funded by cost of goods savings and expense leverage.

comments from Bill Simon, president and CEO of Walmart U.S., page 15:

Each of our formats is rapidly converging with our digital platforms through the continued development of programs like ship from store, Scan & Go, lockers and more. We’re focused on innovative ways to serve the customer, like the grocery delivery test which we recently expanded to Denver. To complement these programs, we’re expanding our endless aisle, giving our customers the ability to shop anytime and anywhere. We’ve more than doubled our online assortment over last year, going from 2 million skus to more than 5 million, primarily driven by Marketplace growth. We’re also investing in our digital platform, building fulfillment facilities to further enable convergence, improve shipping speed and drive supply chain efficiencies.

comments from Bill Simon, president and CEO of Walmart U.S., page 16:

We have robust plans in place to help our customers save money this holiday season. While we’re somewhat encouraged by the momentum coming out of the third quarter, we know the customer continues to be challenged by ongoing uncertainty around healthcare costs, the payroll tax increase and recent SNAP reductions.

Based on these factors, we’re currently forecasting a relatively flat comp in the fourth quarter for the 14 weeks ending January 31, 2014, according to our 4-5-5 retail calendar. Last year’s 14-week comp was up 0.3 percent.

comments from Charles Holley, CFO, page 30:

Last quarter, I told you that our expectations for the back half of the year would be through a lens of cautious consumer spending, and I believe that we’re seeing that play out. In the third quarter, we invested strategically in price across all of our segments, and we made progress on expense leverage. Although it was a challenging quarter from a sales standpoint, we’re encouraged that we continue to manage our business well and deliver consistent solid returns for our shareholders.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1790.60 as this post is written

St. Louis Financial Stress Index – November 14, 2013 Update

On March 28, 2011 I wrote a post (“The STLFSI“) about the St. Louis Fed’s Financial Stress Index (STLFSI) which is supposed to measure stress in the financial system.  For reference purposes, the most recent chart is seen below.  This chart was last updated on November 14, incorporating data from December 31,1993 to November 8, 2013, on a weekly basis.  The November 8, 2013 value is -.777:

(click on chart to enlarge image)

STLFSI_11-14-13 -.777

Here is the STLFSI chart from a 1-year perspective:

STLFSI_11-14-13 -.777 1-year

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed November 14, 2013:

http://research.stlouisfed.org/fred2/series/STLFSI

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1787.33 as this post is written