Earnings season is getting underway, and analysts are expecting the S&P 500 companies to report $25.55 in earnings for the fourth quarter. That represents a 2.8% improvement over a year ago, while at the same time it is significantly below the 9.9% growth forecast made in October. If the current fourth quarter earnings forecast turns out to be correct, then annualizing it reflects a current P/E ratio of 14.2.
Looking ahead, analyst forecasts of future earnings result in a forward P/E ratio of 12.9 versus the historical average of 14.8. Said another way, if future earnings projections are correct and the historical average were to hold , then the S&P 500 should be trading at around 1670, or 14.7% higher than it is today. Although there are a lot of “ifs” in that statement, it has many investors excited.
As usual, investors are more likely to react to what companies have to say about future prospects as opposed to what they did last quarter. Three months ago, if you remember, beating earnings estimates wasn’t enough. Investors wanted to see revenue growth too, and we suspect they will be demanding the same this quarter.
The market will focus on earnings for a while, but the fiscal cliff and debt ceiling will soon be back in the news. Perhaps you’ve heard about one novel solution to the debt ceiling situation. It started as a joke, but it has been getting some serious attention. The idea is for the U.S. Treasury to mint a commemorative $1 trillion coin. They would then deposit the coin with the Fed to buy back some of the U.S. Treasury securities being held there. This in turn lowers the outstanding amount of government debt and avoids bumping into the debt ceiling.
Having the Treasury mint unbacked coins is essentially the equivalent of the Fed printing money through quantitative easing. There is a real concern about the negative impacts of creating $1 trillion out of thin air (or a few thousand dollars of platinum). However, the truly scary part is knowing the national debt now stands at more than $16 trillion and the entities involved with the coin are unlikely to stop with minting just one.
We’re adding a new constituent to our Sector Edge chart with the inclusion of Real Estate, making room by removing the Sector Average. For many years, we included only the ten major sectors as defined by the Global Industry Classification System (GICS). Within GICS, Real Estate is classified as a subset of the Financials sector. However, many analysts prefer to call Real Estate an “alternative asset class” instead of an equity category. We are of the opinion that a direct investment in real estate is quite different than buying REITs (Real Estate Investment Trusts). However, direct ownership of investment real estate is often beyond the reach (or comfort) of many investors, especially when diversification needs are considered. Therefore, funds investing in REITs provide a good, but not perfect, solution. Whether you call them another sector or an alternative asset class doesn’t really matter. They perform differently than the Financials sector and are deserving of investor attention.
The strong opening week to 2013 didn’t change the top four positions with Financials, Materials, Industrials, and Consumer Discretionary leading the way. Real Estate makes its debut in fifth place. Health Care moved ahead of Telecommunications, and the four sectors posting negative trends a week ago have now reversed to the upside. Energy is the strongest of this bunch, while Utilities continues to occupy last place
All Style categories are now posting positive trends, and there is a wide dispersion of momentum scores between top-ranked Small Cap Value and last place Mega Cap. Small is better as 2013 gets underway, with the top four positions being held by the four smallest capitalization segments. The top three are unchanged from a week ago, and Small Cap Growth moved up two places to join them. The three Small Cap categories, together with Micro Cap, now constitute the upper tier. The middle ground is aptly held by the three Mid Cap categories, and the Large Caps loom below. Mega Cap is still sitting on the bottom but managed to flip back to a positive trend this week. Value is stronger than Growth across all capitalization segments.
The back-and-forth battle for first place between China and Europe took a break this week. China repeats as the top-ranked Global category and puts some distance between itself and second place Europe. Latin America jumped four places, landing right behind Emerging Markets. EAFE and Pacific ex-Japan held on to their middle of the pack positions. Japan was the laggard this week, falling from fourth to seventh. Its recent strength has been fueled by a weakening yen, making its export-driven economy more competitive. However, some Japanese officials are now worrying the yen may be falling too far, too fast. As a result, both the currency and stocks are taking a break from recent trends. World Equity and the U.K. are still below Japan in the pecking order. The U.S. climbed a notch to move out of last place, leaving Canada with the duty of bringing up the rear.
“This is Alice in Wonderland looking through the looking glass at debt management.”
U.S. Representative Greg Walden, who is considering introducing a bill to bar the U.S. Treasury from minting a $1 trillion coin
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