EARNINGS WATCH
Tougher day for earnings yesterday:
- 90 companies (32.9% of the S&P 500’s market cap) have reported. Earnings are beating by 5.3% (5.9% last Monday) while revenues have positively surprised by 0.4%.
- The beat rate is 69% (72% ex-Financials (78%)).
- Expectations are for a decline in revenue, earnings, and EPS of -3.7% (-3.8%), -2.3% (-2.6%), and -0.9% (-1.2%). EPS growth is on pace for 2.7%, assuming the current 5.3% beat rate for the remainder of the season. This would be 7.3% on a trend basis (ex-Energy and the big-5 banks).
Oil prices fall on unexpected rise in U.S. crude stocks
Industry data released on Tuesday by the American Petroleum Institute (API) showed crude inventories at the Cushing, Oklahoma hub rose 2.3 million barrels last week, compared with analyst expectations for a decrease of the same volume. (…)
U.S. government crude stocks data to be released by the Energy Information Administration (EIA) at 1430 GMT on Wednesday is expected to shed further light on the build-up in inventories. (…)
The global supply glut is also taking its toll on the products market. China’s exports of diesel will reach their highest since at least 1999 in August as its local market cannot absorb high output from refineries, sources said.
OPEC kingpin Saudi Arabia has also been stepping up exports of diesel.
Meanwhile, Americans are back on the road (from Doug Short):
“Travel on all roads and streets changed by 2.7% (7.3 billion vehicle miles) for May 2015 as compared with May 2014.” The less volatile 12-month moving average is up 0.19% month-over-month and 2.84% year-over-year.
CHINA
- The MNI China Business Indicator fell a straggering 8.8pts to 48.8 in July (below 50 signifying pessimism) – the lowest since January 2009. (Zerohedge)
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Evercore ISI company survey of China sales remained at 39.3 last week, close to the level associated with Hard Landing concerns in 2012 and approaching its 2009 low.
Why European Earnings Will Power Past U.S.
As the mid-year earnings season accelerates, here are four tailwinds driving European profit growth past the U.S.
The euro has fallen by about a fifth against the dollar over the past year. It averaged $1.11 in the second quarter, down from an average of $1.37 in the same period a year earlier.
Industrial, pharma and tech companies with a strong exposure to the U.S. market, such as Airbus, Sanofi and SAP, are set to benefit the most.
Falling borrowing costs, thanks to the European Central Bank’s ultra-accommodative stance, are also set to prop up earnings.
The average coupon on European investment-grade bonds has fallen to 3.1% currently from 3.8% in April 2014, and to 5.4% from 6.2% for high-yield bonds, according to Bloomberg data.
Utilities, which use debt to finance long-term projects, are among the industries that benefit most from lower financing costs. Germany’s RWE had interest expenses of about 1.08 billion euros ($1.17 billion) last year.
The macro picture is also improving. The Composite PMI for the euro zone reached 54.2 in June, its highest reading since May 2011, while the Manufacturing PMI reached 52.5.
Overall, companies listed on the Stoxx 600 index are expected to report on average a 6.7 percent increase in profits this year, with a gain of 12 percent for Euro Stoxx 50 firms, data compiled by Bloomberg show. That compares with an expected 1.3 percent gain in profits for S&P 500 companies in 2015. (…)
According to Barclays strategists in a note dated July 16, only 41 percent of analyst recommendations across all stocks in the Stoxx 600 are rated “buy.†That’s the “least bullish†reading since 1995, and so a positive contrarian indicator.
What is not mentioned here is that Europe earnings have generally failed to meet forecasts as this April 2015 FT Alphaville’s chart shows:
SENTIMENT WATCH
Buffett’s Ratio Is Bearish
Warren Buffett’s favorite valuation model is screaming that stocks are overvalued. It was discussed in a 7/20 Business Insider article titled “Warren Buffett’s ‘single best measure’ of stock market value falls short in 3 big ways.†The article was based on a note to clients on Monday from Bank of America Merrill Lynch’s Savita Subramanian. She wrote that Warren Buffett’s favorite metric of long-term value “may have limited utility.â€
The market-cap-to-GDP ratio, which he once characterized as the “single best measure†of value, is used to determine whether the stock market is overvalued or undervalued. Here are the three shortcomings of the Buffett ratio according to BAML and my thoughts:
(1) Like price-to-sales ratios, the Buffett ratio doesn’t adjust for structural changes in profit margins due to lower taxes, lower interest expense, and higher operating margins attributable to technological innovation.
Maybe so, but that assumes that these changes are indeed permanent. They may be, but that is quite debatable. The implication that the profit margin may remain structurally high is a radical idea given that it has been a highly cyclical variable since the beginning of recorded time, i.e., since 1947. There are lots of reversion-to-the-mean believers who would vociferously dissent from the view that margins may remain higher than in the past.
(2) On average, more than half of S&P 500 revenues come from overseas. So comparing the index’s market cap to domestic GDP is flawed. It would be more accurate to measure it relative to a global measure of GDP.
I calculate the Buffett ratio dividing total US equity market capitalization excluding foreign issues by nominal GDP. Interestingly, it is almost identical to the market cap of the S&P 500 divided by the index’s revenues, which includes both domestic and overseas revenues. Both are near their peaks during 2000, suggesting that stocks are indeed extremely overvalued.
(3) The market cap of the S&P 500 has a much different industry mix than GDP. So the ratio is comparing apples and oranges.
I don’t disagree. However, I long ago concluded that every valuation model has flaws. That’s why I try to track them all. I see are lots of valuation measures that look quite stretched to me. But then again, valuation, like beauty, is in the eye of the beholder
