What Greece’s Deal Means, and Where the Obstacles Lie

The agreement announced by the Eurogroup on Friday will allow all parties to claim victory. Greece won four months to design a long-term solution for its problems, permission to propose reforms to its creditors replacing a one-sided conversation with a dialogue — and short-term flexibility on its budget. Euro-area creditors succeeded in maintaining their demands for Greece to post large primary balances in the long run and to commit to reforms approved by the group formerly known as the Troika.

The first potential hurdles come this week as Greece submits its list of reforms. A bevy of institutions will need to sign off, including the European Central Bank, the International Monetary Fund, the European Commission and national parliaments. Other obstacles could upset the harmony during the next four months, namely the approval required from lenders in April on the details of the reforms. (…)

SURPRISE!

The BI chart on Citigroup’s U.S. Economic Surprise Index that I used in last Friday’s post was 2 weeks old as Stewart pointed out. Here’s a more up-to-date chart from U.S. Funds showing worse surprises in the U.S. but better ones in Europe:

Oil’s Plunge Could Help Fuel Its Rebound The more oil prices fall, the more people can afford oil, an effect that can goose demand and ultimately help push prices back up.

As I wrote on Jan.7 (“Buy Low” Time For Oil), time is on the bullish side.

(…) Over the past six months, 53% of vehicle purchases in the U.S. were light trucks or sport-utility vehicles, which tend to consume more gas than cars, according to Commerce Department data. That was the highest share in a decade and up from 51% last June, when oil prices peaked for the year. The Transportation Department estimates Americans drove more than three trillion miles in the 12 months through November, the most since mid-2008 and the biggest annual increase—38 billion miles—in a decade. (…)

Meanwhile,

The U.S. Energy Information Administration reported higher than expected inventories for the week ending on February 13, jumping by 7.7 million barrels. The figures continue to astonish – even as rigs drop at a surreal pace, down 30 percent since October, production continues at elevated levels.

The disparity has opened up a bit of a debate among energy analysts about the utility of using rig counts as a metric to evaluate the status of the U.S. oil industry. Rig counts have been held up as an early marker that provides details about the future trajectory of production. But rigs have become much more efficient and capable of drilling multiple wells, meaning that they no longer provide a linear connection with production figures. Not only that, but there is evidence that many producers are postponing well completions, which could delay oil markets from finding a balance between supply and demand. Reuters says that at current rates, there is a three to four month backlog of wells awaiting completion. The approach is deliberate – given the short-term flood of production followed by a steep drop off, shale wells earn the bulk of their lifetime revenues in the first few months. As such, it makes sense for production companies to wait until prices have rebounded before they sell their valuable resources onto the market. Moreover, by delaying completion, companies can achieve short-term cost reductions. (oilprice.com)

EARNINGS WATCH

Factset:

With 443 companies in the S&P 500 reporting actual results for Q4 to date, the percentage of companies reporting actual EPS above estimates (75%) is above the 5-year average, while the percentage of companies reporting actual sales above estimates (58%) is slightly below the 5-year average. In aggregate, companies are reporting earnings that are 3.7% above expectations. This surprise percentage is below the 1-year (+4.2%) average and below the 5-year (+5.5%) average.

As a result of these upside earnings surprises, the blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for Q4 2014 is now 3.5%. This growth rate is above the estimate of 1.7% at the end of the fourth quarter (December 31).

If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would jump to 6.6% from 3.5%.

As a result of upside revenue surprises, the blended revenue growth rate for Q4 2014 is now 1.9%, which is above the estimate of 1.1% at the end of the fourth quarter (December 31). If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 4.6% from 1.9%.

For Q1 2015, 69 S&P 500 companies have issued negative EPS guidance and 15 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance for Q1 2015 is 82% (69 out of 84), which is above the 5-year average of 68%.

But in line with the ratio at the same time last year.

Looking at the first half of 2015, analysts are now projecting year-over-year declines in both earnings and revenues for both Q1 2015 and Q2 2015, compared to expectations for earnings and revenue growth for both quarters back on December 31.

Most of these downward estimate revisions have occurred in the Energy sector. However, it remains that all sectors are being revised downward with the median growth around the zero mark.

S&P’s tally of the 439 companies that had reported Feb. 19 shows Q4’14 EPS at $26.56, down $0.22 (0.8%) from the previous week and 6% YoY. Trailing EPS are now $112.82, down 1.5% from their level after Q3’14. Keep in mind that S&P treats pension charges as operating costs which reduced Q4’14 EPS by $1.05. Most other aggregators, including Factset, treat these charges as non-operating.

The earnings season, which started strongly, is ending weakly. During the last 2 weeks, 30% of the 118 companies that reported missed their estimate, much worse that the 17% miss rate to Feb. 6. Misses in the last 2 weeks were particularly high in Energy (46%), Consumer Discretionary (38%), Financials (62%) and Telecoms (50%).

Forward estimates keep trickling down: Q1’15 EPS of $26.80 would be off 1.9% YoY. Q2’15 EPS of $29.13 would be off 0.7% bringing trailing EPS to $112.09 after Q2, down another 0.6%.

In effect, trailing EPS peaked at $114.51 after Q3’14. They will have declined 1.5% after Q4’14 and 2.1% after Q2’15 if current estimates are met. The S&P 500 rose 7% since Sept. 30, 2014.

At 2110, the S&P 500 Index is selling at 18.7x trailing EPS and at 20.2x the Rule of 20 P/E, the first crossing above 20 since 2008.

In most previous bull markets, the Rule of 20 P/E peaked in the 22-23 area. To repeat myself (DEFLATING EQUITIES):

Unlike the actual P/E, the Rule of 20 P/E is not at its past normal cyclical high of 22-23, leaving upside potential to the more daring investors. Actually, since trailing EPS are not expected to rise until Q4’15, investors need rising multiples to push prices higher during the next 12 months. Can the ongoing deflationary bout, potentially morphing into outright deflation, provide enough impetus to earnings multiple? After all, if inflation declines from the current 1.5% to zero as many expect, fair P/E under the Rule of 20 P/E rises from its current 18.5 to 20.0, justifying 2282 on the S&P 500 Index, 9% above its current level.

Using round numbers, 2300 seems to be the best we can hope for during the next 12 months given flat earnings. This would take the actual P/E to 20x. The last time this occurred other than in a mania was in 1992 when EPS were rising rapidly. It also occurred in 1961 as investors joined in the Kennedy euphoria. The young, charismatic President quickly loosened monetary policy and boosted the economy after several difficult Eisenhower years. The euphoria lasted until December 1961 when the P/E reached 22.4x (23.1 on the Rule of 20). The 24% slide in the following 6 months brought investors back to reality and P/Es back to 15.6x (17 on the Rule of 20).

Chinese Cars Fall Farther Behind

Two decades ago the most popular car in China was the Xiali, an unassuming sedan that nevertheless lent its buyers a feeling of wealth and success.

Today, more than three-quarters of the new sedans that Chinese customers drive off the lot are foreign-branded cars like Volkswagens and Chevys. (…)

Government data shows that local-brand passenger vehicles accounted for 38% of China’s domestic market in 2014, down from 46% in 2010. For sedans, local brands’ share fell to 22% from 31%.

Foreign auto makers are launching more-affordable cars, entering into what used to be a Chinese redoubt. (…)