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Ed Yardeni
O Ed Yardeni είναι διεθνούς φήμης αναλυτής και σύμβουλος επενδύσεων
9 Νοεμβρίου 2010
MAJOR TOPICS: QE-7.0. Global Backlash. Materials.
BULLET POINTS: (1) Seven incredible quarters for earnings. (2) Will stocks
correct if QE-2.0 is curtailed? (3) Stocks remain cheap. (4) The three-legged stool is
still standing. (5) Purchasing managers, regime change, and QE-2.0. (6) Professor
Bernanke lectures students and the world. (7) German Finance Minister says Fed is
“clueless.” (8) Bernanke is a long-time advocate of devaluation. (9) FOMC dissidents.
(10) Zoellick’s Gold Standard. (11) How much longer can commodity prices and EM
currencies go vertical? (12) Industrial Gases and Specialty Chemicals should be
overweighted.
NOTICE: Our Morning Briefings are now available on FactSet.
I) STRATEGY: Let’s stop talking about QE-2.0 for a minute, shall we? Instead, I
would like to discuss QE-7.0. Quarterly earnings have been amazingly strong for the
past seven quarters. Joe tracks the data on a weekly basis. During the latest earnings
season for the third quarter of this year, with 88% of the S&P 500 having reported
their results, the actual/estimated blend was up to $21.74 per share during the first
week of November, 5.7% higher than the estimate just before the start of the earnings
season at the end of September. The average underestimate over the previous six
quarters was 10.0%. Joe and I believe that most of these positive earnings surprises
are attributable to better-than-expected overseas results.
While everyone I speak to is sick and tired of the QE-2.0 debate and mostly sides with
the opposition, the new concern is that stock prices might correct if the Fed is forced
to scale it back. This could happen as a result of stronger-than-expected employment
gains in coming months. More predictable is that there will be more opposition to QE2.0 come January when three non-voting dissidents on the FOMC get to vote. There is
also a growing global backlash from other G-20 nations. My sense is that investors
don’t like QE-2.0, but they like what it seems to be doing to stock prices, i.e., pushing
them higher.
Maybe so. Or may be QE-2.0 is overrated as the driver of the rally in stock prices.
Could it be that stocks are rallying because of QE-7.0? Seven quarters of lots of
positive earnings surprises may be the real reason why stocks are doing so well. At
the end of 2009, industry analysts collectively predicted that the S&P 500 would earn
$77.51 during 2010. Last week, with less than two months left in the year, the
consensus on this number was $84.65. The 2011 estimate has remained very stable
around $95 all year. Forward earnings should converge towards this number by the
end of the year. It is getting closer: Forward earnings was at a cyclical high of $93.67
last week.
The S&P 500 forward P/E rose to a six-month high of 13.1 last week. Stocks remain
relatively cheap, in my opinion. This valuation multiple had plunged from 14.3 at the
end of April to a low of 11.5 during the week of July 2. During this period, investors
were fearful of the sovereign debt crisis in Europe, credit tightening in China, and a
double-dip in the US. I argued that the three legs of this stool would not collapse as
widely feared at the time. This sanguine assessment became increasingly credible
since the end of the summer, which is why the P/E has rallied since then.
Last week’s stock market rally was sparked by last Monday’s reports of much
stronger-than-expected purchasing managers’ indexes in Europe, China, and the US.
The elections on Tuesday, and the FOMC’s quantitative easing on Wednesday, kept
the party going. Even if the regime change in Congress leads to gridlock and even if
the Fed is forced to scale back QE-2.0, earnings should remain bullish for stocks. Of
course, gridlock is already bullish for a few major industries that have been under
regulatory attack over the past two years. Whatever the fate of the Fed’s misguided
QE-2.0, the federal funds rate will remain near zero for a long time.
* S&P 500/400/600 Forward Earnings & Valuation (weekly): Is the US earnings
recovery still V-shaped? Yes, it is for all three indexes, and now their valuation has
recovered to six-month highs. LargeCap forward earnings up for six straight weeks,
MidCap up for four weeks in a row, and SmallCap up for nine consecutive weeks.
Forward EPS is at the highest level for all three indexes since the earnings meltdown
that followed the bankruptcy of Lehman Brothers and the collapse of AIG and the
GSEs in late 2008. The blended Q3 estimate/actual has risen considerably since the
earnings season began, but analysts are still cautiously optimistic about the future.
LargeCap forward earnings up in 77 of the past 82 weeks, but forward earnings
momentum is down to 25.2% y/y from a record high of 38.2% in May, and forward
earnings remains 9.5% below its record high in October 2007. MidCap forward
earnings is 5.9% below its record high in July 2007, and SmallCap is 8.2% below its
record high in July 2007. Valuation at a six-month high last week for all three
indexes. LargeCap valuation up to 13.1 from 12.6, MidCap up to 15.7 from 15.1, and
SmallCap up to 16.4 from 15.7.
* S&P 500/400/600 Shares Outstanding (weekly): Are corporations buying back
their shares or issuing more? LargeCap’s share count is up since late 2008 and edging
higher again now after stalling since early 2010, but MidCap and SmallCap in a longterm downtrend. MidCap share count flat since 2008 after dropping steadily since
2004, but SmallCap near a new low. On November 5, the S&P 500 divisor (a very
good proxy for shares outstanding) was down 3.0% from the record high during
September 2004, but is up 4.5% from the lowest reading since December 2000.
However, the y/y change in the divisor was down to 3.0% from a nine-year high of
4.1% in April. Telecom down to 0.9% y/y from a four-year high of 1.8%, Materials
down to 3.4% y/y from a record high of 11.0%, and Tech up 1.8% and near a threeyear high. Health Care up to -2.4% from a record low of -8.1% in mid-March, but
Consumer Discretionary down to 3.0% from an eight-year high of 6.1% in midMarch. Many sectors had their y/y percent changes peak during 2009. Consumer
Staples down to -1.5% from a six-year high of 2.1%, Financials down to 19.1% from
a record high of 29.7%, Utilities down to 1.4% from an eight-year high of 8.1%, and
Industrials down to -1.1% from a four-year high of 1.0%. Energy is up to a 21-month
high of 1.0% y/y.
* S&P 500 Q3 Earnings Season Monitor (daily): With 88% of the S&P 500
companies finished reporting Q3 earnings so far, it’s clear that this will be yet another
good earnings season! More companies have reported higher y/y earnings and
revenues in Q3, and the revenue surprise is higher than in Q2, but the earnings
surprise is smaller. With results in for 440 of the 500 companies, earnings and
revenues are 7.0% and 0.7% above the analysts’ forecasts. Earnings for the 440
companies are 42.0% higher than a year ago and revenues are up 7.7% y/y. Excluding
the Financials sector, the y/y earnings growth rate falls to 26.1%, but the revenue
growth rate rises to 9.0%. Nearly 76% of the companies have a positive earnings
surprise, but only 60% have a positive revenue surprise. Seventy-six percent have
higher earnings y/y, but 81% have higher revenues. Telecom is the only sector with a
negative earnings surprise so far, but four sectors have missed their revenue forecast:
Consumer Staples, Health Care, Industrials, and Utilities. Consumer Staples and
Telecom are the only sectors with lower earnings y/y, and Telecom is the only sector
with lower revenues. With earnings more than 90% complete for seven of the 10
sectors, Q3 is sure to mark the S&P 500’s seventh straight positive earnings surprise
following six negative surprises in a row through Q4-2008.
II) CREDIT: Backlash! On Friday, November 5, Professor Ben Bernanke lectured a
group of college students down in Jacksonville, Florida on QE-2.0. That may be the
only audience in the world that will listen to this lecture respectfully and ask softball
questions during the Q&A. Bernanke should probably avoid speaking gigs in front of
his peers for a while.
Last week, German Finance Minister Wolfgang Schaeuble commented as follows
about QE-2.0: “With all due respect, US policy is clueless.” In an interview in
Monday’s Der Spiegel magazine, he said, “It doesn't add up when the Americans
accuse the Chinese of currency manipulation and then, with the help of their central
bank's printing presses, artificially lower the value of the dollar.” Chinese Vice
Finance Minister Zhu Guangyao said at a briefing on Monday, “As a major reserve
currency issuer, for the United States to launch a second round of quantitative easing
at this time, we feel that it did not recognize its responsibility to stabilize global
markets and did not think about the impact of excessive liquidity on emerging
markets.”
In his lecture, Professor Bernanke responded to charges that QE-2.0 is aimed at
weakening the dollar. “The best fundamentals for the dollar will come when the
economy is growing strongly,” he said. “That's where the fundamentals come from.”
That’s interesting given that in a speech (linked below) titled “Deflation: Making Sure
‘It’ Doesn’t Happen Here” (November 21, 2002) he argued that dollar devaluation
can be an effective way to avert deflation, revive the economy, and boost stock prices:
“Although a policy of intervening to affect the exchange value of the dollar is
nowhere on the horizon today, it's worth noting that there have been times when
exchange rate policy has been an effective weapon against deflation. A striking
example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar
against gold in 1933-34, enforced by a program of gold purchases and domestic
money creation. The devaluation and the rapid increase in money supply it permitted
ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the
United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to
3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the
best years of the century for the stock market. If nothing else, the episode illustrates
that monetary actions can have powerful effects on the economy, even when the
nominal interest rate is at or near zero, as was the case at the time of Roosevelt's
devaluation.”
In 1999, when he was a professor at Princeton, Mr. Bernanke wrote a paper (linked
below) advising the Bank of Japan (BOJ) to depreciate the yen to halt deflation. It was
titled, “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” He wrote: “I
agree with the recommendation…that the BOJ should attempt to achieve substantial
depreciation of the yen, ideally through large open-market sales of yen. Through its
effects on import-price inflation (which has been sharply negative in recent years), on
the demand for Japanese goods, and on expectations, a significant yen depreciation
would go a long way toward jump-starting the reflationary process in Japan.”
And what about the impact of QE-2.0 on commodity prices? The professor told the
students that while commodity prices have risen sharply, they were the exception
amid generally muted prices for other products and should not cause a serious
problem. Bernanke said there was ample slack in the US economy that will prevent
producers from being able to fully price costlier commodities into finished products
that consumers buy. “Globally traded commodities like energy, food...have been
going up pretty sharply,” he said. “Where there's a lot of slack in the economy...it's
very, very difficult...for producers to push through those costs to the final consumer.”
That answer is so US centric! No wonder so many foreign central bankers and finance
ministers are so upset at the Fed. In emerging economies, food and energy account for
the bulk of their CPIs. They don’t have the luxury of excluding these items to focus
on “core” inflation, as we do in the US. In any event, even here in the US, for all
Americans, higher food and energy prices reduce their purchasing power.
QE-2.0’s days may be numbered not only because of the global backlash, but also
because there will be more voting opponents to it on the FOMC. Three non-voting
dissidents on the FOMC will get to vote starting with the January 25-26, 2011
meeting. They are Charles Plosser (President of FRB Philadelphia), Richard W.
Fisher (Dallas), and Narayana Kocherlakota (Minneapolis). Fed Governor Kevin
Warsh voted for the Fed's program last week, but yesterday said he is less optimistic
than some that additional purchases would have “significant, durable benefits for the
real economy.”
Also voting for another round of QE was James Bullard (St. Louis), who yesterday
said he would have preferred the Fed not to have announced the $600bn number
upfront, but rather taken a more incremental approach. “The problem is such a
number can take on a life of its own,” he said. Bullard said the Fed must act to fulfill
its mandate of price stability and maximum employment. “You can't have other
people around the world calling the shots on that mandate,” he said. You also
shouldn't arrogantly ignore the global backlash, in my opinion.
* Fed's Senior Loan Officer Opinion Survey: Are lending standards easing?
Apparently so, according to the Fed’s latest quarterly survey of loan officers, though
improvement was not as broad-based as in the previous survey. The October survey
found looser lending conditions for most types of commercial and industrial loans.
Banks have been loosening standards on C&I loans for medium and large businesses
for four consecutive quarters. The July survey was the first time banks loosened
lending standards for small businesses since the end of 2006. Banks are reporting
looser lending standards on consumer credit cards for the second consecutive quarter.
Banks resumed tightening lending standards on prime residential mortgage loans.
Lending standards for nontraditional loans are still tightening. No major changes were
observed with regard to loans for commercial real estate.
III) CURRENCIES & COMMODITIES: Writing in Monday’s FT, Robert
Zoellick, the president of the World Bank since 2007, argued that a successor is
needed to the “Bretton Woods II” system of floating currencies that has held since the
Bretton Woods fixed exchange rate regime broke down in 1971. He calls for a system
that “is likely to need to involve the dollar, the euro, the yen, the pound and a
renminbi that moves towards internationalization and then an open capital account.”
He added the following zinger: “The system should also consider employing gold as
an international reference point of market expectations about inflation, deflation and
future currency values.”
No wonder the price of gold is up to a record $1,419.20 this morning. Zoellick’s
article is clearly aimed at addressing mounting global concern that if US fiscal and
monetary policies remain so reckless, then an alternative to the dollar as a reserve
currency must be found. In other words, while Fed officials don’t want foreigners
telling them how to run US monetary policy, foreigners are reacting to their arrogance
by selling the dollar and driving up the prices of gold and other commodities. These
prices have gone vertical in recent weeks thanks to QE-2.0. So have the currencies of
numerous emerging economies.
How much longer can this go on? A correction is certainly overdue. I had a
conference call with one of our accounts in Australia yesterday, and this is their view.
They’ve been making lots of money Down Under in commodities. But they are
getting nervous. Vertical markets make me nervous too. However, I am inclined to
remain bullish as long as US monetary and fiscal policies remain so reckless.
* Currencies: Where’s the trade-weighted dollar headed? Lower. The dollar has more
than reversed the gain from August 6 through August 25 and is down 15.2% from its
recent peak in March 2009. The latest decline has moved the dollar back below its
200-dma, and only 2.9% from its record low. The euro has rallied back above its 200dma, while the UK pound moved out of its recent flat trend to new highs for this year.
The Japanese yen remains strong against the dollar, holding at a 15-year high against
the greenback. Chinese yuan remains at its highest readings since the early 1990s.
Commodity currencies such as the Australian and Taiwan dollars are rallying, with
the former at new highs. The Canadian dollar has moved to the top of its volatile flat
trend against the US dollar. The Brazilian real is showing signs of picking up, while
the Russian ruble remains in flat trend around recent lows.
* Industrial Spot Prices: What are industrial commodity prices signaling? A global
boom. While they were flagging the possibility of a double-dip in June, they’re flying
high now. The CRB all commodities spot price index has shot up to an all-time high,
66.5% above December 2008 bottom. The CRB raw industrials spot price index has
also rallied to a new record high, 77.0% above its December 2008 low. The metals
sub-component of the CRB raw industrials index is up 34.7% from early June low at a
new high for this year on widespread strength. It’s only 4.2% below its all-time high
posted in May 2008. Big rally in precious metals prices, with gold and silver at new
record highs. CRB futures price index plummeted along with energy prices during
H2-2008. It’s up 57.4% from its low in March of last year to a new two-year high.
* Grain Prices: What’s sprouting in the grain futures pits? Corn and soybean prices
currently, with wheat price holding recent gains. Corn price has soared 80.0% since
late June to a new two-year high. Soybean price has rallied 26.5% since late August to
its highest readings in more than a year. Wheat price shot up 78.2% from late June
through early August, and has been fluctuating around those highs ever since.
* Energy Prices: What are energy prices up to? Crude oil futures extended last
week’s gains, climbing 21 cents yesterday to $87.06 per barrel, a 25-month high. The
price is up 9.7% ytd, trading 11.2% above its 200-dma of $78.28. Natural gas price
jumped 15.1 cents yesterday to settle at $4.088 per million Btu, its highest reading in
nearly three months. It’s trading 4.8% below its 200-dma of $4.295. Gas is down
26.6% so far this year. The national gasoline pump price held above $2.80 per gallon
for the third straight week after hovering above $2.70 for nearly two months.
IV) FOCUS ON MATERIALS (market weight): The market weight rated S&P 500
Materials stock price index is up 12.5% ytd and is trading at a new bull market high
now. It’s the third best performer of the 10 S&P 500 sectors so far in 2010 and ahead
of the 9.9% gain for the S&P 500. The sector’s forward earnings rose 2.8% m/m in
October for the best increase among the 10 S&P 500 sectors, and was up for a
seventeenth straight month. The consensus annual earnings forecasts for 2010 and
2011 were higher too, but were down in three of the past five months. However,
analysts still expect relatively high earnings growth of 63.7% in 2010 and 25.3% in
2011. NERI dropped to -2.1% from -1.8% in September, and was negative for a third
straight month. Valuation rose to 14.1 from 13.6, but is no longer the highest among
the S&P 500. The sector’s profit margin soared to a seven-quarter high of 6.5% in Q2
from 5.6% and is up from a record low of 0.3% in Q3-2009. It should continue to
improve along with the bull market in commodity prices.
* Diversified Chemicals (market weight): The stock price index for the market
weight rated Diversified Chemicals industry is up 31.3% ytd to a new bull market
high, and is the best performer in the Materials sector. Forward earnings in a Vshaped recovery too and up for a seventeenth straight month in October from a 15year low in May 2009. NERI improved to 26.7% from 23.7% in September, and is the
highest in the sector and has been positive for 15 straight months. Earnings fell for a
third straight year in 2009, but analysts expect earnings to rise 75.6% in 2010 and
18.1% in 2011, and have been increasing their forecasts. Valuation up to 13.7 from
12.6 and at a higher 8% premium to the market as forward earnings continues to
recover. The profit margin was up to a seven-quarter high of 5.1% in Q2 from 4.4%,
and up for a third straight quarter after falling for eight quarters in a row through Q32009. Chemical pricing is volatile and weakening on a y/y basis so far in 2010, but
improved to 8.5% y/y in September from 8.0% and is up from a record low of -25.2%
in July 2009.
* Fertilizers & Agricultural Chemicals (underweight): The stock price index for
underweight rated Fertilizers & Agricultural Chemicals is down 17.9% ytd and is the
seventh worst performing industry in the S&P 500. It’s up 45.2% from a four-year
low in July and trades 9% above its still falling 200-dma. Forward earnings rose 0.7%
m/m in October, but is still in a downtrend even as nearly every other S&P 500
industry has been rising since May 2009. Earnings expected to tumble 38.5% in 2010,
and analysts have been trimming their forecasts since 2008. NERI down to -16.1% in
November from -11.7%, and has been negative for seven straight months. This
industry’s P/E is up to 17.6 from a five-year low of 11.8 in November 2008, but is
down from a record high of 36.8 in December 2007 when analysts were raising their
forecasts. On a positive note, fertilizer pricing is positive on a y/y basis again.
* Industrial Gases (overweight): The price index for the overweight rated Industrial
Gases industry is up 14.9% ytd to a new bull market high and is the fourth best
performer among the 12 industries in the Materials sector. Its 200-dma is rising again
as the air continues to go back into forward earnings. Forward earnings up for 19
straight months in October, and back at a record high since July for the first time since
September 2008. Analysts expect earnings to recover 19.9% in 2010 and 12.4% in
2011 after falling 11.0% in 2009 for its first decline in eight years. NERI positive for
a fourteenth straight month in October, and improved to a sector leading 18.1% from
17.3%. P/E up to 16.7 and at relatively high 32% premium to the market. Profit
margin edged down to 11.5% in Q2 from a record high of 11.8% in Q4, but has been
very stable for an industry in the Materials sector.
* Paper Products (market weight): The stock price index for market weight rated
Paper Products is down 3.2% ytd, but is up 412% from the bear market low in 2009
and trading 10% above its now rising 200-dma. Earnings tend to track paper and
wastepaper prices, and both are heading higher y/y now; but this is a mature industry
with low growth prospects. Forward earnings fell 2.1% m/m in October for its first
drop in 18 months, and is 40.3% below the record high in 1995. Earnings expected to
soar 104.0% in 2010 and 31.1% in 2011 after falling for two years in a row through
2009. NERI has been positive for 16 straight months, but was down to 6.7% in
October from 13.1%. This industry’s P/E rose to 10.9 from 10.4, and trades at a
normal 15% discount to the market as the earnings recovery matures. The profit
margin was up to 2.9% in Q2 from a five-year low of 1.7% in Q2-2009, and typically
had a V-shaped recovery in the past.
* Specialty Chemicals (overweight): The price index for overweight rated Specialty
Chemicals is 9% above its rising 200-dma and has risen 15.3% ytd to a new record
high recently. Specialty Chemicals is expected to have earnings rise for a tenth
straight year in 2011. Forward earnings is up in 20 of the past 25 months and at a
record high again in October. Analysts expect earnings to rise 15.2% in 2010 and
11.8% in 2011, but the 2011 forecast has edged down recently. NERI edged down to
4.8% in October from 5.5% and from an eight-year high of 24.0% in May, but was
positive for a seventh straight month after three negative readings in a row. The P/E
was up to 17.5 in October, but is at a more expensive 37% premium to the market.
The profit margin was down slightly again in Q2 to 9.5% from a 10-year high of
10.4% in Q2-2009, but is up from a four-year low of 8.4% in Q4-2008.
V) UPDATES & LINKS: We have updated Forward Earnings & The Economy,
Analyst's Handbook: Materials, and S&P 500 Earnings Squiggles: Annually and
Quarterly on our website. Questions, comments, downloading problems:
[email protected] or call 480-664-1333.