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Mix-Ansicht- Marc Faber: Are The Wildly Bullish Out Of Step With Reality? - Fontvieille, 04.12.2001, 22:06
Marc Faber: Are The Wildly Bullish Out Of Step With Reality?
Are The Wildly Bullish Out Of Step With Reality?
The perception around the world is that"blood in the streets" as a result of September 11 has provided a great buying opportunity, since most crises and wars in the past have led, after an initial period of weakness, to strong rallies. But this market is in a unique - and precarious - situation in history: earnings are falling faster than share prices. Look out below!
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Dr. Marc Faber
Hong Kong - Having just returned from a trip around the world - which took me from Singapore to Switzerland, Germany, the United Kingdom, Portugal, and the U.S. - giving a number of lectures and meeting many investment professionals, I have gained some unique insights into future economic and financial trends.
What surprised me was that, even after the events of September 11, the mood among investors and professionals was rather upbeat about the future. The perception was that"blood in the streets" as a result of September 11 provided a great buying opportunity, since most crises and wars in the past have led, after an initial period of weakness, to strong rallies.
But strategists' forecasts that stocks are now a bargain depend on a number of factors: corporate earnings, interest rates, and how much investors will be willing to pay for the ownership of equities compared to cash and bonds.
The first problem is obvious. Who knows what the S&P 500 earnings will be next year, let alone in the more distant future?
The S&P 500 earnings per share peaked out at $56 last year and have since declined to an annualized rate of $20 in the second quarter of 2001. Based on the latest earnings figures, the earnings yield on the S&P 500 stands as of the date of this report at just 1.8% and not, as the Wall Street strategists calculate it, at over 4%.
The case could be made that we are going through unusual times and that earnings will recover next year, which is the view held by most strategists and investors. (If ever there was an almost-unanimous consensus, this is it.)
The question is, however, to what extent will earnings recover? For the S&P 500, will earnings per share increase to $40, a 100% increase, or to just $30, a 50% increase? Or is it possible that earnings will be even weaker in 2002 than they were in 2001, as a good friend of mine who is one of the smartest investment managers I know - and one of the few real bears around - thinks?
In his opinion, corporate profits will continue to suffer from companies' high leverage, further declines in capital spending, and because of weak or anemic consumption, which can only be held up through price cuts, which in turn eat into profits. Sure, auto companies offer loans at zero interest rates to revive demand, but what about the impact on profits?
From a longer-term perspective, it would seem that the huge earnings gains since the mid-1980s might be more an exception, largely due to a"bubble economy," than the typical pattern of S&P 500 earnings increases, which in the long run match nominal GDP growth.
We may not see last year's record S&P 500 earnings per share of $56 for a very long time.
In particular, we ought to become increasingly concerned about the financial sector's profits. Recently I warned readers about a sub-prime lending disaster waiting to happen.
Since then, the skeletons have begun to come out of the sub-prime lending industry closet, with Providian announcing incremental loan loss provisions and slashing its earnings estimates for the third quarter from 79-83 cents per share to 19-21 cents. Similarly, AmeriCredit has reported rising delinquencies. Both companies, which as part of the financial sector were considered until August of this year as"safe haven" stocks, fell over 40% on these announcements and are now down by around 70% from their August highs.
And since most financial companies have some sub-prime lending subsidiaries and the financial sector accounts for 24% of the S&P 500 earnings, up from 5% in 1976, any decline in its profitability would have a significant impact on the future total earnings of the S&P 500.
I might add that in the second quarter, Standard & Poor's reported preliminary S&P 500 earnings per share of $4.89, down 64% from a year earlier. According to Michael Belkin, who publishes one of the best weekly market comments for institutional investors,"actual S&P 500 earnings came in about 1/2 the level of First Call's forecast."
If analysts cannot even forecast next quarter's profits, how can we expect them to forecast next year's earnings?
In addition, Belkin remarked that"those new earnings generate a historical P/E ratio of 33 at the end of Q2 (June 29) and a current P/E of about 36 (assuming a 50% year over year drop in Q3 earnings). That P/E multiple is completely off the charts when the long term average S&P 500 P/E is below 15."
He concludes:"the US equity market is in a peculiar situation: The more it drops, the more overvalued it gets - simply because economic activity and corporate earnings are declining at a faster rate than stock prices."
Asian Equities Sleuth and The Original Bear On Japan
Dr. Marc Faber is the editor of The Gloom, Boom and Doom Reportand a major contributor to The DR Blue Service. Dr. Faber has been headquartered in Hong Kong for nearly 20 years, during which time he has specialized in Asian markets and advised major clients seeking down and out bargains with deep hidden value - unknown to the average investing public; bargains with immense upside potential.
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