財經觀察 1650 --- Jan05 2009 :A Look at New Year

January 05, 2009 --- A Look at New Year

US stocks started 2009 with +3% rally to a 2-mth high following the worst yoy drop since the Great Depression. Such a rally based on very thin volumes may be due to technicals, or rally in oil, or the more liberal TARP distributions, or perhaps due to relative valuation of Stocks vs. Bonds. For the whole world, this week we return to fully staffed trading desks, a busy Fed events calendar and more consequential economic data, which may reveal the gains.

On the credit front, 3M Libor is -2bps to 1.41%, TED spread -2bps to 133bps and Libor-OIS spread -3bps to 122bps. Suffice it to say that credit indicators have improved a lot, but the reality is that credit availability for corporates and consumer are still tight.

Stock market, it seems that with pending-up liquidity to be released, we could see a tradable rally going into spring. And then, WTE earnings disappointments at the end of 1Q09 and warnings at 2Q09 could set the market retest of the November 20 lows (Sell in May and Go away!). Surely, the biggest e wild card is the coming economic stimulus package…Depending on the extent of that decline, we could again see a year end rally in end 09.

Beyond the outlook of 2009, I think it is worth to have a look at USDJPY, as it appears the Dollar rally is in-part due to the risk asset rally and in-part due to the pull-back in UST. Other important moves in Asia including KRW 5% rally, as the spot market played catch-up with the NDF – 1) There was a shocking Singapore Q4 GDP print -- down 12.5% yoy vs. expectations of -3.4%; 2) India cut 100 bps overnight to 5.5%. Put all these data together with US Latest ISM manufacturing index for Dec (plunged to 32.2 vs. consensus 35.4 and vs. 36.2 in Nov. This recession will extend a few more Qs than consensus (end in 1H09), if we look through the weak subindex, in particular the new orders subindex at an all-time low, a comparison that stretches back to 1948.

Another Round of Earnings Disappointments

So, how did the US market respond to this data? The Dow was up 258 (almost 3%) and the NASDAQ up a sprightly 3.5%. Nothing to worry about.

However, earnings, as you might expect, are not doing all that well. For the last year I have been highlighting how earnings estimates are dropping for the S&P 500, as analysts try and catch up with the reality on the ground. They are still behind the curve.

Let's look at their estimates for earnings in 2008. They started at $92 in early 2007 and are now down to $48. This chart is not something to inspire confidence in stock analysts.

On a trailing one-year basis, that puts the Price to Earnings Ratio (P/E) at over 19 as of today's close at 925, which does not make the market cheap. But last year's earnings are history. What about 2009? Again, the analysts are in a race to find the bottom.

The current projections are for $42.26 for 2009. That makes the forward P/E 22. That doesn't look like value at all, when the historical average is closer to 15.

Bulls would argue that the market is forward-looking and that all the bad news has been priced into the market. I would counter that the market has so far done a bad job of pricing in bad news, given the fall of the markets last year in the face of a recession. As I repeat incessantly, the US stock market falls an average of 43% during recessions. The stock market was not discounting a recession last January or even in May, even after a very serious financial crisis.

But how bad can it get? Analysts must surely by now have lowered their estimates to more realistic numbers. Shouldn't we start to price in the recovery from here? Well, no, not if you look at the last recession.

In 2001, as-reported earnings were $24.67. Operating earnings in 2002 were $27.57. Does anyone think the current recession will be milder than the last one? Or shorter?

And it gets worse. Core earnings, which take into account pension and other under-reported liabilities, were less than $16 in 2001, and so P/E on a core earnings basis topped out at 71, and on an as-reported basis were as high as 46!

Of course, after that the stock market went on a tear, almost doubling over the next five years. And today the market seems to be suggesting that many people are afraid to miss out on the fun of the next bull market run.