1. Goldman Sachs Lifts Targets for S & P 500 Earnings: Yesterday, GS raised its target for S & P 500 earnings from $40 in 2009 to $52, and consequently raised its year end target for this index to 1060. If that prediction turns out to be true, it would constitute the largest second half rally since 1982 according to Bloomberg.com. More importantly from my perspective, GS lifted its earning target for 2010 to $75 from $63. This played a critical role in the stock rally yesterday. The GS investment strategist, David Kostin, believes the market is now in a sustained rally phase of a bear market recovery. In his view, a risk of a double dip recession is still significant. This article from CNBC goes into more detail.
Jon Stewart had an interesting take on GS's last earnings report: YouTube
It is important to put these numbers in perspective. This is a link to a chart containing the S & P 500 earnings, as well as other information, from 1960 to the end of 2008. S&P Earnings History The $75 number that GS has for 2010 just takes us back, almost, to the $76.45 number for 2005. This chart shows the peak year as 2006 at $87.72. In 1980, the number was $14.99. So, when you look at the this kind of chart, and start thinking long term, it is difficult to remain bearish now while recognizing that there will be, as always, a number of gyrations, fits and starts, disappointments, and believe it or not, better than expected news.
There will be those who will leave no stone unturned in their quest to justify being bearish, always seeing the worse and magnifying the importance of any adverse piece of data to justify their perpetually bearish outlook. And, there is a lot of fodder out there now for the perma bears to spin to justify a dire forecast with the DJIA hovering below 9000, nearly two years into a recession, and the FED doing everything conceivable to jump start the economy. David Rosenberg, who most have been separated from Alan Abelson at birth, a long lost twin no doubt, is in that camp, expecting the S & P 500 to hit 600 by October.(items # 3:Job Losses Worse Than Expected/Forecasts for 2nd Half GDP/) It close yesterday at 951.13.
I saw an interview with Jim Bianco yesterday on CNBC, and he claimed that most strategists were using a $45 figure for 2010 earnings, which would mean, if accurate, that the S & P is currently selling at around 21 times forward earnings, which is high. (see about 1 minute into his interview: CNBC.com)Bianco then used that $45 estimate to justify an opinion that the market was currently overvalued. I am not sure where he has obtained the $45 figure for "most analysts". GS is at $75; & Zachs has the number for 2010 at $74.09. S & P has the number at $74.1 and Thomson Reuters has the consensus at $74.48. So it hard for me to find any support for Bianco's $45 2010 figure as being from "most analysts" (Morgan Stanley upped its target in June to $62) If you really want to be pessimistic, you can pick a number to justify an opinion.
2. Bank of America: The analysts are now all over the place in their 2009 earnings forecasts for BAC. Some are forecasting a loss while others are predicting a profit of as much as 94 cents. BAC did predict a worsening of losses on consumer loans for the second half of 2009. The situation is just too murky now to make any assessment. At best, I may have some clarity in the middle of 2010 about the new Bank of America's normalized earnings power with its new businesses and now bloated share base.
3. GE Target Lowered by GS: General Electric is a long way from finding favor among many Wall Street analysts. GS lowered its target to $13 from $16. (GS also lowered the target for another holding of mine NYSE Euronext to $28; my purchase was at $14.76 Buys of JWF KSA DIS and NYX) Morgan Stanley is more optimistic with a overweight rating and a $17 target. This is another holding of mine where clarity will not likely arise prior to mid 2010.
4. Larry Kudlow on Excess Reserves: This is a link to an interesting discussion by Larry Kudlow, with some helpful charts, to the effect that the money pumped into the system by the Fed starting last year is just sitting around as excess reserves and is not being placed into the system by the banks. CNBC.com
5. Coca-Cola (owned): RB added KO in early March: Buy of KO at 38.72
Excluding items, KO earned 92 cents for the 2nd quarter, compared to the forecast of 89 cents.
The revenue came in light at 8.27 billion, with the consensus estimate at 8.66 billion. Case volume in emerging markets like China and India rose significantly, 33% and 14% respectively, but fell 1% in the U.S. YTD, cash from operations increased 14%.
Considering the worldwide recession, I was pleased with the DD earnings report this morning. Excluding special items, earnings for the second quarter were 61 cents a share, beating the consensus forecast of 52 cents. This was of course down from the year ago quarter with revenues falling 22% year over year. Raw material costs were lower in the 2nd quarter of 2009 by 5%, compared to the 2008 2nd quarter, which was a 225 million dollar benefit. DD had a 21% increase in seed sales. The Agriculture and Nutrition segment has a 15% earnings increase to a record 580 million, the bright spot in DD's business. My current thinking is to just hold the shares for as long as DD maintains the dividend. The dividend yield at my $16.68 cost is about 9.8%. A buy of a common stock at that kind of yield turns it into a bond like investment.
7. CIT Bonds: There was an article in the WSJ that hundreds of millions of CIT internotes, the kind sold to small individual investors like me, were sold last Friday, as fears of a CIT bankruptcy escalated into a crescendo, and at prices significantly below where similar maturity bonds were being traded by institutions. So, Wall Street hosed the small guy again. I have mentioned in previous posts that I own just two bonds, and I am in a wait and see mode.
I DO NOT TRUST THE THIRD PARTY PRICING USED BY MY BROKER. Today, for instance, the 1 CIT bond which I own maturing in December 2009 is currently priced at 59.785 in my brokerage account. If you go to the FINRA site, which I did this morning, I can see that this bond is trading, and the pricing is ten points higher than what is shown in my account. FINRA - Investor Information - Market Data - Bonds - Bond Detail So, my first rule is that I do not trust the third party price. My second rule is never trust anyone working on Wall Street. In any event, I am not prone to panic anyway, and will just wait and see if I can sell those two bonds at somewhere over 90 which is what I tried to do, unsuccessfully, several times before the bad news hit the headlines. I do not mind taking a $100 loss but I am not going to lock in a $400 or $500 loss for a $1,000 bond maturing in just a few months unless a bankruptcy petition has been filed, which of course has not yet happened, and I have good information that a senior bondholder is likely to only recover 50 cents on the dollar at the tail end of a long bankruptcy hearing.
Some of these internotes are lightly traded, so anyone interested in actual trading history may have to hunt and peck for another bond that institutions trade with a similar maturity, in order to get a better idea about market pricing. Also, when I trade in the bond market, I will always use limit orders. For the small guy, operating from a desk in a home, there is at best minimum transparency in the bond market.
One way that I deal with that queasy feeling is too simply limit my exposure to whatever causes that uneasiness. I had that feeling when I just bought 2 bonds from CIT prior to 2008. The feeling is a result of rational analysis, the rational side, LB, took a look and did believe the risk/reward for CIT bonds, which was then investment grade, tilted more on the risk side. One tip off, as I remember it now, was that its bonds even prior to 2008 were priced to yield more than similarly rated bonds from other issuers, a sign to me that the bond gurus already smelled trouble and did not buy into the ratings from S & P and Moody's. So, whenever I see that phenomenon, I will become even more cautious. I also had a very low opinion of CIT's management, which has gone even lower since those bonds were purchased in 2007.
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