I’ll give the analysts’ consensus of forward-looking earnings estimates about 2 more weeks to commence to turning back up… before I will pronounce that we are TOAST, absolutely toast! It’s official… 4 states of the Union are now said to be in economic recession already. More will follow.
Back to estimates. It’s one thing, if they were to just go flat, signaling that growth has slowed, or even stopped… but, when they are on a downhill run, like they appear to be right now, they are screaming recession, and that is death for stocks! Stock prices are dependent, first and foremost of all, upon earnings. As earnings grow, so does share price. As earnings go flat, prices fall back an appropriate level. But, as earnings go backwards, and shrink… prices fall right out of bed. That hasn’t happened yet, and only a reversal of current fortunes can prevent what may be about to befall us… as we only line up with all the rest of the stock markets the entire world over, which have all been in bears of their own, for quite some time.
I am saying that we are about to join all of them. Are you prepared for that? If not, why not? What will it take?
Then, there’s this! I’ve read and heard pundits talk about how that with this price decline, the P/E ratio is shrinking, creating market value. That is just NOT so! What are the two variables in the P/E Ratio? There’s Price, and then, there’s Earnings. Indeed, the price is falling, and one would think that the P/E ratio would, therefore, be contracting, as these pundits are saying. BUT! Earnings, as I watch them being revised and updated daily, are falling faster than price, and the truth is; the P/E Ratio has actually been RISING!
At the market low and turn on Wednesday, January 20, the forward-looking P/E Ratio on estimates was 17. And, when the market tested that bottom not 2 weeks ago, on the 11th, that P/E was 17.3. As I write, and the market is all askew, deciding where it might possibly go next; and because of the plunge in earnings estimates, that same P/E is now… are you ready for this? 18.7! What would it have to decline to, just to regain 17?!?!? Are you ready? I’ll say this one more time. If estimates don’t stop falling, and soon turn up and rise. We are TOAST! Now, I’ll give it this one caveat. The rate of descent of the EPS is beginning to moderate some, and is not plunging quite so steeply… but, that’s sure little comfort!
Light crude is falling back again… Hong Kong is off 1.5%. Europe’s not open, and our futures, as of 2:30 am EST are, guess what, down .38 to .45%. We’re being held captive by oil, and it’s not likely to come to our rescue. They’ll pump ’til their creditors take their assets in bankruptcy!!!
7 am and oil’s UP, Europe’s UP and, of course, our futures are UP .2 to .25%. Until this situation changes… oil owns stocks.
Here’s to your successful investing!
Harold F Crowell