S&P 500, the Quasi – Foreign Company Index
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Posted 08 July 2012 - 11:05 PM
In contrast to European and emerging stock market indexes, the US S&P 500 has been standing like some oasis in the desert. One would think that these companies are largely disconnected from global woes.Unfortunately the dots don’t fully connect given that close to 50 percent of production, sales, and profits are from overseas business, and the amount paid in foreign taxes is more than that paid in U.S. taxes. Europe accounts for 15 percent of total S&P 500 sales and Asia for 7 percent.US listed quasi-foreign firms have feasted on forex gains since the 2009 bottom. All this came to an end in 4Q, 2011. There is a short lag before this shows up in earnings, but at this stage the forex effect is squarely against these companies. This impact is particularly pronounced in the Euro which fell about 6% in the May-June period.I am not convinced this Dollar strength will last, and am even more convinced the US economy is getting very weak, but will leave that to my next post. For our purposes however the impact on second quarter earnings is already baked in and mostly ignored.A number of of these US listed quasi- foreign firms have indicated that business has slowed. Data on earnings pre-announcements paints a less-than-rosy picture of what lies ahead. Companies in the S&P 500 have issued 26 positive EPS pre-announcements, but that has been dwarfed by the 93 pre-announcements cautioning that these companies might not live up to analysts’ expectations for second-quarter earnings. The ratio of negative over positive at 3.6, is the weakest showing in more than a decade, since the third quarter of 2001. Even more important will be guidance and commentary looking forward when earnings are released.The quarter’s expected earnings growth of 5.8 percent is entirely due to Apple and a big earnings gain for Bank of America Corp due to a mortgage settlement last year. Without those, estimates are basically flat.Despite this, S&P 500 EPS growth rate between 2Q 2012 and 2Q 2013 is currently projected by the consensus to run in the high teens. Current trailing S&P earnings are $98. Let me phrase it this way, given all that is happening in the world, given that 12-month trailing 1Q operating EPS was about $98, is it more reasonable to forecast $118 for 2013 (current consensus) or $85-$90? Indeed, given my view of the US Treasury bubble, fiscal cliff and train wreck, $85-90 will prove to be the bullish scenario.On Friday’s action: The market sold off early, then languished at some very weak support levels and then staged a small (option related) short covering rally. All the while the VIX moved lower and closed towards its low of the day. This is classic action before a big sell-off after a failed rally. Really goes to show you how mechanical the trading has become. Only a computer processed algorithm could have explained the Friday action. The firms using these algos don’t seem to realize what lemmings they have become.
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