Get Ready for the Corporate Earnings Meltdown

Companies / Corporate Earnings Aug 04, 2008 - 03:55 PM GMT

Best Financial Markets Analysis Article I'm not talking about the banks or even the retailers. We all know they will continue to slide. I'm talking about everything else. With no real median wage growth since 1999, and soaring inflation for gas, food and healthcare, it's obvious consumers have had much less to spend. Not only has that hurt savings rates (including retirement contributions) but it's also affected consumer spending. But don't expect things to get better by Fall. In fact, I'm expecting the earnings meltdown to begin for much of the remaining sectors in the S&P 500.

You Can Run But You Can't Hide

Standard & Poor's earnings estimates for Q2, Q3, and Q4 of 2008 are -11%, 40%, and 60% respectively. Remember, this the same S&P that rated the mortgage junk AAA. It will also be the same S&P that will end up issuing drastic revisions in earnings once the bottom falls out. But that won't help investors after the fact. You have to realize what lies ahead and react accordingly. With about 63% of the S&P 500 companies having reported Q2 earnings, the results have not been so bad, with about 71% having beat the 2007 mark. In fact, as the pundits love pointing out, “if you remove the problem child – the financials, S&P earnings have increased by 10%.”

"Regardless of the estimates or hype, a double-digit gain from non-financials is impressive — in any economy," said Howard Silverblatt, S&P's senior index analyst.

Sure it's impressive when the Fed has been in a printing frenzy. Well guess what? You can't remove the financials from S&P earnings. With about 92 financials in this index of 500, we are talking about 16.7%. Also consider that earnings were aggressively revised downward so as not to disappoint. More important, how well do you think earnings will be down the road with the heart of the economy – the financial system - collapsing? Add to that soaring inflation and you will soon see earnings collapse as consumers fall flat on their face. Even the correction in oil prices won't save the ship. Oil would have to fall to $80 or lower and stay low for many months. Even if it did, it would take up to a year before the effects would be seen in the economy.

Distance Yourself from the Herd

Please do not forget that Washington through its rebate checks, and the Fed through its endless printing of money, have made their most desperate attempts to delay a recession. While they have failed in my opinion, the real severity is coming soon. Make no mistake about it, S&P earning estimates for Q4 won't even come close to estimates. By the time Washington reports the required (and laughable) “two consecutive quarters of negative GDP” it uses to officially acknowledge a recession, it will be too late for investors who followed this herd mentality.

Continued problems in the credit markets combined inflation will create a drag on earnings. This will accelerate corporate bankruptcies by late 2008, only to soar thereafter. Perhaps the only force that will help earnings will also be the force that ultimately takes them down - inflation. You can't inflate your way out of a recession, nor can you consume your way out of one either. And Washington is about to learn this first hand.

Sure, it's possible that we will see the market rally over the next couple of months. If so, you would be wise to sell. More aggressive traders might consider shorting it entirely once it tops out based on the 1-year resistance trend line. It's also possible that the Dow will break down below the 10,731 lows it made a couple of weeks ago. Only time will tell. It all depends on when the consumers fall and companies start to revise downward.

Now that you know the other side of the picture, you should be better positioned to navigate the market through 2008. As I have been advising for several months, you should sell on rallies and only buy after sell-offs if you're a really good trader because the market is trending downward. The few investors who had the luck or insight to liquidate their portfolios many months ago might be better off waiting for more clarity. The correction in oil will most likely continue, but that will represent a buying opportunity. I will continue to buy more oil and healthcare. Everything else in the U.S. market is a lost cause for now.

If you want to read what the future holds, and how to profit from this mess – all in unprecedented detail – get your hands on the most insightful book written on the coming depression - America's Financial Apocalypse ASAP.

America's Financial Apocalypse: How to profit from the Next Great Depression . Condensed edition: http://www.amazon.com/Americas-Financial-Apocalypse-Depression-Condensed

By Mike Stathis
http://www.apexvc.com

Mike Stathis is the Managing Principal of Apex Venture Advisors , a business and investment intelligence firm serving the needs of venture firms, corporations and hedge funds on a variety of projects. Mike's work in the private markets includes valuation analysis, deal structuring, and business strategy. In the public markets he has assisted hedge funds with investment strategy, valuation analysis, market forecasting, risk management, and distressed securities analysis. Prior to Apex Advisors, Mike worked at UBS and Bear Stearns, focusing on asset management and merchant banking.

The accuracy of his predictions and insights detailed in the 2006 release of America's Financial Apocalypse and Cashing in on the Real Estate Bubble have positioned him as one of America's most insightful and creative financial minds. These books serve as proof that he remains well ahead of the curve, as he continues to position his clients with a unique competitive advantage. His first book, The Startup Company Bible for Entrepreneurs has become required reading for high-tech entrepreneurs, and is used in several business schools as a required text for completion of the MBA program.

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Comments

david hill
05 Aug 08, 07:56

meltdown in Britain as well
That is the next 'big' thing and when the corporate meltdown really kicks in we are all in for long and turbulent period, probably lasting a decade for stability to be fully restored.

Indeed Britain is in for the worst economic hammering it has witnessed since the end of WW2. In this respect there are now major pointers emerging, which should send shivers down the spines of the British people. Recently, the Bank for International Settlements, the organisation that fosters cooperation between central banks, has warned that the credit crisis could push world economies into a crash on a scale not seen since the Great Depression. As an example of what the central banks are saying also, the reserve bank of India stated just 6-days ago that to address the world’s financial crisis, central bank interventions have been staggering and on a level not witnessed since the Great Depression.

But will the central bank’s support be enough is the critical and worrying question. Indeed recently again in this respect, the International Monetary Fund (IMF) stated also that the world is witnessing the greatest shock to global finances since the 1930s. Further, central banks led by the US Federal Reserve, have already piled help and credit on the financial system over the past 12-months, as they did again only last week, to nurse it through this pending economic disaster. Therefore this need will certainly arise continuously to weather the storm, if we can, as the pointers are looking very bleak indeed. Now unfortunately adding to this, the problems are spreading with evidence that started as a financial-sector crisis is just starting into a business crisis.

Indeed with no finance, business will find it hard to survive and with the size of HBOS's (major UK bank)recent failure to raise funds together with the price of underwriting an issue, it will be impossible for other banks to do likewise from now on.

Therefore banks in general will have major liquidity problems and failures for many years to come. Indeed, they will probably not stabilise again for at least a decade. The global writedowns and credit losses of the banks since January 2007 is around US$500 Billion and there is no sign of a let up. Indeed, the IMF stated that the credit crunch losses will hit US$ 1 Trillion at least. Following on from these astronomical losses, Capitol Economics stated recently that we should be preparing for recession as it's more likely than not.

In this respect consumers are going to get hit where it hurts by a mixture of the housing market downturn and inflation they stated. People in the UK will see growth falling from 2 per cent in 2008 to flat (zero) next year and added to this, companies will see their profits fall dramatically.

Consequently one can predict that firms, due to the lack of financial stability and ‘inadequate liquidity’ of our banks, will not be able to borrow. As the financial crisis becomes a firm business crisis Capitol Economics predict unemployment will increase from 1.6 million people to 2.5 million in the UK and while falling house prices do not hit pockets, lost jobs do they say.

Therefore the effects of this present financial crunch will last for years for UK businesses and where others will not even survive to see the recovery at all. Since the crisis began, the American people alone have bailed their banks out to the tune of US$945 billion. Indeed adding to this over the last 18-months the share values of US and European banks including western insurance and investment management institutions, have lost US$2.7 Trillion in value. UBS (one of the world's largest banks)for instance is now worth just around 20% of what it was just a mere year and a half ago.

Therefore the ramifications and long term outlook is very grim indeed. All this shows that financial regulators throughout the world are not robust enough and have not enough power to curb the excesses of the financial world. Governments therefore, when this is all over, should make sure this time, that the full market philosophy is kept firmly in check.

If not, what we are experiencing now will happen time and time again. The ‘free’ market has got to change therefore and where the public (consumers) always learns the hard way, for they are the ones the banks really hurt and of course the ones who have to ultimately pay.

Dr David Hill
World Innovation Foundation Charity (WIFC) Bern, Switzerland

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