Valuation, Sentiment Different Than March 2000, October 2007

According to ThomsonReuters, the “forward 4-quarter” earnings estimate for the S&P 500 fell $0.37 this past week, from $112.39 to $112.02.

Given the S&P 500′s 2.17% increase for the week, the P/E ratio for the S&P 500 as of Friday, March 8th was 14(x), which is at the high end of the 2 – 3 year trading range.

The year-over-year growth rate for the S&P 500′s forward estimate fell to 5.67%, which is lower than the recent range as well. (I don't like to see that, but I’ll give it a few weeks.)

The “earnings yield” for the S&P 500 as of Friday, March 8th was 7.22%.

The 10-year Treasury closed Friday at 2.055%, higher than its February 14th, high tick, and the highest close since the 2.40% yield peak from March, 2012.

Q4 ’12 earnings are almost entirely reported now, and the quarter came in far better than expected, at +6.1% year-over-year earnings growth and +3.7% revenue growth.

All eyes now turn to Q1 ’13, with reports set to begin in about 30 days. The S&P 500 earnings growth is expected at a very tepid +1.4%, while revenue growth (when we see the data) should be expected to be in the range of 1% – 2% again.

It is our opinion that Q1 ’13 earnings expectations are still too low, but the pattern has been for the quarterly estimate to decay as we approach the quarter, and then see stronger-than-expected results.

Towards the end of March, we will hear from FedEx (FDX), Oracle (ORCL), Accenture (ACN), and Nike (NKE) which will give us a nice cross-section of sectors when these companies report: industrial, technology and consumer spending. (long FDX, ORCL, NKE).

Stat of the week:
It pays to look ahead to see how analyst estimates are reflecting sector fundamentals. There is great uncertainty still surrounding how full year 2013 earnings estimates will unfold. The following three tables will show how the 10 sectors of the S&P 500 rank from from highest to lowest earnings growth on the following dates: October 1, 2012, Jan 1, 2013, and then Friday March 8th, 2013, for full-year 2013 expectations:

October 1, 2012

Telco +23.3%

Basic Mat +21.9%

Consumer Discretionary +15.3%

Technology +13.2%

Financials +12.6%

S&P 500 +11.6%

Industrials +11.4%

Consumer Staples +9.9%

HealthCare +8.8%

Energy +7.8%

Utilities +2.5%

January 1, 2013:

Materials +21.8%

Telco +21.1%

Financials +16.2%

Consumer Discretionary +14%

Technology +12.5%

S&P 500 +10.9%

Consumer Staples +9.8%

Industrials +8.5%

HealthCare +7%

Energy +3.9%

Utilities +0.09%

March 8th, 2013:

Telco +21.7%

Basic Mat +17.5%

Financials +15.7%

Consumer Discretionary +13.1%

Technology +9.9%

S&P 500 +9.2%

Industrials +9.1%

Consumer Staples +8.7%

Energy +4.5%

HealthCare +1%

Utilities -1%

Commentary:
The fact that the Telco and Basic Materials sectors remain the top 2 sectors the last 6 months, gets very little play in the financial media, probably because the two sectors combined, comprise only about 5% – 6% of the S&P 500 by market cap. We lifted our Basic Materials weighting this week, buying Freeport McMoRan Copper & Gold (FCX), although we think upside in the stock might be limited given worries over the two acquisitions it made. Still, an upside move in copper over the next 3 – 6 months, would help FCX, but less so after the acquisition. (Long FCX, Alcoa (AA)). For Q1 ’13, Basic Material earnings growth estimates have declined 1,500 BPs since Oct 1, 2012.

Notice how Financials remains in the top 3 sectors when ranked by earnings growth for 2013. Our largest holding is JP Morgan Chase (JPM), and then Charles Schwab (SCHW), Goldman (GS) and Wells (WFC), and CME Group (CME) (long all).

Our largest overweight remains Technology in client accounts, which should help on any market pullback as we think Apple (AAPL) is pretty much done declining. (Long AAPL)

Industrial earnings estimate revisions have turned positive the past 6 months, even though the sector’s 2013 growth prospects are still below the S&P 500. (Breakout in Boeing (BA) this week, now above $80. Long BA)

Finally, we are surprised that Standard & Poor’s does not just roll the “Telecom” sector into the Technology sector of the S&P 500. Like Transports were rolled into Industrial’s years ago, roll Telecom into Tech, and Basic Mat into Industrials, and the result is 8 sectors of the S&P 500.

Our largest sector overweights as we move through 2013 will remain Technology, Industrials and Financials, as has been the case for the last few years, unless earnings pre-announcements or some kind of warning, takes us out of the sectors.

However, given such low expectations and the negative sentiment, we think there is more earnings upside for these sectors for the rest of the year.

Various and Sundry:
I continue to be amazed at the poor market and investor sentiment, even as the S&P 500 reaches its March, 2000 and October, 2007 highs. The fact that equity fund flows just turned positive after a 4-year bull market, probably tells you a lot about mutual funds, and about market sentiment;

As a portfolio manager, am I in the prediction business or the risk management business for clients? Definitely the latter, I would think.

ISI Research – we were fortunate to have ISI turn us on to their research. Dr. Mark Schoenebaum is a great biotech / pharma analyst. Love Scott Leuffler’s weekly missive and the occasional notes from Bijal Shah and Ed Hyman. Quality research from the group. Ed Hyman and Nancy Lazar were early and right on the housing turn, while John Mendelson (technician) was early and right on the bounce in pharma.

It as been 12 years, man, 12 years (!), (takeoff on Jeremy Piven’s character in Grosse Point Blank) since the S&P 500 has made an all-time high (and kept it).

It is a light week for earnings, although we get more releases from retailers. We’ll have our preview of Costco (COST) up here tonight. (Long COST).

Every year, since 2010, we’ve seen a decent correction in the S&P 500 as we moved through the 2nd quarter. Will we get it this year? Last year, the peak to trough correction was just 10%. Not very much, indicative of sentiment I think.

Gary Morrow, excellent technician at thestreet.com likes the Life Insurers – big breakouts this week. We’ve never owned or followed fundamentally.

Morrow also likes Encana (ECA), which is a natural gas play. We are long ECA, frustratingly. Both ISI and the Natural Gas Association, in trips through Chicago in 2012, thought the equilibrium price of nat gas, was $4 – $6 btu. Still have a ways to go.

Bob Lang, another friend from my days at TheStreet.com wrote an options article that has merit for stock and sector picking. If you are waiting for a definitive market pullback, you may wait a long time. Buy in slowly and in small increments.

Big test for California muni bonds and the muni market this week with the California GO issuance. Looking at the National muni ETF (MUB), and it looks toppy. December ’12 low was $109.79.

Last point: favorite headline this week found on Seeking Alpha, indicative of market sentiment: “Dow at Record High – is the End Near ?” That tells you everything.

March, 2000 S&P 500 p.e = 28(x)

Oct, 2007 S&P 500 p.e = 17(x)

March, 2012 S&P 500 p.e 14(x)