Earnings – Very Bad News for Scam Lovers

Earnings – Very Bad News for Scam Lovers

Glossary: Scam Lover = stock market bull (stock markets exist to allow scamming of the public)

David Rosenberg, Merrill Lynch; 11/23/07:

“Financials now represent 30% of the total profit pie -- There is considerable temptation to strip financial-related earnings out of the pie to show how wonderful it is in the other parts of the market (though consumer discretionary isn't faring that much better). But the reality is that financial-related earnings now represent about 30% of the total profit pie versus 25% just three years ago — so stripping out financials is like stripping out California, Florida, New York and Texas from GDP…

“What has been more shocking is reported earnings -- Against this backdrop, what has been more shocking so far in the third quarter earnings season has been the "reported" numbers, which unlike the operating earnings do not strip out the charge-offs incurred. Here the results were even more abysmal as reported EPS plunged 28% YoY, which was the worst print since the fourth quarter of 2002… And, the folks at S&P tell us that the worst is not yet behind us. This is key because in the final analysis, it's nice to talk about "operating" earnings, but it is "reported" earnings that investors pay for. For one, it is hardly clear that these current charge-offs are going to be "non-recurring" — Freddie Mac's writedown is a sign that nothing has really been "kitchen sinked". 3Q goes down as the fifth worst third quarter since 1945…

“When doing the valuation analysis on reported earnings, under the proviso that we see a typical recession/write-down scenario, then the historical record suggests that investors are looking at forward P/E multiple closer to 25x… Moreover, the current $15.29 estimate for reported EPS is the lowest level of earnings since the fourth quarter of 2004. And where was the S&P 500 trading at that time? Answer: It veraged 1,162 that quarter — just in case you were thinking of buying this dip.”

2008 is shaping up to be the year of “Slaughter of America Pigs, China Bulls, and India Goats” to begin in earnest. Are Scam Lovers sacrificial lambs? That question would be fully, and unambiguously, answered by 2010 in the depth of depression.

Jas (Date: Sun, 25 Nov 2007 09:57AM PST)