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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 252541  
Subject: Earnings cycle rate of change Date: 10/7/2012 4:47 PM
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Just a fun series of numbers.
8 month rate of change of real S&P 500 trailing reported (not estimated) earnings, annualized rate

2010.02   2009.3%
2010-03 1581.3%
2010-04 1275.3%
2010-05 1063.4%
2010-06 325.4%
2010-07 138.7%
2010-08 59.3%
2010-09 50.5%
2010-10 42.7%
2010-11 36.9%
2010-12 35.0%
2011-01 31.2%
2011-02 27.2%
2011-03 24.1%
2011-04 20.9%
2011-05 18.0%
2011-06 15.8%
2011-07 13.6%
2011-08 11.5%
2011-09 11.2%
2011-10 9.6%
2011-11 20.3%
2011-12 19.9%
2012-01 18.9%
2012-02 16.1%
2012-03 13.3%
2012-04 10.5%
2012-05 8.5%
2012-06 8.2%
2012-07 0.4%
2012-08 0.4%
2012-09 -0.4%
2012-10 -0.8%

It rather looks like the earnings cycle is rolling over.

Trailing earnings are around $87.92 at the moment, depending on your data source.
I think the cyclically adjusted on-trend sustainable level is under $70 in 2012 money.
If you're of the "it's different this time" school and project the recent extraordinarily
high post-80s earnings growth trend to continue, it would be a pinch under $80.
That requires the assumption that net earnings as a fraction of US GDP will
rise from its current near-record-breaking level to higher and higher levels.

My guess of where the on-trend earnings lie suggests that fair value
for the S&P would be about 960 based on the average observed level
of valuation since 1937, two full secular bull/bear cycles ago.
The super-optimistic "it's different this time" scenario suggests about 1100 is fair value.
Both figures in end-2012 dollars.

In short:
Don't use trailing P/E ratios as a market valuation tool when earnings are near a record high.
Half the time, including now, they are way above the sustainable trend.
There's always another recession coming.
Nothing (absolutely nothing) other than the price-to-trend earnings
ratio you pay at the moment of purchase determines the central long run
expected return from the broad market for time horizons 5-10+ years.
That ratio is unusually high right now, so forward returns will be unusually low.

If you're in the broad US market, use some technique that has a very
good chance of getting you better than average returns.
Stick with undervalued things, use quant techniques like MI, use timing, or get the heck out now.

Where do you find some value?
Hmmm, HEDJ at $44.27, might look very good near $40-41 on the next sell off.
Just a thought!

Jim
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Author: klouche Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 239820 of 252541
Subject: Re: Earnings cycle rate of change Date: 10/8/2012 12:46 PM
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Just a fun series of numbers.
8 month rate of change of real S&P 500 trailing reported (not estimated) earnings, annualized rate

2010.02 2009.3%
2010-03 1581.3%
2010-04 1275.3%
2010-05 1063.4%
2010-06 325.4%
2010-07 138.7%
2010-08 59.3%
2010-09 50.5%
2010-10 42.7% ...


Jim, This has the potential to be a good leading indicator. How far back can the data go? By itself, this compares to the Hindeburg Omen?

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 239826 of 252541
Subject: Re: Earnings cycle rate of change Date: 10/8/2012 6:46 PM
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How far back can the data go?

I did this with Prof. Shiller's data, kept up to date using Pinnacle.
A bit tricky because Shiller uses "earnings during the reporting time
period ending on the date shown" whereas Pinnacle uses "last 4 quarters of
earnings reported prior to the date shown" from Dow Jones News.
Shiller's data are monthly from 1871, and always a few months late.
Pinnacle's are weekly from January 1936 and updated every Saturday.
Both data sources have a CPI column so real earnings adjustments are easy.

So, basically no problem spotting rollovers in real earnings over many cycles.

I haven't really tried it as a top detector, assuming that by the time
earnings roll over the market already did so.
That's why leading economic indicators use market prices as an input.
But it's worth giving it a whirl.

I highly recommend downloading Prof. Shiller's data and playing around with it.
Go here http://www.econ.yale.edu/~shiller/data.htm and get the "available for download, Excel file (xls)" link.
Be sure to use the inflation adjusted figures in column J.

Jim

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