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Tuesday, April 14, 2009

S&P500 Earnings Estimates for 2009 and 2010

The S&P 500 as-reported earnings are down over 60% over the past 17 months. This is the largest decline of GAAP or “Generally Accepted Accounting Principles” earnings on record going back to 1936. In fact, earnings are currently lower than they were back in the mid-1960s.

Every month I update the "Fed Model" in "Kirk Lindstrom's Investment Letter." The “Fed Model" refers to a simple model the Federal Reserve uses which compares the earnings yield of the S&P500 with the 10-year Treasury bond. The model says the stock market is over valued if the earnings yield (defined as the total earnings of the S&P500 divided by its price) is lower than the yield of 10-year Treasury bonds, currently yielding 2.81%. (See US Treasury Rates at a Glance)

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 159% (a double plus another 59%!!) vs. the S&P500 UP a tiny 8.6% vs. NASDAQ UP a tiny 3.5% (All through 12/31/09)

As of December 31, 2009, "Kirk's Newsletter Explore Portfolio" is up 33.5% YTD vs. DJIA up 18.8% YTD

Below are excerpts from page 6 of the April 2009 issue of "Kirk Lindstrom's Investment Letter" when the S&P500 (S&P500 charts at a glance) was at 788.91.
Operating earnings are what companies say they would have earned from “normal operations.” GAAP earnings include options expensing, law suit settlements and other write offs such as the special charges companies take for restructuring or sub prime defaults at the major banks. I like to follow BOTH because some companies make a habit of writing off mistakes and lawsuit settlements as a regular part of their business to make their operating earnings look better.

2009 Operating EPS (Top Down) = $49.02
Year over Year Dollar Growth = ($0.47)
Year over Year Percent Growth = NA
PE Ratio = 16.1
Earnings Yield 6.2%

2010 Operating EPS (Top Down) = $48.44
Year over Year Dollar Growth = $6.95
Year over Year Percent Growth = 14.2%
PE Ratio = 16.2
Earnings Yield =6.2%

2009 as reported GAAP EPS (top down) = $34.74
Year over Year Dollar Growth = $19.65
Year over Year Percent Growth = 130.2%
PE Ratio = 22.7
Earnings Yield =4.4%

2010 As reported GAAP EPS (top Down) = $41.49
Year over Year Dollar Growth = $6.75
Year over Year Percent Growth = 19.4%
PE Ratio = 19.0
Earnings Yield = 5.3%

With 99% reported, 2008 GAAP and operating earnings were only $15.09 and $49.49, respectively. With recent cuts in dividends, especially in the financials, the S&P500 dividend yield is 2.75% at $787 compared to 3.16% last month at $770. In Nov. 2008, the S&P500 dividend yield was 3.19% at 850! I expect dividends to go up (return) when the economy recovers.
This chart, courtesy of Chartoftheday.com, shows inflation adjusted GAAP (real) earnings going back to 1936.
With the massive write-offs at companies like AIG, C, BofA, etc., Q4, 2008 came in with negative earnings! This level of negative write-downs cannot continue forever as the loser investment banks will eventually run out of market cap left to write-off.

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 159% (a double plus another 59%!!) vs. the S&P500 UP a tiny 8.6% vs. NASDAQ UP a tiny 3.5% (All through 12/31/09)

As of December 31, 2009, "Kirk's Newsletter Explore Portfolio" is up 33.5% YTD vs. DJIA up 18.8% YTD


More information:

Kirk Lindstrom's Investment Letter Performance

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