Zbigniew Piekarski remains bearish on stocks, while indexes continue to fall.
The latest Thompson Financial/IBES forecast, constructed from the views of individual institutional analysts, is that average earnings per share (EPS) growth across Europe will be 32.5% in 2003.
The consensus forecasts for other regions are not a great deal lower: the UK figure is 19%, the US forecast, 15.1%, and the overall global expectation is 22.7%.
Two-thirds of managers expect lower costs (increased unemployment) to be the main driver of higher corporate earnings, with a quarter advocating higher sales volumes. Just 6% of them predict that higher selling prices will drive higher EPS, indicating that corporate pricing power remains as elusive as ever.
Unfortunately, every year since 1990, the January forecast from IBES (Institutional Brokers Estimate System), which was recently bought by Thompson Financial, has ultimately proved to be slightly overoptimistic, on average by 9% plus.
As the markets have been "correcting," so our analyst friends polled by CNBC have been reducing their anticipated EPS growth for the companies constituting the S&P 500 for this year. In October, they started off with a prediction of 17.4% for 2003; this was reduced to 11.7% at the beginning of January, and the current expectation is 10.3%.
If you recall, we predicted that a turning point would be reached between January 13 and 17. This has certainly been the case, with the Nasdaq falling by 6.51%, the S&P 500, 2.80%, and the WIG20 and TechWIG declining by 4% in that week alone. This decline is continuing and "negative returns" abound.
We really do love the term "negative returns." It implies that the investment managers to whom you entrusted your hard-earned money have actually worked on your behalf in order to produce a return. The fact that it may be less money than you initially invested is neither here nor there, as it is the fault of the "market" per se and, as everybody knows, one cannot beat the market, particularly when it declines as a result of "geopolitical considerations."
In my view, the downtrend in stocks is all about excessive valuation and poor earnings outlooks, rather than the prospective war in Iraq. To be sure, the daily news on Iraq is an important factor in the day-to-day market moves, but it is a secondary factor in the basic trend, which remains down, no matter what happens in the Iraqi situation.
The bear market started in March 2000, long before Iraq was a factor. If a war in Iraq begins and then goes badly, it will exacerbate the market downtrend in a major way. On the other hand, the markets could have short, but powerful, rallies if Saddam Hussein is deposed quickly, either with or without a war.
However, the fundamentals related to value and earnings will still predominate, and the markets will sink to new lows, once again reflecting the largest profit recession in recent memory.
The point I'm making is that the major trend has little to do with Iraq and everything to do with the poor outlook for economies and earnings against the backdrop of excessively valued markets - and the overvaluation of the companies within the WSE is on a par with, if not greater than, that of the USA.
The people who led investors astray with excessive and constant optimism and the "new paradigm" want you to believe that they were really right and that the markets would be far higher if not for the prospect of going to war.
This is not the case. All the capitalist economies are suffering from major structural imbalances which have not, as of yet, been corrected and are creating strong headwinds against economic and earnings growth. These are vast manufacturing overcapacities, low consumer savings rates, record consumer debt and massive trade imbalances. The US trade deficit is surging past $40 billion, while in the UK it is the worst since records began in 1697.
In this situation, it will be exceedingly difficult for aggressive monetary and fiscal policy to gain any traction, particularly in the corporate welfare culture within Europe, as it overtaxes production and restricts consumption.
Over the past few years, credit-empowered overconsumers have helped to create one of the biggest economic success stories in history - China. Last year, factory production reached a seven-year high and is accelerating. China is the reason why commodity prices are increasing, while corporate profits are declining, and it will not go away.
Last Wednesday, President George W. Bush presented his proposal for an economic plan for small businesses. His televised speech was made in a warehouse. The backdrop consisted of a huge wall of large brown cardboard freight boxes with the words "made in the U.S.A." stamped in bold black letters for the viewers to see. Unfortunately, the cameras revealed that each box was originally imported from China and had "made in China" stamped on their sides, but the viewers could not see it. It was a very large warehouse.
Bottom line: I am bearish on stocks in the short-term and long-term. Stocks have accelerated away from the Fibonacci turn window and should be down for the balance of the first quarter. The bear will probably stop to catch its breadth for one to three trading days but breadth, sentiment and cycles all argue more persuasively than ever that the "point of recognition" is at hand for the bear market. Needless to say, I am maintaining my "short" positions and will make profits as markets fall.
Zbigniew Piekarski is a portfolio manager based in Warsaw. He can be e-mailed at zbigp@bipnet.pl.
The consensus forecasts for other regions are not a great deal lower: the UK figure is 19%, the US forecast, 15.1%, and the overall global expectation is 22.7%.
Two-thirds of managers expect lower costs (increased unemployment) to be the main driver of higher corporate earnings, with a quarter advocating higher sales volumes. Just 6% of them predict that higher selling prices will drive higher EPS, indicating that corporate pricing power remains as elusive as ever.
Unfortunately, every year since 1990, the January forecast from IBES (Institutional Brokers Estimate System), which was recently bought by Thompson Financial, has ultimately proved to be slightly overoptimistic, on average by 9% plus.
As the markets have been "correcting," so our analyst friends polled by CNBC have been reducing their anticipated EPS growth for the companies constituting the S&P 500 for this year. In October, they started off with a prediction of 17.4% for 2003; this was reduced to 11.7% at the beginning of January, and the current expectation is 10.3%.
If you recall, we predicted that a turning point would be reached between January 13 and 17. This has certainly been the case, with the Nasdaq falling by 6.51%, the S&P 500, 2.80%, and the WIG20 and TechWIG declining by 4% in that week alone. This decline is continuing and "negative returns" abound.
We really do love the term "negative returns." It implies that the investment managers to whom you entrusted your hard-earned money have actually worked on your behalf in order to produce a return. The fact that it may be less money than you initially invested is neither here nor there, as it is the fault of the "market" per se and, as everybody knows, one cannot beat the market, particularly when it declines as a result of "geopolitical considerations."
In my view, the downtrend in stocks is all about excessive valuation and poor earnings outlooks, rather than the prospective war in Iraq. To be sure, the daily news on Iraq is an important factor in the day-to-day market moves, but it is a secondary factor in the basic trend, which remains down, no matter what happens in the Iraqi situation.
The bear market started in March 2000, long before Iraq was a factor. If a war in Iraq begins and then goes badly, it will exacerbate the market downtrend in a major way. On the other hand, the markets could have short, but powerful, rallies if Saddam Hussein is deposed quickly, either with or without a war.
However, the fundamentals related to value and earnings will still predominate, and the markets will sink to new lows, once again reflecting the largest profit recession in recent memory.
The point I'm making is that the major trend has little to do with Iraq and everything to do with the poor outlook for economies and earnings against the backdrop of excessively valued markets - and the overvaluation of the companies within the WSE is on a par with, if not greater than, that of the USA.
The people who led investors astray with excessive and constant optimism and the "new paradigm" want you to believe that they were really right and that the markets would be far higher if not for the prospect of going to war.
This is not the case. All the capitalist economies are suffering from major structural imbalances which have not, as of yet, been corrected and are creating strong headwinds against economic and earnings growth. These are vast manufacturing overcapacities, low consumer savings rates, record consumer debt and massive trade imbalances. The US trade deficit is surging past $40 billion, while in the UK it is the worst since records began in 1697.
In this situation, it will be exceedingly difficult for aggressive monetary and fiscal policy to gain any traction, particularly in the corporate welfare culture within Europe, as it overtaxes production and restricts consumption.
Over the past few years, credit-empowered overconsumers have helped to create one of the biggest economic success stories in history - China. Last year, factory production reached a seven-year high and is accelerating. China is the reason why commodity prices are increasing, while corporate profits are declining, and it will not go away.
Last Wednesday, President George W. Bush presented his proposal for an economic plan for small businesses. His televised speech was made in a warehouse. The backdrop consisted of a huge wall of large brown cardboard freight boxes with the words "made in the U.S.A." stamped in bold black letters for the viewers to see. Unfortunately, the cameras revealed that each box was originally imported from China and had "made in China" stamped on their sides, but the viewers could not see it. It was a very large warehouse.
Bottom line: I am bearish on stocks in the short-term and long-term. Stocks have accelerated away from the Fibonacci turn window and should be down for the balance of the first quarter. The bear will probably stop to catch its breadth for one to three trading days but breadth, sentiment and cycles all argue more persuasively than ever that the "point of recognition" is at hand for the bear market. Needless to say, I am maintaining my "short" positions and will make profits as markets fall.
Zbigniew Piekarski is a portfolio manager based in Warsaw. He can be e-mailed at zbigp@bipnet.pl.
