EPS revisions

Saw comments today that mentioned huge positive earnings revisions for technology companies and how negative this was. Huh? how could positive earnings revisions be negative? Well because these analysts are just raising numbers to justify the current speculative rise in stock prices. The commenter assumed there was no way the new estimates were realistic because the economy won't be that good, yada yada yada. wow.

So last quarter it was all just cost cutting and therefore unsustainable and now its the numbers are going up not because anyone thinks they are real but because the analysts need big numbers to justify their target prices and buy ratings. I would argue they didn't juice the numbers like that during the bubble so why would they do it now? (not saying that their estimates at the peak involved sustainable levels of revenues and profits -- obviously not but the numbers were in line with company guidance and recent experience about what was possible -- they didn't need or want to really juice the estimates because they wanted the companies to beat numbers and they just raised the multiple to get their high target prices).

Two things to keep in mind when you hear its all just cost cutting:

1. GDP was flat at best in Q2 so why would anyone expect revenue growth? (granted that flat was Q/Q not Y/Y but that only makes my comment more right because the Y/Y change has to be negative -- so again why would you expect revenue growth in a declining economy?)

2. the dollar was actually a drag on revenue growth in Q2 for multinationals -- probably clipped revenue growth by 5+%.

So as we get to Q4 and you see the dollar is additive to revenue growth instead of a subtraction and GDP growth is now very positive both Q/Q and Y/Y then wouldn't you expect to see very strong earnings given that cost cutting has been so pervasive?

ECRI is unbelievably adamant -- STILL that the recovery is going to be very strong with no double dip. no one believes that. ALMOST EVERYONE believes our problems are so bad that the economy can't possibly enter a sustainable growth phase.

I chatted with some investment professionals today who went through their litany of issues surrounding the banks (will see lots and lots of failures), housing (still falling), government debt and stimulus (recovery is all due to huge stimulus so it can't last -- very inflationary they will have to raise rates), yada yada yada.

Went on and on about all the issues -- when I confront them with the recovery data from ECRI they point out sure the recovery will be strong in Q4 but it can't be sustained and its all just a sugar high from the stimulus. I can assure you that anyone with that kind of thinking has been too bearish all along this year -- someone that admits the recovery will be strong but it can't be sustained is someone that has refused to look forward -- has only looked backward at how bad things were and assumed there can't be any good news to get the market up because we have all these issues. He then switches gears to say that sure now its ok but I'm really worried about the long term -- Hello -- what have I been saying? there will be another bust and it will be ugly but that could be years in the future -- the market could make a triple top at 1550 before then.

One thing I would point out is that I am thinking about adjusting my thoughts on the next bust -- I have thought that since we didn't really deal with the overindebtedness of this last boom --we artificially have lowered rates and used various tactics to support asset values such as houses above true market levels -- that the next bust would be worse. we would have to deal with all the issues from the last boom plus the news issues from this boom. its still quite possible but given that anyone that levered up in the last boom does not have access to credit now, you have to assume that a whole new class of borrowers is going to lever up and cause problems. I'm thinking that maybe just like 2000-2002 was a different bust from 1990 that the next bust will be different from this one -- financials won't go bust twice in a row but some other industry will do it. Tech? probably not since we are too close to the last bubble burst.

Energy and commodities? sure could be. health care? possibly but do you see people going out and levering up to open up health care facilities? I don't.

Infrastructure? yep that's a possibility too -- all that building going on in China and other emerging markets. You'll know which area it will be because that will be the focus of all bullish commentary and it will be the area most often talked about in Time or Newsweek or businessweek or other non-financial publications. It will be the area that MBA's try to get into.

bottom line -- do you know anyone that thinks we are about to have a strong and sustainable recovery? I don't besides ECRI and Cramer.

one last thing -- if we don't see a strong up move on Wednesday that will be a change in the pattern -- last couple of months you see a 3 day sell off followed by a big up day followed by a neutral day -- generally up but basically flat -- followed by another big up day. some are already talking about a lower high -- so if the market pulls back to less than 1035 we will then have a lower low too. obviously at that point the rally is over and we are going to <700 again. Oh except we did all that lower high and lower low in July and then soared about 200 points. I can live with the pain of going below 1000 if I'm confident we will head to 1200+ soon after. unless the economy rolls over, fed raises or people get truly bullish, I don't see how a bigger pull back won't be a better buying opportunity.

good luck