SAN FRANCISCO -- Tom Galvin has done it again -- altered his forecasts without clearly identifying the change.
Last week, Galvin's new distinction between equity-only and balanced recommended portfolios created some confusion among investors and reporters, who appeared to focus on the more bullish aspect of his call. The Credit Suisse First Boston strategist should have done a better job of highlighting the distinctions, I concluded in a piece
Cutting Through the Bull. Apparently, somebody agreed, because in an interview this afternoon, Galvin was asked by
CNBC's Ted David to "set the record straight" about his recommended allocation, which Galvin did. Notably, the strategist's balanced portfolio -- 70% stocks, 20% bonds and 10% cash -- was listed in the graphics accompanying the interview, rather than his 95% stock and 5% cash equity-only portfolio.
Still, Galvin's habit of making subtle, but important, downward revisions to his forecasts with barely a mention reappeared today. Next time Galvin is interviewed on television, don't be surprised if he's asked about year-end price targets.
Today, Galvin cut his year-end 2002 price target for the
S&P 500 to 1500 from 1550. More significant than the change itself (which David didn't ask about) was that Galvin had previously been publishing targets for 2001. As with the offering of two portfolios, Galvin's sin is one of omission: He made little effort to highlight that the change had occurred, and it (again) apparently escaped the attention of many other media outlets.
On the "Market Statistics" page of his July 23 report, Galvin printed year-end 2001 targets of 1450 for the S&P 500, 2600 for the
Nasdaq Composite and 12,000 for the
Dow Jones Industrial Average.
In today's report, the statistics page contained 2002 year-end targets of 1500 for the S&P 500 (as cited above), 2600 for the Comp and 12,000 for the Dow. The change appeared without warning or explanation in the report.
"I'm basically telling people to take an 18-month view," Galvin explained in a telephone interview today when I called to ask about the discrepancy (it might have been a typo). "If you're investing, it's not for the earnings picture this year. You're betting on a recovery next year."
Based on today's close, the strategist is thus forecasting growth of 24.5% for the S&P 500, 28.8% for the Comp and 15.4% for the Dow between now and year-end 2002. While such returns would likely please most investors, Galvin conceded that his 2001 year-end targets for the Comp and Dow have been pushed out 12 months hence.
"The Nasdaq remains in a valuation quandary," he said. "Clearly, the valley for tech has proven much deeper than I've expected, and even while we're forecasting a 40% earnings recovery for tech [next year], it's still going to leave a lot to be desired to lift the index." (Yes, he said "40%" earnings growth for tech next year.)
Apparently, the strategist is no longer officially publishing year-end targets for 2001. But based on lowered earnings expectations for the S&P 500 (see GuruVision below) and a price-to-earnings ratio
of between 20 and 25, he said fair value for the S&P 500 at year-end is around 1300. That target represents a nearly 8% rise from today's close of 1204.52, but also represents a surreptitious downgrade of his prior target.
There's no shame in changing recommendations if market developments and/or fundamentals fail to live up to prior expectations. But there is shame in trying to sneak such changes through the back door, especially if your footprints are already there.
GuruVision: Break Out the Hatchets
As referenced above, Galvin cut his 2001 estimate for S&P 500 earnings to $51.50 from $55.25 and his 2002 estimate to $59 from $62. As a result, the strategist cut his year-end 2002 S&P price target to 1500 from 1550.
Galvin joined a growing bandwagon of estimate cutters, which also added UBS Warburg's Edward Kerschner and J.P. Morgan Securities' Douglas Cliggott to its ranks today.
Kerschner cut his 2001 earning estimate to $49 from $53, and his 2002 estimate to $59 from $61. His year-end 2002 price target is unchanged at 1835. Cliggott lowered his 2001 estimate for S&P 500 operating earnings to $44 from an already below-consensus $50, and put a $46.50 target on 2002 results. The strategist cut his year-end price target to 1100 from 1200 for 2001, and to 1200 from 1300 for next year. The oddly matched trio (Galvin and Kerschner have been among the Street's most vociferous bulls, while Cliggott ranks with the
most skeptical strategists) is part of a much bigger estimate-cutting effort. Thomson Financial/First Call consensus estimates for third-quarter S&P 500 year-over-year earnings have fallen to a decline of 11.5% from a 6.2% drop a month ago. Fourth-quarter expectations have dropped to a year-over-year gain of 0.9% from 5.5%.
The danger for equity investors is that, as fourth-quarter earnings projections continue to decline, 2002 estimates will ultimately be reduced further, once again pushing back the recovery scenario. Long-term forecasts remain fairly optimistic; the current First Call consensus is 2002 earnings of $58.76 a share, which would be a 14% gain over the current estimate of $51.49 for 2001.
Consistent with his recent outlook, Cliggott believes the consensus view is too hopeful.
"We expect a frustratingly slow climb out of the 2001 earnings trough," he wrote today, suggesting business spending may not turn positive until the second half of 2002 and there's little catalyst to revive global growth.
Cliggott believes the market will "look through" some of the earnings weakness, as it did in 1990 and 1991. But "we think a very cautious approach to the U.S. equity market makes a lot of sense until there are unambiguous signs of a real earnings recovery."
At the other end of the bull/bear spectrum, Kerschner argued an earnings rebound next year is predicated on an economic recovery driven by fiscal and monetary stimulus, lower energy costs and the end of the inventory correction.
Those factors should result in gross domestic product
recovering to growth of 3.5% to 4% next year, the strategist forecast today. Based on historic trends for sales growth and margin expansion, "it does not take heroic assumptions to reach 13% earnings growth in 2002," in such a scenario, Kerschner continued.
"This year's weak earnings are next year's easy comparisons," the strategist added, suggesting energy may be the only sector to face difficult comparisons in 2002.
CSFB's Galvin mentioned many of the same factors in explaining his earnings forecast for 2002, as well as expectations for falling employment costs, the dollar peaking, plus leading indictors such as the
National Association of Purchasing Management new orders (the latest to be reported on Wednesday) and the yield curve
. Both Galvin and Kerschner cited the ending of the amortization of goodwill as a potential boon to earnings.
Elsewhere, Lehman Brothers' chief strategist Jeffrey Applegate today wrote he "remains convinced" that the second quarter will mark the trough in earnings. That view garnered him some
unwanted attention last week.
In sum, Cliggott remains in the minority when it comes to earnings and market expectations. However, both the trend in earning estimates and recent history support the minority view.
(For a GuruVision primer, check out
this story.)
Aaron Task
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