This blog post originally appeared on RealMoney Silver on June 2 at 8:41 a.m. EDT.
"The tailwind from the economic recovery is likely over." -- Siemens Finance Director Joe Kaeser ( June 28, 2011).
is Europe's largest engineering conglomerate, and it is a bellwether for the German economy. The company manufactures everything from light bulbs to power plants, and its shares trade at only 11x earnings.
This morning, Siemens cautioned that "the economic recovery is likely over," and its shares are down by nearly 4%.
I also saw some estimates for 2012 earnings. The strategists (fine wonderful folk, pillars of society) are clustered around, said this one source, $105. The analysts (honest folk searching for the truth the strategists have found) are bunched at $112. (Notice the desperate search for vivid language: Clustered, bunched. It's never-ending!) I wouldn't worry about the spread. It seems there always is a gap between the flinty-eyed that hold no allegiance to an industry and the industry analysts who should like their industry and wish it well. I would focus on the $105. If 2011 proves to yield in the high $90s in earnings per share, then a $105 estimate is reasonable. I fear the earnings might be more $93-$95 for 2011. Then $105 would be a bit high. Fuggedaboutit $112.-- Vince Farrell, Ticonderoga Securities (June 27, 2011)
Similar to my friend/buddy/pal, Vince Farrell, I am skeptical of consensus profit projections. In his musings from yesterday (see above), Vince ponders the accuracy of consensus 2012 projections.
I can't see that far yet, but I have enough issues with the next two quarters of profit growth.
It remains my view that corporate profit forecasts -- the top-down 2011
$96-per-share estimate and particularly the bottom-up 2011 S&P 500 $100-per-share estimate -- are too optimistic as world economies are slowing.
Despite clear signs from the housing market and from a plethora of numerous soft economic releases, consensus S&P estimates have not yet been adjusted lower. Nor have S&P year-end price targets budged.
This could change coincident with second-quarter earnings releases and lowered guidance.
Debt remains the chief tail, economic and stock market risk.
Productive and focused policy initiatives can help, but what is needed is patience and time -- something that investors have precious little of.
From my perch, it seems that the leverage associated with the last credit cycle --over here (local, state and federal) and over there (in the eurozone) -- is suffocating the world's economic recovery. The ensuing and much-needed austerity measures are the outgrowth of a world that used debt egregiously and is now heavily laden with it.
It is different this time (on numerous other fronts), and it remains my view that expecting the current cycle to compare favorably with the length of the average economic recovery in the U.S. may not prove to be sound. Nor are comparisons of valuations vs. alternatives (e.g., artificially held low interest rates) especially valid. As to the other comparisons, let us not lose sight that the risk premiums were attractive, corporate liquidity was strong, and earnings quality was good in early 2008 (as it is today).
We will likely find out by the late summer whether the current soft patch is self-sustaining or transitory.
Yesterday's economic release of consumer income and spending produced further evidence that the economic weakness may be sustained during the second half of the year, as real incomes and personal expenditures continue to disappoint. It supports my view that the consumer remains the Achilles' heel to growth.
As mentioned in my
," the average Joe is caught between a rock and a hard place -- his wages are showing no growth, while the costs of life's necessities are rising. As a consequence, consumers are saving more and are still repairing their balance sheets.
The recent weakness in spending will serve to lower second-quarter 2011 GDP to under consensus (probably below 2% and similar to first quarter 2011). The optimists look at lower energy prices with promise toward a second-half recovery. While the price of crude has quickly dropped by $7 to $8 per barrel upon release of the strategic petroleum reserves, relying on lower energy prices is a slippery slope in an unstable world (geopolitically) and given our dependency on uncertain supply sources.
Consumer confidence remains low and is moving lower, coincident with elevated unemployment, still declining home prices and the continued economic/investment shock of 2008-2009. (One only has to look at the $7 billion yanked from domestic equity funds a week ago as an expression of uncertainty and needed consumer cash.)
Many optimists argue that slowing growth is well known and that it has been discounted by the recent market drop. Moreover, they argue that stocks are cheap at only 13x, particularly with the 10-year at 2.90% and with the public lending money to the U.S. government for a near-zero return. This valuation, they contend, compares favorably with the average P/E multiple since 1960 at around 15x (during which the yield on the 10-year U.S. note averaged much higher at 6.6%).
Stocks, the bulls contend, are "the best house in a bad neighborhood."
This might be the case, but the foreclosures are accelerating.
In all likelihood, our economy and equity markets will "muddle through."
But lower profit forecasts lie ahead, and with the trajectory of economic growth so weak, our markets have limited upside (at best) and remain quite vulnerable to external shocks (at worse).
My baseline expectation is the same: We are in a range-bound market (S&P levels between1250 and 1350).
As a consequence, it is not the time to be super bullish or super bearish.
It is time to be a stockpicker.
Doug Kass writes daily for
, a premium bundle service from TheStreet.com. For a free trial to
and exclusive access to Mr. Kass's daily trading diary, please click here.
At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.
Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.