An Economic Blue Screen Of Death

My older readers will remember the Microsoft (MSFT) "blue screen of death" that would pop up when your computer froze. All you could do was hit the reset button. It’s as if we've now hit a giant economic blue screen of death, and again all we can do is hit reset.

Those Wild and Crazy Analysts

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Look at how the projections for earnings per share for the S&P 500 have dropped over the past year. Every few months, estimates dropped. It will get worse.

Given US consumer malaise, the already low numbers for this year are likely to be revised down again. Let's go to the chart:


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Now let's look at 2009 projections:


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Note that in February 2008, earnings had been revised downward to $71.20. But analysts were still bullish. They projected the next month an almost 10% increase in earnings for 2009. They are now down to $48. 2009 earnings can go a lot lower.

One last graph: This is the actual data from the S&P. Notice the huge disparity between the as-reported earnings and operating earnings estimate for 2009. The operating earnings are literally double the reported earnings. Reported earnings are what companies use for tax purposes. They are also the basis for any historical comparisons you see. Operating earnings are what I call EBBS, or Earnings Before Bad Stuff, i.e., the BS.

The operating earnings estimates are "bottom up." That means that S&P gets the estimates from each of the analysts that follows the individual companies and adds them up for the estimate. The top-down estimates take into account economic conditions. It makes a huge difference in accuracy.

If the optimists are right, we're at single-digit price to earnings ratios (around 8). If the as-reported team is right, we are at relatively high levels, even after the recent large drop. How high? As of 11 a.m. PST, the 2009 P/E projected ratio is 20.2. That’s not a level from which major bull markets are launched.


Click to enlarge.

But is that the level we should be looking at? If you take a longer-term view, you can make a case that we’re getting closer to a secular bear price-cycle low. I'm getting closer to the time when I can be cautiously optimistic.