The Inexorable Disappointment Of The Earnings 'Hope' Cycle

Tyler Durden's picture

Summer is over. Analysts return to their desks amid a grand-tour of conferences, industry gatherings, and company meetings, and - as has happened on average for the last twelve years - expectations are notched down from first-half-of-the-year 'hope' that this-time-is-different. Barclays' Barry Knapp notes that while macro risks seem more balanced than last spring, equity investors face a considerably higher risk in that of elevated earnings estimates. Since 2000, the worst month for analyst estimate revision momentum (net revisions) is also October, followed by September and December (tied). It stands to reason (though it’s tough to statistically ‘prove’) that equity investors and analysts return from vacation, attend conferences, and cut their earnings estimates. This, in turn, contributes to increased volatility and negative returns. While many will be focused on broader concerns – the ECB meeting, German Constitutional Court, presidential polls and macro data – equity investors are likely to hear a consistent message from the ~180 conferences: the global and domestic economic outlook is not robust enough to justify 11% y/y earnings growth in 4Q12 or 12% in 2013.


Via Barry Knapp, Barclays: When Equity Investors Go Back To School


As was the case in April and July, current quarter (3Q12) estimates have in fact been reduced – in this case to roughly -3% y/y. Forward estimates remain quite optimistic though, with 4Q12 up ~11% y/y; consumer discretionary, financials, technology and materials are expected to lead the rebound to robust earnings growth. At this stage of the business cycle, we would expect earnings growth close to that of nominal GDP.  Our S&P 500 earnings forecast calls for 4% growth for both 2012 and 2013. Still, despite ample evidence that domestic growth is below its potential (~6%) and emerging markets are no longer a source of positive operating leverage, the consensus for 2013 remains +12%. In our view, the numbers need to come down; we suspect all those conferences will play a role in the seemingly inevitable rationalization.


Most investors are cognizant of autumn’s seasonality in terms of returns and volatility; August, on average, has been the worst-performing month since 1989 and September the second, while December has been the best-performing month through that time...


...since 2000, the worst month for analyst estimate revision momentum (net revisions) is also October, followed by September and December (tied). It stands to reason (though it’s tough to statistically ‘prove’) that equity investors and analysts return from vacation, attend conferences, and cut their earnings estimates. This, in turn, contributes to increased volatility and negative returns.

Chart (via Bloomberg's Chart of the Day)



With few signs of global growth stabilization and a reasonably soft, albeit more stable, U.S outlook, we were struck by expectations of a sharp acceleration in earnings growth (both 4Q12 and full-year 2012) in the domestically leveraged consumer discretionary sector and a return to growth in the globally geared materials sector. In both cases, estimate trends are down and net revisions, a leading indicator, are headed lower. Weekly chain store sales estimates for August, part of the second most important shopping season of the year, ‘back-to-school’, are well below last year. ICSC is forecasting 1 to 1 ½% y/y comparable store sales for the month (compared to +4.6% in August 2011), while the Redbook series is forecasting 1.7%. Consumer confidence has been falling as gasoline prices march back towards $4 a gallon. Estimates have fallen in the metals and mining names but chemicals remain at risk from the myriad of negative data points (China, in particular).


Thus, while many of us will be focused on broader concerns – the ECB meeting, German Constitutional Court, presidential polls and macroeconomic data – equity investors are likely to hear a consistent message from the ~180 conferences: the global and domestic economic outlook is not robust enough to justify 11% y/y earnings growth in 4Q12 or 12% in 2013.

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Newsboy's picture

Something-for-nothing is proving to be an unsustainable economic model again...

bigdumbnugly's picture

but you got to admit it is the go to model of choice again and again.

New_Meat's picture

for some, growing towards "unsustainable."

Ahmeexnal's picture

The cartel started their raid on silver at the open, but they seem to have literally hit a wall.  JPig is toast.

New_Meat's picture

I hate the bastards and I would ask kindly that you not engage in speciesism.  Thank you very much. - Ned

AldousHuxley's picture



make money on hope with longs

make money on reality check with shorts


they are called men on wall st. who make commission on volume of transactions while others take the risk on volatile odds.


not smart enought to beat wall st? don't play the game....



i-dog's picture


"not robust enough to justify 11% y/y earnings growth in 4Q12 or 12% in 2013."

LOL ... ya think!?!

ekm's picture

Since when earnings matter?

If the suckers have run out of money, reagardless of how much they want to come back and play into the stock casino, they have simply run out of money.

You see, the suckers (retail and pensions) were addicted to going to the casino.

Let's make an analogy: John loves the casino but lost his job, got a lower paying job and now he can just make ends meet, but that's it.

So, the casino is very unhappy to lose a great customer, so the casino offers $100 dollars credit. John says I got no money. Then the casino offers $1000 then $10000 credit (debt) in order to lure him. And John say: How many times am going to tell you: I GOT NO FREAKING MONEY. FUCKOFF.


That's what's happening right now. Whether the predators offer 11 times PE, or 5 time PE or 2 times PE, or lower than book value estimations, it freaking doesn't matter. THE SUCKERS GOT NO FREAKING MONEY, SO THE PREDATORS HAVE TO GO AHEAD AND FIGHT AGAINST EACH OTHER - (enter HFT).


Enter the Fed. They bought bonds from Primary Dealers, hence they supplied them with fresh money, part of which went to buy and buy and buy and buy stocks, until they are the only buyers. Now.................good luck. Let the wolfs fight for food by screwing each other since all sheep have been eaten already.


ekm's picture

The Stock Market is INHERENTLY a Pyramid Scheme (or Madoff, Ponzi scheme) that can go ahead only if newcomers appear. Newcomers pay for the the first ones to form the pyramide and then over and over and over until fresh new money from newcomers CANNOT cover all payouts.

Madoff collapsed when no newcomers could cover the payments demanded.


Where are the newcomers for this stock market? Earnings? PE? It's a joke. Nothing matters. Only newscomers matter. There's none and it will be like this for many years.

S&P at 400 is inevitable.

Timmay's picture

I think they are living "downstairs", paying those student loans for jobs they never got.

ekm's picture

Absolutely exactly.

The reason S&P is going higher at lower volume is that the Democrats that owned House, Senate and WH ordered the Fed to do Cocainated Easing 2. The Fed did that but they ordered the Primary Dealers to return the favor by buying stocks with part of the cocainated easing money.


The problem with it?

Try matching something INFINITE like fiat dollars with something FINITE like Stocks? It eventually ends up Primary Dealers owning most of stock market just to return the favor to the Fed, hence the weakest link of Primary Dealers has to go to crash the market in order to enable some trade, hence volume, you know, to keep people employed at the trading desks.

Morgan Stanely I'm thinking will be the 4th one: Bear Stearns, Lehman, MFG.

And all of these for one reason only: No newcomers. Bear stearns and Lehman couldn't sell their MBS holdings. MFG couldn't sell their italian bonds to anybody.

No newcomers.

Meesohaawnee's picture

and now my friend .. we see what CNBS;s role is. Try to lure the newbies

ekm's picture

Brilliantly said.

As Timmay said though, they're living downstairs playing videogames, not watching CNBC any longer

Meesohaawnee's picture

well done EKM.. well done

q99x2's picture

Democrats Vs. Republicans smoke screen.

How about an article on the advances, as a percentage, of HFT systems compared to last year and prior quarters instead of this old school earnings discussion. Or maybe how much an influence as a percentage of actual growth the jobs act will allow accountants to fudge the numbers. And, how that impacts overall earnings. Or the, trickle down effect of the disperstion of lawlessness through social systems.

I think we are at a point where the German workers will quickly see the system collapse after their money is given to the bankers because it will run straight out of the system into the bankers hands and the system will continue collapsing as if nothing were done.

Seems like everyone thinks the redcoats will be wearing lipstick on Thursday.

Mr Lennon Hendrix's picture

Let's pit "equity investers" against "dollar bulls" and see who wins this shitshow.

It's like WWF - whoever yells the loudest wins.




Doesn't anyone else see the problem here?  All the fancy pantsy graphs and data points fail to recognize the crux of the problem - everything is based in fiat and fiat has no intrinsic value.  The dollar is a promise to pay.  You think the Fed will pay back the debt they hold?  Equity is ownership in a corporation.  You think the corporations care if you own part of it?

The reason for any tool of finance is to keep the status quo going until the police grid is firmly in place.  They have until 2015 for that is the year that the EROEI of oil runs negative.  So they will try to kick the can come hell or high water until then, mining strikes and cyclical growth be damned!



asteroids's picture

Just like 2008. Nothing "bad" will happen unless or until someone goes "bust". Greece, Italy, Spain, take your pick.

ekm's picture

I agree but it's all about Primary Dealers. They need badly many primary dealers to buy fresh US debt.

I'd say Morgan Stanley is the next candidate to collapse. They seem to be the most desperate ones trying to lure suckers.


I bet that JPM will buy MS at $2/share same as they bought bear stearns.

buzzsaw99's picture

fundamentals, meh

Cabreado's picture

Zooming out (perhaps way out for most), the evidence is blinding.
That being that self-interested persons in places of influence and control is not a sustainable situation, and the system eventually crumbles --
but We still pretend-to-the-end that if only... if only...
then We could keep our lofty expectations going -- and even in "awareness" deny that those expectations have been kept aloft by lies.

A reworking of expectations, and a routing out of the liars, in creative and lawful ways -- there is the only path to anything remotely sane, towards the softest landing possible.

Protecting sovereignty is important, as the alternative is hell.

Humility is critical, as is acceptance of where We are in the course of history.

New_Meat's picture


"...and a routing out of the liars,"

Actually, that is what has been going along all of this time.  The bastards have been routed through the "Legal Jeopardy Exposure Zone" and into prospective freedom, excluding clawback and other retro-encabulator extraordinary events.

Now, if you'd wish "rooting out" you really do need to engage my boar-ish cousins who have noses sufficient for trussels and tusks ready for the toughest banksta'z ass.  They are intrigued for this new search, since (... well in all confidentiality, they have told me ...) it will be much easier for them to sniff out targets.  They'd have less work to do, and the munching will be much better on fiat-fattened bankstaz.

Don't cha' know.

- Ned

Cabreado's picture

"Don't cha' know."

No, meat, I don't know.

But you tell a mildly interesting tale.

Perhaps we shall sufficate on the mildly interesting, while we discount the important simple, eh?

deflator's picture

ECB C+P+Bernannk jawboning= to da moon bitchez.

Schmuck Raker's picture


Hussman Funds 2012 Annual Report
Includes a detailed letter to shareholders with notes on present investment and economic conditions, as well as detailed portfolio and performance information.

New_Meat's picture

I've been enjoying the consistent (Jan-Feb) messages about "it will be better in 2H" for the last 15 years or so.  When I was a young and tender piglet, I thought that these messages were rather smart.  I'm stringier now.  And have the yellowing in my eyes that they call "jaundice".


- Ned

monad's picture

Will the Barack Hussien Obama Presidential Library be in London, Beijing or Geneva? Or seeing they like his work so much, Oslo?

Ahmeexnal's picture

He's all set to become the first living person to be proclaimed a saint by the vatican.

monad's picture

Evil knows its own.

Whats the real Romney plan, to arrange the USA LBO? They aren't going to lay us all off...


Rathmullan's picture

And the corrupt lying managements will lead the analyst sheep around by their nose rings whom will be implored to look thru to full year 2013 earnings and the same flea circus that believes QE is free magical money (because, well, it has been) will inch the S&P P/E? ratio up to 18 so Asness can by a "gigayacht". 

chump666's picture

Lets see if the idoits at the Fed can offset a China crash:

FT: Slowdown weigh on garment, toy industries
Prompts banks to crack down on defaulters in steel industry & rein in credit
RTRS: INSIGHT-China's steel traders expose banks' bad debts

By keeping oil bid and starting a trade war with China.

Keynesian morons.

ekm's picture

You may be correct, but I think oil is kept bid by the Gov trying to buy and store as much as possible so when Iran is attacked, they'd inundate the market with crude.

The way I see it, they were ready to attack in Nov 2011, but Obama crapped in his pants, same way that he postponed the order to kill Bin Laden three times because Valerie Jarret advised him so.

chump666's picture

Possible.  If that is the case the Fed and Obama are playing a very dangerous game with Asia, China looks like it's going into a full bore hard-landing/crash, now China being a massive net importer of oil and their ecomomy begins to slow down into a crash,  If the oil is kept bid, we are going to see geopolitical tensions erupt.  My bet it will start with south China sea, with India/Vietnam/Philippines/Japan v's China.  The tensions are there, oil price staying high as the WHOLE global economy falls into deep recession could be the beginning of America's antagonizing of China with the oil price.  But China could beat America senseless with a trade war, a full scale one, I think that is about to erupt.

And just before elections.

SafelyGraze's picture

had lunch with the 'Nank today

I say, Nank, we appreciate your reassuring words last week

what words, he says

I go, the standing ready. It's very reassuring.

it's meant as a threat, he says. like at the airport. they stand ready to search you. cavities. everything. 

even so, I say.

besides, he says. I've kinda changed my mind.

oh shit, I say. what does that mean.

about standing ready. he says. I think I'm no longer standing ready.

but .. I say. you'll need to print. you'll have to print.

of course, he says. I'll print like an absolute fiend, he says.

but .. I say

I'm just not standing ready to print, he says.

you mean .. I say

it takes no effort, he says. you don't have to stand ready. standing ready is like saying "on your mark .. get set .. get set .. get set .."

just to keep everybody alert, I say

I *might* stand ready, he says

you're *ready* to stand ready, I say

well, he says. if conditions warrant it.

but if they don't .. I say

exactly, he says. then I would not stand ready to stand ready.

ready to print, I say.

print. he says. buy. swap. speculate. you name it.

another trillion, I say

trillion? he asks. do you ever just .. dream out loud?

ten trillion? I say.

what would ten trillion do, he says.

well, I say. it would ..

jack. squat. he says.

oh, I say

ten trillion would do jack squat. 

the waiter arrives with the crispy duck. 

do you ever dream out loud, he says

I guess so, I tell him.

here, he says. have some of the duck. it's delicious.

the man is nothing if not generous.

where is the fencepost, he says.

twenty maybe, I tell him. twenty trillion. that would do it.

twenty, he says.

twenty, I say. twenty *large*.

I try the duck. he's spot on. the duck is crazy good.

twenty is bullshit, he says.

I swallow. I drink some water. where are you taking this, I ask.

I want you to let go of your fears, he says

my hand is trembling

I want you to look out over the horizon, he says

I don't know if I can, I say

right now, he says, there's a rover on the planet mars. the Planet Mars! and where is Mars? I'll tell you where Mars is. it's in our Own Steenkin Solar System! Mars is bullshit. Orion is bullshit. twenty trillion is bullshit. 

I stare at him

what I'm saying is, let's kick down some Freaking Doors! he pounds his fist on the tablecloth. are you with me? he says.

his lip twitches. you've seen how his lip twitches. 

Let's teach this coon hound how to Sing! he says. let's land us a rover on a Freaking Nebula!

I'm standing ready, I say

you damn well better be, he says.

here, he says. try the sauce. 



IridiumRebel's picture

this could very well be my favorite post....EVAH!


twenty trillion thumbs up to you sir(lip twitches)

Squid Vicious's picture

LOL @ reality... it doesn't fit the meme (I learned that word from The and MSNBC, very proud of myself for using it in a sentence)

Meesohaawnee's picture

tonight on Fox Chicago. They blamed record gas prices on the hurricane. Fuck you fox. ! The real culprit is the Bernak

IridiumRebel's picture

They are really running out of excuses......what's next? I'll be hanging with the hotties to left of our screens....

Meesohaawnee's picture

and now its the segment "you decide"what? whos the bigger idiot?

Gamma735's picture

Dead Kennedys'

"Kinky Sex Makes The World Go 'Round"

Greetings:This is the Secretary of War at the State Department
of the United States
We have a problem.
The companies want something done about this sluggish
world economic situation
Profits have been running a little thin lately
and we need to stimulate some growth
Now we know
there's an alarmingly high number of young people roaming
around in your country with nothing to do but stir up trouble
for the police and damage private property.
It doesn't look like they'll ever get a job
It's about time we did something constructive with these people
We've got thousands of 'em here too. They're crawling all over
The companies think it's time we all sit down, have a serious get-together-
And start another war
The President?
He loves the idea! All those missiles streaming overhead to and fro
People running down the road, skin on fire
The Soviets seem up for it:
The Kremlin's been itching for the real thing for years.
Hell, Afghanistan's no fun
So whadya say?
We don't even have to win this war.
We just want to cut down on some of this excess population
Now look. Just start up a draft; draft as many of those people as you can.
We'll call up every last youngster we can get our hands on,
hand 'em some speed, give 'em an hour or two to learn how to use
an automatic rifle and send 'em on their way
Libya? El Salvador? How 'bout Northern Ireland?
Or a "moderately repressive regime" in South America?
We'll just cook up a good Soviet threat story
in the Middle East-we need that oil
We had Libya all ready to go and Colonel Khadafy's hit squad
didn't even show up. I tell ya
That man is unreliable.
The Kremlin had their fingers on the button just like we did for that one
Now just think for a minute-We can make this war so big-so BIG
The more people we kill in this war, the more the economy will prosper
We can get rid of practically everybody on your dole queue if we plan this right.
Take every loafer on welfare right off our computer rolls
Now don't worry about demonstrations-just pump up your drug supply.
So many people have hooked themselves on heroin
and amphetamines since we took over, it's just like Vietnam.
We had everybody so busy with LSD they never got too strong.
Kept the war functioning just fine
It's easy.
We've got our college kids so interested in beer
they don't even care if we start manufacturing germ bombs again.
Put a nuclear stockpile in their back yard,
they wouldn't even know what it looked like
So how 'bout it? Look-War is money.
The arms manufacturers tell me unless
we get our bomb factories up to full production
the whole economy is going to collapse
The Soviets are in the same boat.
We all agree the time has come for the big one, so whadya say?!?
That's excellent. We knew you'd agree
The companies will be very pleased.
zippy_uk's picture

Look - it works like this...

Companies need to generate proffits quick - so....

1 - Offshore all the work to the lowest wage countries - make sure it will take decades for wages to get to decent levels when you do

2 - Freeze or cut wages of remaining workers

3 - Invest in Automation to increase productivity

Then you are ready to serve all your new customers when the recovery kicks in - all 3 of them.