Monday, July 27, 2009

Analyst Herd Stampedes to Premature Earnings Rebound

Wall Street analysts perennially get turning points wrong. I am not surprised that their herd mentality is forging a consensus around a market bottom in earnings right now:

Wall Street firms raised forecasts on Standard & Poor’s 500 Index companies 896 times in June and lowered 886, according to data compiled by JPMorgan Chase & Co. The last time analysts were bullish on a net basis was in April 2007, before more than $1.5 trillion of bank losses tied to subprime loans spurred the first global recession since World War II, the data show.


Unfortunately, bad news on earnings continues to mount. Check out double-talk like this:

About 75 percent of S&P 500 companies have topped analysts’ estimates so far, with per-share earnings dropping 26 percent on average, according to Bloomberg data.


Analysts have uniformly lowered the bar on earnings expectations to make it easier for weakened companies to beat estimates. Kudos to Karl Denninger's Market Ticker for noticing this phenomenon.

This turn of opinion has something in common with the last time analysts were net bullish. Back in April 2007, only a handful of skeptics and heretics saw the subprime explosion coming. Analysts now seem to be ignoring the second phase of the credit crunch: commercial mortgage defaults. You can be certain that policymakers aren't ignoring the difficulties in commercial real estate:

U.S. commercial-property prices fell 7.6 percent in May from a month earlier, according to Moody’s Investors Service, bringing the total decline to 35 percent since the market’s peak.

Bernanke told lawmakers July 22 that a potential wave of defaults in the $3.5 trillion commercial-mortgage market as borrowers find it difficult to refinance may present a “difficult” challenge to the economy.


Folks, the show's not over. Act II promises more drama than we've seen so far.