Thus far, roughly 20% of the companies in the S&P 500 have reported, and overall first-quarter earnings are down 22.1%, according to Brown Brothers Harriman. But excluding financials, earnings are up by 8.2%. If the actual reported earnings are combined with estimates for the remaining companies, earnings are coming in slightly above expectations, at a 12.9% decline. Excluding financials, they're up a healthy 9.5% Brown Brothers says.
Why is this wrong?
-- The financial sector is the largest part of the S&P 500, comprising 17.64% of the index.
-- The financial sector provides the lubricant (read money in the form of credit) for the whole economy. If it isn't functioning well we have a big problem overall.
-- This is part and parcel of the "if we don't talk about it, it's not really a problem" mentality that has infested American political discourse for the last 20 years.
Here's the deal. If we were talking about a really small sector of the economy, say the Yak breeding business -- I wouldn't really care about their earnings picture. But we're talking about the largest component of the S&P 500 and the part of the economy that helps the other parts of the economy grow. Dismissing earnings misses, asset writedowns and the overall problems created by the credit crunch minimizes the actual impact of the problem. And that will eventually get us into a world of trouble.
7 comments:
Eventually? The future is now. Murdoch is just the errand boy for the people who want us to be comfortably numb when it all falls apart.
Pick your issue; torture, health care, the endless war, the financial pyramid scheme that is the basis of our economy. It's all been trivialized for the American public by the media dope pushers.
Flag lapel pins and bowling scores are the drug of choice as America passes from critical to terminal.
I wonder if they worried about who wore Roman Eagle toga pins when Rome fell.
I agree with you bonddad about the fox influence on WSJ. I started to notice this when I started seeing the fox news on their website. I hope financial people catch this on sooner than regular people because this would cost them a lot of money if this becomes a faith base financial new site.
re: "...Dismissing earnings misses, asset writedowns and the overall problems created by the credit crunch minimizes the actual impact of the problem. And that will eventually get us into a world of trouble...." - it destroys trust; which is harder to rebuild than a lost bank acct
it's like the reporting on citigroup's figures, leaving off all the unsaid
great read, thanks!
Ignoring certain inputs into an overall financial picture can make sense depending on what you're trying to conclude. Historically it made sense to ignore energy and food in inflation, to an extent, because it tends to fluctuate. Of course, when those changes become systemic, rather than sporadic, you need to realize the flaw that develops in that logic.
In this case, there is some value in analyzing the market outside of the financial sector. If you look at the historic performance of those other markets you can see what spillover there is from the financial sector. That's good to know. But taking those same numbers and trying to say, "oh we'd be fine if it weren't for those wacky financials," is, in a word, dumb.
If anything, the financials are a leading indicator here. They are what prime the pump for ongoing growth. If they are struggling, then they aren't going to be supplying the credit necessary for growth in business investment. With the financials tanking hard right now, what we should expect is a strong dip in that market that will slowly drag down earnings growth in the broader market. The deeper and longer the drip, the more that it will create drag on the broader economy.
So while what the WSJ is saying is true and perhaps interesting in a certain context, but overall, it really doesn't mean a whole lot.
It's funny because WSJ mentions the very point you are making in the previous day's issue
http://bonddad.blogspot.com/2008/04/basic-problem-in-nutshell.html
thank you for pointing this out. I have been waiting for the "murdoch creep" in the WSJ and here it is. I can see next year's headlines "discounting financials, transports, manfactuaring, retail and construction the economy is great" Also "triple digit growth in yak breeding pushes dow through 1000!!!"
An alternative explanation which the markets seemed to embrace this week is that there has been little contagion beyond the financials. With growth strong overseas and export growth generating a lot earnings at places like IBM, Intel, Cat, and Coke, the conventional wisdom that the economy is in a recession that is getting worse took a severe hit this week.
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