Bianco on earnings volatility and recession

Edward here. Economists are telling us that the economy is decelerating rather quickly. What does that mean for stocks, in either a recession or no-recession scenario? Jim Bianco was on Bloomberg Television yesterday with some insightful comments about stock valuations and economic cycles.

Bianco told Bloomberg that he believes the likelihood of recession in the US is greater than 50%. To his mind, this means getting defensive. What I found most compelling in his analysis was how he looked at consensus earnings estimates and what impact this could have on valuations.

He said:

Valuations look very good under one assumption – that the current estimate for earnings is going to become reality. If we have a recession or anything close to recession, history shows us that Wall Street can not only miss earnings when we have a recession, but be way off on earnings; 25%, 30%, 35% is not uncommon of a miss when we have a recession in earnings. So all of a sudden, an 1100 or 1150 S&P that looks cheap now might be expensive if we have a 30% hit on earnings.

This is exactly right. Profit margins are cyclically high right now. Profits were at record levels in Q2. I agree that a double dip recession is a major possibility irrespective of what happens in Europe. Therefore, I see a growth slowdown as a sure thing. To wit, analyst are cutting (earnings estimates and, therefore, also) S&P 500 forecasts like mad. There is every reason to get defensive. Lighten up on risk-taking now and don’t wait for October 1 as previously recommended” is how Jeremy Grantham put it in May.

And remember, this is still a secular bear market. That means P/E margins will continue to shrink as the market overshoots to the downside. We are a long way from bottom.

In the end, like Bob Janjuah of Nomura, Bianco sees a gold/bonds strategy as a good call here. He says overweight bonds if you are a value type but definitely look to gold if you are a speculative type.

Video below

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Stan

    I’ve been surprised stocks have been trading at such high multiples of PE. Stocks that i’ve been waiting to drop like SYT, INFY and othera trading at 14x, 18x, many 20+x earnings and commentators say market is undervalued or reasonable. My old reading of value investors say value should be 8-12x earnings. If history is any guide stocks should drop substantially but every central bank keeps liquifying markets, multiple bailouts and there is no regulation to discourage over over leverage.

    If your a value investor its very frustrating.

    1. Because

      Central Bankings job is to liquidify markets ie handle the transfer payment crisis of fractional reserve banking. This was the complaint of the early 30’s Federal Reserve, where they basically forced the US to ahere to a ill-liquid market. It caused Kennedy point man FDR to install militarism and the beginnings of the Welfare state. What happened if the FED had done its job in the early 30’s?

      You need to get rid of supposed “price earnings” theories. They are what they are. If we had a massive contraction, those earnings would collapse as would GDP.

      The fact is the US hasn’t contracted much since the Great Depression. The fact we are whining about 4 year “stop” is embarrasing. The fact is, this “stop” should still be going for another 1-2 years.

      Americans have a long way to go. They still worship the big business, even though they say they don’t. They can’t let go of the 1990’s economic boom. They simply are living in the past. This country is dying not because of liquidity by central banking, but self-defeating notions that capitalism is a one way street and the capital owners should extract all the rents. Sorry Mr and Mrs American, capitalism is a 2 way street. Laborers will try as much as the bosses to extract. That is the nature of capitalism. When you lose this balance, you get the British of the 1970’s or today’s America. Representing both sides in complete power and destruction.

      1. Paul Tioxon

        Dude, you have so captured the Yin and the Yang of the Tao. Seriously, the capitalists roaders of China have got the give and take between capital and labor and have the market mechanism, serving the state and together creating a social order, not the social chaos that we have had installed upon us by the shock doctrine of neo-liberalism. Kudos on yr analysis.

    2. Nathanael

      There’s a very clever and subtle suggestion by a commenter at Krugman’s blog that stock in very large companies with big wads of cash is being used as T-bill substitutes (in the same way that gold is).

      If this theory is right, you would expect the price stocks in “strong” industrial corporations with lots of real assets and cash (and little debt) to rise, as real interest rates fall. Earnings have little to do with it in such an analysis; the mere fact that the company can be expected to remain profitable *at all* makes it a safer bet than most of the alternatives right now.

  2. ArkansasAngie

    Making money the old fashion way is getting pretty darn hard.

    Fall is harvest time and the grain bins look kinda empty. The coming winter might see some similairities with the Donner Party.

    Anyone want to bet on holiday retail sales being super duper, hot dog?

    1. Black Smith

      Call me crazy but I’m looking at console video games sales as a leading indicator. Right now things are terrible.

      Not the YTY sales chart.

      Yes, the delay in Madden NFL 12 jiggered the numbers but I think the retail game channel has some serious problems ahead.

      Note the in August that average unit game price fell to $32 and has been steadily declining for three years so the overall cash the industry has been taking in is in serious decline.

    2. Moopheus

      “Making money the old fashion way is getting pretty darn hard.”

      You mean by producing a desirable good or service that someone actually wants or needs?

      1. ArkansasAngie

        I do have a little ole start up that we’re ging to kick off here in about 2 weeks. It is a product w/out an ounce of technology in it. Simple. Simple. Simple. Niche market of motivated people with a problem to be solved.

        It won’t be the next Wall Street IPO but it should be good for establishing a nice little 10 million or so in gross sales.

        I’m putting my money in Main STreet. None of my money will find a home in New York.

        For $100,000 equity I’ll create 2.5 jobs — hopefully self-perpetuating. And to think Obama’s jobs are $312,500 each.

  3. Jim Haygood

    While I share Jim Bianco’s view that the likelihood of recession is above 50%, I’d say that probably we’re already in it since May.

    Stocks typically bottom several months before recession ends. And we’re seeing it happen … right here, right now. Today the NDX (which often leads the S&P) broke out intraday to its highest level since the early August collapse: unambiguously BULLISH. NDX chart:

    Yet more head-scratching evidence from our old pal, Ed Yardeni: individual income tax receipts are up a robust 20% year-on-year. This is quite a shocker:

    Although I’m a long-time admirer of Jim Bianco’s analytical prowess — he taught me lot — I couldn’t disagree more with his tilt toward bonds and gold. I’m short gold, and sorely tempted to mortgage the house, the wife and the oldest son to short the living piss out of bonds as well.

    Stocks are a liquidity meter, and they’re telling us that the Greek crisis is going to met with a global flood of fiat liquidity. Just close your eyes, and buy the mushroom cloud!

    1. NOTaREALmerican

      Re: I’m short gold,
      Re: Stocks are a liquidity meter, and they’re telling us that the Greek crisis is going to met with a global flood of fiat liquidity.

      Re: Just close your eyes, and buy the mushroom cloud!

      Isn’t gold THE mushroom cloud? It expands until the fiat liquidity insanity stops and then… (there’s no then, unfortunately).

      1. Jim Haygood

        Yes, but it doesn’t expand neatly and linearly. Gold lost two-thirds of its value from 1980 to 2001, while the CPI doubled.

        Every portfolio needs a gold allocation. But I see too many newbies that are 100% in gold, and proselytizing others to jump in the pool with them.

        In August, GLD became the largest-cap ETF on the planet, blowing past granddaddy SPY:

        Something is wrong with this picture. Gold needs to take a well-deserved break.

        1. mookie

          Gold will “take a break” after the Euro mess shakes out and after the US mortgage debt is finally written down. I’d look for it to at least hit $3k before then. Think of gold as the “investment of last resort”. It’s where money flees when there’s nowhere else to go. At some point it will be time to switch from Gold to bonds. Before then, it’s your best investment.

  4. gordon

    Just look at the ECRI or WLI (weekly) and claim we aren’t in a recession. Also, small biz survey fell off a cliff. Plus the BEA used a 1.7% deflater to arrive at 2.8% GDP, that’s a bald-faced lie because it’s around 3.5% annual, using a deflater of 3.5% or even 3% gets you to GDP contraction for at least 6 months. There is more lying in the media than at any point I can remember and I’m 60. Almost every data point can be disproved, CPI, unemployment, you name it. Like we’re winning in Afghanistan, there’s a good one. How about Fisher or Bernanke saying Q/E had no bearing on the $CRB index?. Like we can’t pull up a chart in seconds to find another Liar?

    Here’s the ECRI -WLI

  5. Hugh

    The markets are like inveterate partyers living under a volcano. Some days the earth shakes, the skies grow dark, and the partyers start packing up to leave, but the next day the sun’s shining so they go back to partying. Now an impartial observer would say that the volcano is going to erupt and take out all those below any day. It seems incomprehensible that people wouldn’t get out while they still can. But each partyer is convinced that whatever happens to everyone else he/she will get out in time. And if that doesn’t happen there will be a deus ex machina that will save them all.

    The euro is going to explode. It looks like it will be a very disorderly, uncontrolled demise. Interconnectivity means US banks are not going to escape the fallout, but Wall Street parties on. I can only think that they all will be the first to the exits, an impossibility, or that government will ultimately bailout their mistakes like it did the last time.

    I also agree with Jim Haygood. I think we are back in recession. I don’t think except for a technical pause from the effects of the stimulus we ever left it. A bump is not a recovery.

  6. different clue

    Anyone reading this thread who has also read the latest Fukushima post and thread might well want to buy hundreds of cans of pacific salmon before the Fukushima rad-plume enters the North Pacific where the salmon live. Because once?if?when? that happens, won’t the cesium and etc. enter the food sources that the salmon eat? If or when new generations of salmon are too rad-contaminated to eat, those who didn’t buy hundreds of cans of salmon ahead of time will just have to go without salmon for decades to come.

    At some point perhaps those with legacy stockpiles of canned salmon might be willing to sell some of their canned salmon to desperate salmon addicts at the price of: one can of salmon for all the krugerrands that will fit into an empty salmon can.

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