Courtesy of our friends at Rcube Global Macro Research, please find enclosed their latest publication, where Cyril Castelli and Stéphane Alloiteau look at the weakening momemtum in global earnings:The post showed a chart of Estimate Revision Ratio (ERR) around the world, which I have annotated by circling the US and my own estimate of neutral territory. At first glance, ERR is negative to virtually all countries except for Finland, Ireland and Japan:
Global earnings momentum is weakening.
Earnings revision ratios are moving lower almost everywhere except Japan.
I can't find any discussion of how ERR is calculated on the Rcube website, but from what I have seen from the data from Jeff Miller and Ed Yardeni, the US is experiencing positive earnings estimate revisions, not negative. The discrepancy is likely explained by a difference in methodology. Rcube is likely analyzing either calendar year 2013 or FY2013 earnings estimates, while Miller and Yardeni focuses on forward 12 month estimates. If you look at earnings or revenue estimates from a single year, rather than forward 12 month, they have a tendency to start high and get revised down - and therefore have a downward bias. To illustrate my point, here is a recent chart from Ed Yardeni showing the difference between forward 12 month revenues (in red) and individual year revenue estimates (in blue). Note how the blue lines tend to have a slight downward bias whereas the forward 12 month red line, which removes the individual year bias, is more upward sloping:
The way to normalize the individual year estimates is to analyze the rate of change over time (and I have annotated the first chart with where I believe the "neutral" zone for ERR is likely to be). Even with those caveats, the Rcube analysis shows that earnings estimates are plunging in emerging markets and Europe, though there is no US chart in the blog post. Globally, earnings estimate revisions are definitely headed south. The chart below shows a negative divergence between estimate revisions and global PMI, which is worrisome:
Can the US hold up the world?
On the other hand, Jeff Miller had a recent post discussing how important earnings are to stock prices. His analysis shows that forward 12 month estimates are still rising for US equities:
Regular readers know that I tend to look at the markets from a global framework. These developments leave my inner investor worried. Right now, the American economy is still showing signs of tepid, though no gangbuster, growth. If the rest of the world is slowing, can the US de-couple or hold up the global economy?
I think that New deal democrat summarized the US situation best with his review of high frequency economic indicators this way:
Once again the story remains that coincident indicators are holding up, while the long leading indicators of interest rates, housing, and corporate earnings have turned negative. The only long leading indicator still positive is Real M2. The Oil price spike and continuing sequestration certainly aren't helping.
Time to get worried?
My inner trader tells me not to worry. These kinds of things don't matter until they matter. For now, we continue to see positive breadth powering the major averages to new highs, the Dow Jones Transports making new highs, which confirm the Dow Jones Industrials' advance and continued leadership by the Consumer Discretionary sector indicating that the American consumer is still healthy. So, don't worry, be happy!
My inner investor is far more concerned as these longer term indicators suggest that US equities may be nearing an inflection point. The risk-reward picture is turning negative and he doesn't want to stick around at the party until the very end when the cops raid the place. He reminds my inner trader of that old Wall Street adage, "Bulls make money, bears make money, but hogs get slaughtered."
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
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