By Mamta Badkar | Business Insider
ĎThe S&P 500 just broke a five-day losing streak today, but the index is still down from its highs.
Market bear Gary Shilling was on Bloomberg TV today saying that with a hard landing in China and a strong dollar, he expects the operating earnings of S&P 500 companies to drop to $80 this year.
He said this would almost guarantee a major bear market with a PE ratio low of about 10, which implies that the S&P 500 index should be around 800óa 43 percent decline from its recent level.
"Bear in mind that the analysts have been cranking their numbers down. They started it off at north of a 110, then 105, they're now 102. They're moving in my direction.
But yeah I think that's true because as you just mentioned you've got the foreign earnings that don't look good because of the recession unfolding in Europe, a stronger dollar so there are translation losses, hard landing in China and the U.S. I think we could see a moderate recession led by consumer retrenchment, and I think that kind of earnings estimate is not unreasonable."
Shilling said that while the
Shilling said he is sticking with his "quartet"; i.e. he's long treasuries, short stocks, short commodities and long the dollar.
Watch the entire interview at Bloomberg TV:
Don't Miss: Gary Shilling - 2012 Is Going To Be Totally Crappy > Ď
†††† Submitted by Tyler Durden on 04/11/2012
In an attempt to not steal too much
thunder from Gary Shilling's thought-provoking interview with Bloomberg TV, his
view of the S&P 500 hitting 800, as operating earnings compress to $80 per
share, is founded in more than just a perma-bear's
perspective of the real state of the US economy. As he points out "The analysts have been cranking their
numbers down. They started off north of 110 then 105. They are
now 102. They are moving in my direction." The combination of a hard
Links to the three-part series that Shilling (and his hosts) describe can be found here (these are notes from the longer discussions):
Part 1 - Shilling Describes the key factors behind his recession call:
Consumers Are the Linchpin:
Spending, Saving and Debt: The support that consumer spending has received from less saving and more debt appears temporary. Household debt -- including mortgages, student loans, and auto and credit-card loans -- has fallen relative to disposable personal income, though. In my analysis, this is largely because of write-offs of troubled mortgages. Nevertheless, revolving consumer credit, mostly on credit cards, is no longer being liquidated.
Consumer Retrenchment: The data so far arenít conclusive, but
Housing activity remains depressed, with the only signs of life coming from the multifamily component, which is being driven by the appetite for rental apartments as homeownership declines. Homeowners are losing their abodes to foreclosures; many canít meet stringent mortgage-lending standards; some worry about homeownership responsibilities in the face of job uncertainty; and many have no desire to buy an asset that continues to fall in price.
What Oil Threat?: Recently, there has been great concern about $4 per gallon gasoline and whether, as in 2008, those high prices will act as a tax on consumer incomes and force drastic cutbacks in other purchases.
Part 2 - Shilling focuses specifically on the employment picture
Job openings were up 16 percent in February compared with a year earlier, but in a survey by the National Federation of Independent Business, a net zero percent of small-business owners said they planned to hire over the next three months. Furthermore, would-be entrepreneurs arenít all that enthusiastic: Only 2.7 percent of job seekers started new businesses in the last quarter, down from 12 percent in the third quarter of 2009.
Job openings: The U.S. has a lot of job openings, but having endured huge layoffs in recent years, employers are being very picky in new hiring. Contrary to Federal Reserve Board Chairman Ben S. Bernankeís assertion that high unemployment is mainly a cyclical concern that will be solved by economic growth, I believe that a big part of the problem is structural.
Business Cost-Cutting: During the sluggish business recovery that
began in mid-2009, sales-volume increases for
Manufacturing productivity: Labor-intensive factories producing items such as textiles or shoes have long departed American shores for low-cost venues abroad and may never return. Those that remain -- and the type of manufacturing that is coming back to the U.S. in the much ballyhooed ďreshoringĒ -- is robot-intensive, highly automated production that requires limited labor. Manufacturing output has recovered from its recessionary low, though not to the previous peak. Yet output per person, a measure of productivity, after the usual recessionary decline, has resumed its robust upward trend.
Jobs up, profits down: As in the past, the large share of national income accounted for by high corporate profits is unlikely to last for long. In a democracy, neither capital nor labor keeps the upper hand indefinitely. Quite apart from the Obama administrationís determined effort to redistribute income in favor of lower-income households, the seeds of narrower profit margins have already been sown. In recent quarters, productivity growth has been tiny. Have we reached bottom in terms of cost-cutting? Industrial leaders say productivity- enhancing opportunities are never exhausted, but it is possible that the low-hanging fruit has all been picked, at least for now.
Corporate earnings implications: More jobs are about the only spur to household incomes, and consumer spending is the only source of strength in the economy this year. If new employees spend their paychecks freely, they could create more consumer demand, additional corporate revenues and profits, more jobs, and so on, in a self-feeding cycle. But, as I discussed in Part 1, new and old employees are more likely to retrench and precipitate a recession.
That would cause great disappointment
for corporate profits. In conjunction with a major recession in Europe, a hard
In Part 3, Iíll examine why the Fed may embark on a third round of quantitative easing if the economy weakens this year and whether Congress will be tempted to enact policies of its own to address a huge fiscal drag in 2013 as payroll and income taxes rise and unemployment benefits plunge.