The Earnings Miss Heard Around the World

Posted by Ray on September 24, 2009 under Main | Be the First to Comment

Cramer Fav RIMM misses its earnings and warns on 3Q09 earnings because higher cost handsets are “delayed” (too expensive for cash strapped consumers) until later in the quarter. While the mobile internet tsunami is real, yet very old news, it is also the least important item on the consumers mind at the moment as mortgage payments and food are front and center. This earnings miss is a warning about all of 3Q09 earnings, the top lines will be light, very light because profits are driven by cost cutting, firings actually.

This miss and warning shot has led to the international markets to open lower tonight, much lower. The Nikkei, Hang Seng, and Titans are down 2.7$, 2.5% and 2%, respectively which is probably how the European and US markets will open tomorrow. Frankly, it is looking pretty ugly and I believe this is the beginning of my long awaited selloff that should have come some 3 months ago, but has not. The only thing that has supported the market has been Dennis Kneale’s hope and huge amounts of liquidity and record low yields. For example of the irrational exuberance look at high yield bonds have had record defaults, but they continue to be bid up so clearly the risk/reward button in peoples head was broken, but it is about to be fixed.

As I have pointed out several times the S&P 500 is trading at 133 time’s current earnings and at a 26 forward p/e, which is very rich. Basically, earnings need to show actual top line revenue growth and GDP had to show a solid 4% growth rate, neither one was going to happen. While I missed a few points of growth I jumped out of the S&P 500, officially, at about 1015, or about August 7th and moved to TIPS and 2 yr treasuries. I did not do too bad, but even the TIPS and treasuries performance made me wonder what was going on, not all investment assets go up at the same time.

So, now we get our selloff and the only question is how big will it be? I have no idea, frankly. It could be as little as 3% or it could be as much as a 50% decline on the S&P, frankly the economic data is not really that good if you take an honest look at it, it is better, but not V shape recovery good. I do believe in the 3Q09 positive GDP number somewhere in the area of 2-3% area, all of which from government spending, but 4Q09 and 1Q10 will be flat to negative as the drugs wear off unless they drug us up again. Unfortunately we will need to hold on to our shorts because it will be a wild ride.