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An Unprecedented Earnings Collapse at Trader’s Narrative

An Unprecedented Earnings Collapse

If it is one thing that this bear market has delivered, it is superlatives. Indicator after indicator, metric after metric has gone off the charts and rendered any historical comparison useless. Earnings data seems to be the latest of these.

Earning season is mostly over and although historically the market weakens during this time, we seem to have evaded any serious repercussions (at least so far).

The magnitude of the economic collapse, as shown in the aggregated earnings of the S&P 500 Index is frightening. The chart below, from Chart of the Day, shows 12-month, as-reported S&P 500 earnings. With almost all earnings reports in, over the past 20 months, this has fallen over 90%.

Keep in mind that this is showing real (or inflation adjusted) earnings. If current estimates are confirmed, towards the end of the year, we may see the first 12 month period with negative S&P 500 earnings!

earnings collapse long term chart

While this is alarming, keep in mind that the market looks ahead while earnings are in the rear-view mirror. I tried to confirm the above chart by using Prof. Shiller’s data but the latest earnings data he shows is for December 2008. Using that as a starting point and going back 20 months, earnings are down 82% - which would lend credence to the 90% collapse.

But the chart doesn’t go back to the 1920’s to show whether the earnings collapse compares in a meaningful way to that era. So I used Shiller’s data once again to do that, here is how earnings looked back then (mouse over for details):

Although there was a dramatic decline from the high in late 1916 and once again a high in 1929, there was no 20 month period which can compare to the recent data. What we saw was an utter and complete collapse of earnings, the likes of which we’ve never seen.

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11 Responses to “An Unprecedented Earnings Collapse”  

  1. 1 Jimmy

    Looks like we had hit a hard rock and hard times for the forseeable future. It’ll be like Japan for the past 20 years. For those 80% of the Japanese people who still has a job, it’s being a long dragged out recession with bouts of deflationary prices. For the rest of the 20% who being unemployed or underemployed, they been living in depression-like conditions for a long time.

  2. 2 Fred Baca

    Truly - is chart of the year!

    I’ve been studying the markets for 25 years - the earnings collapse indicate we are at the beginning and not the end of a very dark period for the US and the world. China will climb out much better than the US, and we are looking a lot like Germany during the Weimer Republic, and we know where this took Germany’s citizens and the world.

    I have been in the bear camp for a while; but this takes me to a new painful level of understanding how much worse things will get. The average American has no clue what’s coming; we have quotes from some of our best Presidents’ and leaders of the USA warning of the danger to society if the crony capitalist decide they can do as they wish - and it is clear they have now. After a study the major bubble collapses, and the present earnings collapse - it becomes clear this event will supersede historical crashes. Stated as a matter of fact - let history reveal we are on the edge of the abyss. The average guy and gal will be following the heard over the cliff, thinking they’ve experienced the worse and can now start to recover their nest egg. This will cause the innocent sheep to come to the end of the rope, some literally and others through social unrest and civil disorder. We will have our bear bounces (currently in the process of ending in May 2009), and the pundits will state “ we have bottomed” (many times) and finally get it right and no one will believe the finally correct verdict. The lie will be exposed after the end, after the market bottom, the economic exodus, the US Dollar destruction; when people understand they either have 8 cents on the dollar or less - the problems and insurrection will start sooner and escalate as the unwinding completes.

    Earnings look backward (in many ways) and yes markets do look forward, but they often transition between bear and bear bounces in abrupt twists that attempt to get investors back in at the worst time. The earnings down trend between 1916 and 1921 lasted 5 years took earnings down ~87%, similar to what we see in the last couple of years (2008-2009). If the free fall does not stop quickly, and I don’t see “everyday citizens” in a position to drive a consumer driven earnings rally in the S&P 500 or any other local business, then the real economy will follow the lack of the earnings death spiral. The affect can be nothing less than catastrophic unemployment, and the negative earnings you mention soon to be achieved. People are beginning to understand the gravity of the debt burden they have dug themselves into, and recognize the equity loss in private and commercial property, so are not able to spend. The realization of loss, combined with no real savings are leading the few fortunate people to begin building a cash reserve.

    There are a few golden charts I’ve been watching for several years, but I had no idea earnings completely collapsed - and the economy does not yet fully reflect the market based on technical (charts) and the fundamentals. The long-term DJIA/Gold (Dow to Gold) ratio is brilliant as an over-arching look down from 40,000 feet perspective when gold will increase and the general market decline in value. This aerial view going back to the early 1900’s can be found (google) at Fred’s Intelligent Bear Site. Take a look at the Long Term Dow/Gold Ratio - the top of 43.7 near the beginning of 2000 has worked it’s way lower hitting nearly 7:1 earlier this year (2009), and has bounced up to ~ 9:1, but it will need to get to ~ 5:1 to hit the bottom of the clearly defined channel. This does not mean it will not fall below the channel, either directly or following a medium term bounce. With Gold at $950-$1000 per ounce, the Dow must drop to 4750-5000 (for the bottom of the channel of ~ 5:1). So, as the bear market rally approaches the end (May 2009), the foundation has been established for the descent. The market may well bounce (off channel bottom) due to the social agenda of the Government of America; but, expect the next bounce to be quick (less than two years). I expect that to potentially take the Dow/Gold ratio up to 17:1 (channel center), depending on how long it takes for the myth of artificial stimulus to die (once we all understand the lie).

    The recent monitizing of this debt (creating artificial money out of thin air) by our trusted Government is the nails being driven into our countries casket. This fancy word for making bonds to represent money (that will be devalued greatly in the future) to act as an asset for the US Government to spend on stuff (themselves and failed Corporate America), and the bonds they are printing are being bought by our Government themselves. It may sound like I’ve written something incorrectly; but, no - our US Government authorizes the bond sale, then buys them as the world has realized our debt pproblem and will not purchase the amount we need to keep us operating. So, to sustain the US economy (spending on Government and Corporate America) they buy what they themselves have put on the auction block. You may ask what is actually being accomplished; it sounds like a smoke and mirrors and there really is no transaction; but oh contraire, they are diluting the US debt by making the US dollar worthless. Not possible you say, our Government is not stupid. At times I wish they were just stupid, but unless the entire administration is deceived, the engineering work going into the final collapse has been achieved through years of effort and collusion. If you like a good conspiracy theory and missed the old cold war, our Government either has fools in economic positions or the right members are able to transition different administrations, dumb down society how banking and the Federal Reserve really operate and design distractions to keep us on course for our final fall. Either they are fools or there is plan to bring our once proud country down, so all the countries of the world are on the same field. That’s when it really begins to hurt, but will have to save that conversation for another time. If - anyone cares to hear how the story end.

    This is not intended to slam any specific administration, it has been part of our Government for a very long time, but has gotten unbelievably worse more recently. The United States of America is bankrupt, we just haven’t been called to the carpet. Countries around the globe recognize our problem; but in order to smoothly exchange (return) their US Dollar holding, they must sell over time rather that risk massive sudden losses in devaluation. This is not a bold statement, we are not able to pay back the $11 Trillion ($1000 dollar bills stacked over 600 statute miles high) our Government has not balanced. IT’S GOING TO GET MUCH WORSE!

    As of May 15th, 2009 the markets have recovered to the extent they will from the massacre and are poised to take the next wave down. Be prepared and forewarned, don’t be the deer in the head lights. Dow at 8300, then a fall to 4800 is a 42% loss; and after that, those with cash (out of the market and on the side lines) can make some great short-term profit. We do need to watch the Dow/Gold ratio to make sure it does not drop below ~ 5:1 significantly (4.5 to 1 would be my absolute), as a fall to less would indicate we are not going to get the return to channel center. If Dow/Gold drops down to 4:1 without reversing, we need to stay on the sidelines longer yet. Let’s watch together - history is being made, better or worse we are at a pinnacle of world history. If you find this of value, please say so and I will be back. I will provide three stocks that will be fantastic investment opportunities as we hit the intermediate bottom this year.

    History will prove this writing to be an understatement.

  3. 3 Stewart Thallon


    Nice analysis on Dow/Gold ratio. I will be watching that from now on. I am a longtime analyst of markets having first made profits in 1987 blip!

    Please write more and I for one will be reading it. Have you read the cycleman reports of Tim Wood? Or Eric Hadik’s Insiide reports? Good reading too.

    Where do you get a Dow/Gold ratio chart from on a daily basis?

    Thanks Fred and keep writing!

  4. 4 Holly

    Thanks, Fred, I found it very interesting, please keep writing. Sooner or later, only thing is timing which is difficult… since bull sentiment is not very high 44% only, so market may go up again….

  5. 5 Fred Baca

    Stewart - Good job on the ‘87 crash, that was fast and furious times. Not too many we’re on the right side of that short, although more had a chance to get in after the correction.

    The Dow/Gold ratio is updated roughly quarterly on the web site, so the only other option is manual calculations. Fortunately, with Gold prices nearing $1000/oz. (again) it’s easy math this year. For those that don’t have time to read earlier posts on this topic, the web site is found with a google of Fred’s Intelligent Bear Site, then selecting the Long Term Dow/Gold Ratio. This is our long-term tool for gold and market reversals, and we are nearing the end of a very steep plunge (on an intermediate scale). If we don’t bust the Dow/Gold 5:1 ratio by more than ½%, then (and only then) can we start breathing again and looking up.

    As for market sentiment; I do pay attention to it, so thanks for mentioning it Holly. Sentiment works better in locating bottoms, but I find it less effective with intermediate or major top formations. I checked sentiment end of last week and bullishness had jumped to ~ 56% versus bearish at ~ 25%, so started to look for coming reversal. It appears to be underway at present, and there will be volatility. It will be very bumpy the next few weeks, good for shorting the market if you are into it.

    I’m expecting a roll over between now and June, some recovery in mid June into July, and then a dive beginning in July and into the end of the third quarter. That should get us to the bottom of the Dow/Gold channel of ~ 5:1. As we make final approach I plan to buy a some good recession and depression stocks such as Caterpillar (~ 35/share) and Johnson & Johnson (~ $55/share). I believe we will see them down from our current levels by ~ 30-40% (bargain time), dropping J&J to about $35 and CAT below $25/share.

    How much to buy? How much you want to make? If stocks double, as they will over the coming months after the bottom, think of it as the opportunity of a life time. I’m convinced, unless the D/G ratio falls below the lower channel significantly, we find ourselves in the right place at the right time. If Dow/Gold falls below 4½:1, sell stocks immediately as we are in a death spiral that will take Dow/Gold below 1:1 (gold price per oz. greater than DJIA). I expect the bounce from channel bottom to somewhere around mid-channel, so will hold onto stocks for a while. I will do my best to keep up with the dialog, but this is my fun time and as you know work can be demanding, so don’t think I’ve abandoned the post or fellow market wizards. I may not post for a week at a time, but I will check up and see how closely history handles these times.

    I have no interest in these stocks presently, so there’s no conflict of interest and I’m not a broker, so will make nothing (other than friends). I will say what I’m doing, and don’t tell anyone what to do, so please drop a word if it works well for you. This is a market that I’ve been waiting years for, volatility is our friend.

  6. 6 Holly

    Thanks! Fred. But what source of the sentiment you used, may I know please?
    By the way, I found your website is very informative and I’ve made a mark, really appreciate it!

  7. 7 Stewart

    Thanks Fred, Volatility is indeed our great friend now. Timing is everything. Keep writing my friend.

  8. 8 mani

    Great Fred,Great analysis do write often.

  9. 9 john pitman

    I would like to contact Stewart Thallon to purchase Hottrader swing software as I do not know his address .

  10. 10 Babak

    John, I forwarded your email and inquiry to the email that Stewart left for his comment above. Hopefully he’ll get it and get in touch with you.

  11. 11 phil

    when will we see an update here ??????

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