The first installment of this year’s Barron’s Roundtable was weirdly muddled, with a lengthy back-and-forth about 2013 S&P 500 EPS that never ever mentioned a specific EPS estimate. When asked directly, “What is your S&P 500 earnings estimate for 2013?” Abby Cohen did everything but answer the question, first noting that consensus estimates are for 12-13% growth and later revealing that Goldman’s top-down number (but, apparently, not hers) is growth in the “mid- to high single digits.” T. Rowe’s Brian Rogers expects growth of “5%, 6%, 7% for the year” — but off of what 2012 base he did not say.
We learned once again that Bill Gross dislikes equities but knows little about them. He claimed that “Wages as a percentage of GDP have declined to 54% from 59% in the past 10 years. That trend would have to continue for earnings to keep going up.” Actually they don’t need that trend to “keep going up” because A) nominal GDP will keep rising, B) big companies are gaining share – think about Amazon and that nice local book store that shut down five years ago, C) over a third of S&P profits are overseas, with an increasing share in emerging markets, D) companies can use free cash flow to grow EPS via acquisitions and share buy-backs. Gross is making the common error of assuming that corporate profits in the GDP accounts and S&P profits are more or less the same. They aren’t.
Piercing this gloomy thicket of disinformation was Felix Zulauf’s bright beam of unconventional wisdom. The Swiss fund manager asserted, “Europe’s high priests of economic policy have put preservation of the euro above everything else. By doing that, they have destroyed millions of jobs and consigned millions of people to poverty. At some point this will backfire. You can’t glue the European Union together forever with central bank money.” And Felix made these related points:
- The notion that improving trade balance in some beleaguered European countries is a harbinger of prosperity is misguided, because it is driven by imploding imports rather than strong exports. Unlike Asian countries in 1998-99, Europe’s “peripheral nations” cannot boost exports via currency devaluation.
- The French economy is not competitive and is moving in the wrong policy direction (toward more socialism), so its performance in 2013 will disappoint. We have been making that point for seven months.
- In theory Europe could solve its problems through greater political and fiscal consolidation, but what is more likely is that some countries will abandon the Euro.
- I would add that Europe’s supposedly green energy policies (which cut CO2 emission less than in the U.S.) hurt competitiveness. Germany chemical companies are alarmed by Dow Chemical’s low energy and feedstock costs; the solution is to build the next plant in Texas.
I agree with Felix. Currency arrangements are supposed to meet the needs of an economy – not the other way around. The Euro’s raison d’etre is political not economic. The Euro-zone is a non-democratic entity governed by unelected policy elites, and while the ECB can temporarily calm the bond markets with a flood of liquidity it cannot cut a 12% unemployment rate kept high by fiscal austerity, bank deleveraging over-regulation, and a dysfunctional currency regime. The menu peuple will strike back at the voting booth, probably beginning in Italy this year.
Because liquidity has brought complacency, problems in Europe are my top candidate to interrupt the current bull run in U.S. equities. But Q4 profits are not too bad and the fiscal cliff has been less of a problem than I thought, so the “valuation levitation” will continue. Stocks need to get quite a bit more expensive before they look safe to the investment committees that run large pension and endowment funds.
Copyright Thomas Doerflinger 2013. All Rights Reserved.
