Monday, January 11, 2010

Société Générale's Albert Edwards on Employment and Market P/E

ZeroHedge has the catch, the first half is an erudite discussion of the Birth/Death model, etc.:

...Yet where Edwards shines is in his observations of the divergence between the run up in forward P/Es and still all time low expectations of long-term EPS growth.

This means the equity market is far more reliant on the expectations for strong 2010 earnings growth being fulfilled (a near term eps disappointment can be shrugged off if valuations are dependent on high long-term earnings expectations). The 27% year-ahead expectation for global non-financial eps growth is a near record and particularly challenging when margins are at such high levels. The tentative evidence that the cyclical upturn may already be stalling out would leave an expensive equity market ready to complete the Ice Age secular de-rating.

Lastly, in debunking yet another rose-colored glasses myth, Edwards takes on the misperceptions surrounding the "surging" corporate cash flow and the barrage of M&A deals "just around the corner."

I hear much talk abound that the US corporate sector is throwing off unprecedented surplus cash and that it is only a matter of time before this triggers a major recovery of investment and/or M&A. Indeed both the household and corporate sector?s financial position seems to have been transformed from their noughties low of 4% deficits, with both sectors now running healthy surpluses of 3%

The national income accounts (NIA) definition though should be seen besides the Fed?s Flow of Funds (FoF) calculation of the very same surplus. On a slightly different definition this shows a more moderate surplus of only 1% of GDP. And when one assumes a neutral contribution from inventories (which will almost certainly be the case in Q4), the surplus drops away to 0% (see chart below). This is indeed certainly much better than a few years back, but not though compelling evidence that an investment/M&A boom will be imminent this year.

At the end of the day, nothing matters: fundamentals have long been pushed away to the scrapheap of relevant data. As Rosie keeps harping: "good news is good news and bad news is good news." What else is there to say? Maybe a few things. Our analysis on the upcoming Minsky moment will be published shortly.

Albert Edwards Takes On Payrolls, P/E Expectation Divergence And The "Barrage" Of M&A Deals Just Around The Corner