Wednesday, January 16, 2008
Trying to sum up the entire market can be a fool's task. Every day some stock goes up and some stock goes down. But long term, the market trades based on expected earnings.
As we enter fourth-quarter earnings season, the S&P 500's estimated earnings growth rate is negative 9.5%. Only three months ago, estimated fourth-quarter earnings growth was 11.5%. Things have turned sour very quickly.
As you might have guessed, the main culprit is the financials. Analysts have lowered their fourth-quarter estimates for financials by a whopping $33 billion in the last four months.
Historically, financial stocks lead the rest of the market. If earnings growth for the fourth quarter does turn out to be negative, it will be the first time we've seen consecutive quarters of negative earnings growth since 2001-02.
I'm sure you'll recall, 2002 was not a good year for stocks.
That's the bad news. Now the good news: Executive insiders, investing legends, and even companies themselves have been buying up a storm in the last six months.
Since August, insider sentiment has been decidedly bullish. In fact, in August and again in November we saw insider buying at levels that historically predict market rallies.
And according to GuruFocus, a service that tracks investing legends, Warren Buffett made 16 purchases in 2007: a whopping number for a famously picky investor. Five of Buffett's purchases were new positions.
Buffett's purchases don't necessarily signal a market rally. But they do reveal that, like corporate insiders, he's finding value in the market.
Finally, 2007 was a record year for stock repurchase programs. In the last 12 months, publicly traded U.S. companies announced an incredible $595 billion in stock repurchase programs, up 59% from last year's already impressive $372 billion. Five sectors – retail, industrials, energy, media, and consumer products – saw a 100% increase in announced repurchases year over year.
Now, we can't take that $595 billion entirely at face value. Only about 25% of announced stock repurchase programs are completed. But even then, we're still looking $148 billion. Like individual executives and investing legends, corporate management sees value at current prices.
So there's our dilemma. Corporate profits are slowing, but a lot of guys who are much smarter and better informed than us are loading up on stocks right now.
If you're a long-term investor (meaning, like Buffett, you wouldn’t care if the market closed down for five years), now may be a great time to buy.
But if you focus more on the medium or short term, I'd wait and watch for earnings results over the next couple of weeks. If earnings growth continues its negative trend, 2008 will be a rough year for stocks... no matter what the insiders think.
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