Practicing What I Preach

(Author and Granddaughter)

I had the great pleasure to have spent the week with my 18 month old granddaughter this past week (hence limited blog writing capability) but a ton of fun trying to keep up with that bundle of energy.

And how (you might ask) did the financial education (see last Monday's blog) part of that experience work out?

I failed miserably. 

We visited (at an appropriate distance) with all the various wildlife in their natural habitat (bears, snakes, eagles, osprey, loons, fishes), played ball, participated in water activities, watched "Bubble Guppies"and brushed teeth routinely,  but perhaps it was a bit "too early" to discuss compounding and the rule of 72 every night before bed.

Nothing like a little dose of reality to bring me back into line, but I won't give up so easily, it is as important as good dental hygiene.

• So what happened in the financial world this week (oh yes I am paying attention)?

and more importantly why?

• Commodity prices continued to tumble in a sign that the global economy is struggling.
• New home sales in the US surprised to the downside and prices are down 1.8% over last year.
• Q2 corporate earnings announcements continued and to date 187 S&P 500 companies have reported.
• While earnings are generally better than expected (76% have reported better than the mean expectation), revenues continue to struggle (only 54% are beating expectations).
• In fact, according to FactSet EarningsInsight:

"For Q2 2015, companies are reporting year-over-year declines in earnings (-2.2%) and revenues (-4.0%). Analysts do not currently project earnings growth to return until Q4 2015 and revenue growth to return until Q1 2016. In terms of earnings, analysts are currently predicting a decline of 2.4% in Q3 2015, followed by growth of 3.4% in Q4 2015. In terms of revenue, analysts are currently projecting a decline of 2.8% in Q3 2015 and a decline of 0.6% in Q4 2015, followed by growth of 5.7% in Q1 2016. For all of 2015, analysts are projecting earnings to grow by 1.5%, but revenues to decline by 1.9%. " 

• If companies can't grow revenues, it is indicative of a consumer who is consuming less (one of our themes for 2015 and quite possibly beyond) and once again begs the question: how can share prices continue to grow if companies can't grow revenue?
• Earnings per share data show that at current prices, the S&P 500 companies are trading at 12 month forward Price to Earnings levels of 16.7 which is well above the 5 year average of 13.9 and the 10 year average of 14.1.

Furthermore, the S&P 500 is struggling:

• Year to date it is plus about 1%.
• It has not been able to get back to the highs reached in May (2135) although there have been a couple of attempts.
• Buying is not materializing (at this point) in any significant way to push new highs and while the "bulls" continue to be positive, the fundamentals do not support it.
• Share buybacks and low interest rates have made a major contribution to much of the growth of the S&P 500 over the last while, but when interest rates start to rise and the Fed's monetary policy becomes less accommodative, these catalysts will lessen and the focus will return to the fundamentals.

So we remain cautious and underweight equities waiting for better value (better reason to buy).

www.highrockcapital.ca