GalaTime

The latest weekly from John Mauldin - Is That Recovery We See? - has a bunch of interesting charts; especially ones on analyst estimates for S&P earnings in 2008 & 2009.

… let’s look at just how bad analysts blew it estimating 2008 earnings. In the table below, as recently as October of October 15, they were estimating AS REPORTED earnings to be $54. down  from $92 when I first saw the 2008 estimates. There were only two months to go in 2008. So, what are the actual 2008 earnings? Down to $14.88!

From $92 to $15. How much worse can it get as an analyst? What’s the point of the estimates?

The P/E ratio for the end of the second quarter is 1944 (not a typo). The losses of the 4th quarter almost wipe out all earnings for the 12 months ending June 30. But by the end of the 3rd quarter, the P/E ratio has dropped to a negative -467. That has never happened. We have never seen negative earnings over a 12 month period since WW2.

P/E ratios? Fuggedaboutit. Even at the index level, the ratio has stopped making sense given the implosion in bank earnings, and double-digit declines in all sectors.

There are a lot of pixels being wasted on arguing whether this is a bear market rally or the next big bull. What really matters is where things are going to settle down once we are past the negative P/E.

… If the high correlation between stock prices and data surprises holds, the recent rally in stocks might be tested. Even if the economy has bottomed, it’s very likely that the eventual recovery will prove to be uneven, causing the flow of positive surprises to be uneven. During these periods, the risks to stocks will be greatest when the market is overbought and investors have priced in high expectations of positive data surprises continuing.”

It’s one thing to aruge that we are past the worst. It’s another thing to argue that going forward, things will be back to ‘normal’. The new normal is likely to be much worse that expected.

As for India, analysts are now acknowledging the reality of a 10-15% drop in earnings - and hence Nifty EPS. But a few positive surprises in the April reporting season, and we’ll back to calls for Nifty at 5000, Sensex at 15000, and what not.

Bottom-line: Buyer beware.

• Morgan Stanley: India - Flirting with QE

Since September 2008, India’s foreign exchange reserves have declined by US$34 billion. This, we believe, has resulted in a sharp deceleration in M1 growth to 12.7%Y as of March 13, 2009 from 19.4%Y in August 2008. Additionally, the choice of purchasing longer-term government securities and MSS bonds as a vehicle to inject liquidity should have the added advantage of capping and possibly reversing the sell-off in bonds since the start of the year, which persisted even after a 50bp cut in policy rates on March 4.

Both the net injection of liquidity to shore up M1 and the possible lowering of bond yields lead us to classify the RBI package as ‘active quantitative easing’ – outright purchases of assets with a view to increasing money supply and possibly easing financial conditions at the same time. This policy measure is in the same vein as the measures introduced by the Fed, BoE and the BoJ, but on a much smaller scale.

We believe that these liquidity injection measures initiated by the RBI, a likely further deceleration in banks loan growth and improvement in the government’s consolidated fiscal deficit (including off-budget subsidies), should result in the 10-year bonds declining to 6-6.25% over the next two months and further to 5.5% by end-2009.

• DNA: Pvt equity, venture cap deals fell sharply in Jan-Mar

PE firms invested $526 million across 36 deals in the quarter ended March 2009. According to Venture Intelligence study, the sum was much lower than in the same period last year.

While January-March 2008 saw 133 deals totalling $3.9 billion, the numbers for the same period of 2009 were lower than even those in the December 2008 quarter, which saw investments of $1.2 billion across 63 deals.

VC firms invested $44 million over just 9 deals during the period. This was lower than the $91 million invested across 18 deals in the December quarter and the $226 million across 33 deals in the year-ago period.

• Mint: Prepare for lower Q4 numbers: brokerages
  

Centrum Broking forecasts a 13% decline in the earnings of the companies it tracks.

Motilal Oswal Financial Services Ltd sounds more bearish, even though in its earning preview report, it wrote “…we could be at the end of the earnings downgrade cycle”. It forecasts a 19.3% decline in the earnings of the companies it tracks, excluding oil firms.

Typically brokerages track between 100 and 150 top listed firms among the pack of BSE-500, which make up for at least 90% of India’s market capitalization.

Religare Hichens Harrison predicts a 9% decline in net profit for the 30 companies that make up the Sensex.

• CFA Pubs: Models, Emanuel Derman

In contrast to both fundamental and phenomenological models, the gap between a successful financial model and the correct value is nearly indefinable because fair value is finance’s fata morgana, undefined by prices, which themselves are not stationary. So, model success is temporary at best. If fair value were precisely calculable, markets would not exist.

… we can summarize the essence of quantitative finance on one leg: If you want to know the value of a security, use the known price of another security that is as similar as possible to the first security. All the rest is modeling. Go and build.

The right way to engage with a model is to be like a reader of fiction—to suspend disbelief and then push ahead with the model as far as possible. The story of the theory of options valuation, the best model economics currently offers, is the story of a platonically simple theory taken more seriously than it deserves and then used extravagantly, with hubris, as a crutch to human thinking.

• DNA: Reliance’s gas worth Rs 8.4 lakh cr

According to a government source, total gas reserves in the D6 block are in the range of 40 trillion cubic feet, worth $168 billion (Rs 8.4 lakh crore) as per valuation approved by the government.

That’s17% of India’s GDP and 3.2 times the total value of all RIL shares — Rs 2.6 lakh crore. RIL’s partner, Canadian firm Niko Resources, had suggested in 2007 that the reserves were much higher than the 11 trillion cubic feet claimed by the Indian firm. However, neither RIL nor the government had confirmed or denied the suggestion made in Niko’s annual report for the year 2006.

• Calculated Risk: Credit Crisis Indicators

There has been improvement in the A2P2 spread. This has declined to 0.93. This is far below the record (for this cycle) of 5.86 after Thanksgiving, but still above the normal spread.

This is the spread between high and low quality 30 day nonfinancial commercial paper.

Some interesting data from the recent Report of the High Level Committee on Estimation of Savings and Investment, published by the Reserve Bank of India (RBI).

Look at the ‘Components of Household Financial Savings’ table below; since 2003, there has been a massive move out of bank deposits and into insurance, provident, pension funds as well as government schemes (Thanks to reader Vivek G for pointing out that the bank deposits share for 03-07 should be 44% not 4.4 - it’s a typo). But the share of equities remains < 4%! Of course, we need to check how (recently popular) instruments such as ULIPs are accounted for.

Compare India’s credit-to-GDP ratio with that in the US or Japan:

Guess which city gets the highest share of remittances for family maintenance? Ahmedabad!

Net remittances from NRIs abroad are usually ~3% of GDP.

There is lots more in the report; go have a look.

• Bloomberg: Ghost Towns Dot Finland as Forestry Collapse Threatens Growth

Increased use of the Internet is cutting demand for pulp and paper, which account for about two-thirds of industry revenue, according to the Finnish Forest Research Institute. This has helped drive down the price of newsprint in Europe by 19 percent to 495 euros ($639) per ton in the seven years since December 2001. In addition, companies including Metso Oyj, the world’s biggest manufacturer of papermaking machines and rock crushers, are moving production to countries where labor and other costs are lower.

As paper mills close, a growing number of young people are moving to cities from northern rural areas to find work. Kemijaervi has shrunk a third to 8,600 residents since 1981, while Helsinki has grown 17 percent to 563,000 inhabitants. The shift has left roads, bridges and other infrastructure unused in smaller towns, while new highways and homes now need to be built in the cities.

• EconompicData: Ready to Ride the Golden Bubble

• Traders Narrative: Revisiting The Long Term Bullish Case For Stocks

• Bloomberg: Asian Profit Estimates Have Most Room to Decline, JPMorgan Says

Profit forecasts in the region will need to decline by 24 percent before reaching the so-called bottom trend line in previous cycles, JPMorgan’s quantitative analysts led by Robert Smith wrote in a report. Europe and global emerging markets are the only other regions where downgrades haven’t reached the lower limit, the report said.

Tata Power Co. and Doosan Corp. are among companies in the region where earnings estimates are in the upper end of their historical range, according to the report.

“These are at or near their upper cycle long-term trend line and have a lot of potential downside,” the analysts wrote. “They are teetering at the edge of a potential ‘downgrade cliff’ and are vulnerable.”

Nifty EPS headed to 175? At a bottom-level P/E of 11, that gives us a worst-case scenario of sub-2000! Ouch.

• Mint: I-T searches at Anand Jain’s home, offices

The investigation wing of the income tax (I-T) department in Mumbai on Thursday searched the offices and residence of Anand Jain, chairman of Jai Corp. Ltd, and a close confidant of Reliance Industries Ltd’s chairman and managing director Mukesh Ambani.

A person familiar with the development, who asked not to be identified, said Jain is being investigated by the I-T department for alleged kickbacks and other irregularities in real estate transactions through his two venture capital funds. However, this could not be confirmed as neither the I-T department nor Jai Corp. officials were willing to comment on the issue.

• Mint: DB Group shelves largest shopping mall project

In an attempt to beat the current market slump, realty firmDynamix Balwas Group, or DB Group, has shelved its ambitious retail venture to build the country’s largest shopping mall in suburban Mumbai after spending more than a year planning and designing it. The developer now plans to construct low-income, budget homes on the land purchased for the Rs700 crore Ozone Orchid project in Dahisar.

The withdrawals from the retail sector were triggered off last year when DLF Ltd, the country’s largest developer by market value, shelved its high-profile 4.5 million sq. ft Mall of India project in Gurgaon, on the outskirts of Delhi, due to cash-crunch and falling rentals. Mall of India was proposed to be the biggest mall in the country, larger than DB Group’s Ozone Orchid.

Large, larger, largest. I don’t mean the mall, I mean the hole in their balance sheet.

• Bespoke: Financials Wipeout

• LA Times: Beijing’s Olympic building boom becomes a bust

By Rodman’s calculations, 500 million square feet of commercial real estate has been developed in Beijing since 2006, more than all the office space in Manhattan. And that doesn’t include huge projects developed by the government. He says 100 million square feet of office space is vacant — a 14-year supply if it filled up at the same rate as in the best years, 2004 through ‘06, when about 7 million square feet a year was leased.

The National Stadium, known as the Bird’s Nest, has only one event scheduled for this year: a performance of the opera “Turandot” on Aug. 8, the one-year anniversary of the Olympic opening ceremony. China’s leading soccer club backed out of a deal to play there, saying it would be an embarrassment to use a 91,000-seat stadium for games that ordinarily attract only 10,000 spectators. The venue, which costs $9 million a year to maintain, is expected to be turned into a shopping mall in several years, its owners announced last month.

• Wired: Recipe for Disaster: The Formula That Killed Wall Street

For five years, Li’s formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.