January 26, 2018


On Friday, the S&P 500 surged another 1.2% while Toronto was up 0.2%.

Most stocks rose including Walmart, up 1.6%, Berkshire up 1.0%, Dollarama up 2.0%, Amazon up 1.75%.

Bombardier (no longer on our list)  had a great day, up 15.3% after a U.S. agency unexpectedly reversed course and ruled that countervailing or anti-dumping duties of close to 300% would not be applied after all. I wonder now though if Bombardier will regret having given away half of the C-Series program to AirBus for nothing. If it does regret that move, perhaps it can get out of the deal. One approach might be for Bombardier to issue a large amount of shares to try and get its book value UP closer to zero or maybe even above. If it could raise enough money, maybe it could afford to pay some kind of break-fee to AirBus and cancel that deal.

In my own trading, I bought some BHP Billiton today and added significantly also to my Stantec position. I bought Stantec in New York to use up some U.S. cash as I felt my U.S. cash position was too high and I missed my chance to transfer it to the Canadian side at 78 or 79 cents and now refuse to do so.

S&P 500 level and earnings:

The S&P 500 is now up 7.4% in this new year to date. That would be a decent gain for a year.

While the latest surge in the S&P 500 was happening, there were some changes in earnings estimates on the S&P 500.

The forecast for 2017 GAAP earnings on the S&P 500 fell from $114 about ten days ago to $108.47 as of today. 32% of the S&P 500 companies have now reported earnings. The estimate for the final Q4 earnings number came down as some companies reported (or are expected to report) unusual losses related to the income tax reduction because they had loss carry-forwards which are not as valuable in a lower tax environment. Some companies also reported extra taxes on repatriating foreign cash. This would be offset somewhat by some companies like Berkshire Hathaway and most industrial style companies that will report large unusual gains in relation to deferred tax liabilities. In any case, if the $108.47 2017 GAAP earnings estimate is correct then the S&P 500 is trading at a hefty 26.5 times trailing GAAP earnings. That P/E is higher than historical but it might be reasonable or even low if long-term interest rates are going to stay extremely low or even go lower as some people still think could happen. And the forecast for 2017 operating earnings is $124.22 for a P/E of 23.1 on that basis.

But stocks tend to trade more on forward earnings. The estimate for 2018 GAAP earnings is $141.35. On that basis the S&P 500 is trading at a far more reasonable 20.3 times 2018 estimated GAAP earnings. And the estimate for 2018 operating earnings is $152.11. On that basis the S&P 500 is trading at 18.9 times 2018 estimated operating earnings.

Analysts tend to focus on operating earnings not only for individual companies but for the index as well. I agree with excluding unusual gains and losses for individual companies to arrive at sort of normalized earnings. For indexes I have thought that practice wrong, since on an index of 500 companies there is nothing unusual about some amount of unusual losses each year. There are gains too, but it ALWAYS nets to unusual losses to be added back. There are 20 years of quarterly data for operating and GAAP earnings on the S&P 500 database that I am looking at. There is not a single quarter where the unusual gains and losses netted to even a tiny gain. It’s ALWAYS a loss to be added back. How then are such losses on the index unusual?

The S&P 500 may very well continue to surge. But I will put on the record right now that I believe the estimates for both the S&P 500 GAAP and operating earnings for 2018 are absurdly high. Despite a strong economy and the tax cuts I am extremely doubtful that the final 2018 numbers will come in that high. The forecast calls for a 22% increase in operating earnings. And, it calls for a 30% increase in the GAAP earnings.

Well, it will be interesting first of all to see if those 2017 estimates continue to get trimmed as the remaining 68% of the S&P 500 Q4 earnings roll in. If the operating forecast of $124.22 gets trimmed that could possibly finally take the wind out of the sails of this big S&P 500 surge.