November 4, 2015

Wednesday’s markets closed with the S&P 500 and Toronto each down%.

And oil gave back much yesterday’s gains but remains above $46.

Couche-Tard was up another 2.7%.

Bombardier was up 6.5% after one of its C-Series customers, the Latvian flag carrier, Baltic Air, which has ordered 13 planes, got an $87 million bailout which it needed due to its negative equity of 75 million euros. It’s pretty sad when this is the sort of thing that makes Bombardier’s stock rise. Bombardier has negative equity of $4.0 billion and only got a bailout/investment of $1.0 billion. Perhaps now they should call for a level paying field with Latvia.

There has been talk that this is one of the worst earnings seasons in some years in the United States. Just how bad is it? GAAP earnings share on the S&P 500 are expected to be down 4% year-over-year and operating earnings per share are expected to be down about 7%. And, about 75% of the companies in the S&P 500 have already reported. Actually this is not a very large drop in earnings and is explained by lower oil prices. We should not expect reported earnings to rise like clockwork every quarter. And Q4 earnings are projected to show a 10% increase. So I am not exactly losing sleep over this one quarter of earnings slippage.

I have a statistics Canda report that shows the average profit and equity of the various industries in Canada. In six quarters of data through Q2 2015, the only negative profits on this report are for the oil and gas industry which on average lost money in each of the last thee quarters. All of the other industries made money. And, based on the Q4 numbers the ROEs were mostly at 9% annualized  or higher with some higher than 15%.

I take comfort in this because if companies are making good returns on book equity and I own companies (shares) and if my shares are not trading too far above book value (and they are not) then it seems logical (even inevitable, unless the corporate earnings decline or P/E ratios decline dramatically) that I will make good returns. Stock market returns will always be far more volatile than the underlying corporate earnings, but over time corporate earnings drive stock market returns.