S&P500 Earnings for 2008 vs. Bob Brinker's Prediction

In January 2008, Bob Brinker thought S&P500 earnings would be nearly $100 for 2008. In his January 2008 newsletter, Brinker wrote:

Marketimer currently estimates S&P 500 Index operating earnings for 2008 of $97.10... Using our forward price/earnings multiple estimate of 16.5 to 17 times earnings, the S&P 500 Index should be able to achieve a price level into the 1600's range this year.

In our view, stock market valuation remains reasonable, with the current P/E ratio on the S&P 500 Index at 15.1 based on our 2008 operating earnings estimate.

This chart below shows ACTUAL trailing 12-month earnings are less than half what Brinker projected for operating earnings.


Operating earnings are not real. Operating earnings are what companies say they would have earned from “normal operations.” I think it is smoke and mirrors!

Real or "GAAP earnings" include options expensing, law suit settlements and other write offs such as the special charges companies take for restructuring or sub prime defaults at the major banks. GAAP stands for “Generally Accepted Accounting Principles.” I like to follow BOTH because some companies make a habit of writing off mistakes and lawsuit settlements as a regular part of their business to make their operating earnings look better.

In my November 2008 newsletter I wrote:

2008 Operating EPS (bottom up) = $75.94

2008 As reported (GAAP) EPS (top Down) = $54.51

2009 Operating EPS (Top Down) = $62.40

2009 GAAP EPS(top down) = $48.52

Operating earnings suggest the market is under valued while GAAP earnings suggest the market is fairly valued to slightly over valued if earnings contraction from a deep recession continues into 2010.

It should be little wonder why the stock market was down almost 50% from its 2007 peak given we are in a recession that is going to be much worse than most expected at the start of the year, especially Bob Brinker!

The stock market can recover when earnings recover. Some of the the bad news bears say earnings won't ever recover but that is not my belief.

Using Bob Brinker's 16.5 to 17 times OPERATING earnings and S&P's estimates for 2009 of $62.40, I calculate $1029 to $1060 for the S&P500 "fair value." This "low number" may explain why Brinker is not now pounding the table bullish in the 900s despite being very bullish on the radio at S&P1400 earlier this year when he bashed the Cassandras (See Cassandra Rant) on May 31, 2008.

Not everyone thought we would avoid a recession this year. See my March 2008 article " ECRI Calls it "A Recession of Choice." Given I believe Brinker reads my blog and the comments regularly, it was fun to hear him refer to us as "Cassandras" just days after I published that article that said a recession was unavoidable.

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Bob Brinker's 2008 Operating Earnings Estimates

One of five the components of Bob Brinker's stock market timing model is Valuation. He used to to say the S&P500 can trade at 16 to 17 times forward operating earnings in a "low inflation" environment such as we have had in the past few years compared to the high inflation environment of the 1970s and 1980s.

It has been reported (Summary Bob Brinker Moneytalk) that Brinker said on Saturday April 5, 2008:

"Well as I’ve – you mentioned the investment letter that you subscribe to, and then you well know, I’ve written about this in the letter. And this is the reason that I’ve had (EC: Had is past tense. Remember this!) very, very conservative 2008 earnings estimates for the S&P 500 -- very, very conservative. My number for the S&P 500 for 2008 is way below, way below the Wall Street number for 2008. And the reason is because of the reason you said – because we have a sluggish economy.
We expect the first half to be especially sluggish. And even though I expect some recovery will start in the second half, when you take a look at the year on a whole, hey, we’re looking at a sluggish year. Very low growth in real GDP for the full year is my projection. And consistent with that, and consistent with the inevitable margin compression you get in an economy like this, we have anticipated this in the investment letter by coming forth with a very, very conservative estimate for S&P 500 earnings for calendar year 2008. "

I think if any current subscribers were watching Mr. Brinker live, they might have observed his nose grow a bit longer with that misstatement of the facts.

Every week or two Runner26 reports in our "Bob Brinker FREE Discussion Forum" what Standard and Poors estimates the earings will be for the companies in their index. As of March 31, S&P estimated 2008 operating earings for 2008 would be $96.74, which is LOWER than Bob Brinker's published estimate made in 2007 but higher than Brinker's current estimate!

This is what Bob Brinker said in October Marketimer dated 10/3/07 with the S&P500 at 1526.75:

We expect significant additional stock market progress into next year as investors discount growing corporate earnings in an environment of low inflation and benign interest rates.
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Our Current Marketimer S&P500 Index Operating earnings estimate for 2007 is $93.70. Using our forward price/earnings multiple estimate of 16 to 17 times earnings, the S&P 500 Index should be able to trade into the mid-to upper 1500's range. Investors will begin to look forward to 2008 operating earnings, and based on our estimate of $99.50, we see the potential for theS&P 500 Index to rise at least into the mid-1600's range next year
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We expect slow economic growth this year, with real GDP growth in a range of 1.5% to 2.5%.
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In the August and September editions of Marketimer, we rated the stock market attractive for purchase on any weakness in the area of the S&P 500 Index mid-1400'srange. .... Although we do not believe further weakness into the mid-1400's range must occur, we remain comfortable with rating the market attractive for purchase should any such additional weakness occur. Above that price range, we prefer a dollar-cost-average approach fornew stock market investing. All Marketimer model portfolios remain fully invested.
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In our view, stock market valuation remains reasonable, with the current P/E ratio on the S&P 500 Index at 15.3 based on our 2008 operating earnings estimate. We expect investors to mark up stock prices into next year as corporate earnings continue to grow against a fundamental backdrop of monetary accommodation, slow to moderate economic growth, low inflation andlow interest rates.

Clearly the market did not make the 1600s. This is what Bob Brinker says now in his April 3, 2008 Marketimer newsletter with the S&P500 at 1322.70:

The current S&P 500 Index price of 1322.70 represents a P/E ratio of 15.2 times our 2008 operating earnings estimate of $87. (EC: He should say "New and greatly reduced earnings estimate") We expect investors to value these operating earnings at a multiple of 16.5 to 17 times as we move further into 2008, bringing the index into the mid-1400's range during the second half.

So, maybe his earings estimates are "very, very conservative" TODAY but that was not the case when the market was at a record high and he was looking for investors to "market up stock prices" into the 1600s into 2008.

In fact, Brinker is far less bullish for the S&P500 TODAY than he was back in late 2007 when the market was over 200 points higher and he was predicting it would be in the mid 1600s.

BTW, if you use 16 times his $87 estimate for 2008, then you get 1,392 which is only a gain of $69 or 5.2% above 1322.70. Perhaps that is why he increased the lower multiple from 16.0 to 16.5.

I don't think Mr. Geppetto would be very pleased with Bob Brinker's answer to the caller Saturday.

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