How to handle markets in complicated environments

How to handle markets in complicated environments

Renowned investor Ed Yardeni, president of Yardeni Research, has analyzed the US earnings estimates and made four stock market forecasts. Of the 4, one predicts significant losses, another a flat performance and two of them double-digit increases. Ed Yardeni’s 2018 earnings per share estimate is $155.00 (an increase of 17.4% year-over-year). Analysts continue to raise their estimates and are now forecasting $160.40 (up 21.5%). “My estimate for 2019 is $166.00 (up 7.1%). Analysts’ was $175.72 (up 9.6%). Maybe the analysts are being too optimistic,” says Yardeni.


Según Ed Yardeni:

Puede que tengan razón sobre 2018, especialmente porque simplemente han mejorado sus puntos de vista basados en los resultados reportados hasta ahora durante la temporada de resultados. Al mismo tiempo, en el comercio en línea, han sido conservadores en los demás trimestres de este año. Su estimación de crecimiento para el próximo año me parece demasiado alta, ya que espero que el crecimiento de los beneficios de 2019 vuelva a la tendencia histórica del 7%.

They may be right about 2018, especially since they have simply improved their views based on the results reported so far during the results season. At the same time in trading online, they have been conservative in the remaining quarters of this year. Your growth estimate for next year seems to me to be too high, as I expect the 2019 earnings growth to return to the historical trend of 7%.

Is it a good time for trading?

There is a big difference between Yardeni’s estimates and the market consensus. However, both suggest that the stock market is likely to be at record highs by the end of this year. As the year progresses, the benefit estimate for this year will be less relevant, while the estimate for 2019 will be more so. By the end of the year, the market will discount the analysts’ consensus earnings estimate for 2019, not my estimate.

However, analysts tend to be over-optimistic and often reduce their estimates as the results seasons approach. So let’s divide the difference between my estimate and your current estimate for 2019. That would put the consensus gains for 2019 at approximately $170 per share by the end of this year.

The main stock markets, after advancing ~10% from March lows, are approaching annual highs, despite various risks whose materialization could cause cuts:

1) Argentina: forced to resort to the IMF. Impact on other Emerging Issues?

2) Italy: new Euro-sceptic coalition government (5 Stars Movement + Northern League). Risk of new elections.

3) US-China commercial tensions. Although tariffs have been temporarily suspended, negotiations are continuing to reduce the US deficit with China.

4) Geopolitical risks in the Middle East with upward pressure on oil prices.

5) Monetary standardisation. Risk of acceleration in the face of higher than expected inflation (mainly in the US).

The risks of Argentina

It is advisable to have a liquidity reserve to take advantage of an increase in volatility derived from any of these risks, and to buy in falls, as long as the global cycle remains solid. One year ago issue of 100-year bond at 7.125%, underwritten by 8x (excess of complacency?). Faced with the failure of its intervention in the foreign exchange market to defend the peso (-30% vs. USD in 2018), the Argentine Central Bank aggressively raises rates to 40%.

Need of USD 40,000 million per year (current account deficit). Negotiations with IMF for emergency loan (USD 30,000 million). Positive in the medium term if it stabilises the situation (currency, rates) and allows it to be re-financed in the market, but with foreseeable short-term costs (fiscal adjustment to correct public deficit 6.5% of GDP 2017). IMF assistance programmes have a duration of approximately 12-24 months.

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