Direxion Daily Energy Bear 2X Shares (ERY)

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IMO, This is the big question about this ETF....


Will Third Quarter Earnings Disappoint?

by: Carlos X. Alexandre September 15, 2011

It’s common knowledge that recent corporate earnings have benefited from cost cutting, although the time always comes when companies start to face the law of diminishing returns. The last time I checked, the complaint was that most analysts had not adjusted the upcoming earnings, especially considering the less than perfect economic data that we have been digesting, and the risk is alive and well that disappointments will surpass expectations.

But a reference to an article by MarkeWatch shows that analysts are busy adjusting their numbers.

Calendar year earnings estimates for the S&P 500 SPX have fallen below $100 for the first time since July 21, according to S&P Capital IQ. Estimates for every sector have been cut for both the third quarter and fourth quarter, researchers said. In addition, analysts have cut third-quarter earnings growth estimates to 14.7% from 16.94% on July 11.

The good news is that earnings expectations have been lowered and that will soften a potential blow. The question is whether they are low enough.

Dr. Ed Yardeni, the president and chief investment strategist of Yardeni Research, Inc., shared a piece of data in his blog - the tax revenues data series published in the Monthly Treasury Statements of Receipts and Outlays - and added that this information is not observed by the main stream financial community.

Although his observations point to a surprising increase in individual tax revenue while wages remain stagnant, the corporate side of the tax story is what stands out, as his graph below illustrates.

On the other hand, the growth in corporate profits tax receipts is slowing significantly. Over the past 12 months through August, these receipts totaled $191.2 billion, and are up 11.7% y/y. That’s down sharply from the most recent cyclical peak growth rate of 60.9% during January. The growth rate of the 3-month sum of these receipts was down 7.0% on a y/y basis.



Certainly the debate always centers on whether the market is priced correctly, and whether stocks already discount the future. And the answer will always sound appealing to whomever is making the case, but in one month’s time we’ll determine whether Dr. Yardeni’s observations are valid or if “the price is right.”