Analysis: Wider earnings estimates signal trouble for stocks
Investors spent most of the third quarter selling shares and waiting for good news in the form of earnings that have been steady even as economic growth has been sluggish.A possible red flag for earnings is this: The trend of narrower estimate ranges since the start of 2008 has reversed, according to Thomson Reuters data. Wider estimate ranges means analysts are collectively less sure about what will happen in coming quarters, and that uncertainty suggests underperformance.”The worry is not really Q3, but 2012, where estimate ranges are starting to widen,” said Nick Raich, research director at Key Private Bank.A few surprises have already hit certain stocks hard. Shares of International Business Machines Corp are down more than 5 percent on Tuesday after surprisingly poor results for its third quarter.Mean estimate ranges for the coming 12 months are wider than any point since the start of the year. Industrial stocks have not seen wider ranges from the mean since July 2010. Tech stocks have not seen as much variance in estimates since early 2010.It could have a negative effect on stock prices. Research by Karl Diether and others at the University of Chicago and Harvard University in 2002 concluded that companies with wide estimate ranges tend to earn lower returns than otherwise similar stocks.”When you see a widening of estimate ranges, it theoretically means you will be in for a more volatile period,” said Hank Smith, chief investment officer at Haverford Trust in Radnor, Pennsylvania, with $6.5 billion under management.The primary reason for the widening estimates for the S&P 500 appears to be fears of a Greek debt contagion — an event that could have a broad impact on the global economy. It’s also one that analysts cannot model based on earnings and cash flows.Analysts expect S&P 500 companies to post $107 in earnings per share in the next 12 months. But the uncertainty in the euro zone puts the range of S&P 500 earnings between $65 and $110 per share next year, according to Key Private Bank’s Raich. That’s the widest his estimates have ranged since the financial crisis of 2008.Even consumer staples, known as a recession-resistant group, have seen wider estimate ranges. Cost pressures may be as much to blame as falling consumer sentiment, said Randy Bateman, in charge of $15 billion in assets at Huntington Private Financial Group in Columbus, Ohio.Fund managers are at an inflection point in trying to figure out the 2012 earnings picture, said Fred Labatt, who runs about $1.8 billion at San Antonio-based South Texas Money Management. He sees the potential for more companies lowering guidance on their third-quarter conference calls.”But I don’t really see much downside stock risk to lowered guidance — a lot of stocks already are discounting it,” he said.The big range is one reason some strategists are encouraging more options bets that can capitalize on increased volatility, rather than just better stock selection. Markets have endured a wild time since August, judging by the CBOE Volatility Index staying at elevated levels for more than two months.Raich said he’s been telling his derivatives team to use straddles and strangles, options trades meant to take advantage of volatility. “One way or another, the market wants to move big,” he said.
UN tells Mbeki he got it wrong on Ivory Coast
UN peacekeeper in Ivory Coast in April 2011.
Saudi Arabia weighs response to alleged Iran plot
Saudi Foreign Minister Prince Saud al-Faisal, on a visit to Austria, said the kingdom would have a “measured response” to the alleged plot. Iran called the accusations a fabrication designed to hurt its relations with its neighbors.”We hold them (Iran) accountable for any action they take against us,” Prince Saud said in Vienna, where he was discussing opening a religious dialogue center. “Any action they take against us will have a measured response from Saudi Arabia.”Prince Saud said this was not the first time Iran had been suspected of similar acts, and condemned Tehran for trying to meddle in the affairs of Arab states. Asked what actions Saudi Arabia might take, he said: “We have to wait and see.”U.S. authorities said on Tuesday they had uncovered a plot by two Iranian men linked to Tehran’s security agencies to hire a hitman to kill ambassador Adel al-Jubeir with a bomb planted in a restaurant. One man, Manssor Arbabsiar, was arrested last month while the other is believed to be in Iran.Some Iran experts were skeptical, saying they could not see the motive for such a plot. Iran has in the past assassinated its own dissidents abroad, but an attempt to kill an ambassador of another country would be a highly unusual departure.Iran has denied the charges and expressed outrage, saying the allegations threaten stability in the Gulf — where Saudi Arabia and Iran, the biggest regional powers, are fierce rivals and Washington has a huge military presence.President Barack Obama spoke on Wednesday to Saudi King Abdullah about the alleged plot, the White House said.”The president and the king agreed that this plot represents a flagrant violation of fundamental international norms, ethics, and law,” the White House said in a statement issued by press secretary Jay Carney.Earlier Carney told reporters: “We’re responding very concretely with actions we know will have an impact on Iran and will make clear this kind of behavior is unacceptable and will further isolate Iran.”In Britain, Foreign Secretary William Hague told parliament the alleged plot “would appear to constitute a major escalation in Iran’s sponsorship of terrorism outside its borders.”“We are in close touch with the United States’ authorities and will work to agree an international response along with the United States, the rest of the European Union and Saudi Arabia,” he said.Relations between Saudi Arabia and Iran soured after the 1979 revolution that brought Shiite Muslim clerics to power on the other side of the Gulf. Sunni Saudi Arabia and Shi’ite Iran consider themselves protectors of Islam’s two main rival sects.The rift sharpened this year after Saudi Arabia deployed troops to the Gulf island kingdom of Bahrain to crush a Shi’ite-led uprising there.FOMENTING VIOLENCESaudi Arabia has also accused Iran of fomenting violence in its own Eastern Province, where the kingdom’s Shi’ite minority is concentrated.In a particularly strong-worded statement, Saudi Arabia’s official SPA news agency quoted an un-named official source as condemning what it called “the outrageous and heinous” assassination plot and said the kingdom.”The kingdom, for its part, is considering decisive measures and steps it would take in this regard to stop these criminal actions and to decisively confront any attempt to undermine the stability of the kingdom, threaten its security and spread sedition among its people,” the statement said.On Wednesday, Saudi Prince Turki al-Faisal, a former chief of Saudi intelligence, said there was overwhelming evidence of Iranian official involvement in the plot.Iran’s parliament speaker, Ali Larijani, called the charges an American fabrication.”America wants to divert attention from problems it faces in the Middle East, but the Americans cannot stop the wave of Islamic awakening by using such excuses,” Larijani said in an open session of parliament.Prince Saud said all information Saudi Arabia has indicates that Tehran was responsible.”It is not the first time Iran has done something like this in order to mix itself up in Arab affairs,” Prince Saud said, adding that a similar attempt was made in Kuwait, where a group suspected of planning an attack was arrested.”Iran must understand there is only way for international cooperation between countries — and this is through the respect and adherence to international laws and people’s rights.”The alleged plot was revealed shortly before Saudi Arabia said King Abdullah, believed to be 88, would in coming days undergo surgery in Riyadh for a back problem.