Sather Financial
 
 

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Sather Financial Group

120 E Constitution St
Victoria, TX 77901

(361) 570-1800



 

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1st Quarter 2015 Commentary

Declining Earnings In An Expensive World

Despite a bit of volatility, the first quarter finished very close to where it started the year. The Dow posted a slight loss while the S&P 500 recorded a small gain.

DOW20151Q

More importantly, the forward looking Price to Earnings ratio for the S&P 500 index is approximately 17.1 according to FactSet.  As the graphic below illustrates, the stock market has not been valued this highly in ten years.

SPPE20151Q

What is interesting about this is that the Price to Earnings ratio is increasing not because the “Price” part of the index is going up, but rather because earnings are declining.

According to S&P Capital IQ, first quarter earnings have declined 3% on a year-over-year comparison. If true, the S&P 500 may post their first year-over-year decline since the third quarter of 2012 and the worst quarterly decline since 2009.

Much of the drop can be attributed to the precipitous fall in oil prices (down 63%) and the effect of the strong dollar on multi-national companies.

OIL20151Q

The U.S. Dollar is up 9% for the year, which continues to have a negative effect upon companies who sell product outside the U.S.

Across the board, sales, profit margins and earnings trends are all negative.

TENT20151Q

The Federal Reserve has started to give indications they will increase interest rates sometime in 2015. From what we see, the economy is too weak to raise rates in a meaningful manner. As such, it would not surprise us to see a ¼ point increase in the second half of the year—but that’s about it.

Despite the telegraphing of this move by the Fed, the fixed income markets have reacted by shoving rates back down. If you lend money to the US Treasury for the next 10 years they will pay you a whopping 1.93%--before taxes!

Although the “official” unemployment rate stands a bit above 5%, gamesmanship with that calculation masks a more difficult situation.

Once you add in those who are under-employed, have quit looking for a job or those whose unemployment benefits have run out, the true rate of unemployment/under-employment is about 23%.

EXPLISTAT120151Q

If the unemployed/under-employed statistic does not get the point across, then the Labor-Force Participation Rate should. It shows that the number of people actually working stands at its lowest levels in 36 years.

EXPLISTAT220151Q

Furthermore, we state the fairly obvious: those with an education have the most employable skillset.

EXPLISTAT320151Q

Despite a rather gloomy outlook of sluggish economic growth, poor labor participation and expensive stock market valuations, we remain cautious, but positive.

Several holdings have been liquidated recently either because they were taken over at significant premiums, or we were able to sell assets trading well above historical norms.

This has boosted cash levels. And although cash may not pay much in terms of interest, it does give us tremendous flexibility.

Amazingly, despite the earnings declines, we have been surprised to find very high quality companies that have been “thrown out with the bath water.” As such, we are happy to redeploy cash into assets that should produce solid returns over the next ten-plus years.

Lastly, we hope you will put Thursday April 23rd on your calendar as we will celebrate our 16th anniversary.

Since we have no reason for existing if not for truly incredible clients, we hope you’ll join us for a bite to eat and something cold to drink.

 As is tradition, the festivities will be at Fossati’s (302 S. Main in Victoria) from 5pm to 8pm. We hope to see you there!

Despite a rather gloomy outlook of sluggish economic growth, poor labor participation and expensive stock market valuations, we remain cautious, but positive.

Several holdings have been liquidated recently either because they were taken over at significant premiums, or we were able to sell assets trading well above historical norms.

This has boosted cash levels. And although cash may not pay much in terms of interest, it does give us tremendous flexibility.

Amazingly, despite the earnings declines, we have been surprised to find very high quality companies that have been “thrown out with the bath water.” As such, we are happy to redeploy cash into assets that should produce solid returns over the next ten-plus years.

Lastly, we hope you will put Thursday April 23rd on your calendar as we will celebrate our 16th anniversary.

Since we have no reason for existing if not for truly incredible clients, we hope you’ll join us for a bite to eat and something cold to drink.

As is tradition, the festivities will be at Fossati’s (302 S. Main in Victoria) from 5pm to 8pm. We hope to see you there!

Sincerely,

Dave

Dave Sather, President

CERTIFIED FINANCIAL PLANNER™

 

Warren

Warren Udd

CERTIFIED FINANCIAL PLANNER™