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Lies, damn lies, and statistics

Chemical companies, Consumer demand, Economic growth, Financial Events, Leverage
By Paul Hodges on 27-Jul-2009

Source: Chartoftheday.com

S&P earningsJul09.gif

There are “lies, damn lies, and statistics” according to Mark Twain, the famous American humorist. His argument was that statistics are often (a) untrue* and (b) used without the necessary context.

Last week provided a perfect example of the latter. As the blog’s own Boom/Gloom Index© shows, sentiment is currently very positive in global financial markets. And so US markets rallied 4%, on the basis that reported company earnings were “above estimates”.

Yet in context, this “outperformance” disappears. The above chart from ChartOfTheDay.com (COTD) shows 12-month, ‘as reported’ S&P 500 earnings, adjusted for inflation. And COTD highlight that these are now down over 98% since peaking in Q3 2007. Equally, they say this is “by far the largest decline on record (the data goes back to 1936)”.

Also ignored last week was S&P’s own report on Friday that forecasted total S&P 500 earnings for the 12 months to September “to be negative ($-1.01 EPS), for the first time in index history”. Howard Silverblatt, S&P’s senior equity analyst noted that any recovery in earnings will depend on a recovery in sales, as “you can only cut so much, and for so long”.

*The blog carefully checks all those it uses with reputable sources