Tags: Einhorn | bearish | stocks | earnings

Einhorn: 'There Is a Good Chance Earnings Will Actually Shrink This Year'

By    |   Thursday, 23 April 2015 06:00 AM

Hedge fund star David Einhorn, president of Greenlight Capital, presents a compelling negative case for stocks in his first-quarter letter to shareholders.

"Even if this quarter's S&P earnings will ultimately be somewhat better than negative 5 percent versus the first quarter of 2014, this level of earnings degradation poses a risk to a market trading at a premium multiple of earnings assisted by record high margins," he writes.

The 56 S&P 500 companies that reported first-quarter earnings through last week produced a blended drop in profits of 4.1 percent, according to FactSet.

And when it comes to valuations, the S&P 500 index carried a trailing price-earnings ratio of 20.87 Friday, up from 17.90 a year ago, according to Birinyi Associates.

"Some of these challenges are well-known, including lower energy prices and a stronger dollar," Einhorn explains. "Less discussed is the productivity bust and its impact on peak margins."

Bottom line: "All told, there is a good chance earnings will actually shrink this year. We think the market is too high if earnings have, in fact, peaked for the cycle, and we have reduced our net exposure by adding more shorts."

The Greenlight Capital funds returned a negative 1.7%, net of fees and expenses, in the first quarter of 2015.

Mark Mobius, executive chairman of Templeton Emerging Markets Group, is wary of U.S. stocks too, recommending that investors shift to those emerging markets.
Falling profits are the problem in the United States, he tells CNBC, echoing Einhorn.

"Earnings will not be as good as people expect simply because they have a lot of headwinds," Mobius notes. One headwind is the tepid pace of U.S. economic recovery, he said.

GDP grew just 2.2 percent in the fourth quarter. And the Atlanta Federal Reserve's forecasting model puts first-quarter economic growth at only 0.1 percent.

In addition, "government pressure on businesses has been very, very great under this administration," Mobius states.

"They hate the banks to begin with, so banks are not able to give business support that they really need. As a result, companies have been conserving cash and buying back shares. That doesn't do much for earnings, so expansion isn't really there except in the tech space," he adds.

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Hedge fund star David Einhorn, president of Greenlight Capital, presents a compelling negative case for stocks in his first-quarter letter to shareholders.
Einhorn, bearish, stocks, earnings
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2015-00-23
Thursday, 23 April 2015 06:00 AM
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