The most recent release of the Empire State Manufacturing Survey (ESMS) (February 17, 2009) by the New York Federal Reserve contains data that implies earnings per share in the S&P 500 will continue to fall. Even though the equity markets were focused elsewhere, the survey has a remarkable correlation with both the Philadelphia Fed survey (to be released on Thursday) and the ISM. The headline number plunged to -34.65, the lowest in the series history. Digging deeper into the sub-indexes reveals that the earnings estimates for the S&P 500 are much too high.
Approximately 85% of the companies in the S&P 500 have reported earnings for Q4 08 and as reported EPS stand at $-10.44. Even ex-financials, EPS are negative. For the time being, operating earnings are still positive ($5.77), suggesting that the losses are only on paper. However, the ESMS indicates that operating earnings are likely to deteriorate. Examining the prices manufacturers pay for supplies vs the prices they receive for products results in a macro view of operating margins.
The most recent ESMS showed that the prices paid index is still exceeding prices received index for the second month in a row. You do not have to be a CPA to determine that if you pay more for supplies than you receive for your product, then you lose money. In fact, S&P 500 EPS have traced this relationship closely.
The chart does a great job of illustrating that as prices received exceed prices paid, earnings increase and vice versa. The ESMS suggests that for the last two months companies have been losing money at the operating level. This is distinctly different from a paper loss, this is real money! However, earnings estimates at the operating level are still expected to be positive. In fact, S&P estimates operating earnings per share for the S&P 500 will be $11.66 for Q1 2009, up from $5.77 in Q4 08.
Clearly something is rotten in the State of Denmark, since operating earnings are expected to rise over 200% in an environment where manufacturers are reporting negative operating margins. There is disconnect between perception and reality and in this case the reality of deteriorating margins trumps the perception of positive earnings.
Disclosure: I am short several S&P Sectors including the ETFs RTH,SCC, SRS, and SZK