Tuesday, September 8, 2009

How Much Will YOU Earn?

As I mentioned six days ago http://womensfinancialplanning.blogspot.com/2009/09/is-stock-market-cheap.html , I look to Standard & Poor's for earnings projections. I had mentioned that, in the next twelve months, projections for S&P 500 earnings are $48.67. Note that the next twelve months are September, 2009 - August, 2010.

Last Saturday, Barron's magazine published projections for 2010 by ten strategists, who charge dearly for their advice. These projections are for January, 2010 - December, 2010. Let's take a look.

I. Next Year's Earnings for the S&P 500

Since I'm writing this column, I'll go first.
  1. Standard & Poor's projects S&P 500 earnings to be $72.99 in 2010.
  2. The optimist of the Barron's group is Prudential International, which predicts $80 - 9.6% more than S&P.
  3. Three (BlackRock, Goldman Sachs and JP Morgan Chase) predict $75 - 2.75% more than the S&P.
  4. Two strategists (Deutsche Bank Private Wealth Management and Morgan Stanley Investment Management) predict $72 - 1.4% less than S&P.
  5. US Trust projects $70.50, and and RBC Capital Markets, $70 (about 3.5% - 4%) less than S&P.
  6. Citigroup predicts $68 - 6.8% less than S&P.
  7. Gloomy Barclay's Capital? $60 - almost 18% less than S&P.

So, one of the statistical methods you may have slept through in Stats Class, was to throw out the highest and lowest numbers and average the rest. Doing so gives us $72.19 - 1% difference between S&P's projection and that of esteemed (and expensive) strategists. That's not much.

II. The S&P 500 Index - Left Alone vs. Sliced Up

If you buy the S&P 500 Index, it looks like this:

  • Technology - 18.6%
  • Financials - 15%
  • Health Care - 13.5%
  • Energy - 11.7%
  • Consumer Staples - 11.6%
  • Industrial - 10%
  • Consumer Discretionary - 9.1%
  • Utilities - 3.8%
  • Materials - 3.4%
  • Telecommunications - 3.2%

Our esteemed strategists, on the other hand, want you to buy individual sectors of the index that look like this

  • Technology - 22.2% (3.6% more than the index)
  • Energy - 19.4% (7.7% more than the index)
  • Materials - 19.4% (7.7% more than the index)
  • Industrial - 16.7% (6.7% more than the index)
  • Financials - 13.9% (1.1% less than the index)
  • Health Care - 5.5% (8% less than the index)
  • Consumer Discretionary 2.8% (6.3% less than the index).

They don't want you to buy any

  • Consumer Staples (11.6% of the index)
  • Utilities (3.8% of the index), or
  • Telecommunications (3.2% of the index)

III. The Cost of Buying the S&P 500 Index vs A La Carte

So, basically, this is the deal. You'll be paying a big fat fee to strategists in order to slice up the sectors of the S&P 500, ignoring about 20% of it, and whittling the remaining 80% + up or down by an average of about 5%. They're suggesting that, by doing this, you will see earnings increases on your investments of an average of about 24.5% - less their big fat fee.

You'll pay nothing to me to recommend the S&P, which is predicting earnings increases of 34.5%. And neither S&P nor I care whether you buy or not.

Strategists, on the other hand, stake their livelihood on whether you pay them for their opinion.

Which do YOU think is the better deal? Just for fun, let's keep track of the difference between buying the S&P 500 index in 2010, and doing what strategists suggests throughout 2010. Then, we'll subtract their average big fat fee from their returns and nothing from mine, and see who wins.

It's one woman versus ten men. I'm comfortable with those odds.

1 comment:

  1. Kitty,

    I liked it! Thanks again,

    Gary

    ReplyDelete