Forecast 2014: “Mark Twain!”

By John Mauldin

January 18, 2014

It’s All About the Earnings
The Trouble with Earnings
What Would Yellen Do?
Forecast 2014: “Mark Twain!”
Argentina, Vancouver, Edmonton, Regina, and Home

Piloting on the Mississippi River was not work to me; it was play — delightful play, vigorous play, adventurous play – and I loved it…

– Mark Twain

In the 1850s, flat-bottom paddlewheel steamboats coursed up and down the mighty Mississippi, opening up the Midwest to trade and travel. But it was treacherous travel. The current was constantly shifting the sandbars underneath the placid, smoothly rolling surface of the river. What was sufficient depth one week on a stretch of the river might become a treacherous sandbar the next, upon which a steamboat could run aground, perhaps even breaching the hull and sinking the ship. To prevent such a catastrophe, a crewman would throw a long rope with a lead weight at the end as far in front of the boat as possible (and thus the crewman was called the leadman). The rope was usually twenty-five fathoms long and was marked at increments of two, three, five, seven, ten, fifteen, seventeen and twenty fathoms. A fathom was originally the distance between a man’s outstretched hands, but since this could be quite imprecise, it evolved to be six feet.

The leadsman would usually stand on a platform, called “the chains,” which projected from the ship over the water, and “sound” from there. A typical sound would be expressed as “By the mark 7,” or whatever the depth was. In modern English language, it is interesting to note that the expression “deep six,” refers to this old method of measuring water. On the Mississippi River in the 1850s, the leadsmen also used old-fashioned words for some of the numbers; for example instead of “two” they would say “twain”. Thus when the depth was two fathoms, they would call “by the mark twain!” (

And thus a young Samuel Clemens, apprentice Mississippi riverboat pilot, would take the “soundings” and from time to time would sing out the depth of two fathoms as “By the mark twain!” We think that is how he found his pen name. In Life on the Mississippi, Mark Twain describes sounding: “Often there is a deal of fun and excitement about sounding, especially if it is a glorious summer day, or a blustering night. But in winter the cold and the peril take most of the fun out of it.”

The pilot would much prefer to hear the sweet sing-song call of “no bottom,” as that meant there was no danger of running aground. “Mark twain,” or 12 feet, was getting rather shallow for some of the larger vessels and so sounded a note of caution.

On their surface today the markets seem as smooth and flowing as Old Man River, but are there sandbars lurking in the depths? Will the journey this year be as fast and easy as in the last five? Can we plunge on into the night, relishing the call of “No bottom” that we are hearing from the bulls? Or is that a cry of “Mark twain!” telling us to be cautious?

Perhaps we should take our own soundings from the data to see what might lie up ahead. This week, in the third part of my 2014 forecast, we’ll look in particular at the US markets as a proxy for markets in general. (This letter will print a little longer as there are lots of charts.)

But first, I am pleased to announce that my friend former House Speaker Newt Gingrich will be at my conference this May 13-16 in San Diego, joining (so far) Niall Ferguson, Kyle Bass, Ian Bremmer, David Rosenberg, Dr. Lacy Hunt, Dylan Grice, David Rosenberg, David Zervos, Rich Yamarone, Code Redcoauthor Jonathan Tepper, Jeff Gundlach, Paul McCulley, and a few more surprises waiting to confirm. Nothing but headliners, one after the other.

When I first broached the idea of our conference with Jon Sundt, the founder of cosponsor Altegris, the one rule I had was that I wanted the conference to be one I would want to attend. The usual conference boasts a few headliners, and then the sponsors fill out the lineup. I wanted to do a conference where no speaker could buy his way onto the platform. That means we often lose money on the conference (hard as that may be to imagine, at the price, I acknowledge); however, the purpose is not to make money but to learn with – and maybe have some fun with – great people. We do put on a great show, and my partners make sure it is run well. But the best part will be your fellow attendees. A lot of long-term friendships are forged at this conference. You can learn more and sign up at

It’s All About the Earnings

For over a dozen years I have regularly compared notes on S&P 500 earnings with my friend Ed Easterling. For Ed, the subject borders on an obsession. I am, of course, far more reserved in my enthusiasm. We have co-authored numerous articles, and Ed never fails to call to my attention anything unusual that happens on the earnings front. He is the ultimate data wonk, and I say that in an affectionate way. Ed has what I think is one of the best data research sites anywhere So this week I read his latest email, about the uptick in the forecast earnings of the S&P 500, with considerable interest.

As they do at this time of year, S&P posted an update to their 2014 EPS (earnings per share) forecast. For newbies, “as-reported” earnings are earnings as reported to the tax authorities, and we can more or less think of them as real earnings. “Operating earnings,” on the other hand, are what companies like you to pay attention to. They exclude one-time charges and other things that companies find inconvenient. I call operating earnings “EBIH earnings” – earnings before interest and hype.

S&P conveniently gathers forecasted earnings data from numerous analysts and amalgamates it in one big spreadsheet along with the history of actual earnings. You can access their spreadsheet here. The data we will be looking at will come from the first tab, but there is also a lot of data commentary from Howard Silverblatt, the longtime curator and maven of all things earnings.

The forecast for 2014 as-reported earnings was $106 in late December. Now it’s $119.70 – up 13% from the previous forecast just two weeks ago and up 20% versus the 2013 estimate of $99.42. Since 2013 has concluded, that number will be revised only slightly. Silverblatt says the revised figure is based upon an improved outlook rather than something technical like an accounting change.

The table below is a screenshot from the Excel spreadsheet. Note that, depending on which set of earnings you want to use (and Ed and I prefer to use as-reported as opposed to operating earnings), if the forecasters are right, then the P/E ratio at the end of 2014 will be in the neighborhood of 15, less than the long-term average and down considerably from today’s. This can only be described as a bullish number.

Ed notes in a quick email, which spurred

1, 234  - View Full Page