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Jim Bianco’s Unconventional Ideas

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Jim Bianco’s Unconventional Ideas

May 12, 2015

by Robert Huebscher

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According to Berkshire Hathaway’s Charlie Munger, when it comes to investing, everything important is counterintuitive; everything obvious is wrong. In that spirit, Jim Bianco offered a series of unconventional ideas on the stock market, Fed policy and oil prices.

Bianco is the head of the Chicago-based economic research firm that bears his name. He spoke in San Diego on April 30 at the Strategic Investment Conference, which was sponsored by Altegris and John Mauldin.

The consensus is wrong about corporate earnings and market valuations, according to Jim Bianco, as it is about the direction of Fed policy and oil prices.

I last heard Bianco speak in 2012, when he predicted that Fed policy would be “disastrous” – ultimately leading to inflation – but that equity markets would rally in the short term. That inflation hasn’t materialized, but Bianco was right about stocks.

Let’s look at Bianco’s unconventional ideas.

Corporate earnings, revenues and market valuations

The consensus around corporate earnings and revenues is negative. Jim Bianco said his outlook is “below average,” but perhaps not as bad as many think.

Year-over-year growth in earnings for the first quarter were down 2.9%, but would have been up 5.2% if energy is stripped out, he said. Bianco discussed analyst projections of future earnings, which he described as a “rigged game.” Analysts have been conditioned, he said, to underestimate earnings, so that when corporations report they can claim that they beat those estimates.

Indeed, he said, 72% of corporations had already beaten their Q1 projections. The last time less than half of corporations beat expectations was in 1998.

Analysts are now projecting three consecutive quarters on negative earnings for the first time since the great recession, he said. Historically, analysts overestimate earnings – that is at least until a recession hits. Then, according to Bianco, panic sets in and they cut estimates.

Analysts also predict revenues, which Bianco said are much harder to “game,” because they are not susceptible to financial manipulations. Unlike earnings, analysts tend to over- and under-predict revenues with about equal frequency. Currently, he said, first quarter year-over-year revenues are expected to be down 3.4%, or 2.3% if one takes out energy. Of those companies that have reported first quarter results, Jim Bianco said that only 37% have beaten expectations.

Stepping back, Bianco said, “I don’t see anything that is particularly exciting or particularly compelling in those numbers.” He said that the primary reason for sagging corporate results was the strength of the dollar and, to a lesser degree, low energy prices.

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