No. of Recommendations: 25
This is one of the better write-ups of the quarterly results.
https://www.forbes.com/sites/bill_stone/2023/11/04...The usual first-order thinkers (and journalist bots) see the headline earnings down compared to the same quarter last year. They can be safely ignored.
The second-order thinkers are a bit smarter: they note the big jump in operating earnings, ignoring the price fluctuations of the portfolio. We seem to be seeing lots of those articles this time around. They are very impressed with the quarterly results, with operating earnings up 41%.
But in this case, I think third-order is needed: the operating earnings are up compared to a year earlier solely because the underwriting profit, which is almost as volatile as the stock market, is up a lot. If you do a cyclical adjustment on the underwriting profit, the operating subs as a group are doing very poorly at the moment, for a variety of reasons. Some of the recent reasons are mentioned in the linked article, but not emphasized as much as I prefer to.
I estimate in advance what each quarter's "steady things" net operating profit is likely to be. This involves applying a simple seasonal adjustment, plus an average growth factor from recent years, to the prior 4-8 quarters of earnings. Have a look at the graph.
www.stonewellfunds.com/SteadyThingsRealEarnings_2023-Q3.png
These figures are all inflation adjusted.
You can see how the model continues to think that "steady things" earnings should be rising, but they very much aren't. As a group, they went ex-growth a year and a half ago, despite what I presume is substantial growth capex and ongoing "tuck in" acquisitions. The gap between model and reality continues to widen, despite the fact that the recent data are included in the model, and the *level* is determined mainly by recent actual earnings.
The economy has been slowing, which is just a cyclical issue and will pass. But I am unsure how much that explains the flatness. Overall I am much more concerned than the average "second order thinking" press coverage.
Jim
