Q1 Earnings Season Preview - Why 2009 Is Not 2008

Human nature always wants to get in the way of successful investing as it seeks to reward or punish the past. The maddening reality of the stock market is that it is forward looking. While the media and analysts love to digest the past, successful investors are already 5 steps ahead forecasting the future. This phenomenon is difficult to grasp and it is the reason why many lose money in the market. How can Google (GOOG) report an unbelievably great quarter but their stock sells off? How can Google report a subpar quarter and their stock surges? It’s all because of the expectation for future performance.

This tug of war between the past and the future is in full swing as we enter Q1 earnings season. Economic data is showing its worst readings of the recession, corporate earnings will be horrendous, and most think this will lead to the next leg down in the stock market. Human nature would tell you that the stock market should tank in such an environment, but will it? Let’s look at some differences between today and 2008:

1. Data Interpretation: In 2008, navigating the release of economic data points was like navigating the minefields of a war zone. Employment reports were met with huge selloffs. Decent earnings reports were sold down as even the good news was interpreted as bad news. Those who were long the market were endlessly frustrated at the market’s interpretation of the data. In 2009, it’s been the opposite. The unemployment rate reaches 8.5% and the market goes up. Apple (AAPL) reports that February Mac and iPod sales were down 20% year over year but the stock climbs from $80 to $115. Bad news is treated as if it were good news. Human nature wants to focus on the current fundamentals and punish the stocks. Human nature can't believe in this rally. But human nature is wrong when it comes to stock market performance.
2. Uncertainty: 2008 was the year of uncertainty. Americans elected a President who had relatively no voting record. Bank regulatory requirements forced writedowns and capital raises that threatened to send most banks towards nationalization or failure. The government decided who would receive support and who wouldn’t. The masses believed in the peak oil theory that suggested we were about to run out of the commodity. Steve Jobs was about to die. Politicians had to use fear tactics to get bailout money approved. Consumers hunkered down and stopped spending. And on and on and on.
3. What’s On The Horizon: 2009 is the year of unprecedented government intervention. Obama’s $787 billion stimulus package is the biggest in the history of mankind. Trillions of dollars have been thrown at the banks. The Fed, Treasury, and Congress are working together with regulatory agencies to solve the problems. Such solutions did not exist in 2008.

Conclusion: Although this earnings season will show us the worst of the recession, stocks will persevere and even go up on the bad news. Strong earnings results in 2008 sold off, terrible earnings results in 2009 will go up. The majority of economic data points that we track have started to show improvements in their declining rate of change. The worst is behind us. Uncertainty has been replaced with concrete plans of action. It’s time to alter your set of bear market investment rules that have been in place since the economy began contracting back in 2007. For the new rules, purchase a copy of my digital investor handbook called ‘The Crash and Burn of Buy and Hold’. Adapting to the new conditions is essential for high returns.

The rate of economic contraction is getting better and the stock market will price in the improvements before human nature catches on. The question of the day is whether or not you should buy the index (SPX, QQQQ) ahead of earnings. The 2009 market is telling you that the environment is different than it was in 2008, and yes, the indexes should be bought.

DISCLOSURE: long QQQQ, AAPL

Comments

[mollytjm:]

good article. APPL is a great value right now. They are so cash rich and yet they aren't holding back on innovating...a great tech company that 'gets it'.

Apr 07 08:50 AM

[Kup:]

Good points there, something of note.

"The majority of economic data points that we track have started to show improvements in their declining rate of change."

One thing I think is missed at times is declining improvements in the rate of change are not improvements. You can have a declining rate of change that never turns positive or flatlines. Japan is an excellent example.

Apr 07 10:50 AM

[Fred Voetsch:]

"The rate of economic contraction is getting better and the stock market will price in the improvements before human nature catches on. The question of the day is whether or not you should buy the index (SPX, QQQQ) ahead of earnings. The 2009 market is telling you that the environment is different than it was in 2008, and yes, the indexes should be bought."

And Dow Theory tells you not to get ahead of the market. Once a major trend is in place you don't go against it. Oh, that and the fact that the housing market has yet to hit bottom; the stock market is still above its historic "fair value"; consumers are tapped out and have made getting their balance sheets in order their top priority; demographics suggest a long term shift away from putting money into the stock market and towards taking it out; deleveraging is not even close to being completed; earnings have shown no signs of growing and in fact, continue to decline.

Now let's see...do I listen to the author's gut feeling or go with the only investing theory proven to outperform the market over the long term and a bunch of hard data...that's a tough one...hmmm....

seekingalpha.com/artic...
On November 16, 2008 the author wrote:
"Here are some reasons why hope will trump despair in intermediate market performance..."

The market has dropped 300 points, from 8273 to 7975 since then, even after a near 30% rally.


seekingalpha.com/artic...
On September 16, 2008 the author quoted Jim Cramer, which is bad enough, and then wrote:
"The capitulation to come this week is required to form a bottom in the financial sector. I count ten times this year that analysts have prematurely called for a bottom in the financials and each time buyers have been bitten. We at Lone Peak Asset Management have refrained from making any such calls but it must be noted that this action is different."

Uh...I think we all know what happened in October and November and January and February.


seekingalpha.com/artic...
On May 30, 2008 the author wrote this:
"I can make the case that we are now at an unprecedented point of time to get long financials"


So did I mention that the current P/E of the S&P 500 is 60; the DJIA is 26 and the DJTA is 24? Ah, but why bother with details like earnings?

Apr 07 03:55 PM

[Fred Voetsch:]

On Apr 07 04:42 AM Cetin Hakimoglu wrote:

> Google and AAPL are great buys. GOOG 700 within a year so so. AAPL
> 200 soon. These companies are immune to the supposed financial crisis
> and hype recession.


"the supposed financial crisis", I love an objective thinker.

Apr 07 03:59 PM

[dcb:]

Fred you are awesome.
I love when people get called out. If you will note it looks like the market has essentially moved almost sideways while earnings have dropped. I kind of see a pattern, of dropping and then building into earnings season. if earnings are Ok it will continue and we have bottom. if not we don't. I also hate the Bull folks at every corner. At least the guy should put a disclaimer saying how many times he has missed it before.

That being said my own technique noted bottom on commodities and euro. Not equities. My target is drop of 70% from peak, when brazil and emerging economies retest their lows we will all be even!!!

Apr 07 07:27 PM

[Stockmajor:]

We will see what we will see. I'm still bullish...long term.

Apr 07 11:50 PM

[Hayweed:]

Apple did not report that sales were down 20%. That was npd data that may or may not be correct. Check your facts.

Apr 08 01:06 AM

[RickWade:]

Fred,
same response as before: Schwarz has made some brilliant calls as of late: BAC heading back to $20 when it was at $3, The Bubble of Uncertainty about to burst with the Dow at 6500, and the Citi float call. He was the first that I saw to highlight the doom of mark to market accounting last year as well. Of course he's had some misses like everyone else but I love reading his stuff.

Apr 08 11:44 AM

[brewer:]

Apple could really surprise with app store profits in particular. All those stories about 3 month millionaires selling $1 programs you have read about also netted 30% for Apple.

Apr 08 01:43 PM

[j03m:]

I agree with RickWade, look at Schwartz' track record. He called Apple, He called the oil short, he called BofA and C. Every time this guy posts I make 100+%.

In Schwartz we trust.

The question is - if you bought BAC at 3, should you get out now?

Apr 10 12:39 PM