Earnings Are Horrible, But It May Not Matter 16 comments
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First the bad news: earnings are horrible. Downright depressing actually. As the chart below illustrates, we’ve seen nothing short of an utter collapse during the most recent bear market:
Clearly what we’re going through is not your average, plain-vanilla recession. That would be the blue dashed line above. Even the last recession which came about as a result of the popping of a massive speculative bubble in technology shares and topped off by the economic body-blow from the September 11th attacks pale in comparison. What we’re seeing is the single most severe drop-off in earnings on the record.
Now for the good news. It may not matter at all - that is, when it comes to the stock market. Of course, to the economy, the employees and companies involved there is a significant consequence and I don’t mean to trivialize it. But the stock market is not the economy. For an example of what I mean, consider the company that started the most recent earnings season.
Alcoa (AA) released their earnings report after market close on Tuesday. They reported a loss of about half a billion for the first quarter. As you might expect, at first its stock price fell in after-hours trading but it closed higher the next day (Wednesday shown by green arrow) and Thursday it gapped up and closed almost 10% higher:
Is this normal? Yes, of course. In contrast to what you may have heard, stock prices are not driven by earnings. This is one of the key characteristics of the stock market that throws a lot of novices because it just doesn’t make sense. But it does, once you realize that prices are set by a number of factors and while earnings are certainly part of the recipe, they are not the dominant ingredient.
If you look at enough charts you’ll see stock prices that are falling for companies that are reporting increased earnings and also stock prices that rise with decreased earnings. The key isn’t earnings, which after all, can be heavily manipulated, unlike dividends. But rather the meaning that investors attribute to them. In other words, the price-earnings ratio. And that, is all about “animal spirits” or sentiment.
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That is why talks of yields an P/E is largely all bollocks in this environment. Unless they give a reasonable indication of what the future holds, which currently is just about never, they are a complete waste of time.
But don't be fooled, if the earnings picture continues to deteriorate then so will stock prices. They are not joined at the hip, but they are definitely on the same bus.
Who knows. I'm mostly cash, except for a few shorts I just opened, and on which, I'm already underwater. One can never know for sure what's coming next....
On Apr 10 05:14 PM Mad Hedge Fund Trader wrote:
> Good point. Will someone please help me out here? Q1 corporate earnings
> are expected to drop by 38%, and the market rockets 26%. Is there
> a disconnect here? I know I only got a magna cum laude in math in
> college, not the summa cum laude I deserved. But is it possible that
> the market has gotten ahead of itself? Just a tad? Is the economy
> really going to have the massive bungee cord type recovery that the
> market is discounting here? Could we be setting up for the perfect
> sell in May and go away scenario, like we saw last year? I don’t
> get this. I await your comments in earnest.
> I agree, the fundamentals may be horrible but the sentiment has changed.
True, sentiments have changed. Now, for a moment, consider what will happen to those sentiments IF the fundamentals do not turn around and things start to tank. N.B.: I'm not arguing that the will just asking "what IF?"
If that does happen and if the bear comes back and goes on a multi-week mauling spree, how tough will it be to get retail-type investors to come back in to the fray yet again?
Or simply put again worries about inflation and government manipulation are helping the market. This is not particularly good aside from good tech leadership this rally. I hope the tech leadership aspect of the market keeps up because it would mean innovation, productivity increases, capital and R&D investment, and a better tomorrow.
It is because the market expects future earnings to be substantially higher than what is forecasted. Chart indicators are pointing to a bull market rally of the sort that happened after Regan took office. Every time I have bet against the chart (Ex. Gold will go up because.....) I have lost and my posts from the past would indicate to you. I have been part of this same gang that you hear over and over again and again making arguments one way or another using their substantive intellectual skills to analyze all data available. I have followed companies with extraordinary sales and earnings prospects thinking that the negative charts would turn positive but have had my investment toasted and my head handed over to me. After a few months it would come out that the company's prospects were not really all that rosy and something was going on beneath the surface that was not obvious in the performance.
Given these lessons from the past here is what I do. I do what the charts tell me to do. I place my stop losses where the charts tell to put them. I turn CNBC on and they are spitting on a stock but the charts tell me to buy them -- I buy them. Recent great example is Oil. PBR showed strong buy signals yet when oil closed below 50 every pundit and guru out there was saying that Oil was moving to below 40. Wait a minute -- PBR charts said buy and how do you rationalize this? I followed the charts and the charts trumped the pundits and gurus.
I noticed unusual chart patterns GS and MS when Bank stocks were stuck in the gutter and the Dow was at catastrophic lows just a few weeks back. I consider GS to be a leading indicator for banking stocks because they have historically reacted that way. So when GS registered a weekly Buy signal and BAC showed multiple daily buy signals I bought wholescale into financials a decision that proved to be very profitable. The Gold bulls were making an argument that Gold would soon surpass the $1000 marke on its way to far higher shores. However, the charts showed sell signals. I dumped Gold and sure enough it fell below 900 and is stuck there showing no signs of life.
I also noticed something else unusual. Several commodity, financial, industrial, energy, you-name-it stocks that were once trading in high double or even triple digits that had gone down to pocket change were showing signs of life. When they started registering multiple buy signals I bought in (somewhat reluctantly) dozens of the once-great companies for pocket change. Over the last 4 weeks this portfolio of mine has registered a 30% gain and these stocks keep seeming to power higher. I adjust my stop losses on these stocks on a weekly basis so as to give them enough room to settle down and breath deep preparing for the next run up. I am beginning to think that many of these once double and triple digit stocks will hit their previous 52 week highs in the next one or two years and if that happens that is substantial wealth creation right there.
Ok, coming back to what it is that could be fueling the extraordinary bull run I can only think that the lesson of 2008 which delivered a kick in the balls to America and the Asian tigers China and India is leading a wholescale set of reforms that will provide the market the fodder to make new higher highs than before. A lot has changed in the past few weeks. There have been significant earnings surprises. C'mon people -- how do you discount Best Buy, Bed Bath and Beyond and RIM earnings? These earnings are IMPOSSIBLE if you believe the economy to the way it is. It clearly is not which tells me that again the gurus and the pundits are wrong. Maybe, just maybe, the govt has done things right this time and greasing the wheels and the system for another remarkable bull run. Just maybe. If true the Dow will likely run towards new highs. Past its previous high of 14,000 on to newer levels.
WAKE UP OUT THERE.
I lost money in some stocks I chose to invest in, now I get to lose money in stocks I did NOT chose to invest in. Who the heck is gonna pay me back for making bad investments like our politicians are doing for their buddies.
STOP THE MADNESS!!!!!
On Apr 11 12:05 PM InvestBaboo wrote:
> Earnings are down but the market is up. Why you wonder?
>
> It is because the market expects future earnings to be substantially
> higher than what is forecasted. Chart indicators are pointing to
> a bull market rally of the sort that happened after Regan took office.
> Every time I have bet against the chart (Ex. Gold will go up because.....)
> I have lost and my posts from the past would indicate to you. I have
> been part of this same gang that you hear over and over again and
> again making arguments one way or another using their substantive
> intellectual skills to analyze all data available. I have followed
> companies with extraordinary sales and earnings prospects thinking
> that the negative charts would turn positive but have had my investment
> toasted and my head handed over to me. After a few months it would
> come out that the company's prospects were not really all that rosy
> and something was going on beneath the surface that was not obvious
> in the performance.
>
> Given these lessons from the past here is what I do. I do what the
> charts tell me to do. I place my stop losses where the charts tell
> to put them. I turn CNBC on and they are spitting on a stock but
> the charts tell me to buy them -- I buy them. Recent great example
> is Oil. PBR showed strong buy signals yet when oil closed below 50
> every pundit and guru out there was saying that Oil was moving to
> below 40. Wait a minute -- PBR charts said buy and how do you rationalize
> this? I followed the charts and the charts trumped the pundits and
> gurus.
>
> I noticed unusual chart patterns GS and MS when Bank stocks were
> stuck in the gutter and the Dow was at catastrophic lows just a few
> weeks back. I consider GS to be a leading indicator for banking stocks
> because they have historically reacted that way. So when GS registered
> a weekly Buy signal and BAC showed multiple daily buy signals I bought
> wholescale into financials a decision that proved to be very profitable.
> The Gold bulls were making an argument that Gold would soon surpass
> the $1000 marke on its way to far higher shores. However, the charts
> showed sell signals. I dumped Gold and sure enough it fell below
> 900 and is stuck there showing no signs of life.
>
> I also noticed something else unusual. Several commodity, financial,
> industrial, energy, you-name-it stocks that were once trading in
> high double or even triple digits that had gone down to pocket change
> were showing signs of life. When they started registering multiple
> buy signals I bought in (somewhat reluctantly) dozens of the once-great
> companies for pocket change. Over the last 4 weeks this portfolio
> of mine has registered a 30% gain and these stocks keep seeming to
> power higher. I adjust my stop losses on these stocks on a weekly
> basis so as to give them enough room to settle down and breath deep
> preparing for the next run up. I am beginning to think that many
> of these once double and triple digit stocks will hit their previous
> 52 week highs in the next one or two years and if that happens that
> is substantial wealth creation right there.
>
> Ok, coming back to what it is that could be fueling the extraordinary
> bull run I can only think that the lesson of 2008 which delivered
> a kick in the balls to America and the Asian tigers China and India
> is leading a wholescale set of reforms that will provide the market
> the fodder to make new higher highs than before. A lot has changed
> in the past few weeks. There have been significant earnings surprises.
> C'mon people -- how do you discount Best Buy, Bed Bath and Beyond
> and RIM earnings? These earnings are IMPOSSIBLE if you believe the
> economy to the way it is. It clearly is not which tells me that again
> the gurus and the pundits are wrong. Maybe, just maybe, the govt
> has done things right this time and greasing the wheels and the system
> for another remarkable bull run. Just maybe. If true the Dow will
> likely run towards new highs. Past its previous high of 14,000 on
> to newer levels.
When inflation starts to roar and pent-up demand has to pop because things break and shopaholics are skipping meetings, then there may be earnings, in theory.
Though U.S. people famously don't save that much, they hoard and shop and trade and drink coffee. Consequently, Amazon, E-Bay, and Craigslist will be busy along with some companies that sell staples and garden supplies.
Sorry, no charts. Any math tutors out there?
The printing of money will only make inflation matters worse .
I guess that leaves something to be said for saving, making things, and having a government controlled financial system. Seems to me the grand old USA is slowly finding the value of the real economy, rather than the virtual one that is disappearing to nothing. Point is we have all been living off the virtual economy, so it makes for a rough change to realise just how hard it is to make a living without leverage off the cheap manufacturing sweat of others. China seems to be spending its stimulus money on building their real economy and is still adding value. The West seems to be spending printed stimulus money on propping up failing real estate, virtual business, and keeping unproductive people employed in value destroying business. That is what is so difficult to believe in the present gains - you can sense it is the same phoney scam being continued. When we see the value system in the USA change - that will be the solid turn of the market, anything less will be a continuation of the confidence game, where the traders can feed but true long term investors never win.
I am still long on oil (and cash) - but realise it may take a while for any positive return to show in real terms.I just keep on buying in the big OilCo's when its cheap and pray it has to work for me eventually. At some point in time it has to work, either through inflation, or the value of easily traded raw material, or both. One catch-me though - I know just how much capital it is going to take to keep capacity on line - so its not just about reserves, it is about how much money it will take to keep the reserves flowing as well. Not all OilCo's are equal.