Earnings Season is Crunch Time
There are lots of reasons for the current rally to lose steam just about now. By many technical measures, it is extremely overbought. On a charting basis, the major indices are bumping right up against key resistance levels. At the very least, the strongest 4 week S&P500 period since 1933 suggests a little “back and filling.”
The biggest factor, however, is likely to be earnings. As I noted back in Q4 08, the analyst community remains way too optimistic about Q1 numbers, despite their horrific over-optimism throughout the debacle that was 2008.
And while it may be true (at least in part) that earnings weakness is already reflected in stock prices, its a whole lot truer at 6,500 than it is at 8,000.
Corporate profits will be suffering from a one two punch: Continued writedowns from bad investments, and a recessionary drop in sales that was fairly substantial.
David Gaffen of the WSJ writes:
“Analysts are expecting earnings will decline 37% from the year-ago period. All 10 groups in the S&P 500 show a year-over-year profit slide, a uniform decline that hasn’t happened in the 10 years Thomson Financial has been tracking such data.
The key to keeping the stock rally going won’t so much be whether first-quarter earnings meet or beat those expectations. Instead, the gains will be more dependent on what company executives say about the second, third and fourth quarters.”
37% is a pretty ugly number. But even worse, I disagree with that last statement. What corporate executive has the foggiest clue about Q3 or Q4? In fact, I don’t think they even have a clue about Q2.
In the current environment, plus Sarbanes Oxley, whoTF wants to go out on a limb to forecast future earnings? What corporate lawyer is going tio green light THAT?
Those who are long better hope this rally is dependent upon something else. As for my firm, we took quite a few chips off the table last week, moving from 75% long to 35% long.
>
Previously:
The Barron’s Interview: A Leading Bear Turns Bullish, Sort of (December 7th, 2008)
http://www.ritholtz.com/blog/2008/12/the-barrons-interview/
Source:
Time to Brace for Trouble as Profits Debacle Starts
DAVID GAFFEN
WSJ, APRIL 6, 2009
http://online.wsj.com/article/SB123896411461990545.html
April 6th, 2009 at 7:28 am
Earnings don’t matter to the media and to analysts. Both will utter the incantation that is intended to fool the stupid and aid in the pump and dump …..
“Earnings Exceeded Expectations”
Lemmings will follow these words anywhere.
April 6th, 2009 at 7:40 am
Barry,
There certainly seems to be two schools of thought about the current downturn and the government efforts to remedy it…I agree with you that earnings should be less than well received this time around..
Dr. Hussman seems to be more and more agitated…I have read his weekly posting for years now and he seems to be nearly Postal in a literary vein:
http://www.hussmanfunds.com/wmc/wmc090406.htm
“I have no idea how long investors will remain enthusiastic about trillion dollar band-aids and the debauchery of our accounting rules. I do know that at the end of the day, what matters is the long-term stream of deliverable cash flows that investors can actually expect to reach their hands.”
….Hussman using debauchery in one of his posts….things have come a long way…
(By the way, Leftback, he uses a lot of 25 cent words in the column, but you can Google them up as you read along…but please try not to move your lips while you read….)
April 6th, 2009 at 7:55 am
“I have no idea how long investors will remain enthusiastic about trillion dollar band-aids and the debauchery of our accounting rules
————–
As long as they still have money to lose!
April 6th, 2009 at 7:58 am
Something tells me that the bottom will be reached when:
1. The second batch of equity activists who just jumped in lose what they had not lost in the first round of market declines.
2. When bond holders start feeling the pain.
April 6th, 2009 at 8:04 am
Moving back to Mark-to-Model is simply reverting back to the tradition of political pundits and their blinkered, one-sided, biased analysis. It makes everything easier for everyone who wants to maintain their power, to present a view that supports the actions / philosophies they espouse. And that’s what this great nation is founded upon, emotional spin.
Computers, mathematics, markets etc… and their unforgiving, exact numbers irritate these blowhards to no end.
April 6th, 2009 at 8:16 am
Computers, mathematics, markets etc… and their unforgiving, exact numbers irritate these blowhards to no end.
————–
Are you kidding? Just by leveraging the general state of innumeracy floating around as well as the brain’s special weakness, intuition (which is not always logical and mathematical) , these people know how to play with numbers to make them say whatever they want them to say.
If you just knew how many times I was asked to play around with charts and numbers… and these were done to impress/convince actuaries!
In my mind, the biggest issue isn’t the rules, it’s the willingness of our population to bend them.
April 6th, 2009 at 8:41 am
Prepare for mucho VAPOR in the upcoming earnings reports. Disretionary expenses have been limited or eliminated. Around the campfire savvy investors say: A blip is just a small bubble…
April 6th, 2009 at 8:41 am
I have become convinced that a good portion of the rally has been fueled by hedge fund redemptions from the short side. This forced buying could continue for some time. Maybe we are due for a sell-off here, but I’m expecting this thing to continue with force.
April 6th, 2009 at 9:32 am
between sept 21 2001 and jan 04 2002 Nasdaq rallied around 44% only to make a new low in Oct 2002.
does anyone know a bigger bear market rally than that??
this time around the earning expectations has been tamed down…..so i wont be surprised if the really continues because the expectations are low.
but market seldom trade on fundamentals (in the short term)…..money coming in or going out due to other reasons have more influence (of course with some support from news).
there are still many stocks of technology companies which can double…….if the economy was to really recover from here.
but that is the big question, is there room for recovery…..or it is just optimism which is dismissing some other storms on the horizon like inflation in commodities due to China moving away from USD into commodities..
April 6th, 2009 at 9:40 am
I am supposed to have lunch today with one of the early candidates for the governor of Tennessee…(actually I think he wants to talk with 3 of my partners, but they asked me to go along so that their questions wouldn’t be the dumbest…)
I’ll let you know what he thinks about the economy…there are only 6 at this meeting, and I hope he’ll be honest with this small group..
April 6th, 2009 at 9:44 am
danm said: “In my mind, the biggest issue isn’t the rules, it’s the willingness of our population to bend them.”
That’s the crux of it for me right there. Deep down, any half-conscious person knows we are in the land of bullshit playing pretend these days, but most don’t care if they can pocket a few bucks while riding this fantasy land gravy train. That’s the bottom line.
April 6th, 2009 at 10:02 am
BTW does anyone know how RIMM pulled of a winner this earning?
were they not supposed to be killed by competition and falling sales?
if that is the case then maybe even MSFT, INTC, GOOG, AAPL etc will give better earnings……should’nt the market rally then??
April 6th, 2009 at 10:04 am
Good question about RIMM. Perhaps they’ve adopted GE’s accounting practices?
April 6th, 2009 at 10:08 am
Mr. Bruce-
I hope you enjoy your meeting with the candidate. With your leave, I would like to offer a thought to keep in mind in your interaction with the politician. Many of them have developed a skill that one could call mirroring or reflecting, that is to say, they listen to you and reply with the content of your speech. They tell you what you want to hear- everybody knows that, right? Well, maybe if you send out signals you can hear them ‘ping’ back. This may help you to create a more precise image of the man- I assume he is a man of sort or another.
With regard to earnings, how can they be good enough to support the multiple expansion argument?
April 6th, 2009 at 10:10 am
RIMM always pulls a winner #. It is simply amazing. How do they do that? Man, those guys and gals in accounting must wear the numbers off the key on their Casio calculators.
April 6th, 2009 at 10:20 am
MRegan Said:
April 6th, 2009 at 10:08 am
Mr. Bruce-
I hope you enjoy your meeting with the candidate. With your leave, I would like to offer a thought to keep in mind in your interaction with the politician. Many of them have developed a skill that one could call mirroring or reflecting, that is to say, they listen to you and reply with the content of your speech.
reply:
————
Nice catch. I worked around someone who did that and it was annoying. There was a consistent 20 or 30 second lag time between your comment and his almost identical comment in reply. Only he reworded it a little to make it sound original. He was not flattering me. He was attempting to manipulate me by coming across as a like thinker. He was also a total fuck up at what he did if you watched him objectively and didn’t accept his excuses. He got a lot of mileage out of his act and he outlasted me, so don’t make the mistake of thinking these people are transparent losers.
April 6th, 2009 at 10:21 am
Johnny Retail (on the phone to broker): “Where’s my spring rally?”
J. Hunter Peckington III (broker, on yacht): “April Fool’s..!!!”
April 6th, 2009 at 10:34 am
DH-
Illegitimi Non Carborundum! Satis dictus est!
April 6th, 2009 at 10:41 am
Gold is on sale again.
(Or you could buy shares in C…) Hmm….???
April 6th, 2009 at 10:45 am
As a cynic, I anticipate that where earnings come in below estimates, the cheerleaders and permabulls will spin it as evidence that the companies have written off everything including the kitchen sink, ensuring stellar bouncebacks in coming quarters — such that the lower the earnings, the greater the reason to buy the stock, no matter what the price.
It follows that the real carnage will start next quarter, when those predictions are proven false.
April 6th, 2009 at 10:52 am
Since no one on the board has mentioned it yet…
Mike Mayo (formerly of Deutsche Bank) and the Seven Deadly Sins of banking:
“The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators,” the report said.
All of the firms he has begun coverage of are at an underperform or sell rating…
While I think his analysis (like Meredith Whitney’s) is spot on, my question is, who is still being surprised by this? Apparently lots of people, as indicated by the turn in the futures when the report came out…
Next thing, they’ll ruin my day by telling me Santa Claus doesn’t exist…
HCF
April 6th, 2009 at 11:05 am
@HCF: You can still rely on the tooth fairy – and Dennis Kneale saying “Buy Tech”….
April 6th, 2009 at 11:12 am
@MRegan:
We’ve had other candidates come by the salt mine…and when their lips move, my hands go to my wallet…(and not to pull it out, either…)
should be fun, this is this guy’s first try at statewide office….tyros are often fun just to watch..
April 6th, 2009 at 11:14 am
@ leftback
So I can safely buy a CDS contract from the tooth fairy, since it is collateralized by trillions of baby teeth, right? =) Must be an operation that is too big to fail…
HCF
April 6th, 2009 at 11:17 am
why does it always has to be conspiracy?? did not RIMM say that they smoked it by selling too many handsets?
are you guys saying…they will keep cooking the books till it will be no longer possible?? who can blame them….the executives got options to cash in and make some moolah.
i wish i was in one of those shoes….you can rake in money like there is no tomorrow just by timing your bad news and good news to coincide with your stock options awards…
and of course you need some big hedge fund guy with fire power to help you along….
so the biggest question, the root cause of all this evil:
When will OPM get out of fashion?? when will pension funds, mutual funds etc..playing with OPM taken to task for looting the general populace(who are still stupid that they buy the “you got to stay in the market its oversold, still better contribute more” after they lost listening to “long term markets beat all asset class”.
my best one is “Professionals are smarter than layman” really?? I think i can smell risk when i see one….and if it is too confusing how about simply stay in cash(as i am doing right now).
Professionals lose only as much as the market……wait a second, i gained 2-3% staying in cash….and they are smarter than me??….I did not know a thing about market… except the sense that they are casinos.
April 6th, 2009 at 11:32 am
until there is clarity on the housing price bottom and transparency on the web of bank debt, i don’t feel comfortable putting down long in this environment.
i am trying to analyze circumstances as three problems. the first problem is the economy, which has a financial industry side and an economic contraction side. take away one, how serious is the other? debt/equity is the second problem, and it has two sides: how far must the paydown and reserve accumulation proceed, and then what will be consumer and business leverage limits going forward? the third problem is credit or liquidity (depending on who’s talking), but it seems the government is willing to grease things quite a lot going forward.
as for “market psychology” and technicals and all that: there is a huge amount of cash sitting on the sidelines. investors have been habituated to bubble environment returns since the early ’90s: like inflation expectations, those must undergo a fundamental revision. i do not think that has happened yet. or we may be in a long term epoch of bubble and bust, given the amount of cash in play. bubbles may just be nature’s way of consuming excess wealth down to a level that resources and productivity can justify.
April 6th, 2009 at 11:46 am
Let’s not forget what tiggered this rally: a “leaked” Citi memo that merely rumored earnings. And it blew through abysmal employment numbers and rising oil prices.
This juggernaut seems to have enough steam all on its own to run through April. Until mid-May folks will still be hoping for a surprise beat or two. And any spin from the Obama camp or cohorts like Citi’s CEO will probably be fuel enough to continue upwards in the short term.
My bet is just enough good news leaks out for this to continue to mid-May. But Summer will be hell. IMO.
April 6th, 2009 at 12:40 pm
MRegan Said:
April 6th, 2009 at 10:34 am
DH-
Illegitimi Non Carborundum! Satis dictus est!
reply:
————–
Satis dictus est.
(silence … calculated. Traditionally, the next person who speaks, loses).
April 6th, 2009 at 7:18 pm
“What corporate lawyer is going tio green light THAT?”
Are you kidding me? I thought we have been talking about regulators asleep at the wheel. Nothing has changed. As long as it’s bullish, they will let it slide.
April 6th, 2009 at 11:18 pm
RE RIMM: I would say RIMM is an incredible statement about the death of creative, brave, daring engineering in US. Should have added NEW. Apple is OLD.
Yeah sure, Google, You Tube ,…. We are only capable of closet operations that break out.
So exactly why did Apple pierce the veil with iPhone?
I can tell you , but you won’t like the answer. And I’m not on a VC’s call list.