What we've learned from earnings

Recent corporate results show that even if you can accurately predict a company’s earnings, the market’s reaction is still much harder to get right.

By Bill_Fleckenstein Jul 26, 2013 3:51PM

Stock index © Image Source/Getty ImagesAs the most-recent "earnings season" winds down, it's worth looking at the overall message from the stock market so far.


Heading in to this earnings season, I was not expecting a lot of positive reports from the companies I follow, due to weak gross domestic product worldwide and the strong dollar. But I was especially interested to see if poor results and/or lowered guidance could take the overall stock market lower, or whether bad news would be ignored.


Thus, I was paying particular attention to some of the larger names in the technology sector as a litmus test for real economic strength.


Just a slap on the wrist 

As I suspected, Intel (INTC) and Microsoft (MSFT) were unsuccessful at beat-the-number and had to lower guidance for the year. But the stocks weren't  hit that hard. (Microsoft publishes MSN Money.) Meanwhile, IBM (IBM) -- which once again reported light revenue -- managed to make yet another earnings number (as long as you're willing to look past never-ending write-offs and believe the accounting treatment of its acquisitions and what that does for its profit-and-loss statement down the road).


Nevertheless, IBM's revenue shortfall was ignored, and its earnings were the focus. That, combined with how easily the market shrugged off lowered guidance and light revenue for Yahoo (YHOO) in favor of fantasizing about an Alibaba initial public offering, made me feel as though the imagination component of stocks was going to trump any sort of bad news -- and the reaction to IBM's results sort of corroborated that. (On the other hand, eBay's (EBAY) revenue was also light, and its stock price was punished.)


By the end of last week, we had seen results from Google (GOOG), Microsoft and SAP (SAP). As a group, pretty much all the major players in the tech world had either revenue or margin problems, or expected to (as Oracle (ORCL) announced last month), indicating that the world economy is not as strong as people had expected.


Distorting reality 

If we were not in a money-printing environment, this would be the exact setup for building substantial positions on the short side, because these sorts of issues would obviously matter. As more companies report similar problems, it cumulatively would put pressure on the market to the downside. However, since we are in a money-printing environment, that makes life particularly tricky.


One of my short-selling rules is that if the Federal Reserve is printing money, one has to refrain or be extremely careful and use guerrilla tactics -- i.e., try to get in front a of a catalyst. When that comes and goes, get out of the way, unless somehow the cumulative effect matters. Consequently, the few shorts I have tried lately have been very short-lived.


While some companies (Microsoft and eBay, for instance) did see their share prices decline after announcing earnings, the stock market in general was largely unaffected by poor corporate earnings news. As this week came to a close, it was becoming pretty clear that, for now, stocks would move higher. while bad news would be ignored.


Corroborating that viewpoint, Caterpillar (CAT) lowered its earnings guidance on July 24 and downgraded its view of world growth, but the stock was penalized by only a couple of percentage points.


Thus, the stock market is on autopilot until it exhausts itself (which could happen at any time, maybe next week), bond rates rise high enough or some catalyst trips up speculators. However, I do believe that the risks for equities continue to rise as prices move higher and people are seduced by momentum.


Unlearning our lessons 

Speaking of bonds, one could make the argument that the 10-year bond failed at around 2.5%.But before getting too excited about that, and to really be convinced, we will need to see 10-year rates rise above the high of 2.73%, or so we saw a couple of weeks ago. I continue to think that, at some point, equities will take a tumble and bonds will have a knee-jerk bounce, so I would like to see how high that goes.


I made the comment late in winter that it felt like 1998. From time to time I continue to feel that way about stocks, and right now is one of those occasions. Compared with the bubbles of the 1920s and late 1990s, the amount of money that has been printed is so staggering you can't say that stocks can't go crazy, which is why I have avoided short-selling.


But I still find it hard to believe that so many people are pouring so much money into stocks after the debacles we have seen in the past decade, while all of the pre-existing problems rotting beneath the surface -- with the exception, perhaps, of massive consumer debt -- are still with us (though consumers have traded their debt for not being able to get a decent job). In any case, from my perspective, the markets are basically a wild sea of speculation.

Jul 27, 2013 7:01AM
"wild sea of speculation" - does not produce jobs. It only produces over priced assets.
Jul 26, 2013 11:42PM
When a company beat estimates, that by itself means little. When a company surpasses year over metrics, that usually means everything. What I am saying, finance reporting these days is so corrupt, you really don't know what's what unless you dig into the quarterly reports yourself. Wall Street Ana----lyst will tell you very little, by design. Why anyone would try shorting a rigged market is beyond me at this point. However, at some point, the only ones making money will be those who shorted, it's just impossible to gauge exactly, when that day will come.

Is it really that shocking to see money being poured into stocks, not really. Humans tend to have short memories, especially when it comes to issues of Greed. We literally have two Americas. Some have never had it so good and some have never had it so bad. Eventually, cause and effect will take over, then everyone goes down with the ship, Literally.

Jul 26, 2013 8:25PM
In light of recent events, we now know that our country, the United Corporations of America, exists solely for the benefit and profit of corporations, and that these corporations have been endowed by their creators with the unalienable rights of life, liberty, and the pursuit of happiness.
Jul 27, 2013 8:25AM
Thanks, Bill. Your observations about stocks is accurate. What I observed from the reporting period is that the organized corrupt financial tyranny sector as a whole- will pad and bolster bad reports just to get through the reporting period. Once it is over, the continued influx of QE fiat funds drives the Index up and America further down and out. In a nutshell, anyone not seeing Ben Bernanke as a crook isn't looking or is profiting off the doom he is creating. There is no economy anywhere. My understanding of the next Sequester hurdle is that something must occur in September. While this stupidity becomes fuel for steerage articles, one primary oversight may trump all of this.... very soon we will know if students who enrolled in colleges and universities-- paid their tuition or found funding credit for it. Some reports are suggesting as much as 60% of students have yet to respond at all to invoices, while as many as 60% of those who have, are asking for help that doesn't exist. With no real job creation and absolutely no job recovery, the two fronts-- can't earn can't get educated are far more formidable than any excuse Ben Bernanke can muster about QE. On a side note... what exactly IS- IBM? I'm pretty smart and I can't see anything more than virtual presence and a whole lot of bookkeeping. It's like staring at a soap bubble and giving it credibility as a tangible structure. It's a bubble, when it pops it's a puddle and your share investment is in trouble. Much like buying into Facebook this week. Apparently SOME people have cash to lose and are happily doing so.
Jul 27, 2013 9:28AM

"    amount of money that has been printed is so staggering ...  ...  while all of the pre-existing problems rotting beneath the surface. ..."  The Fed has "created"  an increase of over 300 percent in the money supply in four years.  A 300% decrease in the "real" value of the American dollar?  Yes.  foreign travel or a trip to the grocery story confirms that. 

Jul 27, 2013 8:47AM
An unpredictable, dangerous, market! -
Jul 28, 2013 10:45AM
Submitted by Old and Gray on Sun, 07/28/2013 - 04:35.

I have never in my long life seen a trend line so precise and near-perfect as the Dow performance of Friday, July, 26th, 2013. . But for one wiggle, an absolutely straight line from low point up to closing!

It has since occurred that it may very well have been executed by a computer and a program such as the HFT (High Frequency Trading) with no need at all for executing a live trade, a built-in profitable execution. Don't panic. Line up, place your bets and we'll feed it into the system in a metered process, without interference or interruption!

It should have been obvious - too embarrassingly perfect for the moguls behind the move to miss - yet they did. . . Perhaps a few more wiggles here and there in the trend line to dispel suspicion, something to indicate some human hesitancy or a wavering commitment would have been better. . .

Amazing! From 150 points down to +3 up in the precise remaining time. Would that explain the one hiccup? But, no! Never the work of randomizing mortals. A policy was at work; in no way could it have been mortals. The tiny irregularities resulting could be explained by uneven transactional quantities alone.


How easy to adapt to cynicism these days when we're fed evidence hardly challenging!

Doubters need do nothing other than consult the Dow performance for Friday on your own. Amazing! And it will never be investigated or mentioned by anyone again.


NASDAQ and S&P 500 came close to following suit.

Jul 26, 2013 7:14PM
It looks like the American markets are going to top off with a parabolic blow off top by the end of the year, as Bill mentioned once every body is fully invested, the same blow off parabolic top the Nikkei had ten ten weeks ago, by the way the Nikkei formed a lower high on its weekly chart this week and now all eyes on the 12500 level.


Jul 29, 2013 4:40AM
Corporations are making money by cutting expenses, investors by shorting or following trends, and politicians by spending our money Willy nilly.  There is no logic, only greed.  The realistic souls in this world have no voice.  Unless logic emerges from this economic and political mess only a few will be working to support the many.  How long can that last? Being equally poor has never worked and will never work, we have seen that system fail over and over.
Jul 27, 2013 1:48PM

Risk-reward still matters; Standards & Poor forecasts even with slow global and US growth S&P 500 earnings will be up at a 12-14% constant dollar clip for the next 24 months.  So, all other factors being equal, that should be the return on stocks over the next 2 years, i.e., 12-14% in real terms ... that is awesome historically.

And, before the crash, the S&P PE ratio was in the low 19s [just mathematically that's 5.25% ROI] while 10Y Ts were paying around 4.5%.  So, the move was to lower risk bonds and one would have made a lot of money when rates plummeted and far more relative to stocks.  [Full disclosure: I'm not one of them who did.]  Now the S&P mathematic ROI is 6.2% while 10Y Ts are paying 2.6% and the Fed is hoping to let rates rise as the economy slowly grows faster which will devastate bond holders.  And people have felt that in their portfolios for 6 months now.  It might be a record; I don't know; but 10Y Ts holdings are down 50% annually for the last 2 quarters while stocks are up about 18%.  The fire is on individual investors feet to fulfill the prophesied "great rotation" back into stocks that has been imminent since 2009.  I see this continuing in addition to the risk premium being so low.

So, fear based on the 2008 debacle seems irrational.  This is not then.  I won't advise others, but I'm leveraged into stocks until these basic facts change while preparing myself for a disastrous 30% bear market which I think can only emanate from a crisis in China; and I think that risk is overstated because there is no reason the Chinese junta, if you will, cannot keep doing what it's been doing to it's long-suffering people which is nefarious however profitable and sustainable.

Jul 29, 2013 9:49AM
It's August on Thursday. That gives organized financial terrorists three whole days of manipulation to control the outcome to their favor. That's Ben Bernanke authorizing BILLIONS of fiat Dollars you and I are obligated to repay, given to banks that cannot function without his fiat money, who put it in markets that do America NO GOOD PURPOSE AT ALL. Our National Debt may be exceeding $17 Trillion but our ACTUAL INDEBTEDNESS exceeds $1 Quadrillion now (currencies, derivatives and debt notes). It's time to Close the banks, End the Federal Reserve and to get RID of Wall Street. My words are my rifle, I could use some help here.
Jul 29, 2013 11:09AM

Mr. Fat Cat;Why should I put another $20,000 in a car and worry about it getting stolen?

I can put that $20,000 in a CEF and get a monthly dividend check of $240 for golf and


Jul 29, 2013 8:28AM
I cetainly agree about the 1998 analogy Bill.  I remember constant monthly waiting for the FED lowerings like birthday parties.  The reception and exuberation was almost child like.  Until of course it was over with and the long slow decline ate up everything that we were told was so rock solid. I see the next "direction" to be no different.  New folks come into the market and forget all the lessons so quickly. This is not a block party folks.  This is how the little guy loses a ton of dough.  It is called fluff and nothing has ever really changed in the market but the naivety of the newer participants.  We never really recovered from the last collapse.  The same confidence game hustle is going on like always.
Jul 27, 2013 8:51PM
good point again.  Well done Bill,
Jul 29, 2013 9:29AM
Bill Fleckenstein is pretty much a straight shooter from every one of his articles I have read.  You contrast what he says with the MSNBC guru guy and its a huge difference.
Aug 1, 2013 11:41AM
I wonder what will happen when the worthlessness of all the toxic debt, sovereigns included, is accounted for by the world market.  I also suspect that the "vampire squid" will again be ahead shorting the trade, while simultaneously pushing their clients into the long side of it.
Jul 31, 2013 5:05PM

It is time to return to a free market economy where supply and demand determine rates and asset values instead of the central bank 0 % policy. Fixed return investors have been severely hurt by the Federal Reserve money printing and should mobilize and seek political relief like everyone else has.  

I also believe that harm done to fixed return investors is a significant and overlooked drag on any economic recovery because they are not earning then they are not spending.

Jul 31, 2013 11:09AM

"Wall Street"(stock market)........................................................................................."real economy"


And it keeps getting wider.


Fun word of the day: DISCONNECT

Jul 30, 2013 10:55AM
Bill, you seem to focus only on the weak earnings to justify your " I was not expecting a lot of positive reports" call.  Actually, earnings were not bad.

You mention "Corroborating that viewpoint, Caterpillar () lowered its earnings guidance on July 24 and downgraded its view of world growth, but the stock was penalized by only a couple of percentage points."

Maybe that's because, as you omitted, Caterpillar's miss is in terms of a couple cents and it reported that sales agents have been cutting down on inventory - meaning there will be a surge at some future point.

Meanwhile, you don't mention that John Deere's earnings are running 13.7% more than last year.
Jul 28, 2013 10:52PM

I`m glad to see all these idiots so bearish about the market.It means the market can go a lot

higher.These nervous Nellies shouldn`t be in the market.They`re bitter about missing the

bull run.Stay in CD`S getting 1%.Just because the market is up 90% with Obama is no

reason to be bitter you missed out.

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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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[BRIEFING.COM] The stock market finished an upbeat week on a mixed note. The S&P 500 shed less than a point, ending the week higher by 1.3%, while the Dow Jones Industrial Average (+0.1%) cemented a 1.7% advance for the week. High-beta names underperformed, which weighed on the Nasdaq Composite (-0.3%) and the Russell 2000 (-1.3%).

Equity indices displayed strength in the early going with the S&P 500 tagging the 2,019 level during the opening 30 minutes of the action. However, ... More


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