While the rest of the world has spring, summer, fall and winter, every three months Wall Street has earnings season, when public companies report their financial results. While the numbers that the corporations deliver are important, how the market reacts to those numbers can be even more revealing as a short-term, and sometimes long-term, indicator of where the market is headed.
So let's see what we can learn from Google (GOOG, news), IBM (IBM, news) and Apple (AAPL, news), which grabbed big headlines for their successes (while their stock prices all popped up).
Google was quite successful at Wall Street's favorite earnings season game, "beat-the-number," and the stock quickly rocketed about 10% in the wake of its earnings report. As I saw Google's results, I thought it would be an interesting litmus test for the market the following day (July 15), Would the bulls put on party hats and extrapolate Google to other stocks, or would it be treated as the company-specific news that it was?
Not on the same page
While the rally in Google did put a boost into a few stocks after hours, the following day speculators were not able to turn it into good news for the entire tape, as they often do. Score? Neutral. Essentially, the good news didn't help.
Last Monday IBM, too, won at beat-the-number with the help of currency weakness. (Most lines of business grew about 3%, save for software, where IBM boosts its growth via acquisitions). The company also raised its guidance. Given that IBM's biggest customers are financial entities and governments, none of which are doing very well currently, that is a rather bold claim -- and one that may become a problem. But now that IBM has morphed into a cloud-computing company, it seems to have earned the benefit of the doubt; the stock was higher Tuesday by about 4%, as were shares of its cloud-computing brethren.
Bill Fleckenstein
As for IBM's financial cousins, (remember, IBM claimed it was a financial company during the crisis of 2008 so it would be put on the do-not-short list) Goldman Sachs Group (GS, news)was less successful at financial engineering and lost at beat-the-number by a mile. Nonetheless, its stock declined just fractionally, which I found interesting. Score? Bullish, as basically IBM was extrapolated and Goldman was ignored.
Apple's undoing
Then on Tuesday after market hours, there was a lot of heavy breathing over Apple, which managed once again to beat the low expectations that it sets for itself every quarter. The stock was more than 4% higher that night, but it leaked a bit on Wednesday, gaining "only" 2.5%.
However, a skunk spoiled the party that was expected to be thrown in the wake of the Apple news. Riverbed Technology (RVBD, news) missed numbers, but more importantly, that fact was deemed not company-specific and all cloud-computing companies were clubbed. The news even caused bellwether VMware (VMW, news) -- which won at beat-the-number -- to reverse an 8% gain after hours. Score? Bearish, as Riverbed trumped Apple and "undid" the IBM-inspired rally.
The net of all that good news is that it did not really get the market in gear to the upside. Thus, that is potentially a tipoff that the tape may have more work to do on the downside, especially because the balance of earnings season may not see as much hype and could see some problems.
From 'ewww' to 'whew!'
However, deciphering the market action is complicated by the volatility induced by the financial dramas playing out here and in Europe. As for our debt-ceiling charade, I fully expect (as I have all along) that the debt ceiling will be raised in due course -- just like it has every single time since that "ceiling" has been hit (11 times since 2002).
In Europe, the hope has been that the powers that be would deliver a solution at the European Union summit held on Thursday, when, to quote my friend Joanie McCullogh, they were somehow expected:
". . . to break the impasse on the second Greek rescue plan (read: what to do about private holders of Greek debt) and to stop the contagion spreading through the peripherals. Currently, Germany, the Netherlands and Finland are looking for shared pain. The ECB, France and any Euro countries with a shaky fiscal condition, are not. Because they fear that once private creditors are required to take a hit, the contagion will spread faster and more furiously."
A new bailout deal was reached Thursday (details here). But there really is no solution, certainly not one painless and expedient enough to be politically acceptable. That's why one option has been for the EU/European Central Bank to take a page from the Federal Reserve's money-printing playbook and use the European Financial Stability Facility to buy bad government paper, which only kicks the can down the road yet again.
My conclusion is that, once the noise dies down, the stock market needs to go lower to get the Fed to print more money here (i.e., a QE3 money-printing initiative), which is the only reason the market is as high as it is.
At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.
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.
