The week that was…

Most weeks, I choose one topic on which to spout my thoughts and opinions.  But, this week, there were just too many interesting things to ponder, so here are 8 brief points of interest.

1)  Earnings season is over and the results were better than expected.  Revenues didn’t dazzle, meaning that end demand is slow, but cost cuts more than made up the difference.  This just goes to show that companies and the stock market can do well even in a slow economy.

2)  Economic numbers continue to improve.  Unemployment claims improved, railroad loadings are up, leading economic indicators surprised on the upside as did the Philly Fed’s survey.  The economy is improving ever so slowly, but it is improving.

3)  There’s been a lot of speculation that the Fed’s quantitative easing program is merely an attempt to puff up the stock market to get rich people to spend, thus improving the overall economy.  Andy Kessler and Don Coxe made convincing arguments that the Fed is really worried about real estate and the financial institutions that depend on real estate values, and thus quantitative easying may be an attempt to support bank balance sheets.  Why did the economy roll over in 2008?  Oh, that’s right, real estate values tanked and financial institutions froze up.

4)  The mortgage documentation mess promises to have much more lasting impacts than most realize.  This issue goes to the heart of real estate titles and ownership, and the dinosaurs are going toe to toe to find out who will eat losses.  If the banks end up losing this fight, like they should, then we could be right back into a 2008 crisis again.  See 3) above.

5)  Ireland will likely take a bailout from the European Union (EU).  If you think this means Ireland is in a weak position, think again.  When you owe the bank $10,000, it’s your problem; when you owe it $10 billion, it’s the bank’s problem.  The EU is more worried about Greece, Portugal, Spain and Italy than Ireland, so they are hoping to draw a line in the sand at Ireland (after Greece).  Ireland has the stronger hand in this game.  Oh, and by the way, why is another bailout in Europe good news for markets?

6)  China is working hard to slow down their economy, mostly by slowing bank lending, because food inflation is making the natives restless.  China may succeed more than world markets anticipate.  Initially, markets will probably take that hard.  But, over time, this will lower the prices of input commodities, thus improving developing economies.  This may be a case where slowing for them is good news for us.

7)  Many state and local governments in the U.S. look like Portugal, Ireland, Italy, Greece and Spain in terms of fiscal health.  When these issues hit the front page, likely next year or the year after, it will rattle markets and lead to huge bailouts by the federal government.  This will be good in the long run (because budgets are out of touch with reality), but I don’t think many people, especially investors, are paying attention to the short term impacts.

8)  Long term bond yields spiked over the last couple of weeks.  An almost 5% decline in the 10 year U.S. Treasury bond over a couple of weeks should be a wake up call for investors who think bonds are risk free.  It should also give pause to equity investors who should know that stocks should go down when long term bond yields spike.  But, why worry about that, the market is rallying!

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

The week that was…

Earnings season is upon us!

For those who seriously pay attention to the stock market, earnings season is an important time each quarter. Earnings season is when companies report their quarterly financial results both in conference calls and press releases. It’s not only a chance to see how businesses have done, but, more importantly, it’s a chance to get a peek at how businesses will do going forward. And that peek, more than anything else, is what drives stock prices in the short term.

What are the prognosticators seeing in their crystal balls this quarter? For the first time since the second quarter of 2003, earnings are forecast to grow at a slower than 10% pace year-over-year. What many stock market watchers are worried about is that companies will not only report slower growth, but that they will forecast slower growth for more than a quarter or two. Gasp! Horror! (sarcasm)

In the long run, a stock’s price is determined by what a company will earn over time. The thing that moves stock prices in the short term, however, is not so much how companies are doing, but how they are doing relative to the view of market participants. John Maynard Keynes, a famous economist and successful investor, once compared picking short term investment winners to a beauty contest. Instead of trying to pick the most beautiful person, you end up trying to guess who everyone else thinks is beautiful. The game, in the short run at least, it to try to outwit all the other people trying to outwit you in guessing how everyone will react to short term information.

Would you like to guess how well this methodology works over the long term? Answer: not so good. The problem is that quarterly earnings reports and guesses about how things in the economy are shaping up are extremely noisy–by which I mean they move around a lot and don’t necessarily indicate long term information. This noisiness means that trying to guess what will happen seems to be a fools errand. And yet, most on Wall Street and most money managers try to play it. Want to guess why 80% of professional money managers don’t beat the market?

I’m not saying quarterly earnings reports are a waste of time. Quite the contrary. A lot of valuable information can be gleaned by listening to conference calls and reading quarterly financial reports over a long period of time. That’s why I read quarterly reports and listen to conference calls.

The problem is the importance that’s placed on such noisy data. And this importance is what makes stock market prices much more volatile than the earnings of underlying companies. It’s all those bozo’s trying to guess what will happen over the next 12 seconds that leads prices to go so far astray from underlying value. While such volatility makes consistently beating the market in the short term almost impossible, it does lead to wonderful opportunities to buy good companies at overly low prices.

And, that’s the real reason I love earnings season.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.