Tuesday, May 01, 2007

They Expected Their Expectations To Be False

Procter & Gamble has disappointed investors. You see, they met the expectations of official analysts. But that wasn't good enough for the analysts. The analysts, however, expect companies to report higher earnings than their expectations. They expect more than they expect, in other words.

That of course sounds like a self-contradiction, but only for people unfamiliar with Wall Street. In reality, as I've reported about in the past, the official expectations are systematically downward biased so that every quarter, the financial press will be able to report that for most companies, earnings exceeded "expectations". It never fails. I've followed Wall Street earnings seasons every quarter for more than a decade and one thing that I've always been able to count on with absolute certainty is that no matter how bad the earnings are in an absolute sense, they will always -always- be reported as being "better than expectations" for most companies. Anyone who is positively surprised by this and buys stocks on the "better than expected" earnings is either a dishonest liar or an inexperienced fool.

And so, it must be emphasized, the main reason why stocks rose so much in April was hardly the official financial press spin of "better than expected" earnings as I don't think there enough naive inexperienced investors to account for the entire increase. Instead, there was simply a positive trend driven by technical factors and increased liquidity. Also, the falling dollar likely created expectations(in the genuine sense of the word) that the trend of rapidly increased foreign earnings for U.S. companies will continue.


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