Wednesday, October 28, 2009

Profits Bad-But "Better Than Expected"

3 weeks ago I wrote the following about the then upcoming earnings season:

"1. In absolute terms and in relation to what so-called analysts officially expected just a few months ago, corporate earnings will be really bad.

2. Relative to current official expectations (-25% compared to the already depressed earnings last year), earnings will in most cases, as they nearly always are, be "better than expected", thus promoting the belief that you should buy stocks even though they're objectively expensive."

Today, with much of the earnings season behind us, Bloomberg news writes the following:

"Earnings-per-share have topped estimates at 82 percent of the companies in the S&P 500 that reported third-quarter results so far, which would be a record proportion for a full quarter in Bloomberg data going back to 1993. Still, profits have decreased 19 percent on average for the 236 companies that reported since Oct. 7. Sales have slumped 5.8 percent and surpassed estimates at 64 percent of the companies."

The stock sell-off in recent days indicate that an increasing number of people realize that earnings really were terrible despite beating the rigged "analyst estimates" and that stocks really are overvalued now. That doesn't necessarily mean that the trend has shifted and that stocks will continue to decline in value, but there is a high probability of it and what we can say for sure is that they should do so.