October 21st, 2012
by Jeff Miller, A Dash of Insight
The early returns are in!
The reaction to earnings turned negative, and it is easy to spot the turning point. Google [pending Larry quote] had an accidental early release of their earnings miss. The goof was the source of non-stop media coverage, and inspired a new twitter participant, @pendinglarry. My favorite tweets were these, but check them out for yourself:
-First thing I said after SEC filing went out: "Oh, Schmidt!"
-To be fair, we released our earnings yesterday afternoon on Google Plus.
-(and especially) Thought that Groupon deal for SEC document filing was too good to be true. You really do get what you pay for.
As I predicted last week, the market action is all about expectations and interpretation. The earnings results have actually beaten expectations (given the lower bar) but the revenue beat rate and outlook has been disappointing.
Downtown Josh Brown accurately reports the current verdict:
How's earnings season going? Only 42.3% of S&P 500 reported companies beat Q3 revenue expectations and 57.7% have missed. 64.9% have beat EPS estimates. Sucks.
The early conclusion is that earnings have been maintained only because of unsustainable cost-cutting. Some are drawing broad conclusions from a few reports, with a Barron's cover announcing the death of the PC.
I'll offer my own take in the conclusion, but first let us do our regular review of last week's news.
Background on "Weighing the Week Ahead"
There are many good lists of upcoming events. One source I especially like is the weekly post from the WSJ's Market Beat blog. There is a nice combination of data, speeches, and earnings reports.
In contrast, I highlight a smaller group of events. My theme is an expert guess about what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.
This is unlike my other articles at "A Dash" where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.
Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!
Last Week's Data
Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:
- The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.
- It is better than expectations.
The economic news last week was mostly positive, including these highlights.
- Housing is stronger. I want to emphasize building permits, a leading indicator. It is costly to get a building permit, so it involves a real commitment. Steven Hansen has a nice analysis of this report, showing the data from various perspectives. This is the chart that I think is most helpful:
- Spain averted a ratings downgrade although the threat remains (via the FT). In fact, the general story from Europe seemed better, and key interest rates moved lower.
- Retail sales were much stronger -- not consistent with the onset of a recession (RecessionAlert).
- Leading Indicators from the Conference Board spiked higher -- but last month was revised lower. It is a small net positive, but "flatlining" in recent months as noted by Doug Short.
The actual data last week was pretty good, but the stock result was bad. This happens, and it can be meaningful. Let us take a closer look.
- Superficial analysis, looking backward with too little data. The humorous example of the week comes from Chuck Todd, who jokingly notes the importance of the Florida State/Miami football game. Since 1988, this swing state has been won by Democrats whenever Florida State wins, and by Republicans whenever Miami wins. Florida State is a big pre-game favorite, but the outcome is in doubt at the time I am writing this. Does anyone really think this is relevant? Many of the current prediction methods (both for elections and for stocks) use a similar approach: fitting the hypothesis to old data -- not splitting the data into segments, and no "out of sample" test data. It is pretty easy to perfectly "predict" the last eight elections or recessions if you take this approach. (See more humorous examples via Barry Ritholtz).
- Chinese economic growth is worse than you think. This week's data may have seemed positive on first blush, but Kate Mackenzie takes a deeper look. The problem is that China uses year-over-year reporting rather than a quarterly report with seasonal adjustments. It is quite possible that China's GDP growth had a "six handle" in Q2, although there might now be a rebound. This story is well worth reading -- twice! (even more here).
- Existing home sales missed the forecast and the market seemed to move lower on the news. We'll score it as "bad." Calculated Risk thought it was a "solid report" because of reduced inventories and overall sales in a normal range.
- Initial jobless claims spiked higher, offsetting last week's surprise move lower. Both weeks are part of the period included in this month's payroll employment report. The overall level is still not good, but also not at recession levels.
There was nothing as ugly this week as what we experienced 25 years ago. I knew there would be many providing a look back. The Crash of '87 (which now seems so long ago) had an important effect on the business, the rules, and investors. I offered my personal experiences from the options business in this article. When looking back, it is important to find history that has implications for current decisions. With this criterion in mind, here are some of the best Crash Retrospectives (and maybe also some good stories):
- Josh Brown puts history in his own unique perspective. The best feature of Josh's blog is the unvarying devotion to the individual investor.
- Scott Rothbort (my friend and colleague at Wall Street All-Stars) does a really great job of putting the Crash in perspective, citing several other crises. Anyone would benefit from Scott's daily take on the markets. I certainly do. (I understand that everyone want free information. Sometimes a small payment is worth the investment. The dynamics and chemistry at this site make it both interesting and informative. You will definitely get a variety of viewpoints and some great trading ideas).
- Barry Ritholtz has a number of great links to 1987 stories. I especially enjoyed Art Cashin and Louis Rukeyser's show from that week.
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