Earnings Season Is Starting to Look Like a Disaster

July 27th, 2013
in contributors, syndication

by EconMatters, EconMatters.com

Earnings season is starting to ramp up, and its abundantly clear that we have a problem. We had this occur last year as we were pushing all-time highs in markets, and the bulls wouldn't let stocks drop even as a couple of misses started happening. Then on a Friday before option's expiration, all hell broke loose because there were so many misses and stocks getting killed that the carnage was too much to fight, and the bulls capitulated.

This earnings season is much worse many companies are missing on the revenue side, companies haven't figured a way to manipulate this portion of earnings as easily as the EPS number via stock buybacks. But things are so bad major equity bellwethers like Google, Microsoft, and Intel are just plain missing by any quarterly metric.

Follow up:

The bulls will try to counter this weakness by pushing up other stocks, but this can only last so long after about 30 misses, and the entire market just falls off a cliff because there are so many shorts attacking individual earnings misses on stocks, that the cumulative effect overwhelms even the most optimistic of bulls.


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By my count we have about 10 misses this far into earnings season, only 20 more to go before the real selling takes over in markets! Earnings season used to be good for stock prices, and it is because so many firms need to manipulate their EPS number, that they are all busy bees buying up shares to beat their awful EPS target number by one cent at all costs. They know where they stand after the quarter, now they start buying back shares like crazy to meet this EPS target. What a scam, and it is completely legal.

But the problem with earnings season with stock prices at all-time highs is that anybody in one of these stocks that has an earnings miss loses a lot of money real quick. So earnings season now more than anything resembles a flashlight in a dark room at night, as all the bull cockroaches flee for cover. It acts as a massive dose of reality for the overzealous bulls who wrongly figured that stocks cannot fall in a QE-injected market.

Well, not only can they fall, the bulls may very well have bought at the top of the QE market this week as tapering starts in September. The market probably drops like a rock after an additional 20 earnings misses in the next few weeks. And given that it often takes 13 days of aggressive selling to get out of positions by firms, do you think everybody is going to wait until September to actually start unwinding their exceptionally levered positions?


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Don't everybody run for the exits at the same time folks. Remember to walk, and not run! Just imagine the carnage on the way down as everyone starts selling their 13 days’ worth of positions at the same time. You literally can just close your eyes and hit the sell button.

Once the ETFs kick in, this is going to be one of the most “unsteady” portfolio rebalancing events that we have experienced in recent time with asset prices so far ahead of ‘reasonable valuations’ things are going to get extremely ugly, real fast!

What is that old market adage, stocks take the escalator up, and the freight elevator down. Well, the problem is that not everybody wanting to sell this time will be able to fit in the elevator. There will be crushed bulls piling on top of the elevator trying to liquidate positions, while unfortunate, slow-witted bulls hoping for more fed buying to save their ever-decreasing portfolios a la David Einhorn with his Apple stake! He rode that baby all the way down $300 a share. These bubbles always end the same way!

Thank you Ben Bernanke when all is said and done you are going to be remembered as the worst Fed President of all time! The man who created the largest asset bubble in the history of markets, and left thefallout of the flawed policy for somebody else to fix! This is no different than Angelo Mozilo of Countrywide, that's a nice legacy Ben. I hope you are proud of yourself!


Reading: The Bernanke Conundrum


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