Earnings Season Progressing Nicely

Last week, we looked at how S&P500 companies were doing earnings wise via Birinyi Associates. The numbers were a touch soft (see Earnings Season Getting Underway).

This week teaches us a lesson in the dangers of extrapolation:  With 34% of S&P 500 companies reporting, the earnings picture looks much better (versus last week’s charts 11%).

The beats and misses are much more in line with the recent SPX earnings history, which has been the bulwark of the Bull’s case.   
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Charts courtesy of Birinyi Associates
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Mike Thomson of Thompson Financial has been the prime proponent of "Its all about earnings;" He has been clearly right so far.

The one dark cloud has been guidance: Its a but softer than it has been recently:

Spx_guidance
Charts courtesy of Birinyi Associates

This may change further as reports come in; However, 34% is a much more signficant sample than 11%, and strongly implies earning will be consistent with previous quarters.

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  1. Lauriston commented on Jan 29

    Barry

    Interesting article. I find it interesting because first we have earnings estimates that I would consider almost meaningless even if one was to take the average of all analysts’ estimates. Second we have the actual reported earnings which are just as meaningless if not more meaningless as we know how from revenues right down to bottomline earnings can be represented in a million ways, and CEOs/CFOs can do whatever they like to present whatever they want. There is no agreement even among accountants or the law about how to present accounts. So here we are comparing two data sets that are both meaningless to start with and drawing conclusions? Imagine in the days of Enron looking at Enron estimates versus reported earnings and how all that turned out! Both numbers were off by a billion miles! Anyway, just my humble thoughts. I guess we have to find something to analyze and that’s probably the best we have?

  2. Michael C. commented on Jan 29

    So here we are comparing two data sets that are both meaningless to start with and drawing conclusions? Imagine in the days of Enron looking at Enron estimates versus reported earnings and how all that turned out! Both numbers were off by a billion miles!

    You can’t honestly compare the majority of S&P companies with Enron. Most CEOs are not like Kenneth Lay, and most S&P companies are not going to go bankrupt anytime soon.

    The case of Enron does not render all other S&P earnings or estimates meaningless. Not even close.

  3. Richard commented on Jan 29

    the future will become more clear as the march/april disappointing earnings forecasts start to hit the street. me thinks they’ll be considerably higher than in years past.

  4. ac commented on Jan 29

    Agree Richard, some spring “surprises” in store eh?

  5. Emmanuel commented on Jan 29

    Earnings are manipulable. You don’t have to go to Enron-style excesses, either. The last time the stock market was doing well during the dot-bomb years, most companies did their best to report earnings that exceeded targets. When the stock market tanked, all of a sudden they were falling short of targets and writing things off.

    Coincidence? I think not.

  6. CDizzle commented on Jan 29

    Which question is more relevant as relates to the direction of stock prices:

    1) Did the S&P 500 components make as much money as analysts thought they would?

    or

    2) Are those same companies going to achieve analysts’ expectations for the next 1-4 quarters?

    As one example, the 1-month chart of AAPL would strongly imply that #2 carries more water than #1.

    We saw that people wanted iPods/Macs/other goodies for the holiday season…what about the next 9 months?

    I’ll take the under.

  7. Eclectic commented on Jan 29

    Oh, BR… you’re such a sweet savage when Mrs. Big Pic gives you milk and cookies and makes sure you get a nice nap.

    Yes, the truth is that those earnings are a bit better than I’d have thought… Our fearless leader doesn’t have his boots in concrete… nosiree… he don’t.

    And, so, today we get to hear from several sources how we must buy this or that now, or we’ll miss our chance.

    I suppose if we miss our chance, we’ll have to wait for a stray gamma ray to pierce our chromosomes and cause a mutation… maybe sometime in the next several million years… maybe we won’t get a another chance like this until we mutate…

    Maybe we won’t get another chance until the Big Bang reverses itself and collapses into a black hole… maybe at the next event horizon, when the laws of nature are reversed… maybe then we’ll get another chance…

    In the meantime, we’ll have to look with sad disappointment at our offspring… maybe even unto our great-great-great-grandchildren… and hope they’ll eventually get a chance like we had today, but we m-i-s-s-e-d it.

    Yessir, this is the last train, and we have the last chance to buy the last ticket on this last opportunity to leave this miserable town.

    Buy your ticket now, or forever lose your opportunity.

    Isn’t that the message?

    Doesn’t it make you excited?… Don’t you want to buy the ticket so you don’t miss the train… the only train… ever?

  8. ac commented on Jan 29

    I would argue earnings aren’t doing better than we thought, or there wouldn’t be a gimpy market. Expectations for the future are scaring the bleep out of the markets.

    A April expansion peek looks likely as well.

  9. anon commented on Jan 29

    Eclectic….. is it smokey where you are?

  10. Michael C. commented on Jan 29

    Emmanuel said Earnings are manipulable. You don’t have to go to Enron-style excesses, either. The last time the stock market was doing well during the dot-bomb years, most companies did their best to report earnings that exceeded targets. When the stock market tanked, all of a sudden they were falling short of targets and writing things off.

    Coincidence? I think not.

    In other words, you are saying what? Spit it out.

  11. Eclectic commented on Jan 30

    Smokey?… I suppose so.

    Yes, it’s always smokey around EBITDA earnings, enough so you can never know just what the earnings are.

    I have a theory of why that’s so and I’ll try it out on all of you, my Big Pic brethren.

    It comes from two things that aren’t necessarily related but they’ve become related over the last approximately 25 years; one is the advanced complexity of the accountancy rules used by big league accountants, the type that do the corporate accounting for publicly traded stock companies; the other thing is the shift to dominance by supply-side economic theory.

    I’ll take them in reverse order:

    Supply-side economic theory, the theory that essentially grew out of an acceptance of ‘Say’s Law’:

    http://en.wikipedia.org/wiki/Say's_Law

    …needs a sort of blind optimism that everything will work out okay. It has to maintain such an attitude because it has the cart before the horse. To maintain that “supply must be present before demand exists” completely ignores everything about human nature that’s been proven since there’s been a recording of human history.

    It ignores the fact that unrestrained free-market capitalism (I am generally a free market capitalist – but not a proponent of the unrestrained version) can and readily does from time-to-time erroneously allocate economic resources.

    You only have to open the latest financial newspaper for a perfect example. There are a number of mortgage finance companies across the country right now that are involved in difficult situations because they were practicing an unrestrained version of Say’s Law, by irresponsibly magnifying the availability of funds to subsequently also irresponsible borrowers. It’s not that Say’s Law wouldn’t often be defensible by claiming that the underlying dynamic was demand driven; the problem actually comes from relying as a fall-back on the very principle I’ve stated that irresponsible buyers were also to blame. What they actually represented was phantom demand.

    Here’s another example: We currently have a dramatic increase in corn prices happening, partly as a speculation that the U.S. could possibly convert some of its energy demand into the production of ethanol from corn as an alternative fuel. However, anybody with any sense knows that the production of corn is far more expensive in total economic resources in the long run than its equivalent production of fossil fuels is, even at higher prices for oil than today.

    And now we hear that many acres of soybean production will be converted to corn this next season… That offers the potential for Say’s Law to run amuck in another way, and soon every square inch of available land would be used to produce corn. Soon we’d be knee-deep to a giraffe in corn in a mad rush to build as much inventory that the farmer can produce to take advantage of the run up in price.

    The corn farmer is simply a commodity himself, and he would, given the chance, convert the entire surface of the planet to corn production if it were made possible for him.

    In both the cases of corn production and housing (mortgage) production, we have irresponsible lenders (facilitators) who are the active participants of the supply function of Say’s Law, as they provide the resources to equally irresponsible producers of corn and improperly qualified buyers of houses, or properly qualified buyers of houses who irresponsibly overpay.

    It’s much easier for a proponent of Say’s Law to take the next logical step that we’ve witnessed over the last 25 years (my general opinion of the time), the step toward the adjustment of reported earnings to reflect that boundless optimism that no financial excesses could occur from utilizing supply-side theory.

    Now on to a discussion of pro-forma EBITDA accountancy and its irresponsible focus on reportable “E.”

    I’m no authority, but I do believe that the nature of general accountancy in this country has never been better, at the level the general public uses accountants. However, big league accountancy has progressively demonstrated a very lax attitude toward the natural tendency of publicly traded companies to want to demonstrate an improving earnings stream.

    Consequently the myriad of complex accounting rules that allow a great deal of latitude in how and when revenues, expenses and earnings are recorded have given rise to a sort of gamesmanship in playing ‘meet or beat’ for the public reporting of financial results. Often the proponents of this sort of ‘smoothing of earnings’ (but generally smoothing upward!) would defend it by claiming that it more properly reflects the true picture of the stream of corporate earnings and avoids the confusion of the effects of such issues as: the requirement for making seasonal adjustments, and the occurrence of extraordinary financial events that are claimed not to be recurring.

    Let’s take a closer look at how smoothing might be completely acceptable.

    If we assume that a given reportable period is defined as E[N], in which it is divided into segments as: E[n1], plus E[n2], plus… E[n(N-1)] equals E[N], then it would be perfectly acceptable if the negative effects of some extraordinary event or seasonal correction occurring in one segment were offset by a corresponding observance of a correcting entry in some other segment. In that case the proponents of using the smoothing technique would be correct in their assumption that it more accurately depicts earnings over reporting period E[N].

    But, in reality that’s not what happens, because the human nature that naturally seeks to depict the earnings in the most favorable light takes over. What we really get is a situation in which the favorable accounting treatments that allow a more positively demonstrated period of earnings to be reported, because of some explained extraordinary event or seasonal adjustment, are indeed all to easy to adopt; but the requirement in some other period to offset those extraordinary or seasonal events in a manner that contributes a negative element is all too easy to i-g-n-o-r-e, or to again seek some accounting manipulation to lessen a negative event that might be surprisingly worse than anticipated.

    However, they can’t be ignored or manipulated forever, because in the short run big league accountancy may involve gamesmanship, but in the long run it’s an obedient servant of mathematical science. It behaves like the tide of Warren Buffett’s analogy (paraphrased): “When it goes out, you find out who was swimming naked.”

    Consequently, we then get the public announcement from company “X” that: “We’ve discovered an error in our accounting, and we’ll be restating our earnings back to when Moses did the IPO on dirt.”

    That’s when investors find out that the gamesmanship of ‘meet or beat’ for all those previous reporting periods was all just a string of phantom earnings reports facilitated by overly optimistic smoothing techniques applied to financial results… utilizing the laxity and complexity of big league accountancy, and assisted by the optimism of human nature.

    The trend toward the combination of these two elements I’ve described is in my opinion not nearly so bad as it was, say, 5-10 years ago, but I also don’t believe we can have complete confidence in big league accountancy yet, and it may take another outgoing of the tide to return accountancy to its absolute purpose of objective truth, that in my opinion was in greater evidence prior to the great supply-side revolution of the 1980s.

  12. Teddy commented on Jan 30

    I remember a reporter asking President Reagan during a televised question and answer session in the Rose Garden just after Supply Side Economics became in vogue and after the historic tax cuts as to whether it would lead to budget deficits. Reagan said that “If you don’t give them (Congress) a dime, they can’t spent the dime”. If Reagan could see what has evolved and happened since then, he wouldn’t call it “voodoo” economics as President George H. Bush did. I think he’d called Freakinomics.

  13. Teddy commented on Jan 30

    Correcton: I think he’d call it Freakinomics

  14. Teddy commented on Jan 30

    I’ve also read too many scientific reports that it takes more energy to produce ethanol than the amount of energy derived from that same amount of ethanol. If there was the usual huge surplus of corn in our bins, I wouldn’t worry about it because that would be the ethanol producers problem, but not now, under current conditions. In Brazil, they use sugar cane to produce ethanol where the energy economics are different.

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