Are Better than Expected Corporate Earnings Results Good?

By: Paul_J_Nolte

When you expect a failing grade, but just past that math class, is that “better than expected” necessarily good? Evidently on Wall Street, limping over the very low “expectations” hurdle has been enough to push stocks up and over to be solidly higher for the year. In the rear view mirror are now the market lows for this cycle, the worst economic collapse in a few generations and the broken banking system.

The markets seem to be anticipating a better than 3% economic growth (that we don’t see yet) based upon their 3+ month rally. Also missing in the analysis has been the decline in revenues by many of the companies reporting “better than expected” earnings, which came at the hands of cost cutting (read layoffs). Without revenue growth, sustainable earnings growth will be very hard to come by, making the current valuations of the markets seem a bit rich. While will the markets come to their economic senses? Judging by the recent market action, it could be a while – but look out when it does.

We are officially off to the races. The correction we were looking for was much shallower and shorter than we expected and given the modest increase in volume as the markets rose, we could see another 5-10% tacked onto Friday’s close. Even earnings misses from Amazon, Microsoft and American Express dampened investor’s enthusiasm only briefly before the weekend rally took hold. Many of our indicators are pointing to a more meaningful correction, however the timing of that correction is not determined.

Given one more good week of earnings numbers before the following week of heavy economic data, we could still see higher prices into early August. However, the markets may be setting up for a fall decline, as expectations are getting well ahead of economic reality. But it is a funny thing how trillions of dollars tossed into the financial wind can make fools of investors.
 
The bond model finally succumbed to the rallying equity markets. The bond model has finally given its first negative reading in six weeks and if history is our guide, may remain negative through August. If so, it could be reflecting investor’s enthusiasm for an economic recovery – meaning rates will have to rise to stem the inflationary build-up from the trillions of monetary “easing” that is floating in the system that could trip the inflationary switch if the recovery is at all robust.

The commodity complex is once again rising as energy prices once again take aim at $70/bbl. Copper prices, usually referred to as “Dr. Copper” for its ability to forecast economic recoveries has been pointing higher for eight months. For the first time in a while our indicators are pointing to higher equity prices.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2009 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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