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Talking stocks, trading, and investing in general

Discussion in 'Business, Careers & Education' started by mikeman, Feb 2, 2011.

  1. Master-Classter

    Master-Classter Senior member

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    Saw VIX go up about 20% today. Hit $20. Shoulda Woulda Coulda bought it around $13 to hedge. Oh well.
     
  2. stimulacra

    stimulacra Senior member

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    Regarding UA, a lot of people I know still view the brand as being too new or recent, to be their default choice for sports items. They're only a controversy away from falling out of favor.

    I think sports brands du jour will give Nike a run for their money for a few quarters but it'll be hard to displace Nike from the default short list for most consumers. The wide moat argument would still apply.

    I wish I had some cash to deploy before the election :)
     
  3. idfnl

    idfnl Senior member

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    Think I may double my position tomorrow. I have way too much cash sitting fallow to keep waiting.
     
  4. SirReveller

    SirReveller Senior member

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    Great earnings commentary from Mauldin. Thought of you guys. Lots of fun stuff in here.

    Warning: long AF.
    Earnings: The Shell Game

    You own stocks for two reasons. You either think the shares will gain value, or they will give you dividend income, or both. Neither will happen unless the company is making money or at least has the plausible hope of making money someday. Earnings reports are important because they tell us whether that’s happening.

    They’re important for a deeper reason, too. A company’s market value is essentially the present value of its expected future profits. Small changes in that “expected” number can have a kind of domino effect. Public-company executives know this and try to put their best feet forward. Analysts are supposed to see through such maneuvers and discern reality. They issue forecasts about companies, and then each quarter we get to see if the forecasts were right.

    Somehow this innocent-sounding exercise has evolved into a giant expectations shell game. For the most part, Wall Street doesn’t care if a company’s report is good or bad; it cares whether the results match, beat, or fall below the consensus analyst forecast. A company “wins” the game and earns a higher share price by delivering unexpectedly positive numbers. This creates all sorts of perverse consequences.

    You can see the problem all the time in the way analysts, in response to a company’s guidance, revise their forecasts downward as the release of the earnings report approaches. Michael Lebowitz at 720 Global published a great chart on the phenomenon last week. These are averages for the 17 quarters from 2Q 2012 through 2Q 2016:



    Profit projections made one year out are usually way too optimistic. Over the next twelve months they fall steadily to a point just below the eventual actual number. Voila: a huge failure to deliver on the year’s goal gets transformed into a “we beat expectations” victory.

    This happens all the time, as Lebowitz shows in this chart for the same 17 quarters.



    Here’s how Lebowitz explains this chart:

    The black line represents quarterly forecasts of earnings growth one year in the future. The green line shows that, six months later, earnings growth has been revised downwards in every instance. Earnings expectations continue to get revised lower as shown by the red line, which represents earnings expectations three months prior to their release. The yellow line shows expectations in the quarter that earnings are due to be released.  As you can see in every instance, earnings expectations are at their highest a year in advance, and lowest in the quarter they are due to be reported. Hardly a coincidence, we suspect.

    Indeed, this pattern is hardly coincidental. It resembles the sort of fact manipulation routinely practiced by political-messaging operatives. Early on, you tell people how wonderful the future will be when there’s no way anyone can prove you wrong. As reality draws nearer and the chances of looking foolish increase, you get more cautious. Then at the end you purposely dampen any enthusiasm so your voters (or investors) will get a pleasant surprise.

    Unexpected bad news is the absolute worst thing, for both Washington and Wall Street, so both work hard to avoid it – by intentionally disseminating information they know (or should know) to be wrong. They defend this practice by saying it’s better to err on the side of caution. That’s true, usually, but they are still erring on purpose instead of giving their honest opinions.

    You know where this goes next. Wall Street ears fill with “whisper numbers” that supposedly reflect the “real” estimates that analysts don’t publish. Who gets the whisper numbers, and when do they get them? The potential for abuse is obvious. People who get reliable whisper numbers can trade ahead of the unwashed public and disfavored institutions that must rely on published forecasts.

    Giving someone who is not inside the company advance notice of actual earnings is illegal, and you can get in serious trouble for it. But that doesn’t stop a lot of interesting action from happening right before some companies announce their earnings. I should note that there are many legitimate money managers who go to extreme lengths to try to figure out what is going on in the companies they cover, to the point of counting the cars in the parking lot or the number of trucks leaving a warehouse, and so on. But that is just the side story…

    The net result of this earnings forecast manipulation is a stock market with a last-minute bullish bias. The rosy early forecasts convince investors to buy a stock, and then the lower last-minute revisions convince them not to sell even when results are nowhere near original expectations. Then, all these forecasts get aggregated into sector and market forecasts, convincing strategists to maintain or increase their allocations to stocks instead of other asset classes.

    And the manipulation does make a difference. Mark Hulbert, writing at MarketWatch, gives us the following chart and story:



    Consider the percentage of recently-reporting companies that beat Wall Street’s expectations. Among the firms in the S&P 500 that have reported this earnings season, for example, 76.1% beat the analyst consensus and just 16.8% missed.

    Nor are these recent results a fluke. Over the last 16 quarters (or four years), according to Standard & Poor’s data, more than two-thirds of all S&P 500 companies’ earnings beat expectations. In no individual quarter was the share beating less than 63%.

    Beating expectations has now become expected, in other words.

    In contrast to the largely clueless analysts, however, investors appear to be seeing through the expectations game. They have stopped getting particularly excited by beating expectations, for example. At the same time, they severely punish companies that fail to clear the artificially low hurdle that their expectations game has created.

    This asymmetry is evident in the performance of a company’s stock immediately after reporting its earnings. During the current earnings season, the stocks of companies missing expectations fell 2.3% following their earnings reports, versus just a 0.6% average gain among companies that beat. (Data is from J. P. Morgan Markets.)

    I don’t think this phenomenon is the result of some nefarious conspiracy, but it might as well be. It is the fault of both company management and all-too-willing analysts responding to the incentives before them. It usually works… until it doesn’t – and I think we’re approaching a time when it won’t.

    Analysts Gone Wild

    Equity analysts are a big part of the problem. Their job should be getting those estimates right rather than taking what are clearly suspect numbers from companies and plugging them into their spreadsheets. The chart below is from my friends at Ned Davis Research. It shows the consensus estimates for S&P 500 operating earnings when those estimates are first created and then what happens to the estimates over time. This chart starts with the year 2012, and there has not been one year since that has not seen a significant revision downward of earnings forecasts. Note that initial estimates have been higher every year than the year before, except in 2016, and that the drop-off in earnings estimates was more precipitous in 2015 and 2016 than in prior years.

    In 2015 (the green line if you are seeing this in color), consensus estimates went from an initial forecast of $137 to barely above $100 by the end of the year. That is a huge miss – over 30%. But that expectations dive didn’t dismay the analysts, because they initially predicted roughly the same level of earnings for 2016; and as of September 30, it looked as though earnings are going to come in at roughly $110.

    For 2017, earnings predictions started above $140 and are now down to $132. In a world where GDP growth may be in the neighborhood of 2%, do you think it makes a whole lot of sense that earnings are going to grow by 20% in 2017? Really? Honest?



    And these are operating earnings – you know, what I called EBIBS: Earnings Before Interest and Bad Stuff. You can download this fascinating spreadsheet, which is a treasure trove of data maintained by my friend Howard Silverblatt at S&P, then open it and scroll down to about line 100, where you can see the comparisons of operating and reported earnings. Reported earnings are what go to the tax authorities and are in fact what companies really earned. What you will find is that reported earnings are generally lower, and sometimes a lot lower, than operating earnings. Surprise, surprise.

    When bullish analysts talk about the price-to-earnings ratio (P/E ratio) being roughly 20 today, they are using operating earnings in their calculation. If they used reported earnings, they would find that the P/E ratio is roughly 24, more than a 10% difference and certainly up in nosebleed territory. I should note that the much more useful CAPE (the cyclically adjusted P/E ratio created by Prof. Robert Shiller), today’s P/E is 26.79. That is back up in 2007 range and was exceeded only in the irrational markets of 2000 and 1929. And it’s higher than when the bear markets of 1901 and 1966 started.

    Digging a little farther, you find that analysts are projecting earnings to grow roughly 30% from where we sit today by the end of 2017.

    It rather boggles the mind that people take these estimates seriously. But that is the problem: a very large number of people and market advisors do, which is why, of course, you hear that you’ve got to be bullish and stay in the market. Because if earnings really do rise that much, a forecast of 2500 on the S&P is not unreasonable in this market environment. And so you get a lot of predictions of a big S&P 500 bull market in 2017.

    It won’t be long before Barron’s puts out its annual forecast issue. It will be interesting to see just how bullish the estimate for the S&P will be. Just a wild guess from me, but I bet the consensus will be somewhere in the 2400 range.

    It seems the Barron’s forecasters and the analysts running the S&P numbers are all drinking from the same well. That must be some mighty fine water.

    Phantom Earnings Growth

    The S&P data does in fact show that earnings-per-share growth is increasing. That is good, right? Do we not want earnings to grow? Of course we do – but that’s not what is happening.

    What is happening is that companies are using the ultra-low interest rates the Federal Reserve has set to borrow money to do stock buybacks, which give us the illusion of growing earnings without actually increasing them – and creating a lot more debt on company balance sheets.

    How have earnings actually done in real (inflation-adjusted) terms? That is a different story.

    This is data from Robert Shiller, who tracked earnings back to 1871. He then inflation-adjusted using 1983 as a starting point. This chart, which starts in 1966, shows that earnings in real terms have fallen back below their 2006 peak.
     
  5. Master-Classter

    Master-Classter Senior member

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    Totally makes sense and I've read about this in part before. I've always been surprised when a company has a solid report but becuase it wasn't as good as expectations, the stock drops, and in some cases by huge numbers, like 15-20% drops just based on a single quarterly report, maybe with a bit of future guidance in there. These should be like 3-5% adjustments but because the stock prices have gotten so far away from actual value and are all based on multiples of the future, most of the price has nothing to do with how the company is doing right now, so a small change has to be multiplied many times, plus everyone's just looking to make a buck so they're all playing roulette here, and throw in the ability to do options trading and things start to get a little crazy.

    I'm trying to remember which one it was but I remember one company I was holding had a report earlier this year that included lower guidance, which of course dropped the price, but someone commented that they were probably sandbagging the stock now to lower expectations so when they were only doing ok instead of very well later in the year, then at least they'd look like they had a beat on expectations. So it's all just a stupid game of managing expectations.

    I don't want to get into a whole discussion about TSLA, but I see them as a good example of this kind of thing. So much of the stock is based on speculation, not the reality of what the company is doing. To me it's just like some sort of twitchy widget that jumps around so much I can get in and out and make a little money and I mean sure there's some sort of story here that someone will buy it for the long hold but it moves around so much that I see it simply as a trading stock for now until it stabilizes.
     
    Last edited: Nov 1, 2016
  6. idfnl

    idfnl Senior member

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    NKE trade is done, didn't quite double up but close.
     
  7. stimulacra

    stimulacra Senior member

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    Can't wait till next Tuesday…
     
  8. GreenFrog

    GreenFrog Senior member

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    Interesting AH action with fb.

    First down 4% at its worst. Now up close to 1% 15 minutes after the results came out.

    Dem crazy AH traders.

    Edit: listening to conf. call and the stock tanked once CFO mentioned mobile ad revenue growth would slow meaningfully due to reduction of ad load lever. Followed up with significantly increased investment cost in expensive / niche engineering talent for 2017.

    Down 6% now. Yikes.

    Edit 2: Sheryl Sandberg is such an articulate, eloquent speaker. Never has any filler "ums, uhs, you knows.' NONE.
     
    Last edited: Nov 2, 2016
  9. idfnl

    idfnl Senior member

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    Not sure why people still use internet words like "dem" and "dey". It's hasn't been funny since 2012.
     
  10. lawyerdad

    lawyerdad Senior member

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    You could say that about 99% of the conventions and in-jokes on this forvm. But of course we use them all in an ironic, meta- fashion, which makes them brilliantly funny all over again.
     
    1 person likes this.
  11. idfnl

    idfnl Senior member

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    Heh, forvm. Dems funny.

    I think the people posting insider words do indeed think its funny, otherwise they'd stop. It's like a forum laugh tack.

    You can roll this phenomena into that Attolini pink tie joke which was funny for a few hours, then just became a 6 year long black hole for people with nothing to do in the face of a place designed for people with nothing to do.
     
  12. GreenFrog

    GreenFrog Senior member

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    dat disdain doe
     
    2 people like this.
  13. idfnl

    idfnl Senior member

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  14. GreenFrog

    GreenFrog Senior member

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    Wish I picked up FB when it was down 8% last night.

    Want to buy some now still but the fucking election overhang has me hesitant.
     
  15. idfnl

    idfnl Senior member

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    Heh, FB down below where I sold it months ago. Life is good :)
     
  16. Master-Classter

    Master-Classter Senior member

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    Le sigh, added about 20-30% to FSLR since I already own plenty and it just dropped about 15% today after the report. Hopefully a few months from now and it'll work it's way out of this.
     
  17. GreenFrog

    GreenFrog Senior member

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    I sold off a third of VRX yesterday for a negligible profit. Looking to add before Tuesday next week.

    Other than that, damn, my portfolio is taking a beating.
     
    1 person likes this.
  18. Piobaire

    Piobaire Senior member

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    It's not been pretty but I'm just sad I don't have any cash left to deploy other than ongoing DCA contributions. :(
     
  19. GreenFrog

    GreenFrog Senior member

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    I'm 60% cash so I have a powder keg of funds to deploy, thankfully.

    My biggest issue is I become a huge pussy when the market is in decline, thinking that losses will accelerate. I hesitate and then the BTFD strategy proves itself before I can take advantage of it.
     

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