“Life’s just a cocktail party on the street. Big Apple”, Shattered (Jagger – Richards)
Last week, we contended that earnings season is poorly structured. We lead off with major banks. Their relationships with most of the world’s most important companies and myriad consumers should offer insight into the health of crucial economic sectors, but the problem is that they derive their profits from esoterica like trading results and the shape of the yield curve. Neither of those matter much to non-financial companies.
In a discussion yesterday about our outlook for the earnings to come, I hit upon the following idea: bank earnings are the cocktail hour of earnings season. This week is the first course, when many important companies report, and next week, when megacap techs release, is the main course. We can also think of next week as the time when the host and honored guests give their speeches.
Just as a cocktail hour can set the tone for the affair that will ensue, we can glean important insights about investor psychology from the banks’ prelude. This is something we noted last week. Few were expecting Citigroup (C) to be reward with a double-digit percentage gain after its results, but the response was a welcome sign to many that investor sentiment could be more charitable this quarter than it was in the prior two. Never mind that Citi’s results were bolstered by solid trading results and interest revenues – the former will have no bearing on the vast majority of companies, and the latter is more likely to be a headwind for non-banks rather than a profit center – the response was what mattered.
So far we have not seen negative earnings become a problem. JPMorgan Chase (JPM) quickly shrugged off its disappointment after Citi jumped. This morning we have IBM trading about 6% lower after beating estimates but guiding lower. The strong dollar was the main culprit behind the reduced guidance, something that may present an issue for other multi-nationals as well. That seems to be of little consequence to enthusiastic traders who are eager to seize upon any hopeful signs as an excuse to push prices higher.
We wrote last week that it “would not surprise me in the least if the next move was higher”. That sentiment may be the result of a surfeit of negative sentiment and positioning, or simply wishful thinking. Yesterday’s rally faded on news reports that Apple (AAPL) would be curtailing hiring, hours after Goldman Sachs (GS) said something similar. As the largest company in the US, AAPL could certainly be considered one of the speakers on the dais of the earnings season party. We’re likely to know more about their plans on the 28th of this month — a day after the next FOMC meeting, by the way.
It is hard to have a successful event without a well-received cocktail hour. But that is not a certain sign of success. I recall attending a Bat Mitzvah with wonderful hors d’oeuvres that ended with a visit from the police. Stuff happens, and an earnings season that is punctuated by a Fed meeting certainly can take an odd turn. But for now, we hope you’ve enjoyed our appetizers, and please take your seats in the main dining room.
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