Tuesday, June 16, 2009

COPS & Next QTR's Earnings (looking ahead)

When one says the words "Earnings" or let's say "Financials Earnings", what comes to mind?
- Bullish? Manipulation? M2M accounting change? Exceeded expectations?

Different answers for different people. The first 3 are truly just opinions and viewpoints. The only one that matters is Exceeded expectation. (Well actually the only thing that really truly matters was the market's REACTION to them..... which was UP)

Most people's memory's are fairly short, and the last thing that comes to mind on the earnings front, especially financials was EXTREMELY bullish.

Regardless if it was all due to M2m changes, (as it was) that is not what matters. All that matters was the market reaction.

Some traders are "chasers".
Almost all analysts are "chasers".

What analyst would downgrade GOOG below 300, yet not at 700? It was done.

What analyst would put a 0.50 target on MGM when it was trading at 2.50, yet not at 20,10 or even 5? It was done.

What analyst would raise targets on AEM at 55, but not 30? It was done.

Analysts are not stock pickers, they are not advisers, they are salesmen for their firms.
99.99% of the time are making recommendations in attempts to benefit the firm for which they represent and nothing more.

Analysts are like the cops, when they all start showing up the to the party, the party is busted. (best analogy I can think of. 1 or 2 cops...ahh no biggie, it must just be their patrol route.........25 cops,something is up)

For example the last 2 qtrs (I believe it might be the last 3, but I know the last 2 for sure) that GOOG reported, they "beat expectations". Yet if they would of been held to the expectation set 4 weeks prior to earnings they would have missed both times. The bar was lowered in the last 4 weeks so much that enabled them to "beat the street". No one talks about that, as the final result is all that matters. But watching how it got there is key. (bar raising or bar lowering)

So twice a week I take a glance at the estimates of GS, BAC, AAPL, GOOG for a "chaser-gauge" broad sentiment check. I jot down those 4, and I keep track of the direction those estimates are moving. They pretty much they move w/ the current stock price. When the market is bullish, the chasers raise the bar.....when the market is bearish, they lower the bar.

Let's take a look at Goldman Sachs for example:

GS: 3.31 currently, raised 13 times in the past 30 days, and 4 times in the past 7 days!!
(watch that number 3.31, as it will change....that is important to watch)

Last qtr Goldman earned 3.39 with the expectation of 1.64. It was almost like the analysts did not even attempt to try to gauge the M2M impact. (ya think that was done by mistake? lol)They went from missing by 33%, to exceeding by 106% the next qtr. And these are the analysts experts who do this for a living.

When July comes around, and "Window Dressing" is over. The ONLY 2 things I can see that will push the market higher intermediate term are either:
a) great actual up-side surprise earnings results (that's a fools guessing game, and less likely)
b) large bullish momentum going into earnings (I think that could be likely)

From my experience of how the market usually reacts I "think" there is a very strong possibility that before they report many analysts will be extremely rah rah bullish.

Such things will be said as: "You remember how good they were last time, don't miss the train this time!!! Financials = blowout baby! don't you remember...M2M has assured that for us! etc"

The Market is always trying to get AHEAD of the next trend. (the hard part is knowing what the hell the next trend is!) And with the most recent memory of the financials being "everyone exceeds earnings"......until proven wrong, people like to stick with what has "recently" worked.

I know myself, after witnessing a few blowout ER's, even dummy me caught on. I would go long 3 days before earnings of the most heavily shorted stock I could find, and sell right before the ER, over and over again. Heck, I must of done that about 15 times this past season. (w/ only 1 loser!!) Trend was raining money, and I "think" that because of it's results this last qtr, it has a good shot to get the the benefit of the doubt at least going into the season this time.

If it set's up like this however, I dont think the results will be the same however.
The cops are in a totally different mood now at this next party.

Many people I have read refer to last qtr as an "earnings trough". I look at as more of an "expectation trough". As the "sky is falling sentiment caused all the chasers (ie analysts) to set the bar so low, no wonder it seemed like every day there was another "blowout report". With the sentiment now almost seeming like "new bull market euphoria". I have a feeling the chasers might overshoot again, as they almost always do and the high's of the year are IN. (right before earnings season).

Just thinking out loud and speculation as nothing should be a dead set thought in this market.

However if numbers like 3.31 continue to rise going into GS earnings, It likely means the kool-aid has become way too thick. Now if numbers like 3.31 start creeping lower plus, then that's the more tricky one, to be cautious of, dont get "googled"!

Aside from watching the actual EPS estimate changes going in. CNBC (Jim Cramer, etc) should as always give a good "red-alert" sentiment gauge. I fully expect massive pumping of the financials before the earnings and upgrades to be flying out of the wazoo. I'd love to hear talks of GS to 200 and such. Pump it up, because that's just means that much more downside to come in my opinion.

Intermediate wise, I see very few factors keeping his market up after early July.

Alot does rest on RIMM here this week. It's still a huge momentum stock. I "hope" they get a bullish reaction from the ER. Just as I "hope" that every one on CNBC pumps the financials next qtr earnings like the great lottery ticket rush that you just MUST be in front of!

Because if that happens, which I think is pretty likely considering the last results, I also think it's going to give us the best swing short entry since the beginning of Jan. (after the end of year Window dressing/Jan Effects)

Now mind you, back at spx 720....(link below)..I was a raging bull and said stay long, and wait till April 2nd, then do a 180 and short the be-geezus out of the market! (well, at least I got the up part correct LOL). But that's why "calling" tops and bottoms is a fools game and it doesn't get you any bonus money in your account. (hey, I had to try just once....)


Conditionally, I am just speculating...that the actual earnings will NOT be as good as last qtr for what is expected, b/c of the sentiment now is not as fearfull so the bar is higher. And for this to get set up nice, i would like to see a huge pump fest w/ cops galore surrounding the area for it to have that nice risk/reward ratio in favor before hand.
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