Albert Edwards On Why "The Farce That Is US Reporting Season" May Be Different This Time

Tyler Durden's picture

As everyone who follows earnings seasons knows all too well, one of the traditional games companies play with sellside research analysts is to push earnings estimates lower just ahead of earnings announcement only to beat by the thinnest of margins, setting off a buying rally in the stock that more than offsets the gradual decline it may have experienced in the preceding run down. This observation is one half of Albert Edwards' note to client from this morning. He says: "It’s that surreal time of the quarter, just ahead of the reporting season, when US companies cajole compliant analysts into reducing their profit forecasts so that on the day the company can record a positive earnings surprise. Companies place so much store on beating analysts’ estimates that they play this ridiculous game of guiding down analysts numbers in the weeks or even days ahead of the announcement, only to beat depressed forecasts by a penny on the day (see chart below). The angle in the press and in analysts’ reports is then that this constitutes ‘good news’ despite, more often than not the outturn undershooting the market estimates of only a few weeks previous. Nuts!" The other half focuses on how this particular earnings season may be different, and why unlike previously, earnings downgrades may be for real this time: "We show that in contrast to expectations of a second half recovery, economic leading indicators are actually signalling the reverse, as is our favoured measure of analyst optimism. Hence the recent spate of profit warnings – which have resulted in a deeper than normal round of downgrades – may be the beginning of something far more  undermining to equity prices over the next six months." So is this time, especially in the absence of the artificial boost to everything that is QE, any different? With earning season imminent, we will finally find out just how well the corporate sector (not having represented the actual economy for a long time) can stand on its own in the absence of monetary fiscal and stimulus for the first time in years.

Edwards' graphic presentation of the "reporting season farce":

His explanation:

In early May, prior to the renewed jitters about US economic slowdown, we pointed out that analyst optimism seemed to be turning down (albeit from a very high level), and that this was probably a prelude to worse than expected economic data. We have updated that chart and it shows optimism has deteriorated further and that the change in optimism has fallen deep into negative territory (see left-hand chart below). For a more timely reading of the profits situation, my Quant colleagues aggregate the data from the company level on a weekly basis (see righthand chart below). Both at the US and global level this shows analyst optimism falling away more sharply than it did prior to the previous report around three months ago).

In his latest Global Earnings Estimate Analysis, Andrew notes that a new trend towards EPS disappointment may be emerging. And although he does not believe that analysts’ optimism has any particular lead qualities, especially relative to stock market prices (see right-hand chart below), what is clear is that the change in analyst optimism has a tendency to lead the official economic leading indicators (see left-hand chart below), thus suggesting there is more bad news to be reported in coming months.

And in this environment, it will prove difficult for the equity market to de-couple from this weak fundamental trend. For as we know from Japan, in the Ice Age, the equity market will dance to a cyclical tune.

As to what Edwards' indicators that the current decline in the economy is more than just a soft spot, he reverts to two things we points out last week: declining consumer confidence and the near record spread between the ISM new orders and inventories data.

Regular readers will know that we watch the leading indicators closely. Studying Japan a decade ago we came to the conclusion that in a post-bubble, Ice Age world, the equity cycle and economic cycle become unusually synchronous. Prior to that bubble bursting, the equity market enjoyed a closer positive correlation to bond prices than the profits cycle and the secular trend was PE expansion driven by lower bond yields. In the Ice Age, the secular trend sees equity PEs contract, despite lower bond yields. The secular trend of PE contraction intensifies ferociously during economic contractions.

So we note that once again leading indicators in the US and indeed around the world have turned downwards. To be sure, at this stage they are not signalling anything particularly catastrophic, but the trend undoubtedly calls for decelerating activity in the months ahead (see left-hand chart below).

Always the gentleman, Edwards does admit a dose of mea culpa here:

Now you might reasonably point out that we said exactly the same thing in the middle of last year and we were wrong! But I believe that the unravelling economy last year was saved from slipping into recession by Ben Bernanke quickly reaching for the printing press in the form of QE2. Now, with many Fed governors now openly hostile to QE3, it will probably take far more in the way of bad news compared to last year to prompt the Fed to take out its  increasingly discredited monetary wand.

As noted previously, the most notable thing about the upcoing earnings season is that it will finally take place without the artificial props of either monetary or fiscal policy and as such it will provide the clearest indication of how to look at corporates on a standalone basis (granted with ZIRP, interest rates are at record lows: that particular benefit to the bottom line will take a while to be factored in, especially once rates finally commence their gradual, or very sharp, move higher.

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The Axe's picture

Buy=52 week high   Sell=52 week low....bullshit game

Ahmeexnal's picture

It's NEVER different this time.

Max Fischer's picture

Ok...  so if it's never different, and we evaluate the past 20-30 years, then one should expect the stock market to soar from here:

Even if companies posted no growth, price-earnings ratios would be lower than on 96 percent of days in the past two decades.

- Max Fischer, Civis Mundi




MFL8240's picture

Still believe in PE ratios in the days of computerized fraud in the markets?

trav7777's picture

well i had a friend who was short happy a couple weeks ago, and I said, nah, I see the SP, if it's gonna drop, it will put in a big H&S formation.  Wait for a rally to SPY 135ish.  And here we are.  The next couple of days are meak or break but I ain't shorting shit until I see a break of the neckline.  Learnt the hard way back in '10.

If the QEx isn't coming and the austerity is and all of that deflation shit, then this is what's gonna happen.  We'll slog sideways to down, and then break south

chartcruzer's picture

exactly!   we've got historic CCI spikes on both the intraday and daily SPX charts - very rare - especially given pomo wind down.   backtesting indicates a nice pullback probability ahead.   And, wait for a clear direction in price first (trendline break, PSAR flip, or whatever you use).[s162488959]&disp=P[s162497802]&disp=P

HpDeskjet's picture

So? In the last 2 decades stocks have been the most expensive ever... I read that article too, its total bullshit. The guy is comparing EXTREMELY expensive to expensive/normal prices... Stocks haven't been cheap for over 2 decades. It's all relative ya know.


Based upon Shiller PE, stocks are now at best "fair value". However, margins are at all-time record highs + sales growth is topping => Earnings can only go down from here.

nantucket's picture

To Max Fischer:

Careful of that metric. It's not an apples to apples compare over time.  Most analysts now cite "operating earnings" which are very different (i.e., higher) from gaap earnings.  Operating earnings are created by the companies themselves and it leaves out certain expenses (rightly or wrongly) that leads to higher reported earnings. 

The 20+ years ago historic data to get that PE use gaap earnings and the recent 20 years or so PEs typically use operating it's not apples to apples, so buyer beware. 

What's worse is that the percentage difference between gaap and operating has steadily grown from 2-3% when they were first widely used in the early 1980's up to 20% recently. 

Here is the real test to see if a valuation metric is worth anything.  Look at the level of the metric in the past and then look at the ensuing 5-10 year market returns and see if the metric has any reliable forecasting power.  Me thinks you'll find that when gaap or shiller 10 year PE is used, the market is in the upper third quartile of historic valuation and, better yet, when the PE is this high, ensuing 5, 10 year market returns are extremely weak.

nantucket's picture



Here is the link to the shiller pe valn chart, I stand corrected, we are in the upper quintile.  very rich.


HpDeskjet's picture

Amen, I do all kinds of tests (for work) for all kinds of asset classes. There is only conclusion that one can draw nowadays => EVERYTHING IS EXPENSIVE on aggregate levels. Bonds, Equities, Commidities, Real Estate, etc. etc. Of course there some specific investments that are attractive (still a reasonable amount of corporate bonds for example), but the excess liquidity worldwide, makes sure that these become rare...

Tampa Boat Transport's picture

Oh really Ahmeexnal ?
 but you should review this and then comment

 <a href="">Tampa Boat Transport</a>


The Axe's picture

Buy=52 week high   Sell=52 week low....bullshit game

Gubbmint Cheese's picture

You mean 25% EPS growth on a 2% increase in revenues can't go on forever?


Are you sure?

dexter_morgan's picture

Saw the CEO of CocaCola on TV this morning and he says all is well, MUCH, MUCH better than 18 months ago, so who am I to doubt him?

equity_momo's picture

Hardly typical though. Buffets best investments were his early ones : spotting the bluest of bluechips of which Coke are right up there as.   

If you are no.2 or 3 in any sector though , prepare to shrink at best , die at worst. The big get bigger and the also rans fold. Thats how GD2.0 will play out. 

Monopolies bitchez.

trav7777's picture

take a look at Five Guys franchise requirements.  They wanted 500k in liquid and 1.3M+ total net, along with capability to do at least 5 locations.

Only the rich have a chance to get richer.  If you're just a hardworker with a dream, you're not gettin on no gravy train.  Life is like No Limit poker where the tall stacks just bully the shorter ones off of pots and the only way the short stack gets parity or comes back is via a hail mary on the river.

Oh and every guy I know who was in the Clitton WH is a sellout lobbyist now, cashing in on their connections (and I mean mfing cashing in kaching).  All those idealists from the party of the little people sure have managed to get filthy rich.

Johnny Lawrence's picture

I actually looked into opening a Five Guys, that's completely right.  All of their franchise rights are sold out in the US & Canada.  Sucks, I'd love to open one, especially with commercial lease rates where they are.

equity_momo's picture

You're both correct.  So why dont we start playing these fuckers at their own game? Only problem is it takes trust and commitment. 

I know , you know , the collapse is coming. We also know it wont be even handed. I therefore want to be surrounded with like minded individuals where i live and where i do business.

Start thinking about pooling resources and moving to smaller communities where you trust your neighbours/local beaurocrats etc.

Setting up a website to start putting these business and home communities together wouldnt be a bad start

trav7777's picture

take a look at Five Guys franchise requirements.  They wanted 500k in liquid and 1.3M+ total net, along with capability to do at least 5 locations.

Only the rich have a chance to get richer.  If you're just a hardworker with a dream, you're not gettin on no gravy train.  Life is like No Limit poker where the tall stacks just bully the shorter ones off of pots and the only way the short stack gets parity or comes back is via a hail mary on the river.

Oh and every guy I know who was in the Clitton WH is a sellout lobbyist now, cashing in on their connections (and I mean mfing cashing in kaching).  All those idealists from the party of the little people sure have managed to get filthy rich.

equity_momo's picture

Im equal opportunity in my hatred for big government and as i see it , each Administration justs gets larger and larger regardless of persuasion. But Clintons watch was one of the most insidious , corrupting bunch of hypocrits this Nation has ever seen.

SheepDog-One's picture

100 P/E's market-wide in a depression may be a wee bit over valued? Frankly, I'm SHOCKED at such a suggestion! DOW 30,000!! Because any form of REALITY entering the picture here is simply 'unthinkable' according to many top economists and hedge fund mgrs.

nobusiness's picture

Stocks are setting new highs.  Where are the downgrades he mentions???

BeerWhisperer's picture

I'm seeing just as many upgrades and downgrades as normal. Most of the Earnings coming out so far have been to the positive. Will this be the end of market conspiracy or will zerohedge be proven right again?

chartcruzer's picture

first, US 'stimulus' is proceeding in many forms like gov mortgage relief, food stamps, many people living in homes mortgage free, extended unemployment, et. al,..   Debatable what you call 'stimulus',, I guess.  This buy no means represents a sustainable economy (and thus corporate earnings) especially given the total public+private sector debt load.

Regarding the equity markets the luquidity pump is now in trickle mode.  Note the effect in the past per the chart below.   Corporate earnings are a side show in this manipulated environment.[s206018187]&disp=P

as such this feels like a total short covering rally.   But,,,,, I'll just follow the trends....


mynhair's picture

In other news:

Squirrel Alert issued.  Turn to your local teleprompter at your own peril.

buzzsaw99's picture

Does JPM have anymore loss reserves to book as bonuses, er, profits?

Robslob's picture

Bookmark article for same time next year...Thanks!

TooBearish's picture

I eagerly await the wide eyed money honeys on CNBS with blouses a bulging breathlessly screaming "beats the street!"

Beat this bitch

Franken_Stein's picture


This is a farce.


Zonker's picture

You are right, it IS a game, so play hard, play well and be a good sportsman.  Ranting and raving all the time is not good for your game.  Being happy supports better trading - this IS the maxim.



Orly's picture

To steal from an old adage myself, "The worst day trading is better than the best day working."

Live to trade another day and life is all smiles.


Global Hunter's picture

A company trying to influence analyst estimates a few days before reporting seems like a pretty big conflict.  I don't know for sure but I would think that CEOs and CFOs have a pretty good idea how the quarter went a few days before press release.

If I'm wrong on that, set me straight please.

Doyle Hargraves's picture

"This time, it's different" are the four most expensive words in the English Language-Ludwig von Mises bitchez!

slaughterer's picture

At last, an earnings season strategy report.  Thanks ZH.    

Greeny's picture

ha-ha-ha, Booyah, bitchez, keep whining, told ya,

buy the f* deep! Now just sit a side and cry.. Markets are

smoking hot.. "May Be Different This Time" Right,

it is different, corps going to blow away estimates, as

usual... Collapse, Collapse.... :))) *LOL*

SheepDog-One's picture

Bought the dips in gold and silver, theyre rockin! Fuck your paper junk Greenie!

mayhem_korner's picture

Everyone file in here.  Nothing to see.  Don't pay any mind to the nozzles above your heads, keep moving in...

slaughterer's picture




1.) NO

2.) NO

JR's picture

"Obviously, everything revolves around the corporation and the health thereof, not around the people and their economic or other wellbeing. This capture is definitely a huge part of the problem;  most people’s reality is being spun by media whose interest is their own profit." – Nathan Martin, Nathan’s Economic Edge

LooseLee's picture

Just another example of the criminal, deceptive, and fraudulent nature of many human beings and especially those that are the ones responsible for this phoney market and economy. The lack of character prevelent in many of our corporate and political leaders is a sure sign that the 'end' is near.....

Sherman McCoy's picture

Hasn't this dipshit been wrong for the last 400 S&P points? The only job on the street he's qualified for, is sweeping it!

css1971's picture

QE2 has been active for 99% of the last quarter. I'd expect the next reports, not the current ones to show problems.

RichardP's picture

I still think the goal is to be in the vicinity of Dow 14000 by election day.  I think they will do whatever it takes to make that happen.  Any bets on whether they make it?

mynhair's picture

Already have my Dow 20K hat.

Juice Box's picture

Prince Albert in a can!

Itsalie's picture

The OECD topped out in 1998 and 2003 while the ISM graph topped out a year later in 1999 and again in 2004. but in each case, stock market managed to rally on and on thanks to the Fed. The hopium crowd won't bail out without a major rapid shock when even government manipulation of statistics can no longer take place. The crowd is drinking the hopium that the eurocats are trying to create a brownout to cushion the on-going Italian and Spanish trainwrecks by printing away, followed by B Gross' twit that the fed would take over from there by August Jackson Hole. There would be more and higher frequency coordinated efforts to oil the perpetual motion machine until the end. But Edwards would eventually be proven right, maybe just a couple of years too early.