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Earnings And Guidance Suddenly Matter? Say It Ain't So...
Submitted by Pater Tenebrarum via Acting-Man.com,
A Disturbance in the Farce
Corporate revenues and earnings have been weak for quite some time. In big cap stocks this has been masked by the stock buyback effect, which supports earnings per share, even if the underlying trend of a business sucks. Unfortunately, stock buybacks are a horrible use of capital when stocks are trading at bubble valuations. Ironically, managers of listed companies have a great knack for boosting buybacks to record highs right when prices are at their peak. After a crash like the one in 2008 when prices are actually cheap, buybacks tend to dry up almost completely.
Image credit: George Lucas
Moreover, many companies are levering up their balance sheets to finance these buybacks. So not only are they buying at absurd prices, they are incurring a mountain of debt to do so. Corporate debt has rushed from one record to the next in recent years. Future regret is absolutely guaranteed.
Hitherto, the stock market has largely ignored weak earnings and so-so guidance. However, it seems the patience of investors is running out, in spite of the fact that money supply growth remains brisk and in spite of the incessantly repeated mantra of the “magical second half” in which the economy is held to finally attain “escape velocity” – whatever that is actually supposed to mean (apparently many economists believe the economy is a space-ship).
Further below is a chart showing the stocks of three companies of very different quality. The first is IBM, a company in which Warren Buffett inexplicably bought a large stake just as its stock price was close to peaking. IBM’s main claim to fame is its mastery of accounting trickery, which has served it quite well while its actual business was slowly but surely going down the drain. Zerohedge recently posted an article about IBM’s seemingly inexorable collapse in revenues – we reproduce the chart of its quarterly revenue growth data below:
IBM’s quarterly top-line growth, via Zerohedge. This looks quite atrocious, especially considering we are in a “recovery” – click to enlarge.
IBM has gotten away with its mediocre business performance for a long time, not least because it has bought back its own stock by the truck-load, keeping a rising trend in earnings per share alive. Alas, its balance sheet has become a lot less appealing as a result.
The second company is the highest quality one of the three, namely AAPL – it disappointed slightly on earnings and revenues last night, as well as on guidance. However, Apple continues to enjoy solid support from Wall Street analysts, so it is not certain whether the overnight downturn in its share price will even be sustained. What is remarkable is only that it has been down at all. To be fair, AAPL is still quite conservatively valued compared to the overall market.
The third company is known as the “ flying pig”, a sobriquet given to it by Fred Hickey and Bill Fleckenstein. MU (Micron Technology) is in a really crappy business, namely DRAMs. However, against all odds, its stock has been able to levitate for a long time. This is no longer the case.
Three recent examples of the market reacting negatively to earnings and/or guidance disappointments – click to enlarge.
Conclusion
It’s still early days in the current earnings season, and in recent quarters the market has always been able to dodge the bullets. However, we do get the feeling that a bit more attention is being paid to weak results this quarter than has been the case previously – at least so far. If so, then the market could easily get into trouble. The strong dollar still affects the earnings of multinational companies negatively, and the domestic economy isn’t much to write home about either.
Google has delivered a strong earnings report, and has been rewarded with a multi-billion dollar jump in its market cap. However, this may well turn out to be the exception to the rule this quarter. All companies that have sizable business in China are likely to report disappointing results from the region, and while European economic activity is perking up as capital malinvestment and consumption surge under the ministrations of serial money printer Mario Draghi, the absolute numbers actually remain pedestrian at best.
The strongest argument in favor of a continued rally in the stock market remains money supply growth in the US and Europe, which is still reasonably strong in the former (with TMS-2 growing at more than 8% y/y), and absolutely insane in the latter (with money TMS growing at nearly 14% y/y by now). However, weak earnings could at least temporarily dent the party. There is one sub-sector of the market that continues to do very well however: the stocks of distinctly profit-less rivers of no return such as AMZN, TSLA and NFLX keep levitating.
It is a kind of flight forward by investors – promises of future returns that may or may not eventuate (in AMZN’s case “may not” seems most likely, based on its historical performance) continue to be highly rewarded – no price seems too high. This is actually a fairly typical bubble phenomenon. It is impossible to say for how long it will continue and how far it will go, but it is possible to say how it will end: in tears, especially for Johnny-come-lately investors.
The market’s profit-less wonders continue to produce astonishingly good returns for their shareholders – for now – click to enlarge.
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Wall Street's motto has always been - "With fraud, all things are possible."
Forward
Anybody else notice the clear "head & shoulders" pattern on the AAPL chart?
Guess not....
No, it's a reverse cock & balls formation intersecting the Jones oscillator in the flank - a classic trap.
the Darth Bane pic made my day. well done.
NO, they do not. Commodities getting "crushed" you say, show me diesel at 20 cents per gallon motherfucker.
The paper world is becoming fucking irrelevant at an exponential rate now.
If you have possession of commodities then you can do and build real shit, period.
Everything else is fucking noise. Looking forward to tasting the bacon from those flying pigs. When it comes to these companies now, the only thing that matters is the size of their lobby. Companies like IBM are zombies and, as always happens, the "official" market is so bullshit now (full of useless over-compensated paper-pushers) that real innovation is occuring in the black market and open source arena.
It ain't so. Its all momentum.
Stock buybacks have to be one of the most fucked up uses for capital that I have ever seen. They do nothing but help the short sighted insiders and screw the long term share holders.. I'll be willing to bet dimes to donuts that all these companies will be issuing shares at lower prices in the future.
Yes, in fact they will be the same shares they've spent the last 5 years accumulating! Not only will their revenues and earnings come in weak, their EPS will be multiples worse as all that share float that had been yanked in off the street goes flooding back out again.
Thank you for the excellent, though perhaps inadvertant illustration of inflation in the U.S.
The saying used to be dollars to donuts! (doughnuts, actually)
and I want to say....FUCK YOU Steve LIESman...
Gee, you mean quarterly reports aren't supposed to open with "Once upon a time"? That takes all the fun out of it.....
IBM is desperate, they asked for a 10% price hike in license renewals this year (for declining demand).
The stock market is a cotton candy machine; fluffed spun sugar on a cardboard stick for $4.50.
But the point is, all the executives got rich with the buy backs, they can walk away from the bankrupt companies later.
Let me grab my violin and Ill play a tune for the pitied at heart.
All the real stuff is going down in price and all the financially engineered stuff is going up in price. This is what happens when you hold interest rates low for 7 fucking years.
Let it all burn, I say.
Maybe IBM should focus on...... gasp........ technology, instead of acounting tricks, tax dodges, and levered share buybacks.
They've pretty much sold off their hardware and laid off their brain power and this is what's left.....
Yet they still charge 4X what everyone else does for subpar consultants. And their software is old and decaying. They are toast.
They are relying on selling their "cloud computing" product, but you can better cheaper. Their answer to that is "But we're IBM!'. No, you were IBM, now your the second rate software shoppe.....
And Amazon is lightyears ahead of them on that front now.
How can they be light years a head of them when they buy their equipment, contractors and data warehouse space. Amazon is part of the shell game as well. They certain don't make equipment or have the people or have the real estate. They are just a retailer that OEM other people's offerings.
You are too focussed on hardware (I read your comment below). It's infrastructure as a service. No one cares about hardware and no one wants the overhead of maintaining it. Companies want managed services and Amazon's are the best and cheapest.
I know exactly what they are, it's a veiled disguise of putting North America under the control blanket of Cloudflare technologies to control content with the AWS service offering. They are one of the principals on the list that sold you all down the river with SOPA and PIPA.
Please don't offer me a shit sandwich and assume that I'll eat it. They are part of the problem and reason nothing is happening and Moore's Law freezing in place. And one of the reasons that silicon valley is irrelevant long term, they cut their own throat. They are so far behind the curve and stuck in government subsidiaries it's pointless to even bother talking about them as if they mattered.
Don't lay any claims that they are a technology company today. In the mid 90's, they were. Today. They are a dime a dozen website retail company that OEM's other people's products. AWS btw if you want to apply to sell your data centre space to have one of their CloudFlare ransom devices hold your shit hostage for the NSA for a meagre paycheck, by all means feel free to subscribe to that model. My suggestion is the bunch of them should go back to school. I understand wymen's studies and psychology always have openings for first year students. Pretending to be a technology company might not be the best place for them. They are just eBay without the bid now button. That's it, that's all and the 90's are over. Dot.com is dot.gone.
If you want to read further on how it works, here's the wiki.
https://en.wikipedia.org/wiki/Amazon_Web_Services
You can shift the conversation to the NSA but that doesn't make you right. The name of the game is massively distributed computing, horizontal, not vertical scaling. There is no need for more computing power. All of the advancement is in the software used for the distribution of tasks. Computing power on a single machine is now irrelavent, but you can hold onto that if you'd like. You are the one behind the curve.
What now you are regurgitating their marketing material? The problem caveman is you don't even know what you are looking at and the horseshit the technology flea market do their circus barking with isn't worth anything. Managed services market is PACKED with better offers that are cheaper.
Quick question, what technology do they use to do that? Is it magically powered by unicorns and rainbows? Or is it powered huge load balancers, servers, SANs, system management, network management and agent distribution, not the mention the army of developers all working on various things?
BTW: please don't ever use that word 'scale' in engineering circles, you will get slapped for pretending that scale in the context of marketing means anything to an engineer. It sounds as ignorant as when everything was 'e' something eCommerce...eBusiness...eBananas...so fucking stupid. I know the sales people have to have a product to sell, but call it what it actually is. It's a co-location/rental data center service that offers a managed component with security service that's at best a 4 out of 10 service offering. There are mom and pop shops that exceed what AWS offer with 1/100 the overhead costs and -gasp- they are profitable.
Versus Amazon which requires billions to run and makes as much as a corner store in net profit per year. I guess that scaling thing hasn't worked out for them.
LOL, you're a fucking arrogant idiot that only cares about what things are called, not the substance of what things are. A typical tech asshole that thinks he's smarter than everyone else. People are saving loads of money and people are making loads of money implementing it, yet everyone is stupid in your eyes. You clearly don't understand how the technology business works. You can resist it all the way down to poverty. I can't imagine that you actually ever did anything in technology that mattered. My guess is that no one wants to work with you or hire you because you're a dick. Amiright?
Just to follow up on this to illistrate, I can set up 100 servers with 25 live replicated databases and 75 web servers on the west and east coasts of the US and in Europe and Asia in about ten minutes. And I can do it personally, one person. Imagine the cost of that 10 years ago.
This. They are just a VAR and channel partner warehouse. If anyone actually knows an IBM engineer, like an employee, they are probably lying. All of the people working for IBM are usually three layers under a contract somewhere.
I find it interesting that if AMZN was able to miraculously repeat its so called MASSIVE BEAT it would have a P/E north of 500... assuming the beat is really on GAAP earnings.
Just more rigged market.
It's because Moores law has been broken for a couple of years for a couple of reasons. Mainly. There's no carrot. There is literally no reason to develop anything new with the technology industry commoditiized and it lacks the beast to pull that cart. There are developments in the quantum chip development, it's all junk though. There's robotics happening, but it's all junk. Again this is the cost of a steady paycheck and earnings in technology. The entire system of creativity and development crashes hard because everyone and their asshole cousin uses a crappy company like Apple as the model. Apple is not an innovator. It's a marketter, borrower and a retailer. Shit even their operating system MacOS is mostly FreeBSD under the hood.
What happens is when a large percentage of the capital being committed to technology is locked up in old ideas, nothing new happens. Moore's law stops cold, no more development happens and as a result all the 'old technology' is then the direct competitor of anything 'new' because it's all the same old crap. There have been few changes in the past 7 years with technology, the i3-7 core is nearly unchanged save a couple of power savings tweaks. The AMD line isn't much better and the company has been simply overclocking old chips to make new products.
The fact is a refurbished laptop has nearly the same specs as a brand new laptop, if asking a shop owner which one is 'good'. They both are. It doesn't just happen in hardware circles either. Software as well. Microsoft is it's own largest competitor against itself. Windows XP is still a huge part of the IT universe and it's the primary reason people aren't moving. Microsoft built it well and people simply don't want to move...even with Microsoft giving away Windows 10. People are comfortable with their choice and it works for them just fine because the average person views a computer as a porno/email/solitare/typewriter appliance. By consequence of the IT/Technology field frozen in time and unable to comprehend the law of diminishing returns. All the rest of the fields of science and technology at this moment in time aren't moving anywhere either because a single industry won't let go of the old shit and move forward into the net new which will offer the opportunity to help move the milestone for everyone, including themselves. They are listening to the wrong people on the 'top end'. The 'top end' are like antiquated mainframes on 12 inch floppies versus multitasking balanced multicore systems powered on whisper of 2 watts that can do the same work with a fraction of effort.
Where is stuff happening?
Only place right now any real development is happening is in the Open Source arena and the ASIC chip development field which is driven by the need to meet and exceed the technical requirements to make a BitCoin block chain happen. It's profit driven. The carrot is in front of the beast pulling the cart. BitCoin is like anabolic steroids for Moore's Law in the field of networking equipment, systems development, processes, ASIC chip design, energy savings, battery design and manufacturing. So far the only large companies with brains that's understand the long term view of it are the Android phone developers and tablet makers since they are the primary beneficiaries of the technology improvements of BitCoin driving the ASIC market of development hard and fast. And BitCoin will continue to drive that market hard and fast for 120 years. Because that's what it was built to do. Engineered to make things faster, cheaper and more efficient while sticking a knife in the ribs of the banks. Versus the current method 'professional' method which is blindly feeling the wall for a light switch in the hopes a purse can be made with a sow's ear..
When people see the NASDAQ scoreboard, all those 'big' players in technology are so far behind the curve they should all go back to school. Maybe take up something nice and fluffy like sociology or political science or basket weaving. Obviously IT and technology isn't the place for them if they don't actually want to contribute to the field and want to pretend they are some shit hole company like Apple or a front end non-profit like Amazon (like yahoo, they have yet to break even in the years they've been open)
Technology is changing constantly, but the "thought leaders" in the industry are all pointy haired and worse. I do consulting nowadays and I spend an awful lot of my time telling all the geniuses that the bullshit that they read about in some executive magazine won't work. They don't believe while writing me a big check and then call me in a year to come and make the pile of shit they bought work. That's when the checks get REALLY big, with zero guarantees of fixing anything.....
It's kind of the reason I've stopped consulting. It's time to go back on to the front lines in the incubators to restart the stalled engine, most of the incubators though are Web 2.0 knock offs. Some of them are great ideas. Most of them are a waste fo time. Left me with no other choice but to take the option with the most options that will change things quickly and has the largest net benefit by the derivatives and sub branches that it has accidentally created serendipitously. That seed is called BitCoin, tailored and engineered to grow in the rich bullshit thickly spread over the world economy.
Now the economic impact of BitCoin, while substantial and beneficial, is tiny part of what it's doing to drive technology faster and harder under a single umbrella all powered by volunteers and partnerships with the Open Source community.
Consider the following. This was all done with with no money (except BTC) and no support but the community using it to endorse it in an Open Source Model. Today 80 million people use BTC everyday for something. As adoption increases monthly in a nice steady organic pattern of growth, once it hits the 5% mark it will over take central bank economies fairly quickly and offer a decent escape hatch for anyone that needs to shuffle their savings during the obvious transition. Right now it's matching paypal as far as daily transactions go. While it's not a country GDP, it's certainly a long way from ordering a pizza online with BTC.
In terms of driving technology. past 4 years the ASIC chips have gone from kilo/mega/gig/terra...in four years. That's the fastest chip development curve in the history of all technology on earth, ever. because of a single seed called BitCoin driving the change because that's the requirement built into BitCoin. When I say that 99% of everything on NASDAQ is behind the curve, I mean it. Took four years, to curb stomp every hardware manufacturer, every service junket, break all records and build a small economy on top of that.
With literally nothing but an idea, that's called moving mountains. Watch as it changes the world with little more than making sure the best damn offer is given for the idea. On earth, it's not that hard considering the competition BitCoin is up against. The fiat regime of craptacular capital from thin air is slow, old, fat, greedy, stupid and officious. It is not hard at all to shove it out of the way while using it to power the next level in technology growth and at the same time offer a completely transpearent, very flexible and secure money system that meets (and exceeds in some cases) the same criteria of 'modern' banking. Just takes the will, the time and the committment which there is an ample supply of.
Excellent post, thank you.
It still doesn't matter.
Awe Hello No!
-Sharknado III
Managing business on the basis of stock price or EPS is a horrible way to run a capitalist society. This almost guarantees a misallocation of both profits and credit. There is precious little there for new plants, improvements, R&D, etc. so very few jobs will result. With all of this going on plus the new "trade" deals it seems the Powers That Be have completely given up on the US labor market.