Three months ago we laid out [5]the best known trick in the public company playbook, i.e., how to beat earnings with atomic watch precision. The answer, presented in the following chart from Deutsche Bank, demonstrated why the average EPS beat in the past 4 years has been about 3.3%. The reason: the average EPS cut just prior to reporting had been -4.0%, or more than the average beat.
[6]
Today it is the turn of French bank SocGen to look at the earnings "charade" and try to build a case for shorting the market after the season is over as the downgrades resume.
Here is SocGen's Andrew Lapthorne's reasoning why "Equity rally will fade once the reporting cheating season is behind us"
The resurgence in risk appetite can be put down to central bank support, with the ECB and China either cutting rates or intimating that they are prepared to do more, and of course the charade that is quarterly company reporting. As our readers will be well aware, we have long highlighted the game corporate investor relationship departments play with analysts. To the extent that many companies apparently now simply tell analysts what numbers they should submit to the consensus, numbers which inevitably they then beat a couple of weeks later.
This relationship is, in our view, clearly seen below:
[7]
During the busy reporting weeks, upgrades rise relative to downgrades only for this to reverse during ‘quiet’ periods when companies revert to guiding numbers back down again. Why is this important? Well a market being “positively” surprised tends to rise; history shows that during the busiest reporting weeks the S&P 500 has risen 60% of the time versus less than 50% during the quietest weeks. The simple message is this: don’t be short during US reporting seasons. However given weak trend earnings momentum (see page 13), shorting the market thereafter could be worth considering.
[8]
Fair point, however one can quickly counter with another even more "bullish" thesis: once earnings season is over and the buyback blackout period ends, the year-end stock repurchases go all out: after all management teams have to max out those equity-linked bonuses. And, as a reminder, in November and December alone is when nearly a quarter of all annual buybacks take place.
[9]
And with both buybacks in 2015 and debt issuance set to make record highs, it is virtually assured that the amount of buybacks at the end of 2015, courtesy of who else but the Fed, will be truly unprecedented as the market does everything possible to close at new all time highs.
