“Earnings beat expectations but revenues missed.”
Variations on this theme pervade the business airwaves here during earnings, currently at fever pitch. Stocks bounce around in response. Soaring heights, crushing depths, and instances where stocks moved opposite of what the company expected.
Why?
Well, everyone is doing it – betting on expectations versus outcomes. The Federal Reserve Open Market Committee meeting wraps today and much musing and a lot of financial betting swirls around what Chair Yellen is expected to offer as outcome.
Then Friday the world stops at 8:30am ET, holding its breath to see if the expectation for April US jobs matches the outcome.
And by the way, I will join Rick Santelli in Chicago Thursday morning, in between, on Squawk on the Street to pontificate fleetingly and I hope meaningfully.
Obsession with expectations versus outcomes in equity markets and across the planar vastness of economic and monetary data blots out long-term vision and fixes attention on directional bets.
It’s not investment. And it’s no way to plan the future, this mass financial pirouette around a data point. But it’s the market we’ve got. We must understand it, like it or not.
Back to your stock. The reason that after you beat and raise your stock falls is what occurred ahead of your call.
It may have nothing to do with how you performed versus consensus. For proof, droves from the sellside are looking for IR jobs because trillions of dollars migrating from active portfolios into indexes and ETFs aren’t using sellside research. Or listening to calls.
It reminds me of the Roadrunner cartoons, Wile E. Coyote running off the cliff. Remember? Parts of Wile E. drop in order, the last thing remaining, his blinking eyes.
That’s to me like results versus consensus. The eyes of Wile E. Coyote, last vestige of something fallen off the cliff of colossal change to investment and trading behavior. The sellside still has everybody thinking outcomes versus expectations matter to investors.
No, they matter to the hordes with directional bets – over 40% of the market.
They bet long or short, or on the spread between high and low prices. They may have fixed for floating swaps that pay if you beat, leading counterparties to sell your shares – and the bettors are short your stock too, so they make a fee on the bet and more covering as your stock falls.
And the CEO says to you, “What the heck?”
If your stock is 50% short (we measure it) and slamming the ceiling of Sentiment due to a marketwide derivatives surge after expirations – which happened Apr 24-25 – it doesn’t matter if you crush consensus. Structure trumps Story. Price will fall because bets have already paid thanks to the broad market.
The market makes sense when you understand what sets price.
Active investment leads less than 20% of the time. The juggernaut of indexes and ETFs rumbles through at about 34%, and it’s now distorting share-borrowing and Risk Management. The latter is 13-16% of your market cap – hopes for the future that can sour or surge on any little data point.
Let’s bring it back to the Fed and jobs and the economy. I said your stock will move based on what happened beforehand. That can be a day or two, or a week or two.
The economy is massive. It will move on what happened beforehand too but the arc is years. No matter what may be occurring now, which in turn will manifest in the future.
The threat to the US economy and stocks is a lack of appreciation that tomorrow is a consequence of yesterday, not of tomorrow. For the better part of a decade, furious fiscal and monetary effort promoted borrowing and spending so people would consume more.
But the consequence of borrowing and spending is debt and a lack of money. Which causes the economy to contract in the future. Stocks are pumped on past steroids. If the economy beats and raises, everything can still fall because of what happened yesterday.
We must first navigate consequences of yesterday before reaching the fruits from today.
Same for you. The stock market is awash in bets on divergences, even more when financial results mean opportunity blooms. Your active money clangs around in there, often as confused as you.
Your challenge and opportunity, IR professionals? Helping management develop an expectation of market form that matches the outcome of its function now.
