Stocktake: Investors brace themselves for lacklustre earnings

US earnings season begins this week and Wall Street is nervous. Little wonder. Earnings estimates have tumbled 8.2 per cent in 2015, FactSet notes, the biggest quarterly fall since early 2009. Nor is the damage confined to energy stocks brutalised by collapsing oil prices. Estimates in all 10 S&P 500 sectors have been cut this year. Annual profit declines are expected in six sectors.

The number of companies issuing positive guidance is the lowest since 2006, while the number of companies guiding estimates lower is well above historical averages. Valuations remain elevated, FactSet noting the S&P 500 trades on 16.7 times estimated earnings – well above its five-year (13.7) and 10-year (14.1) averages.

Plunging oil prices and the stronger dollar mean earnings will be tepid or worse. However, don’t assume stocks will fall. Importantly, most companies issuing negative earnings guidance enjoyed share price rises around the time of their preannouncement, with overall gains averaging 1.7 per cent.

Markets are moved not by negative news but by negative surprises. Unless earnings season is appalling, stock prices may yet emerge unscathed.

When bad news is good news

Good news is bad news and bad news is good news. So says

BlackRock

, which last week noted how the market recently tumbled 1.42 per cent following an impressive jobs report. Days later, stocks rallied after a report found US retail sales had fallen three months in succession.

Why? Good news means the US economy may be strong enough to withstand an imminent interest rate increase; bad news may cause policymakers to delay dreaded rate hikes.

BlackRock expects the "good news/bad news dynamics" to worsen as the rate hike date nears. Until last October, as Reformed Broker blogger Josh Brown put it at the time: "Good news was good and bad news was even better." That's no longer the case in the US but it is true of Europe, where good news is celebrated as indicative of recovery and bad news is taken to assume more stimulus.

Confused investors might prefer if good news was good news and bad news was bad news. Markets, alas, are trickier than that.

Highs do not a bubble make

European indices delivered stellar returns in the first quarter of 2015, but they weren’t the top performers – that honour falls to Venezuela (up 32 per cent) and Argentina (26 per cent). The catch? Soaring inflation means gains have been entirely illusory.

It would be nice if journalists could appreciate this difference between nominal and inflation-adjusted returns. Instead, not a week passes without references to how the Nasdaq is trading near 5,000 for the first time since 2000, or how the German Dax and FTSE 100 are at all-time highs, or how the Iseq is trading at seven-year highs, and how all this means global indices must be back in bubble territory. They're not. Stocks rise over time; all-time highs are common, not a sign of irrational exuberance.

Saying otherwise is as dumb as believing that because stocks were expensive in 1929, they must be incredibly pricy today, given they’ve gained so much. Give me strength.

Trader makes killing on a tweet

How fast do traders respond to breaking news stories? Very, very fast, judging by a Fortune story last week recounting how one options trader quickly bagged $2.4 million. At 3.35pm on Friday, March 27th, trading in chipmaker

Altera

was halted. Shares in the stock soared when trading resumed minutes later, following a report

Intel

was in talks to buy the company.

One trader, however, had pounced at 3.33pm, a minute after a Wall Street Journal reporter tweeted the paper was readying an article about how Intel was “in talks to buy Altera”. His $110,000 options purchase was soon worth millions.

Many online traders expressed astonishment that the trader could read the headline, immediately enter the ticker symbol and execute the trade so quickly. Some suspected insider trading; others suggested an automated trade triggered by an algorithm designed to act on stock tweets.

Whatever the reality, one thing is clear: pennies dropped on the market floor don’t stay around for long.

Masses flock to stocks in China

Chinese stocks are on fire, and ordinary people want a piece of the action, with four million people opening trading accounts in March alone.

A new survey shows 6 per cent of new investors are illiterate; more than 30 per cent have not gone beyond elementary school; more than two-thirds left education by the age of 15; some 12 per cent have a college education, compared with 40 per cent of existing investors; new investors’ household wealth is just over half that of existing investors.

This is not going to end well, and those who lose out the most will be the people who can least afford to.