It's Earnings Season Again
The Banks Kick Things Off Tomorrow
It’s that time of year again. Companies have to open the books and remind us all that there are real underlying businesses behind those ticker symbols. This is something that has become easy to forget in a market where hype, hope and, quite frankly maybe a little hysteria are key emotions. Remember what happened just this week with Signal.
I actually had this conversation with someone this week and something I am thinking about more an more is “do people actually understand the businesses behind the companies that they trade?” I think the answer depends on the time frame that the person is using. A short-term trader who will hold a stock for maybe a few days or weeks, probably does not need to know all that much about the company, the products, management, etc…for all they know, Apple is a produce company. But I do believe that investors should take the time to learn about and understand the companies that they own. I am probably the rare CMT who believes this but I digress. By the way, I am an investor not a trader. I want to find good companies, with good stories that I can own for a long-time. So I pay attention to earnings season. Then I use my technical analysis to size my bets and manage risk.
Here is what John Butters at Fact Set had to say as we get set to kick off earnings season tomorrow:
Analysts and companies have been more optimistic than normal in their estimate revisions and earnings outlooks for the fourth quarter to date. As a result, expected earnings for the S&P 500 for the fourth quarter are higher today compared to the start of the quarter. Despite this increase, the index is still expected to report the third largest year-over-year decline in earnings over the past ten years, mainly due to the negative impact of COVID-19 on a number of industries. Earnings growth is projected to return in 2021.
This is interesting because it gets to the heart of something that I have been writing about for a while now, things are getting better. Now, life is a relative sport. If things can’t get better relative to the first half of 2020, than we have some serious problems and reading about investing will be the least of your concerns. Look at that drop in 2Q2020 earnings:
But this also presents a dilemma. The equity markets here in the US and abroad have been trading near all-time highs. And if markets discount the future, it is safe to say that these improvements are already reflected in stock prices. So earning are going to have to be a lot better than what is currently expected. More importantly, company management teams are going to have to sound positive on their businesses for 2021. The question is, will they? Would you? If you had the podium and the opportunity to tell the world how you think your business is going to do in 2021, knowing all that you know right now, would you sound really upbeat? Or would you sound more conservative and give yourself and your team the chance to overdeliver throughout the year?
The banks will get it started as they always do with Citigroup, JP Morgan and Wells Fargo all reporting before the market opens tomorrow. While all will be closely watched, JP Morgan is the one that will get the most attention. Jamie Dimon, their CEO, tends to be a pretty straight shooter in his comments and if the world is truly getting better, Jamie will tell us. By the way, here is a title to an FT article.
The banks have had a nice rebound from their COVID lows but have not yet broken above the highs seen in 2018. If their reports are well received and the SPDR S&P Bank ETF (KBE) can move through those former highs, that would send a powerful message to the rest of the market.
That is what I will be watching. If Jamie sounds downbeat, I will probably look at some of the names that I own that have run a lot and trim them back a bit. It’s like a hedge (a real hedge), you have prune it now and again so it can keep growing. At this point, Jamie’s comments are more important than the second impeachment of a President. In the second half of 2020, companies had an easy bar to beat when it came to earnings, I am not sure the same holds for 2021.
PS: How would you like to be Stefan Thomas? The TL/DR here is that Mr. Thomas has 7,002 bitcoin stored on a hard drive but he has forgotten his password. After a certain number of failed attempts to unlock the device, it will lock forever…Thomas has two attempts left. Bitcoin is trading at ~$34,000. That’s roughly $238 million. There should be a media executive somewhere trying to figure out how we can live stream the last two attempts and give Thomas a cut of the ad revenue. According to my Apple watch my heart rate went up five BPMs just writing this…what do you think Stefan is feeling?
As always, thank you for taking the time to read what I have to say. If you like it, please consider sharing it with your network.
*Nothing in this note should be considered investment advice. Please do your own research.