the current earnings season

Two things strike me about the current earnings reporting season for US publicly traded companies:

–the market reaction to reported results, both weak and strong–and to forward guidance as well–has been unusually sharp.  Rises/drops of 10% on news haven’t been uncommon

–much of the data that the market is reacting to has already been in the public domain before the company earnings announcement made it “official.”  This lack of discounting in advance is very unusual.

Qualcomm (QCOM–I’ve owned it in the past but not now) is a good example.  The stock dropped by 9% after the company said that two developments would damage future results:  Samsung will not include a QCOM Snapgragon chip in its next generation smartphone; and QCOM is having trouble collecting royalties in China.  But who didn’t know this already?   The former news has been circulating on the internet for weeks, and the latter was the subject of a full-page in-depth article in the Financial Times three days before the earnings report.

As I was thinking about this last night, it struck me that the last time I can remember similar behavior in the US stock market was in 1991.  Even though economic circumstances are far different then, the 1991 stock market might turn out to be a good template for 2015.

In mid-1990, world markets slumped as Saddam Hussein invaded Kuwait.  Markets rallied back to their prior levels when the US invaded Iraq in January 1991–but went sideways for most of the rest of the year.

During the sideways time, stocks with their own growth story–that didn’t depend on general economic trends–could do no wrong (fledgling biotechs were rock stars).  Commodity stocks, in contrast, were repeatedly pummelled.  Industrial, or other relatively economically sensitive areas, were trashed as well, though, as I recall, not so badly as raw materials names.

This uncomfortable period came to an abrupt end in late 1991, as signs of a general economic upturn began to be seen.  Biotechs promptly crashed.  Economically sensitive stocks surged.  And the market went from ignoring the future and rehashing current earnings reports to discounting into prices anticipated earnings for 1992 and beyond.

If the 1991 analogy holds true, domestic US companies seem to me to be the current safe haven, while those with EU exposure are in trouble.  Niche companies or special situations will be in their own special nirvana, and economically sensitive ones simmer in purgatory.

Nothing much new there.

The point is that in a 1991-like market the same news gets discounted over and over again for an extended period.  There is no countertrend rally that gives relief to out of favor sectors, no reversal of form for underperforming names.

If I’m correct, the cost of deciding to ride out poor portfolio positioning with the idea of maybe repositioning during a countertrend move will prove more costly than the experience of the past half-decade would lead anyone to expect.

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