WEIRD THINGS—EARNINGS

Weird Things Every day seems to bring about another revelation about how well or how poorly the market is doing—depending on your perspective. I dislike saying this but your viewpoint almost always depends on your political persuasion.

Recently it was the information released by IBM. They missed their numbers. They're still making millions, er . . . billions, but revenues slipped a little. Yes, after really getting into the numbers, I see why the market reacted.

Let me start with another observation. For years I touted an expression that gives a lot of meaning, or at least some understanding to why prices for stocks are what they are—and more importantly why they move. Let's start with this basic premise. Here it it: A STOCK PRICE TODAY IS BASED ON THE ANTICIPATION OF FUTURE EARNINGS. That's it. The marketplace is like a giant auction.

IBM said they missed their numbers. They were shooting for $20 per share, but they were actually $19 plus change. But the stock reacted wildly. It was down $18 or so when I last checked. That doesn't make sense to me. So here's my first criticism of the way this herd thinks. It is that the market may determine the prices, but the market usually is wrong. It errors to the upside or to the downside. It's hard to figure.

It over-reacts to the smallest of news items and even indulges poorly to nuances. Think about this: Many NYSE stocks trade at 20 Xs earnings. That means that at 20 times the earnings of $19 (and that was one quarter's earnings) the stock could at $380 and it would not seem unusual. So, what next? Watch this stock and this market recover.

There are trading opportunities everywhere. Choose wisely.

NOTE: I wrote this article a few months ago. I think it was September of 2014. Look at what the stock has done. Study these earnings reports, but more importantly follow what the commentators say about the numbers—and that would include the commentators inside the company.

Wade B. Cook

 

Stock MarketWade Cook