(Marco Bonelli) Is being happy with less the right attitude on Wall Street?
Once upon a time in the land of industrials there was a $45Bln company that reported Q2 earnings. Thanks to the help of a number of sell-side analysts that worked hard to lower the bar for expectations, the company was able to beat the $1.11 estimate by 3 cents, although revenues misses the $9.56Bln mark by $120Mln. Management spoke of an uncertain and tough environment and cited that they literally expect zero growth for the rest of the year. As a result they guided down EPS and revenues for Q3 but still felt comfortable with the guidance range for the year, in fact they raised the low end of the range from $4.35 to $4.40 and defined the new range as $4.40 to $.4.55, which just brackets current estimates of $4.49. As an outside observer, would you call it a favorable report? At least the media had a strong opinion and printed headlines like "...boosts forecast..." and "...posts upbeat Q2 profit."
Yesterday, HON's share price gained $3.64 or 6.71% and added $2.84Bln in market capitalization based on this report!
This is just one of many examples, GWW, DOV, SWK reacted in a similar way and the industrials sector was the second best performing sector in the S&P500 yesterday with 1.69% daily gain.
Maybe it was still seen as one of the better reports in a flurry of "inline" reports; maybe it was the fact that the company still managed to report some year-over-year earnings growth (compared to the -0.9% average performance of the 75 S&P500 companies that reported so far); maybe it was just a big sigh of relief (that led to considerable short covering) after the industrial sector in general was one of the most hit sectors in past week in light of the increasingly apparent economic weakness globally but Europe in particular that caused yesterday's reaction or maybe it was the perception that a difficult quarter is behind us and we are able to look forward to a brighter future.
Similar fairy tales could be told out of technology land but the message would be the same and the last sentence would read: ...maybe it was just a big sigh of relief (that led to considerable short-covering) after the technology sector in general was the most hit sector in past weeks in light of the increasingly apparent economic weakness globally but Europe in particular with lower IT spending, rising inventories, falling ASPs as a consequence.
The rally is good! After the rebound in June, the market got stuck in some kind of no-mans land where even flipping a coin wouldn't have told you where to go next. Yesterday morning many commentaries sounded very cautious following the strong rally on Friday and probably investors really got tired of the "same old" negative news, so lifting the mood with a few strong days and outlining some "positive" developments is a welcome change.
Whether the little bit of positive is enough, whether -0.9% earnings growth and another flat performance in Q3 is enough to keep market participants happy for longer than a few days and whether another disappointment at the next FOMC meeting in two weeks with no QE3 announcement (yesterday's description of the economy in the Beige Book clearly didn't justify any additional stimulus from the Fed) gets interpreted the same way as Ben Bernanke's remarks got worked out on Tuesday remains an open question. The weak market breadth of yesterday's performance might already give some hints!
Trade well.
(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own.)
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