| Discounted in the Market |
28 July 2003
|
Earnings Season Follies
Markets are clearinghouses for information according to many popular theories. Price is the distillation of
all-known data into a single number. As a definition, its value hinges on the qualifier "all-known." What
happens when something that isn't known turns up, or when something that is known turns out to be
wrong. On Wall Street, that is the fun of earnings season, when the market shows the analysts who is
boss.
Part of the amusement comes when results for the quarter come out, and stock prices drop because the
figures did not meet analyst expectations. Only on Wall Street journalism could the data be blamed for the
hypothesis being wrong. To rephrase it, the stock price fell because the analysts had over-estimated the
results. Or another way, the stock price fell because the analysts who had been expecting certain figures
were wrong in their expectations. Their models didn't work. Their assumptions were incorrect. They
used questionable methods. One last time, the analysts were wrong.
The beauty of them being wrong, either on the high side or the law side, is the sudden stock movement
that follows as the real information is priced into the stock. Nobody on Wall Street can make a dime if
prices don't change. So by being wrong, the analysts are preparing the conditions for future profits if the
trading departments are nimble.
One is not suggesting a market manipulation. Conspiracies are not all that easy to keep secret. However,
this is a damning argument against merchant/investment banks providing their own research to the public
and then helping them make the trade. These days, it need not be a conflict of interest but the mere
appearance of one.
Research should be independent, provided by third parties who get paid only for making the study of the
firm. No price projections, no forecasts of earnings, no hot tips from the people who trade -- Chinese
Walls don't work when it comes to perceptions. Until that happens, earnings season will be a source of
amusement.