Now do you know why I call them "Pimps" or would you prefer that I call them Cinderella's?
>>Not-so-great expectations... I have been talking a fair amount lately about this whole phenomenon of earnings versus expectations as opposed to earnings versus the business, and how fundamentals and stock prices have completely disconnected. Justin Mamus this morning had a terrific little ditty on the evolution of "versus expectations," and parenthetically how dead fish came to be dead fish. I'm going to share that with you in its entirety:
"The sequence, roughly pieced together, has gone somewhat like this: Analysts who began, and then justified, their existence to make the brokerage firm look diligent and reliable in its recommendations, would (a) as part of their job come up with earnings estimates which (b) became cobbled together as a consensus number, making (c) an organization called First Call the leader in such fundamental material. They became more and more identified with this as CNBC, leader in its own field, used First Call for its earnings estimates and then via a representative regularly interviewed on the air.
"There may be more detail to this than we care to know, but our assumption is that First Call gathered all the estimates by a roster of firms with such analysts, and averaged their estimates so as to come up with a consensus estimate - a single number seemingly more believable because more decisive for sound-bite purposes than a range, and more useful for analysts, whose wont had been to express themselves ("I'm the highest estimate on the Street" or "I'm right in line with the Street's estimates.") for marketing purposes.
"It then turned out that individual stocks became severely punished for "missing" their estimates...even if an analyst on the low end of the range was absolutely right about the number the company actually announced. The analyst got increasingly less credit - be it bonus or pat on the back - for being right because his audience of money managers became more engrossed in the reaction of the stock to some other, sort of theoretical, but consensus, estimate which the media made more and more 'important.'
"Corporate reports weren't just glommed together in tiny type on a newspaper page, but were actually announced on TV, and increasingly turned up in individual headlines. Companies learned to low-ball their comments - or to "pre-announce" - so as to avoid debacles. Analysts simultaneously realized they should be more in the mainstream - no reward for being brilliant - and since at that time the tendency had been toward an anticipated slowdown in earnings, they found it easier to tilt downward, to cut estimates if need be. Thus corporations, and the analysts following those companies, cooperated (and in some cases may have conspired) in reducing estimates - protecting them, if you will, from becoming a "disaster du jour" - an expression not heard any more, as evidence that the problem has been solved.
"It then became obvious that individual stocks were being rewarded for exceeding those diminished estimates. Grinning like kids with their fingers stuck in the cookie jar, companies then found it advantageous to denigrate their own prospects where once any functionary would have been fired on the spot for speaking honestly about even trivial problems. To do better, easily achieved if they'd managed their reduction sufficiently, got their shares to pop - so 'beating expectations' became the new game. All of this, as you saw, became highlighted, featured in newspaper headlines, and with some CEOs from some relatively less known companies getting invited to talk on CNBC about how well they were doing, the way, in our day, it was B movie starlets that enjoyed such invitations.
"But when beating expectations became the expected expectation, something more was needed. Ahha, the 'whisper' number began to be spoken of fondly and loudly. Analysts, in oxymoronic style, would announce their expectation that such and such a company was going to beat their estimate...without changing their estimate whatsoever. That style has become today's form of having their cake and eating it too - by pre-announcing their belief that their estimate was less than their whisper, they couldn't be wrong. Accordingly, if we understand this right, and have summarized it well enough, the whisper number has become the real estimate to beat, and that's at least one reason why so many stocks are selling down when they meet, or even beat, that literary estimate." << |
