Ack! I was not aiming for the glib quip, but if that's how it came out - my apologies to the thread and here's a more practical line of pursuit, fwiw. My attempt is simply to put the "earnings" story into some kind of perspective that is less than all-important.
Let's look at Amazon and Yahoo etc. What drives their prices? Not earnings, because they have none, and one estimate of future earnings is as good or as worthless as the next. What we do know is that somewhere in the future there will be Internet companies that are making money. Who will get to that point, and how they get there, remains to be seen. Each of those companies, however, has stock that it can use to grow those earnings. Take Cisco, for example. It has always been trading at a high multiple, always had investor "enthusiasm" on its side. It has consistently used its valuable stock to make acquisitions. Acquisitions which created more earnings. Where would Cisco have been if it had to make those acquisitions using debt? The fact remains that there was a virtuous cycle involving investor enthusiasm which enabled acquisitions which enabled higher earnings. Did earnings cause the enthusiasm, or did the enthusiasm enable the earnings? At the other extreme you have something like Presstek about which nothing more need be said. In the case of Cisco, a combination of factors were in place which produced a stellar result. I don't think you can legitimately say a specific factor in that mix was the primary driver. In a dynamic process like that you cannot isolate one factor and make it representative of the whole.
Take a macro example. The wealth effect and how that interacts with the real economy. If a stock market panic lead to a depression it would be very hard to isolate the cause and the effect. Some things are in the nature of self-fulfilling prophecies.
I am not trying to make the case that only technicals drive prices - they simply record buying and selling sentiment. I am trying to question the notion that investors merely follow earnings and fundamentals invariably. They anticipate earnings and visualize good "stories" and invest on that basis. This anticipation is as often proved correct, in hindsight, as it is proved wrong. When it comes to measuring sentiment, the anticipation element of stock prices, technical analysis is more geared to it than fundamental analysis. Neither one is intrinsically better than the other and neither is sufficient on its own. Every investor who ignored strict fundamentals, took the plunge and bought Cisco a while ago - they can say they bought it on fundamentals alone. Some of them are probably telling the truth. Others are probably glossing over the fact that they saw a good "story" and decided to buy and were proved correct. Fact remains many bought on abstractions - not purely on the hard, defensible, numbers. Ten years down the road if Amazon turns out to be the biggest retailing game in town with solid earnings - the next generation of investors can claim that it was driven purely by earnings. But, again, that would only be by hindsight. If the bubble, if it is one, bursts now and it never recovers, Amazon's ability to do business will be seriously hampered if they managed to unwisely factor in enthusiastic investor support into their business decisions, without it being clear that that support is not a thing of the moment.
Another way of putting it would be to see the strength or weakness of stock prices as a mandate from investors to managements. The smarter managements will use a strong mandate to grow the business. And for every smart one there will be a dozen schmucks who cannot get it together. Apple got two mandates in its lifetime - the more recent, second mandate seems destined to go the way of the first. It's not clear that they have tweaked their business model. They've simply introduced a new product line within the same model. The weakness was never in their product line, quite the opposite, the problem was with they way they sell their technology (as distinct from a box) to their buyers and developers, a play between control and and letting-go. If they learn incrementally and respond to signals they will eventually get it right. If not - c'est la vie.
To me it is very clear that "good", "strong" companies are defined by a symbiotic relationship between managements and investors in which earnings are secondary, things that eventually follow. The only reason William got it right and some of us, me included, got it wrong in this instance was because he was busy monitoring sentiment while we were focused on earnings and industry consolidation and commoditification. (He could have been reading specialist or chicken entrails for all I know, but that's neither here nor there.) What is clear is if the street/market is sending the right kind of signals, via the stock price, to Luzco, he will take that as positive reinforcement and persist in a chosen path, whatever that is. Contrariwise, if the stock floundered or plummeted, taking his options with it, he might get discouraged and try to do something else which may or may not pan out. How do we fit in long-term, short-term into all this? Where does one begin and the other end? Weeks, months, years? Darned if I know.
Critically, for me, the short-term sends signals to managements which define and refine their strategies in increments. Depending on the nature of the industry, its stage in the industry and product life-cycle, its sources of pricing power .... these factors are of paramount importance. With the economic theory of commoditification so clearly mapped out, why do we still have firms going belly-up? I'd venture the simple answer - a series of short-term signals (compulsions) that produce an undesirable long-term result. It's like that pig that allegedly leads you across quicksand. The pig, (the market in this case) sometimes does its job and other times, smoking the good stuff or more interested in truffles elsewhere, leads you astray and you wind up dead.
Am off on vacation tomorrow, back end of the month. Good luck all.
mano
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