Don’t hate the player, hate the game.
Like most pithy maxims, that old adage prescribes a rule of conduct that asks far too much of our avaricious, covetous species,
By and large, I manage to live by that rule, or some version of it. But averse as I am to pocket-watching (a manifestation of hating the player rather than the game), I’ll admit to being slightly miffed in late-2021 and early-2022 by the small fortunes which accrued to those who played the Bored Ape Yacht Club game.
The game itself — “monkey business” in a very literal sense — I found quite funny. The six- and seven-figure windfalls that accrued to the players not so much. It wasn’t envy — if I have an AMG Mercedes, I don’t need to envy yours, unless of course you have the GT63, in which case sure, ok, that’s better than my CLE53 — it was the uncomfortable realization that a group of people who between them hadn’t a shred of sense, made house money buying cartoons of debonair monkeys.
I have a very high tolerance for absurdity and generally speaking, I delight in seeing people get rich. But there was just something about those monkeys — and the people who bought them and flaunted them on Twitter — that rubbed me the wrong way. I hated those players a little bit, and certainly more than I hated the monkey business itself.
Anyway, earnings season’s a game. We all know that. It’s a charade. As I put it two years ago (nearly to the day), “when you read soundbites from top-down strategists feigning surprise at another ‘better than feared’ reporting season, remember it’s all just entertainment — sportscasters editorializing around a game their bottom-up colleagues helped fix.”
On Monday, SocGen’s Andrew Lapthorne underscored the point while editorializing around what, so far anyway, is a very high beat rate for Q2 results. “Quite a few years, maybe even decades, ago we came up with the idea of ‘just-in-time’ consensus forecasts where individual analysts’ estimates would suddenly drop one by one prior to a company’s quarter end, only for said company to ‘surprise’ a few weeks later,” he jeered. “The result are US reporting seasons that almost always beat the consensus, good company headlines and perhaps even a good share price reaction on the day.”
That’s the game. Corporate management and, as Lapthorne noted, the company analysts with a direct line to the C-suite in their coverage universe, are the players. Here’s the result:
The charts are from Deutsche Bank’s mid-season earnings tracker. On the left, you can see that three-quarters of the S&P 500 beats estimates on average, and typically by about 5% (chart on the right). It’s, um, easier to beat estimates when you have an open dialogue with the people who produce them.
On Monday morning, I described this as follows: “There are so many ways to ‘beat’ on the bottom line that any management team which can’t is derelict. ‘Earnings’ can mean whatever you want it to mean.” It also helps that you can (legally) manipulate the metric by reducing the float (i.e., buying back shares).
In his missive, Lapthorne took a “bah humbug” view of the elevated earnings beat rate illustrated on the left, above. “Expected ‘surprises’ are not surprising,” he quipped.
Don’t hate the player(s), Andy. Only the game.
Beats are meaningless. Only beats and raises are meaningful.
As of yesterday, 47% by name/40% by market cap of the SP500 has reported. 80%/87% beat consensus rev, 83%/91% beat cons EPS. 60%/72% saw cons 3Q rev go up, 44%/55% saw cons 3Q EPS go up. Average price reaction to earnings was +0.1%/+0.1%.
By sector is more interesting: in Technology, 80%/97% saw 3Q cons rev go up, 70%/79% saw 3Q cons EPS up. In CommSrvc, 78%/98% and 44%/79%. Bringing up the rear were Materials, ConsStpl, etc.
Comparing rev to EPS is interesting too: almost every sector has higher % 3Q rev increase than 3Q EPS increase, and that applies up cap and down cap as shown from by name and by cap %s.
In general, up cap did better than down cap (compare by name to by cap %s) and especially so in CommSrvc, Cons Disc. However, down cap did better in Cons Stpl, Health Care.
Overall and so far, I see emerging margin pressure, large cap fundamentally outperforming, and an earnings season neither good nor bad enough to affect the market outlook (positive through the summer, in my 2 cents’ opinion).
Today’s noteworthy example:
“Motorcycle sales keep falling, but Harley’s stock is soaring. Here’s why.
Harley-Davidson investors cheer the sale of a stake in the company’s financing business to KKR and Pimco, which will fuel more share buybacks, even as earnings disappoint.”
I became cognizant of this game in the late 90s when Cisco put together an insane run of beating quarterly EPS forecast by precisely 1 cent. No more, no less. It was just way too precise and predictable to be coincidence.
Is it time for an update on bitcoin?
I can deal with the monkeys- seems like Vegas- which I am not interested in for myself.