Dick Sears  Commentary:  Good News, Bad News

Last week I said that I welcomed earnings
season, because it brought to the market a
dose of reality. Now I'm beginning to wonder.

The right to future earnings is what the stock
market trades. Forecasting that future is never
easy, but quarterly reporting does provide a
useful measurement along the way. Between
reports, prices have only supposition to go on.
But once a report comes out, there is a new
reality to factor into the equation.

Sometimes the news is bad news, of course.
Last week a disappointing earnings report from
Flextronics International (FLEX) resulted in a
24% drop in price on the day it was announced.

In general, though, with Gilder stocks we expect
good news during earnings season, because
they're good stocks. If they weren't, we wouldn't
own them, LOL.

But as Brian Wesbury pointed out this week,
good news may not be enough.

Because of Sarbanes-Oxley and our generally
litigious culture, corporate managements today
are almost forced to give the investing public a
gloomy forecast of the future. When they do, a
significant drop in price usually follows. Yes,
when the next earnings season comes around,
or earlier as the truth leaks out, the stock price
will improve.  But then comes another bad
forecast, and the cycle begins again.

It may be that we've reached a turning point in
the market's seasonal calendar. Before now
we would dread the earnings warnings that
preceded earnings season, and then hope to
make up for it when the real earnings came out.

But now we may come to dread the earnings
season as well. Our new threat is the cautious
guidance that follows even robust earnings.

A few weeks ago, I was feeling sanguine about
how few warnings there had been. I took it for
granted that we had a good quarter ahead of us.
I was partly right. Earnings so far have exceeded
expectations even more than they usually do.
But a series of gloomy forecasts has led to a bad
month of October.

All this new misinformation is something we will
have to come to terms with. In the meantime,
stock prices are taking a beating. And maybe
they'll never catch up. Maybe mandated gloom
will mean permanently undervalued stocks.
That's a gloomy thought. More likely, the market
will adapt, and we'll go on as before.

Speaking of misinformation, last week The Wall
Street Journal did a front page story on the crash
of Refco, the now notorious brokerage firm, in
which it was suggested that Victor Niederhoffer
might have had something to do with their failure.
The only evidence given consisted of vague
reports from anonymous sources.

Victor is a man for whom I have great admiration
and affection. He is also a man of great principle
and integrity. I have no doubt his hands in this
matter are surgery-clean.

But the affair does make an interesting story.
In particular it illustrates how the press acquires
misinformation and then runs amok with it.

Victor himself has given an excellent explanation
of the press's failure. And a more arms' length
observer, Jon D. Markman, has written a very
good article on Victor and his history with Refco.

Together they provide an instructive antidote to
some bad news gathering.


 

The Market This Week:   The week began well and ended well, but in between it was a real stinker. And if you're as over weighted in Qualcomm as I am, even Friday was a bad day. QCOM finished the week down 9%. Only SMI (12%) and FLEX (20%) did worse. The GTI's top performers were ZRAN (up 19%) and SYNA (17%). Returns for the Week: Gilder Technology Index (GTI):  - 1.2% Nasdaq Composite Index (NSD):  + 0.4% S&P 500 Index (S&P):  + 1.6% Historical Returns: Period GTI    NSD  S&P  1997 (est'd) 21% 22% 31% 1998 (est'd) 48% 40%  27% 1999 284% 86%  20% 2000 - 44% - 39% - 10% 2001  - 43% - 21%  - 13% 2002 - 56% - 32% - 23% 2003  130% 50% 26% 2004   3% 9%    9% 2005 to Date  - 4.6% - 3.9% - 1.1% Avg for 8+ yrs  9.1%  5.6% 5.6% Last 52 wks 10% 6% 6% Since the high of 3/06/00 - 80% - 59% - 22% Since the low of 10/09/02 238% 88% 54% Comparison of Returns for GTI Stocks By Whether or Not They Pay Dividends: Year Do Pay Dividends Do Not Pay Dividends 2004 11.6% - 3.3% 2005 to Date 0.8% - 6.7% Makeup of the GTI: The GTI companies are those "Telecosm Technologies" in the Gilder Technology Report whose stock is readily available to investors. If a company is not traded on the NYSE, AMEX, or NASDAQ National Market, it is not in the GTI. This past week there were 28 companies in the GTI. Advances vs. Declines: Among the GTI stocks this week, there were 11 up, 17 down, 0 unchanged.

The Year to Date: From the GTI's Origin (1/1/99) to Now: Weekly Change in the GTI, Last 52 Weeks: Trailing 3-Month Returns, Last 52 Weeks:   Volatility, Trend, Recovery:   As an indication of volatility, this table shows average weekly change in the GTI each year:   Year Ave Wkly Change 1999 4.2% 2000 7.7% 2001 8.5% 2002 6.8% 2003 4.3% 2004 3.4% 2005 to Date 2.0% As an indication of trend, this table shows number of up weeks for the GTI each year:   Year Number of Up Weeks As a % 1999 39 of 52 75% 2000 24 of 52 46% 2001 22 of 52 42% 2002 19 of 52 37% 2003 31 of 53 58% 2004 28 of 52 54% 2005 to Date 20 of 43 47% The GTI fell 94.1% from its March 6, 2000, high to its October 9, 2002, low.  Click here for the details of its long recovery attempt

More by Dick Sears

From the GTI's Origin (1/1/99) to Now

Trailing 3-Month Returns, Last 52 Weeks

 

The GTI fell 94.1% from its March 6, 2000,
high to its October 9, 2002, low.  Click here
for the details of its long recovery attempt.