Feb

7

VNThe bears pretended to go away last week when the S&P went up 5%. They left a 1 day decline of 18 points on Monday as a gift to bulls to buy, but when they did they were hit with a immediate 5% decline the next two days. Its very similar to the Trojan Horse left by the Greeks and one wonders if it's a general tendency that can be quantified. e.g. is there an inordinate tendency to visit the previous 20 day low?

One of the most non-economic things to a businessman is the inordinate tendency that analysts put on sales increases. One of the first things that good businesses do is winnow their customers down so that only the most profitable are there. The wealth of a business is increased when profits go up, not when sales go up. Any business can increase sales by selling low margin goods at a small profit. But the good businesses try to sell their products to the customers that have the greatest desire for it, as that way they can reduce the consumers surplus and increase profits. There must be some very flawed studies relating to biased data files that showed in the past that sales increases add additional information that the earnings changes don't reveal, and this has probably caused countless investors to sell stocks when profits increase and sales decrease or in the case of Cisco, or Microsoft, and countless others, the forecasted sales increase is not up to expectations. It must make treasurers who are business people very jaundiced concerning the rationality of investors when they run their business well, increase profits, in tough conditions, and find that their stock is killed when the sales level is below expectations. Any closely held business would think it magnificent to increase profits on reduced sales.

Perhaps the signaling effect of sales increases is mistaken for good business sense. I would hypothesize that companies that beat earnings forecasts but miss sales forecasts and go down in price perform substantially better than the averages.

Tarred by the same brush. How many times can the market do down irrationally when this or that indicator, this or that official, signals that the economy is not growing as fast as it has in the past x years.Forget about the fact that each months figures are generally reversed or revised in the next announcement,and that the figures generally are meaningless because of special seasonal adjustments, and assumptions, and political tinkering in many cases, and that sometimes bad sales for a retailer and many others is much better than good sales because it means they got rid of all the good stuff in the previous month. Suppose the worst is true, and the rate of growth slowed from  3% to 0% or -1%. ? The recession would be brief, the bounce would come, and what difference does it make if the economy goes down  1%, then up 4% two years versus up 3% each year. Stocks are supposed to be valued based on an infinite stream of discounted earnings. That's not affected by one years change in the path. Nor are recessions a good time to sell stocks as the same way when the market turns down when the news is recessionary, the market will look for any silver lining for a change in direction when the economy is in the doldrums.

The Nikkei which closes at 0115 gmt continues to forecast the US market with reasonable accuracy . The most recent was the 5% decline on 2 06 in Japan which forecasted the subsequent 2% decline in the US on 2 06. The Nikkei closed at 13080 on wed morning in the us. It is trading at 13060 as I write, up from a 13005 open.

Dan Grossman wonders:

DVGPerhaps modern tech businesses like Microsoft and Cisco have such high gross margins that sales are always profitable and it is never good to have sales growing at less than forecast by management or predicted by analysts.

You and I are used to old-time businesses with low margins and high overheads that have variable aspects. In these businesses it would sometimes be valuable to get rid of less profitable customers. But perhaps in the software business with 70 and 80% margins,  no customer is worth getting rid of.

Steve Leslie comments:

I have always thought that earnings can be anything you want them to be, based on accounting choices such as depreciation rules, depletion, inventories, not to mention shell accounts (ENRON), outright fraud, and other sophisticated techniques and methods. However sales are what they are. You either sold a product or you did not. It is a more objective indicator.

Price to Sales Ratio (PSR) is just one useful measure. I am sure there are a host of others that the fundamentalist can use to extract information out of a company’s cash flow statement and balance sheet.

I like to use services such as IBD and research companies such as Zack’s and Value Line to provide valuable information and I go from there.


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