Monday, August 3, 2009

Ramblings of a Portfolio Manager 8-3-2009

Ramblings of a Portfolio Manager or Farewell Earnings Central! We hardly knew Ye…

As some may discern from our weeklies, we often like to take shots at the financial media. With our aging eyes, such a large target is rather hard to miss…and in this business, where hitting the mark 5/8th of the time constitutes a good record, we’ll take all the easy shots we can. So it was with a wry smile that we listened to CNBC declare “the most important earnings season ever” officially at an end with the closing of their Earnings Central news desk last Friday. Funny, we were unaware of any SEC regulation promulgating that all quarterly corporate earnings be reported by July 31st. US companies are on many different fiscal years (particularly the retailers), with quarters ending in every month of the year, not just the convenient months of December, March, June and September. But if the pros at CNBC say that earnings season is over, then who are we, or any of the 100 or so publicly traded retailers out there, to argue? Not that anything such companies as Wal-Mart, Target or JC Penny have to say about the state of their business would shed any light on the health of our economy and, thus, the fate of the capital markets. It is folly to argue with someone with a larger pen or a taller pulpit so we humbly submit to the wisdom of the press…not!

Sorry, while not wishing to appear contrarian, or in any way in disagreement with the almighty media, we humbly submit that the “most important earnings season ever” has yet to begin. Investing in an economy that is 60% dependant upon the consumer as we regularly do, we would argue that the fate of the retailers will give us a better read on the future than how well Goldman Sachs did in high frequency trading last quarter. So far this year, the retailers have followed the playbook of the rest of corporate America—reporting lower-than-expected sales with better-than-expected EPS thanks to cost cutting. While that type of expectations management may have worked just fine with the likes of Goldman or Intel (which is more than slightly leveraged to the consumer by the way) this quarter, it will not get the companies serving you and us, or the stock market in general, very far. That is, if we get earnings reports from the retail sector similar to what we have been hearing thus far from the rest of the economy but without positive forward guidance, our little market rally may be in jeopardy. So stay tuned…but not to CNBC it would appear.

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