Mike O’Rourke of BTIG discusses Friday’s big decline, and notes that investors seem to be reacting to companies missing on revenue, but hitting on earnings.
What’s worrisome, he notes, is that investors seem to be punishing companies for not going balls to the wall:
GE was another company reporting big improvements in credit trends. It was a similar story with revenues missing expectations and earnings beating them. The revenue miss was on the Industrial side of the business. Again, it was never the industrial side of the company that threatened to put the whole franchise out of business just over a year ago.
Earlier in the week, Alcoa noted that financial market instability was a greater threat than the real economy. GE also provided an example of how the instability and headline risk within the financial markets is unsettling business. GE, as a large multinational industrial corporation, devoted a portion of the presentation to Europe and the sovereign debt crisis.
Here was the company’s summary, “A couple of macro questions, could the austerity program slow the growth in Europe? Does the lower Euro help European competitors? I think we’ll have to see. You know, we have 14% of our industrial revenue in Europe, and we have already been basically dealing with a slow-growth Europe, and we’ll have to see what competitors do with the pricing. But you know, as fast as we’re worried about the dollar going to 1-to-1 now, we’re worried about it going the other way. So I think the global nature of the company and the broad manufacturing base we have helps us to kind of weather these short-term volatility periods, and based on what we see today, I don’t think European volatility should have a material impact on our earnings.”
There is an old saying, “if you manage the business right, the share price will take care of itself.” This week, we had a number of companies report earnings. In most cases, they exceeded expectations but fell short on revenues. Companies also reported improvements in key underlying core metrics, metrics in areas that threatened their very survival a year ago. Regardless, the market did not react well to this news. Would the market have been more impressed simply by improved revenues or by an aggressive push for growth? That seems more like the pattern of rewarding bad behaviour that has been so popular over the past 1-2 decades. Market participants often complain about CEOs managing for the short term, and usually get the most vocal after that strategy inevitably blows up. Today we see corporations focusing on the long term, with an eye towards risk and yet there is “disappointment.” Market irony never ceases to amaze us.
It’s also highly possible, of course, that the selloff has nothing to do with punishing conservatism, and that top-line misses stemming from the industrial side only confirm the double-dip fears.
Regardless, this is a mega week for earnings. We should know more about what the market is thinking quite shortly.