A lot of big companies report their quarterly earnings this week and that should be the biggest pusher of the markets. For a while now I have been telling our readers that the markets are going bearish; that the bull run has not been supported by strong fundamentals; that things are setting up for a big fall. While I am not necessarily changing my mind on most of these things, one thing is clear: corporate earnings have and will continue to be strong.
Years ago I wrote an article about what should push the markets. What I said specifically is “quarter in and quarter out the only thing, barring a major geopolitical catastrophe, which should determine how the major markets are moving is whether or not corporate America is producing profits at or above where they should.” Well, in spite of all my nay saying about the weak fundamentals in the markets the reality has been this past 18 months that companies by and large are still turning profits. Even in cases where the profits have fallen short of analysts’ expectations (and let’s face it – the expectations have been lowered significantly) companies are still in many cases operating in the black, not the red.
The Boeing Company is a good example of a company whose expectations have been lowered and is still turning a profit. If BA had reported the same number three years ago when the stock was trading close to $110 per share they would have missed expectations. This most recent quarter was different partly because they are finally back on track to deliver the infamous (only infamous because of the delays) 787 jumbo jet, and partly because of lowered expectations that made outperforming a bit easier. The result was a so-so number still seen for what it was: profits!
Even when companies are coming up short of expectations they are still running in the black and the results, however disappointing to the markets, are not dragging the whole market down. Take Google for example. When they reported their earnings a couple of weeks ago, and subsequently had a pretty big move down, it wasn’t because they didn’t post profits. It was because they came up a little bit short of analysts’ expectations. In the past this move down may have dragged the whole sector and maybe the whole market down with it, but because corporate America by and large is posting profits the sector and the markets in whole continued to move up. Sure, the NASDAQ suffered for a day or so, but it did not feel the devastation that a company as big as GOOG could have brought in the past.
The moral is this - in spite of some still weak fundamentals in certain parts of our economy, and in spite of the high unemployment numbers (something that has lent itself to companies being able to stay afloat) corporations across the country are making money. Maybe not as much as in years past, and maybe not as much as some analysts and shareholders would like, but they are in fact making money, and that is fundamentally good and fundamentally strong and that is why the markets are going up.
While we look for the trend to continue, Murphy’s Law would tend to dictate that as soon as I say “bullish” a bearish week is likely to come along, so stay ready to make adjustments to your trades so that no matter what the markets throw your way you can handle it and in most cases profit from it.
Jeffry Dunyon
CEO
Safe Option Strategies
