A Lagging Indicator?
Like any good, or in this case bad, arbiter of our future, we look to the market to help explain life and know how to feel. What we get in return is an emotional roller coaster that is only partially correlated to our actual well-being. It’s variable payout nature ensures that we will place emphasis on outcomes that do not matter, but as some do matter, we will continue to look for insight into our future. Such is the case this past week.
We last wrote about the market in August. At that time the major indicies had just taken a big dump, losing close to 15% in no time at all. More enlightened experts would have explained how the drop made sense given fundamentals weren’t there in the first place to support such a value, combined with uncertainty over the world and profit taking. It’s what we say anytime we want to explain any drop. And, you can see from the graph below that after the drop, the market (the Dow in this case) had a hard time picking up momentum with a bunch of false starts and retreats.
Enter October. It’s a bonafide rally. It’s a little hard to see looking at the above, but this chart tells the story better.
October month to date is up almost 20 percent, not quite at the high for the year but demonstrably higher and by far the best month in a long time. The tech industry has had quite the run compared to other sectors. Even LinkedIn is still trading well above its IPO price, and Apple continues to give those in tech continuous sweet dreams. Factor in too Google’s impressive recent earnings and the relative exuberance in the startup scene, and you could easily believe that tech deserves to outperform the rest of the economy. All of this has happened even though we have yet to see some of the more impressive and anticipated tech IPO’s – Groupon, Zynga, Facebook, and LivingSocial. The first two will soon drop, and it’s just a matter of time before the last two do, let alone some expected ginormous acquisitions, i.e., Dropbox. When will Microsoft decide to simply pony up $15bn for them?
So, what then is the problem? Earnings. That pesky decision for our financial and emotional life to be divided into four quarters where public companies give us their results and in most cases provide some guidance on the rest of the year. It’s the meteorological equivalent of guessing a hurricane’s landfall… every three months with lots of mini-hurricanes. When they miss land fall, stocks rise, people rejoice. When they don’t meet expectations, it’s just a question of the damage. Let’s take a look at two such recent crashes.
Amazon
Amazon reported record revenues but its profit came in way under expectations, and it said that it might not show any profit but a loss ($200mm!) at the end of next quarter. Netflix on the other hand, holy cow. It’s hard to know where to start. They have been an absolute stock darling. From July 2010 until July 2011 the stock went up six fold, from $50 to $300 per share. The stock has lost almost 70% of its value in a few short months. If you had $1mm in stock; it would be $300,000 now. Ouch. Why? First in July they jacked prices and tried to create two different businesses, one of which from a branding perspective was horribly thought out. Then they disclosed that they lost 800,000 subscribers as a result and will probably lose another 600,000 more. Astute readers will have noticed that it trades nowhere near $300. Look at the expanded view from June of this year.
The question that started this entire piece remains the same – what does it all mean. We once heard that technology is actually not a predictor of the economy but a lagging indicator. It goes down well after other sectors. We have seen an enormous retreat in financial stocks, which are seemingly on their way up. Are Amazon’s recent slip and Netflix’s continued stumbles signs of an avalanche to come or easily explainable? For example is it really reasonable for an analyst, one who can make >$1mm per year sharing their ideas about stock prices, to cut their target on Netflix from $220 to $95? It would be one thing to do so before earnings, but to do so after only makes us wonder what anyone actually knows. Maybe then, it could really be nothing, just emotions not facts. That it might not be keeps us up a little later than we’d like.
