Red Light, Green Light—Part Two

Okay, let’s start down the path. It’s about June 15—a few weeks before the quarter ends. People start to talk. Analysts adjust and readjust their expected earnings numbers. The CEO of Big Company comes out in interviews or news releases and downplays their numbers, saying something like, “Sales have been good, but we have a charge off, so earnings will be $1.12 instead of $1.32.” The stock drops $5, from $86 to $81.

Now toward the end of June other news—rumors mostly as the company hasn’t released its actual SEC filings yet. Rumors could be about mergers, share buy-backs, takeovers, stock splits, other sales figures, new product announcements, et cetera. These impact perceptions about the company. The stock wavers but heads back up.

The year or quarter ends. There is no talk from the company. This is a very quiet time. Outsiders may speculate, but the actual numbers are kept secret. The company brass is mum. No one, and I mean no one, wants to be in violation of the regulations. You see, people can’t trade on news the general public does not have.

Earnings is the most widely watched measurement of stock values. Because of this, all CEOs must be very careful of what they say about earnings.

Let’s move down to the first week of July. The quarter is over, but the actual filing (l0Q) has not yet been filed. That will happen in a few weeks—at least by August 15, the filing deadline. Now, think this through. If the CEO, CFO or other corporate bigwigs comment about actual numbers before the proper documents are filed, it is assumed that he or she knows what the numbers should be. Do you see?

Here’s the pathetic, yet comical irony. Now the news is out—it’s official. The interviews or press releases start up with something like this: “Earnings are ahead of expectations by about 10%. They are $1.22 per share.” As the report goes on, you’ll see an interesting twist. “We’re pleased with the numbers and growth, but we contemplate a slowdown in sales next quarter (or year) and may not be able to maintain these high numbers,”

Is this crazy or what? They good-mouth and bad-mouth their numbers in the same breath.

Now another unusual thing happens. Many times the stock goes down in spite of good news. It is a strange phenomenon. I’m still perplexed when it happens. It’s part of the “buy on rumors, sell on facts (news)” syndrome. It has a lot to do with sentiment—expectations and the like. It’s a mystery wrapped in a conundrum engulfed by an enigma.

NOTICE: See Part 3 for more useful information.
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