Earnings Season

I heard there’s a new slogan making the rounds in corporate accounting departments. “Flat is the new up.” I have to admit, that got a chuckle out of me. But it’s true, flat really is the new up when it comes to sales volume, revenues, and even earnings to an extent.
And that maxim will be put to the test next week as we head into earnings season for the Fourth Quarter of 2009.
It’s the weirdest thing, but I’m always a little surprised by Q4 earnings. It just seems to sneak up as I’m easing back into full work mode right after the holiday season. I don’t think I’m alone here either, because I haven’t seen any mention of Q4 earnings in the media.
OK, that’s not exactly true. Meredith Whitney did offer up an earnings estimate cut for Goldman Sachs (NYSE:GS) earlier in the week. Ever since Whitney started her own firm, she’s seemed a bit more eager to make a splash in the headlines. I imagine her as a task master in her office: punctual, driven, strict, and humorless. Kind of like Dwight from The Office (yes, I catch that show on occasion).
*****Still, Whitney’s is the first recognition that earnings season starts with Alcoa (NYSE:AA) on Monday. It should also be noted that the market ignored Whitney’s Goldman earnings cut (the parallels with Dwight continue). Truly, flat is the new up.
Of course, investors will be looking for earnings growth. But I suspect if revenues come in flat and companies can give a somewhat encouraging outlook for 2010, stocks will hold current valuation, and may even move higher.
That’s because investors want to believe that the economy has at least reached a point of stasis. We want to feel confident that the worst is over. Pessimism is still rampant. And evidence that even the most dire forecasts aren’t coming true will likely be seen as good news.
Take today’s new unemployment claims number. It was slightly better than expected. And the 4-week average of new claims continues to fall. And economists are now looking eagerly at the 425,000 level as the point where the economy might actually start adding jobs.
Of course, there’s no explanation as to why 425,000 new unemployment claims for a week means that job growth is right around the corner. But if the market believes it is good news, then good news it is.
*****China is easing its foot on the gas pedal. Controlling record-loan growth is being called a priority by Chinese Central Bankers.
No doubt the China bears (of which there are many) will pounce on this news as evidence that Chinese growth is a loan-fueled bubble and huge declines for Chinese stocks are coming.
But in my opinion, the China bulls are missing the point: China has $2 trillion in foreign currency reserves. That’s cash on hand. So China’s lending surge doesn’t represent the same type of imbalance that it did in the U.S. between 2004 and 2007. In other words, the Chinese government is not taking on debt to add stimulus to its economy.
The other important factor for China’s economy is demand from Europe and America. While domestic demand in China is improving, China is still an export economy. As the U.S. economy stabilizes, that’s good for China. I’m more concerned about Europe right now. I don’t think Europe is in nearly as good of shape as the U.S. and that’s potentially troubling.
Still, I’m buying quality Chinese stocks at attractive valuations. Because the long-term growth story for China is practically iron-clad.
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