When companies report earnings it's most often the headline number as opposed to the forecast that gets all the headlines. Well, that's wrong according to Standard & Poors Equity Strategist Alec Young. "Earnings numbers are a bit of a lagging indicator," he explains. While earnings reports do a good job supporting a trend in either direction, they are "not a great indicator of cyclical shifts."
What's a "cyclical shift"? In this case it's when a moribund jobless recovery driven by free money and a weak dollar meets up with no demand and a worsening international picture, to create a new recession as opposed to a slow recovery. The bullish case rests on whether or not economic headwinds (Japan, commodity prices ad nauseum) abate or prove more stubborn, as Fed Chairman Bernanke suggested in recent testimony.
The difference between Young and perma-bulls is a focus on the forward-looking picture. Once you look ahead, as opposed to whether or not a company beat in the past, you stop caring so much about how cheap things look on a trailing earnings basis. You also stop listening to the headline numbers you see flashing up on your television and start digging into the fourth or fifth coming earnings releases. Down below is where companies start saying things such as "business slowed in June" and "the outlook for the second half is murky." As a rule of thumb, if the best a company is willing to commit to is a vague hope that calender 2012 is going to start picking up, it's time to start letting go of their stock.Read More »from The Next Real Market Indicator