The Exchange

Heavy Earnings Week Ahead: Here’s How to Weight It

The Exchange

By Marek Fuchs

This week promises to be a big one here in our valley of economic indecision. Many companies representative of their industries, from Apple (AAPL) and Facebook (FB) to General Motors (GM) and Starbucks (SBUX), will be reporting their numbers to the investing world.

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This, of course, comes at a particularly vexing time in our economic climate. Between contradictory indicators and a government shutdown that delayed the reporting of economic data, there probably hasn’t been a more confounding period since the days the Bureau of Economic Statistics was staffed by dinosaurs.

Luckily, if ever there were a chance to get a bead on the economy through earnings reports, this week offers it – with a caveat. When you get a representative sample of the U.S. economy that includes the likes of Apple, Facebook, Biogen (BIIB), Starbucks and General Motors, all reporting in a few days' time, you can lay them end-on-end and reach an adequate conclusion, right?

Well, not if you do it with the same old method. After all, the media and traders tend to merely dip into that day’s showcase report and extrapolate out from there. Problem is, the next day comes and offers up a different report and wholly separate conclusion. Hence, our never-ending schism. Apple reports good results? Tender mercy! We’re on Easy Street. General Motors gets spanked? Call the economic undertaker! We’re dead.

An example of earnings nonsense

Just look at last week, which was a prototypical example of such nonsense. On Wednesday Caterpillar (CAT) reported disappointing earnings and all was lost. Not mincing words, Business Insider said: “Global bellwether Caterpillar had a bad quarter and its outlook stinks.” The New York Times pointed out ominously that Caterpillar “is considered a crucial barometer of the global economy. ” And major indexes were down following the report.

But by Thursday, wouldn’t you know it? Microsoft (MSFT) reported good results, and happy days were here again. Business Insider deployed the words “strong” and “flies.” The New York Times called the days’ earnings “robust,” and – you guessed it – major indexes were up.

Let's take a moment to grab a neck brace. It’s the best treatment for whiplash. As an aspirant for reason, of course, you can aim higher. But how?

Putting it all together

Try it out this week. For starters, don’t stand in economic judgment until Friday. If you catch yourself weaving, say, Apple’s Monday earnings into a tale of macroeconomic win or woe, get ahold of yourself and...wait. Play it all down until Friday. At that point, proceed. But harness the reports all together, weighing them according to their respective industry’s contribution to the overall state of the economy, backing out any particularities.

Is this a highly scientific method? No, it is an act of improvisation. But here’s the deal: Tamping down that contemptible impulse to jump to larger conclusions each and every time a new earnings report is unfurled will be a step forward.

The secret sauce involved is less than dazzling. The formula involves a sense of the industry’s contribution to GDP, backing out a mathematical hunch as to the particularities of the individual company’s strengths and weaknesses. The resulting percentage stands indicative of the company's importance as a portion of our overall glimpse of the broader U.S. economy.

In Apple’s case, for example, technology is a crown jewel of American industry – incredibly important – but the company’s product cycle is a bit long-in-the-tooth and their gadgets have begun cannibalizing each other, which speaks less to the big picture. Moreover, Facebook gets an overweighted emphasis in the technology sector, as its field of social media is more promising at this juncture than rusty old gizmos. Starbucks offers a good sample from the consumer sector but needs to be underweighted more than it normally would to allow for its degree of crossover with Apple. Both companies appeal to the aspirational consumer and tug at the public in a similar fashion.  During the economic crisis, it often seemed American consumers were buying little but iPhones and high-priced lattes.

Manufacturing is a relic, no longer the central element of the nation’s economy, but General Motors still holds considerable psychological impact. Biogen is representative of the health care sector, another modern day crown jewel, which should be overemphasized because of the possible impact of the Affordable Care Act.

The upshot? Here’s how your calculations should roll:

Apple: 10%

Starbucks: 15%

Facebook: 20%

Biogen: 30%

General Motors: 25%

It is, to be certain, hardly groundbreaking to lay down the claim that traders and the media – those twins of quick-hit thought – are intellectual turncoats.

But crafting a systematic framework, even if imperfect and something of your own creation, is key to avoiding the many excesses of quick-hit thought in this puzzling environment.

Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.

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