well i guess that is what makes a market, opy is strictly up due to what they call "quantitative drift" meaning no real players are buying or selling and its moving up with small bits here and there. The company is likely in a quiet period before their earnings and once they come out they will be great like all the rest, but the stock is up 350% from the low, more then goldman sachs so its just noise and will revert. The stock was also boosted 15% by its inclusion into the russell index, that to will revert, the stock is also almost certainly going to be priced for a secondary offering and that will move it back to $20 level. Earnings for financial companies mean very little as its a boom and bust business that pays out most of the profits to the employees and then eats the losses during the down times, this will be no different...
I disagree, it is not just noise and it will not revert if they deliver on margins tomorrow.
Your views remind me of those of El-Erian today who sees stagnant revenues and rising margins…but equities can’t rally more on this.
From Reuters: "For the equity rally to continue, drivers of corporate profits must shift from cost containment to revenue growth," he said.
“While second-quarter earnings for the Standard & Poor's 500 index companies .SPX as a whole have been better than expected so far, there's a divergence between revenue -- or top-line growth -- and earnings -- or bottom-line growth. With 225 companies in the S&P reporting second-quarter results, earnings are surpassing estimates by 17.7 percent, but revenue is beating estimates by a mere 0.9 percent, according to Thomson Reuters. That suggests that cost cutting was the main factor driving better earnings, El-Erian said.”
This is why bond guys will never get the equity markets and go on CNBC making statements like: July rally was a “sugar high.”
As I mentioned before, revenues can easily be inflated and here are just a few examples: by securing deals at unfavorable rates accepting unfavorable credit terms that might turn into bad debts, by aggressively investing in new production lines regardless of market supply/demand conditions, by using excessive leverage etc. If this sounds familiar it is because it is how companies inflated revenues for the past few years.
For me, having stagnant revenues yoy as these factors are no longer….and being able to generate at the same level even as they drive down costs, is why equities have rallied and will continue to rally some more (what we are seeing this week is just some profit-taking).
For the next six months to a year, the market will continue to prefer to see stagnant revenues and rising margins than rising revenues but compressing margins. And as the economy, in the next 6 months to a year, pulls out of the recessionary trend and revenue growth accelerates it will send stocks over past highs.
This is why tomorrow when the company reports, I will be looking for rising margins not rising revenues. Of course, if we see both revenue and margin growth, well then, who knows how high the stock will go.