What to Watch Instead of Guidance

10/18/2013 9:00 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

Even though we are in the heart of earnings season, MoneyShow's Jim Jubak wants you to watch something other than guidance for direction.

For the week ahead and the week after that, let's watch earnings. We're in the heart of earning season for the third quarter and normally at about this time, I'd be saying to you something like, "Well, watch guidance because it's really what happens next quarter that counts," but I'm not going to say that this time because I don't think anything the companies are going to say, if they offer any guidance at all, has any connection with the reality that will actually emerge over the quarter.

Third quarter earnings are projected by Wall Street not to be very pretty, that projections right now are calling for a 1% increase in third quarter earnings year over year for the S&P 500 stocks. That's down from the 2.4% increase in earnings we got again year over year in the second quarter but what's really a big drop is that three months ago, Wall Street was expecting like 7% growth for the third quarter; 7% projections gradually came down to 1%, that's where we are, and means, probably, the companies are going to be able to report a fair number of earnings beats as they jump very low expectations. The problem, of course, is that while we're in the middle of a battle over the budget, we're in the middle of a battle over debt ceiling, all this has slowed the economy in unpredictable ways.

We really don't know what's going to happen for the fourth quarter. We don't know when things are going to end, we don't know what this has done to consumer attitudes, consumer spending, or corporate spending, so what I would usually say to you is, "Well, let's watch guidance for the fourth quarter to see where earnings are going to be." The problem with that is that I don't think companies are going to be able to offer meaningful fourth quarter guidance.

They may have a number if they want to be really, really daring and try to extrapolate from current trends but you got to remember that really the mess in Washington has only started to affect stuff for the last few weeks and we really don't know how or when it's going to end or how it's going to sort of spread out through the rest of the quarter.

You get companies that are going to be able to say pretty much nothing about the fourth quarter and that's going to leave Wall Street with this huge problem, which is they don't know what to expect. Wall Street was not expecting a great quarter for the fourth quarter, but it wasn't expecting a bad quarter and now they really don't know where they are, so analysts are not going to be able to play the usual game, which is okay, you drive up a stock by raising guidance. You get really, really optimistic and then gradually pessimistic.

All those games are up for grabs, so, in terms of guidance for earnings in the quarter, not much meaningful, and really, it means that kind of the macro guesses, since we won't know anything about fourth quarter GDP, either the way the economy as a whole is growing, but fourth quarter guesses on the affect of the dollar or oil prices, or anything like that for fed policy, are really going to be what one of the few things that we're going to be able to look at for the quarter in the lack of specific guidance from specific companies.

This is Jim Jubak for the MoneyShow.com Video Network.

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