Why "Bad" Earnings Spark Big Rallies

Unraveling a mega-cap earnings mystery… [Morning Reckoning] April 30, 2024 [WEBSITE]( | [UNSUBSCRIBE]( Why "Bad" Earnings Spark Big Rallies Baltimore, Maryland April 30, 2024 [Greg Guenthner] GREG GUENTHNER Good Morning Reader, We’re smack in the middle of another exciting earnings season. It’s once again that magical time of the quarter when investors become confused, angry (or both!) when stocks don’t react as they expect after filing their quarterly updates. Why are earnings so tough on armchair investors? It might have something to do with all the confusing numbers and analyst estimates floating around. Or maybe it’s because the financial media stirs the pot by quick-calling after-hours reactions, only to update their coverage when a stock abruptly changes direction following the conference call Q&A. But the most frustrating part about earnings season is that stocks don’t react appropriately once the numbers hit the wire – at least, not in the minds of most investors. More often than not, a stock will behave differently than one might logically expect, even when earnings perfectly adhere to analyst expectations. Unfortunately, there’s no quick fix that will make earnings season more palatable for the average investor. Companies will continue to dish out fresh reports every three months, and investors and traders will simply have to do their best to navigate the uncertainty. As long as you’re involved in markets, you’ll have to deal with the occasional earnings shenanigans. So it’s best if you learn to embrace the madness… Today, I’ll show you that it is possible to ride the earnings wave without losing your mind. The secret to earnings zen doesn’t involve scouring estimates, analyst reports, or insider transactions. You simply need to learn how to put the earnings announcements into context with the forces affecting a stock’s price and trend. Let’s check out a couple of recent high-profile earnings reactions that have frustrated the investing masses… [Urgent Publisher Warning]( Hi, I’m Matt Insley. I’m the Publisher at Paradigm Press. Today, I have [bad news to share]( regarding the future of Jim Rickards’ newsletter. [>> Click here now for my announcement.]( [LEARN MORE]( A Tale of Two Mega-caps… Last week, we witnessed Tesla Inc. (TSLA) rally off 52-week lows, closing higher by more than 12% after reporting an earnings miss. The very next day, investors were forced to watch Meta Platforms Inc. (META) crater more than 15% after beating both top and bottom-line estimates. Moves like these are why so many people are distrustful of the stock market. They have no idea what to make of price action not matching up with top and bottom-line numbers parroted on the financial news. The Tesla news alone unleashed more than its fair share of angry comments across social media… Demand for EVs is falling off a cliff! Tesla’s free cash flow flipped negative! Profits are hitting 3-year lows! But none of these facts prevented Tesla shares from rocketing off their lows as traders appeared blissfully unaware that anything could be wrong with the company’s business prospects. Meanwhile, Meta has been a Wall Street darling since it bottomed in early 2023. Shares were up 450% from their 2022 lows ahead of its earnings announcement last week. The stock was also up 40% year-to-date ahead of earnings — the opposite action we had seen from Tesla during the first quarter. While Tesla’s financials were a mess, Meta actually posted some impressive numbers. The company beat earnings and revenue expectations for the quarter, extending its fiscal comeback from the dark days of its metaverse pivot in late 2021 - early 2022. But slightly lower second-quarter expectations stuck out to investors despite the strong Q1 showing. After a perfect start to the year, sellers came out in full force and sent the stock lower by double-digits to its worst showing in 18 months. What Did You Expect? To truly understand why the market reacted as it did, we have to zoom out and place the earnings into the context of the bigger price trends shaping these two popular stocks. On one hand, we have sputtering TSLA shares that have already coughed up more than 40% year-to-date. TSLA broke from its Magnificent Seven brethren in late December and spent most of the first quarter digging itself into a deep hole. Most investors expected the worst. In fact, sentiment couldn’t have been more bearish heading into last week’s announcement. Combine that with the strong downtrend and breakdown to fresh lows, and you have a recipe for a big bounce on mediocre results. Tesla only needed a report that was slightly better than apocalyptic to spark a short covering rally. And that’s exactly what happened! The opposite was true for Meta. The stock was on a historic run, posting one of the best-looking charts amongst the mega-caps extending back to the 2022 bear market lows. This strong uptrend plus the fact that Meta shares extended to new all-time highs following its previous earnings beat left little room for error. Anything less than a “perfect” earnings report would of course entice investors to take profits — which is exactly what happened. Tesla just needed to prove the wheels weren’t falling off their cars to attract buyers, while Meta needed to dazzle analysts and investors to maintain its Heck, even if this premarket drop holds, META shares won’t completely fill the earnings gap higher from early February (the stock jumped 20%-plus following its last quarterly earnings release). Bottom line: earnings reactions are all about expectations — just not the expectations everyone talks about. You have to separate the financials from how the herd feels about a stock. The best way to do that is to analyze prices and trends. Best, [Greg Guenthner] Greg Guenthner Contributing Editor, Morning Reckoning feedback@dailyreckoning.com [“I Am Deeply Disturbed by the Impending Aftermath of the Presidential Election.”]( [Click here to learn more]( No one has been properly warned of the election threat facing our nation – until now. Former White House Advisor Jim Rickards explains the disturbing future that awaits us in November. [Click here](. [LEARN MORE]( In Case You Missed It… Turning Passions Into Interests Sean Ring, Editor [Sean Ring] SEAN RING Good morning Reader, "He'd Give You The Shirt Off His Back." To me, the above quote describes a nice, poor person. There’s nothing wrong with that, but I never understood why that compliment was the highest you could give a man. It's almost like saying, "He's a great guy, but he can't organize his financial affairs." Folks, there's a reason stewardesses tell you to put your mask on first before you help anyone else when you're on a plane. You've got to take care of yourself before you can help anyone else. This leads me to my old neighbors when I was living in the Philippines. The Worst House in the Best Neighborhood Thanks to a horrible storm just before we were moving to Italy, I now have a keen understanding of why real estate agents tell you it's better to own the worst house in the best neighborhood rather than the best house in the worst neighborhood. We didn’t live in the worst house, by the way, not by a long shot. But some of the villas in our subdivision are impressive. They're not McMansions of the cheap American kind. You can't build that crap here with the humidity. The house would rot within a year. But these houses are big, fitted with their own generators, and perfect for this humid climate. Unfortunately, my landlord was a cheapskate and didn't kit out the house we were living in with its own generator. I'd have had no problems besides cash and gas if he did. But here's the thing. These professionals, business owners, and entrepreneurs - all people whom middlebrow bureaucrats would have us hate — are the very people who've made my family's life bearable during the disaster that struck. Our next-door neighbors, doctors both, handed us a 50-meter extension wire to plug in our gadgets. They have a generator and loads of excess kilowatts. Because of this, we were able to reach our families to tell them we were safe. And we slept much better with our fan cooling us during the night. Our across-the-street neighbors had loads of fresh, running water because of their generator. We filled up twelve 5-gallon jugs per day to wash and shower. And we’re not the only ones. Folks are coming from miles around to get their water. And it's nothing to them. Why? One, because they're really lovely people. And two, because it's easy to be generous when you're rich. Money Making as an Interest Years ago, I picked up The Passions and The Interests: Political Arguments for Capitalism before Its Triumph by Albert O. Hirschmann. It's one of those books I bought for my Umberto Ecoian "anti-library." That is, it was for reference and research. But I wish I had read it sooner. It's as rich as a chocolate gateau, an epic treat for those who ever wondered how we went from seeking God to seeking glory to seeking riches — and how and why we did so. Hirschmann takes you by the hand through the seventeenth and eighteenth centuries to show you how those who fought for capitalism won the ideological argument. Regrettably, I can't take you through a full review. But I will tell you about a few things that jumped out at me and how they relate to the issues at hand. Whose Hand Was That? The first thing that shocked me was that the Invisible Hand was an invention of Montesquieu, not Adam Smith. Montesquieu wrote that the pursuit of honor in a monarchy "brings life to all parts of the body politic," and as a result, "it turns out that everyone contributes to the general welfare while thinking that he works for his own interests." That's the Invisible Hand leading you to glory, not riches. But I like Smith's adoption of it for the latter purpose. It was essential to counteract the church's ideas — especially St. Augustine's — that lust for money, power, and sex were man's three principal sins. It's as Easy as 1, 2, 3! First, they tried to repress and coerce man. St. Auggie - I went to Villanova, I get to call him that — and old Johnny Calvin were big fans of this. But it wouldn't take. By the Enlightenment, the day's best and brightest realized that The State suppressing these vices didn't solve any problems. They just created incentives to circumvent authority. Sound familiar? Second, the powers that be tried to harness the passions. This was better, but we're not there yet. Giambattista Vico, the great Italian polyglot, wrote: Out of ferocity, avarice, and ambition, the three vices which lead all mankind astray, [society] makes national defense, commerce, and politics, and thereby causes the strength, the wealth, and the wisdom of the republics; out of these three great vices which would certainly destroy life on earth, society thus causes the civil happiness to emerge. This principle proves the existence of divine providence: through its intelligent laws, the passions of men who are entirely occupied by the pursuit of their private utility are transformed into a civil order which permits men to live in human society. Hegel's concept of the Cunning of Reason echoes this by saying men, following their passions, actually serve some higher world-historical purpose of which they are totally unaware. The State would be a transformational force rather than a coercive one in this role. Essentially, let the people do what they want, as long as they make money and don't infringe on the rights of others. But the central issue was how this transformation happens. This is where David Hume comes in, and The State exits. Hume wrote in his Treatise, "Nothing can oppose or retard the impulse of passion but a contrary passion." As an aside, I remember watching Samuel L. Jackson talk about how getting addicted to golf got him off his drug addiction. For Robert Downey, Jr., martial arts replaced drugs. I thought both their stories were nonsense until today. The great thinkers of yesteryear wanted the body politic to substitute "passions" with "interests." No coercion. No repression. And no State, funnily enough. Just find something more beneficial to which you can get addicted. And boy, does making money suit that bill! Dr. Johnson himself once said, "There are few ways in which a man can be more innocently employed than in getting money." To them, passions were wild; interests, harmless. To be sure, it was important to pursue wealth sensibly. When indulged to excess, it can lead to disastrous results. If only these guys could've seen Enron, Lehman, and Evergrande! But even better, they should see my neighbors — and all those who lent a hand to one another during the crazy disaster a few years ago… Wrap Up I'm not a philosopher per se, so I hope my casual writing sufficed. I think the idea that we're all against each other in some sort of class war is Marxist nonsense. I saw more goodness during the cyclone aftermath than I had for a long time. Yes, the benefactors have money. Yes, the beneficiaries don't have as much. To me, the message is to become as financially successful as possible. That way, you can "feel possession," as psychologists say, and once you do, you can pass on to others what you don't need or want. All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com X (formerly Twitter): [@seaniechaos]( Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Greg Guenthner] [Greg Guenthner, CMT,]( is chief strategist at Forge Research Group. He has spent the better part of the past two decades developing long-term and short-term strategies with a single goal in mind: to help everyday investors generate outstanding returns and control their financial futures. Greg’s charts, analysis, and insights have appeared in Marketwatch, Forbes, Yahoo Finance, and many other financial publications. 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