Why "Bad" Earnings Spark Big Rallies

Unraveling a mega-cap earnings mystery… [Morning Reckoning] June 18, 2024 [WEBSITE]( | [UNSUBSCRIBE]( Why "Bad" Earnings Spark Big Rallies Baltimore, Maryland June 18, 2024 [Greg Guenthner] GREG GUENTHNER Good Morning Reader, We’re just about to be ending this quarter which means… earnings season is coming. 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… You have [(1) item]( on hold at our warehouse: Item #: [51987]( Status: On hold Value: Approx. $300 Claim by date: 06/21 at 11:59 PM To see how to claim yours simply [click here]( our Head of Customer Experience will show you what you need to do. [LEARN MORE]( A Tale of Two Mega-caps… Earnings are hard to predict… We can see stocks like Tesla Inc. (TSLA) rally off 52-week lows after reporting an earnings miss. On the flip side, a stock like Meta Platforms Inc. (META) can crater 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. 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 [Response Requested 1/1000th of an ounce of gold available]( You're being offered a 1/1000th of an ounce of gold when you upgrade your account. It will come in the form of a “Gold Back” - a new type of gold currency that’s starting to spread across America ([click here to view](. [Click here to learn how to claim your new Gold Back Currency<]( [LEARN MORE]( In Case You Missed It… Hunter Biden is Guilty, But Who Cares? Sean Ring, Editor [Sean Ring] SEAN RING Dear Reader, I admit, I wasn’t fussed about the whole Hunter Biden conviction. But I couldn’t understand why. I mean, they finally got a Democrat on something. But Hunter Biden is such a dirtbag; gun charges don’t do him justice. No, this isn’t the same as getting Al Capone on tax evasion. It’s more like getting Lex Luthor on a jaywalking charge. Let’s not mince words. Hunter is a crackhead who shagged his dead brother’s wife. That may be immoral and unethical, but it’s not illegal. Ok, smoking crack is illegal, but being a crackhead isn’t. It’s a slight distinction, all the same. Biden describes the affair in his unintentionally ironically titled book Beautiful Things: I was at my lowest, she was at her neediest, and we clung to each other with abandon. We talked at length about how much we had come to rely on each other, how our health and well-being seemed dependent on the love we’d grown to share. “It was an affair built on need, hope, frailty, and doom,” he adds. Ewwww… But really, we needed to get Hunter on what he’s really done wrong: being a target for blackmail by foreign powers. How did he do that? By playing fast and loose with his “jobs” overseas. For instance, Junior Biden's involvement with Burisma has been a subject of much debate and speculation. Hunter's appointment to the board of Burisma in 2014, while his father was the Vice President of the United States and involved in U.S. policy on Ukraine, was an example of nepotism or an attempt to gain influence through family connections. That’s not illegal, but it opened Elder Biden to much criticism and potential blackmail. After all, why else hire the unqualified son of the US Vice President? That’s why people have speculated Hunter’s involvement with the company was part of a broader pattern of corruption or influence-peddling. To be fair, Junior Biden has denied any wrongdoing. He stated that he was qualified for the position based on his experience as an attorney and a board member of other organizations. Alas, a conviction for a big-picture crime didn’t happen. But to get to the heart of my apathy over Biden’s conviction, look at this X thread: Credit: [@Chesschick01]( I think the world of Thomas Massie. He’s an MIT graduate who’s also a libertarian. By his voting, he demonstrates time and time again that he puts people’s freedom first. But I disagree with him on this point. After all, why have laws if we don’t abide by them? Biden’s Conviction Let’s look at why Biden was convicted: Hunter Biden was recently convicted on three federal felony charges related to a gun purchase in 2018. These charges include lying on a federal screening form, lying to a gun dealer, and illegal possession of a firearm as a drug user. Inevitably, Biden and his defense team expressed disappointment with the verdict, indicating plans to appeal the decision. The special counsel, David Weiss, emphasized that the conviction underscores the principle that no one is above the law. We’ll talk about this point later. Biden lied on a federal screening form when purchasing a gun in 2018, falsely stating that he wasn’t using illegal drugs at the time. This “misrepresentation” occurred despite his ongoing struggles with drug addiction, which he later acknowledged publicly in his memoir and other statements. The lie was an attempt to avoid legal disqualification from purchasing a firearm that applies to illegal drug users or addicts. By falsely answering "no" to the relevant question on the background check form, he was able to buy the gun, which formed the basis for his conviction. The case is cut and dried. He’s undoubtedly guilty. Just the pictures of him with a crackpipe in his mouth would’ve done him in. But if you understand libertarians like Massie, you can see why he thinks the whole trial is bogus. Libertarians and Guns Libertarian theory on gun ownership is rooted in the principles of individual liberty, personal responsibility, and limited government. Libertarians generally believe that individuals have the inherent right to own and bear arms for self-defense, property protection, and as a safeguard against potential tyranny. Key points of the libertarian perspective on gun ownership include: Individual Rights: Libertarians believe self-defense is a fundamental human right. They argue that everyone should be free to own firearms to protect themselves, their families, and their property from threats, regardless of their personal habits, traits, or behaviors. Minimal Government Intervention: Libertarians advocate minimal — or zero if you’re of the anarcho-capitalist variety - government interference in personal affairs, including gun ownership. They argue that regulations and restrictions on firearms ownership infringe on individual freedoms and are ineffective in preventing crime. Second Amendment: In the United States, libertarians strongly support the Second Amendment of the Constitution, which guarantees the right to keep and bear arms. They view this as a critical check on government power and a means to ensure a free society. Self-Responsibility: Libertarians believe that with the right to own firearms comes the responsibility to use them safely and responsibly. They advocate for education and training in firearm safety rather than restrictive laws. Deterrence Against Tyranny: A fundamental aspect of libertarian thought is the idea that an armed populace can serve as a deterrent against potential government overreach and tyranny. They argue that disarming citizens can lead to increased government control and diminished freedoms. Massie’s view makes complete sense when considering where they come from. Nevertheless, this time, I think the conviction was justified. Elon’s Take I somewhat agree with Elon’s take. As I mentioned, the conviction was correct. But what Elon alludes to is spot on. Hunter Biden almost certainly “took bribes,” not in the paper bag sense, but in the nepotism baby hiring at Burisma. Or even better, [the “art” he sold for $1.5 million](. That’s not a bribe, technically. But anyone can buy fingerpainting to launder the bribery. “You swirl some paint on the canvas, and I’ll pay $150,000 for it!” “Great idea! I took art in junior high school!” Chesschick01 Hits the Nail on the Head She’s got it in one. The gun charge has nothing to do with the President. Hunter is the sacrificial lamb in this case. After Trump’s sham of a trial, the left can claim “no one is above the law” by getting the younger Biden on three federal gun charges. Isn’t the justice system fair? Give me a break. Wrap Up In May 2022, [NBC News]( wrote: From 2013 through 2018 Hunter Biden and his company brought in about $11 million via his roles as an attorney and a board member with a Ukrainian firm accused of bribery and his work with a Chinese businessman now accused of fraud, according to an NBC News analysis of a copy of Biden’s hard drive and iCloud account and documents released by Republicans on two Senate committees. The documents and the analysis, which don’t show what he did to earn millions from his Chinese partners, raise questions about national security, business ethics and potential legal exposure. In December 2020, Biden acknowledged in a statement that he was the subject of a federal investigation into his taxes. NBC News was first to report that an ex-business partner had warned Biden he should amend his tax returns to disclose $400,000 in income from the Ukrainian firm, Burisma. This guilty verdict is so unsatisfying. It’s like going to Peter Luger’s and getting served a Big Mac. 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. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. 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