The Zigmont Report (Daily Market Recap for 7/24/18)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $12B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.

The opinions expressed below are my own

Hype-lite.  Google crushed earnings, as we expected.  The stock was up 5% in after-hours trading.  The hype for Google and equities generally carried through the night and our market opened higher, climbing further throughout the morning.  Capital flow was healthy.  It was running at a 115% pace in the morning and finished at 109%.  Money was in motion and the bulls declared victory today.  The equity hype is palpable but it’s not as cuckoo as we might think.

The S&P peaked with a 24-handle gain in the morning.  It gave about half of that away over the rest of the session.  GOOG peaked on the open, up about 61 points.  It gave back about a third of those gains over the session.

What we have here is strong initial hype (and probably a good dose of short-covering) and then a softening of bullish enthusiasm.

Earnings season is going strong at this point and 176 companies in the S&P 500 announce this week.  The beats are everywhere.  The percentage of reporting companies that are beating earnings estimates is 86%.  The usual value for that is about 65%.  To say that the analyst/management expectation-massaging game is going strong, is an understatement.

Just to come back to GOOG for a second.  The adjusted earnings were $11.75 per share.  Analysts expected $9.59.  However the GAAP earnings were $4.54 per share, this was the result of the $5 billion fine the EU slapped on them.

The analysts and the company (and the investors) are paying attention to the adjusted numbers and are ignoring the GAAP numbers.  I’m no accountant so I am not a slave to the GAAP for measuring/understanding the financial health of a business… BUT…..

Adjusted earnings have dominated the reporting landscape for a long time and it’s unlikely we’re going back anytime soon.  A systemic shift has already occurred on the Street.  GAAP has taken a backseat to adjustments, and it all seems reasonable at the moment (in the 9th year of a raging bull market).

One day, probably in the midst of the next bear market, GAAP will be the preferred metric of investors.  That day isn’t today and that should be a sign to us.

It doesn’t mean the end is near.  It just means (to me) that investors, companies, and analysts are rationalizing together.

See you tomorrow,