Beats Earnings – Blinded by Excessive Low Expectation

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Apr 17 2009
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Citigroup Inc. (NYSE: C, stock), once the mightiest and largest financial institution of the United States of America and one of the components of Dow Jones Industrial Average index but now considered to be one of the most troubled U.S. banks reported its smallest quarterly loss since 2007. The bank posted a first-quarter loss to common shareholders of $966 million and this sent everybody cheering simply because a year ago Citigroup suffered a loss of more than $5 billion or $1.03 a share. With the latest earnings result Citigroup’s loss was 18 cents a share, better than Thomson Reuters’ average estimate for a loss of 34 cents a share. Cool! Its revenue doubled from a year ago to $24.8 billion *applause* but the credit costs actually jumped 76% from a year ago to $10.3 billion, the same way JPMorgan Chase’s $10.1 billion credit costs.stock) also reported better-than-expected earnings, beating the Thomson Reuters average estimate of 21 cents a share but it’s first-quarter earnings fell 58% from a year ago. So, should investors really smile as if the worst is over? Sure, there’s nothing wrong to be positive and optimistic but are you sure the strong trading activity seen by banks, hence the revenue, in the first quarter was not a one-time event? JPMorgan CEO Jamie Dimon acknowledged Thursday that banking trading activity is unlikely to remain so robust going forward. If I were you I would take my money or profit from the table and run.

General Electric Co. (NYES: GE,

Mattel Inc., the largest U.S. toymaker, says weak sales overseas and cautious retailer orders led to a wider first-quarter loss that just missed analyst expectations. Mattel’s loss for the quarter totaled $51 million or 14 cents a share compared with a loss of $46.6 million or 13 cents a share, a year ago. Analysts polled by Thomson Reuters, on average, expected a penny smaller loss of 13 cents per share. In general the stocks jumped despite making losses because of the excessive low expectation from analysts. There’s something very wrong with this model on analysts’ expectation on earnings. During current bearish market the standard was lowered excessively so that when the companies reported losses that beat the consensus, never mind that it still in loss, analysts cheer and immediately sent the stock prices higher.

But this is wrong because the companies are not out from the woods yet and the stocks’s rise may be mistaken by investors as a signal that it’s time to jump into the bandwagon when in fact it’s not. Of course it’s your hard-earned money and nobody can stop you from going into the market hoping not to miss the boat. But what if this is not the boat for you? What if this is another sucker’s rally? If you’re a discipline swing trader who plays the market like a bull or bear but definitely not a pig then by all means go ahead. People tends to rush into conclusion whenever they saw the slight voew of the so-called “recovery signal”. However if you’re a long-term investor then anytime is a good time to buy stocks so you shouldn’t care about the prospect of “credit card” bubble, no?

Again it depends on what you believe on the current “rally”. If you believe the bull is charging and you’ve actually missed the earlier boat and you need to buy now no matter what, then go ahead and buy. On the other hand if you believe the current rally is a suckers’ one, then continue to watch the show. But please bear in mind that as long as the consumers are not spending there’s so much you can go. Ask youselves if you’re convince enough on the current bull. Or are you blinded by the fact that the earnings expectation was set too low in the first place.

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