Saturday, January 20, 2018

Fourth Quarter Earnings

Two schools of thought.

1. "The new tax plan is going to lower the effective corporate rate and boost companies earnings. Repatriation will be big along with share buybacks, increased dividends, and other tools to increase EPS."
This was my first idea and I clung to it with vigor. I went in on depressed companies who would greatly benefit from this tax rate. GE in particular comes to mind. The first week of 2018 made me even more confident and I preached it like Joel Osteen.

2. "Remember, the first earnings report is going to be Q4. A number of companies are going to realize their tax bill will be much lower in 2018 and thus buy and expense as much as they can for the end of 2017. The beginning of the year is going to be poor."
My good friend, my much-smarter-than-me friend, pointed this out to me. The headlines are starting to show that the first earnings of 2018, which will be Q4 of 2017, are going to show a huge expense. GE is getting slammed, a few of the big banks say they are going to owe billions. The market looks poised to continue to increase but maybe earnings season number one will be slower than originally expected.

It's all going to come down to how the reports are presented. To the idea of thought one, if the analysts focus on the guidance it will be a powerful indicator into how the whole season will play out. There could be 5 great things in the report and one bad. If the analysts report on the 5 good things/guidance and gloss over the bad then you better buy a ticket on Elon's next rocket.

On the opposite side it is just as easy for the analysts to focus on the negative. There are 5 good things and 1 bad thing. Sometimes, no matter how it's written or expressed the analysts are going to focus on the negative. They could easily forego any positive guidance on focus on the negative from the fourth quarter. The mood of the analysts and the market makers are going to make an especially huge difference.

Will 2018 guidance be the leading indicators or will they focus on the - probably - bad fourth quarter?

I'm extremely excited and interested to see where we go. Maybe it's just because the majority of the market seems optimistic, most companies are going to use any tax savings on increasing shareholder value, and the seemingly overarching concentration on guidance lately but I believe the Q4 are going to be mostly over-looked and will be focusing on great 2018 guidance.

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