Why Earnings Just Don’t Make Sense (Part 5)

Reports on Google’s 2013 Q4 earnings announcement left me utterly confused. This is the main reason I wonder whether earnings are another case of optionScam.com.

A whole sub-industry has been made out of providing earnings data, using fundamental analysis to calculate price projections, and determining what stocks to buy and sell based on those fundamentals (earnings). Ultimately, if fundamental parameters are not objectively quantifiable (i.e. no consensus!) then who is providing the right data? Surely we should be using the right data to make accurate stock picks, right?

Aside from the whole issue of data accuracy, I am not even certain any statistically significant correlation between earnings results and subsequent stock price movement exists. Certainly the people at Tasty Trade don’t. I have not replicated their backtesting results but what they have presented suggests stock price to be somewhat correlated with direction of the overall market. They actually claim the distribution of directional moves to be pretty much random +/- a bit of positive drift. That would be about 53% up and 47% down, which is consistent with overall market movement.

It would be very difficult to perform a comprehensive analysis of post-earnings stock price changes stratified by good/bad earnings results. The biggest challenge would probably be determining consensus as to whether the results are good or bad. What estimates should be used? How do we define consensus? Should we look at earnings? Revenue? Something else? Do we factor in a margin of error?

As mentioned above, looking at the post-earnings price changes independent of any estimates makes a decent argument for “randomness” despite a limited number of tickers studied.

Let’s review:

1) Many companies specialize in selling information about earnings estimates and earnings analysis.
2) Data are now available to suggest nothing about earnings may actually be predictive of subsequent stock price changes.
3) The sub-industry described in 1) makes lots of money at the expense of investors who don’t know or understand 2).

That’s a pretty good formula for optionScam.com, folks!

Why Earnings Just Don’t Make Sense (Part 4)

I find pretty much everything about these reports on Google’s 2013 Q4 earnings announcement to be confusing.

My review suggests different media outlets can interpret corporate earnings differently.

Poor writing can make it seem like one media outlet doesn’t even agree with itself!

Also confusing is the post-earnings stock movement. Intuitively, I would expect a stock to go up (down) following a good (bad) earnings report. Sometimes it may be hard to say what is good or what is bad, though.

I do believe that eventually (i.e. within a few days), the media usually does a pretty good job of retroactively explaining stock price reaction. They do this by pointing out something in the announcement that is either good or bad. This can be done because rarely, if ever, is every fundamental measure revealed from an earnings announcement good or bad. The media can always cite something to support its report whether it be positive or negative in tone.

I don’t believe any of this retrospective analysis to be actionable, however, in terms of developing potentially profitable trading strategies. I am also not convinced that any fundamental measure is significantly correlated with subsequent stock price changes. Show me the data if you believe otherwise.

Can you see why this is categorized under optionScam.com? I will take one more blog post to explicitly state that argument.

Why Earnings Just Don’t Make Sense (Part 3)

Last time, I began to discuss three reports on Google’s 2013 Q4 earnings announcement and ended up somewhat confused. Today I will focus closer on the numbers to see if we can gain some clarity.

Report #1 said Google made $9.93 in Q4, which missed the consensus estimate by $0.41. This implies the consensus estimate to be $10.34. Report #3 said they made $12.01, which missed the consensus estimate of $12.26. The two reports are inconsistent with regard to the consensus estimate. I’m not sure how that can be since I understand “consensus” to be the average of all published analyst estimates. What’s worse, though, is that the two reports don’t agree on Google’s actual earnings! Maybe one reporter was sick or had excessive wax build-up preventing him/her from hearing on that day?

Once again, I am confused.

I suspect Report #3 is poorly written. The last sentence says “last quarter, Google… earned $10.47.” As mentioned above, Report #3 said they made $12.01: in the same paragraph! Did they just state two different earnings numbers just three sentences apart?! That can’t be. I must be misunderstanding. I can only surmise that “last quarter” means 2013 Q3 while the current report covers 2013 Q4. In other words, “last quarter” is Q3 and “this quarter” would be Q4.

Focusing on the revenue numbers provides a bit more clarity. Reports #1 and #3 say Google posted revenue of $16.86 billion. Report #2 says revenue was $16.9 billion, which is equal to the others taken to one decimal place. Finally we get some consistency! Report #2 does say that revenue was for “last quarter,” though. Evidently for Report #2, “last quarter” is 2013 Q4 and maybe 2013 Q3 would have been “the quarter before last.” This is different syntax than applied in Report #3 where “last quarter” referred to 2013 Q3 as discussed above.

Deep breaths…

I will continue in the next post.

Why Earnings Just Don’t Make Sense (Part 2)

Last time, I presented three reports on Google’s 2013 Q4 earnings announcement. Today I will discuss them.

First question: was this a good or bad earnings report?

Headline for Report #1: “Google misses, shares up.” That sounds like a bad report but a good outcome. On the other hand, if shares are up then maybe it’s a good report. “Misses” has a negative connotation though.

Right out of the gate, I’m confused.

Report #2 says “Google earnings top expectations.” This seems contradictory to Report #1, which said Google “missed.” Topping expectations is more consistent with the stock moving higher but then is Report #1 wrong about the miss? Maybe the judgment call refers to different measures (e.g. revenue, earnings, margins). Is the writing sloppy because the antecedent was not specified? Report #2 later clarifies by saying “Google’s earnings figures were pretty hot,” which tells us that earnings, at least, were good.

Report #3 says “strong revenue growth,” which suggests that revenue was good. Earnings and revenue were good, then, so what “missed” according to Report #1? Actually, Report #3 says revenue growth was strong but it says nothing about estimates. Maybe Google still missed its revenue estimates despite revenue being strong?

Report #3 goes on to say: “the search giant missed earnings expectations by a wide margin but wasn’t punished by traders.” Report #2 said earnings topped expectations. Which is it: did they top or did they miss by a wide margin? There’s no fuzziness with this comparison: they are in stark contrast with one another!

I will take a closer look at the numbers in the next post.

Why Earnings Just Don’t Make Sense (Part 1)

Earnings just don’t make sense to me with regard to stock price movement.

While I have seen many anecdotal instances to support this hypothesis, I will use one example to keep this blog series short: Google 2013 Q4 results, which were reported on January 31, 2014. I will present three reports on the earnings announcement.

In no particular order, here is Report #1 from Zacks:

> Google Misses, Shares Up Regardless
>
> Google Inc (GOOG) reported fourth-quarter earnings of $9.93,
> missing the Zacks Consensus Estimate by 41 cents, or 4.1%…
> shares jumped 4.1% after-hours, after rallying 2.6% during
> the day. Google’s gross revenue came in at $16.86 billion…

Here is Report #2 from The Motley Fool:

> Google and Amazon Earnings
>
> Google earnings top expectations. Google this: Shares of
> the search engine that you probably used two minutes ago
> jumped more than 4% in after-hours trading Thursday, after
> Google (NASDAQ: GOOG ) reported a projection-beating
> $16.9 billion in revenues last quarter.
>
> The takeaway is that Google’s earnings figures were
> pretty hot…

Here is Report #3 from The Verge:

> Google Q4 2013: strong revenue growth driven by Play
> Store and hardware sales
>
> The search giant missed earnings expectations by a
> wide margin but wasn’t punished by traders.
>
> It seems like Google can do no wrong with the markets
> these days. The consensus estimate on Wall Street was
> that Google would deliver $16.75 billion in revenue
> and earnings of $12.26 a share. It hit the top of that
> line, with $16.86 billion in revenue, but missed on
> the bottom with earnings of $12.01 a share. Still,
> the stock was up slightly in after-hours trading.
> Google made $14.4 billion in revenue and earned
> $8.62 a share for this same period a year ago. Last
> quarter Google brought in $14.8 billion and earned
> $10.47 a share.

I will compare and contrast Report #1, Report #2, and Report #3 in the next post.

Another Way to be Fooled by Randomness (Part 2)

Disclaimer: except for the title, this post has nothing to do with the last one.

About one year ago, I saw this in a trading forum:

> Hey guys,
>
> We’re giving away 5 free subscriptions to Born To Sell’s
> covered call screener on Feb 22. One of them will be
> based on skill and the other 4 are random drawings.
>
> To win the skill-based contest, you have to guess the
> closing value of the DJIA on Feb’s option expiration
> day (Feb 21). The other 4 prizes will be chosen at
> random from among the submissions.
>
> Enter on or before Feb 1 here…

This post captured my eye because of its flawed differentiation between “random drawings” and “based on skill.” How could we possibly tell if guessing the DJIA on a particular date was a matter of skill or a matter of random luck? Based on one instance we absolutely could never do so.

Statistically speaking, in order to demonstrate “skill” that is significantly better than chance (randomness) we would need a sufficiently large sample size of correct predictions. The winner may certainly make claims about his/her prowess based on one prediction but these claims would be premature. To truly be a skill, the requisite sample of correct predictions must not be retrospective and must not make use of hindsight. Predictions made in advance must be verifiable, too. To be sure, con artists have historically used any and all of these means to dupe unsuspecting customers.

I make no claims about the reliability or accuracy of the “Born to Sell” service because I know nothing about it. I do not, in any way, shape, or form, endorse the product. I only mean to provide a brief commentary on “skill” vs. “luck/randomness:” two concepts that are often confused, sometimes deliberately, for the sake of advertising and marketing.

Be on guard for optionScam.com!

The Mysterious Disappearance of Callwriter.com (Part 5)

This blog mini-series presents discussion on the sudden 2013 cease and desist exhibited by Callwriter.com.

I categorized this mini-seires under optionScam.com because I have often found a close association between trader education or trading system products and internet marketing. In the context of trading, “internet marketing” is synonymous with ripoff. Developing profitable trading systems is a laborious project involving hundreds to thousands of hours. Disproving a system can be equally difficult for those without the theoretical understanding to do so. Suckers looking to make a quick [thousand] buck[s] trading stocks, futures, or options are therefore prey to the internet marketers who float attractive products.

In the world of trading/investing, the free lunch is simply never to be had. Many nefarious entrepreneurs/companies advertise and market to make people believe otherwise.

Another thread about the mysterious disappearance of Callwriter.com is seen on The Option Guru website. We can even find a video on that site where we hear (not see) Mr. John Brasher himself! Maybe The Option Guru is a believer…

Some further searching turns up this page. Wait… that’s also The Option Guru! The content here is from 2009, though, so maybe he didn’t know enough about options to be a guru just yet. Under the “About Me” section I can see his name is Jeff. When I see the same people on different websites then I start to get suspicious.

Look closely back to that first website from two paragraphs above and you can see another product being advertised: “Trading Pro System.” I did an Internet search trying to determine if this was fraudulent and I found this website. When I see the same product being sold by multiple people (e.g. “Eric Holmlund,” “David Vallieres,” “The Option Guru), then I start thinking optionScam.com. It’s more like these are affiliates all cashing in on an internet marketing scheme just like many distributors sell Mary Kay cosmetics (except the latter is a real product with substantiated value).

Ultimately, the business theme always seems to be the same: who cares if the product can really make anybody money as long as it has marketable reason to exist and sustainable demand.

optionScam.com, folks! Sometimes it’s hard to nail down precisely but if it’s too good to be true…

If it walks like a duck and quacks like a duck…

If there’s reasonable doubt then come about!

The Mysterious Disappearance of Callwriter.com (Part 4)

I’ve been reviewing the Twilight Zone-ish annals of a premium trading service that suddenly ceased to exist. Here is the reply to my response shown earlier:

> Mark:
>
> I have no disagreement with your post and comments
> regarding the “landscape” of snake oil salesmen
> etc. I myself am still owed quite a bit of money
> from the untimely and criminally negligent demise
> of MF Global.
>
> I have no problem with group members voicing
> (especially when asked) their opinions of various
> advisory services, trading rooms etc. There are
> certainly more than a fair amount of less than
> honorable folks out there who will willingly take
> your money and not bother to provide anything of
> value in exchange.
>
> Alex’s post seemed to be written by someone having
> no actual knowledge of what happened to Mr.
> Brasher. Regardless, he basically wished him dead.
> I thought that was WAYYYY over the top. I made no
> personal attack on Alex, nor did I in any way
> excuse what happened (or may have happened) with
> Mr. Brasher and his Callwriter service.
>
> Alex’s follow-up post in response to yours, which
> included personal attacks on me and insinuated
> that I (with Mr. Brasher as my leader) was somehow
> complicit in the demise of Callwriter, simply
> demonstrates that my original post responding to
> Alex’s was spot-on.
>
> I guess when one has no facts to support their
> position, or are actually called out to explain
> why they have chosen to wish death upon someone
> when they actually don’t know anything about the
> reasons for the unfortunate closure of Callwriter,
> they resort to personal attacks unfortunately.
>
> Best Regards.

I will wrap up this business drama in the next post.

The Mysterious Disappearance of Callwriter.com (Part 3)

A smattering of subscribers seemed to be out money when Callwriter.com went offline. I continue with a forum thread addressing this occurrence that took place in March 2013.

In response to one trader who commented how unfair/mean it was to be angry with the service for disappearing without advanced notice, I chimed in:

> Given that the landscape of investing and trading
> is littered with so much in the way of snake oil,
> con-artistry, and other shenanigans, a person who
> walks away from paying customers with nary a word
> nor a refund deserves all the hatred, anger,
> disrespect, and prison time that s/he may get. I
> see no reason to be politically correct on
> something like this; Callwriter subscribers got
> had, plain and simple, and I don’t blame
> them for being angry about it. “Common decency”
> and “callous disrespect for others” have no place
> in this context.
>
> If you don’t believe the financial industry to
> be a hostile landscape then I suggest you start
> watching American Greed on CNBC. One way
> to lose money is by being scammed; increased
> awareness in this area can only make us better
> traders.
>
> Mark


> As one of the subscribers who got s……d, I
> think I can speak with a little authority. I
> actually met John. While he owes me a few
> months of subscription, I don’t think he owed
> me anything else. He seemed like a nice man.
> His wife was a nice lady. They had a family.
> It’s too bad. Life goes on. One man’s
> reputation is ruined.
>
> In a perfect world, I would have liked a
> refund, but that wasn’t forthcoming. This is
> opinion only, but I think he must have been
> in some serious financial distress. He was
> an attorney by profession. He had enough
> sense to not post on the website acknowledging
> problems. Not honorable, but it’s what a good
> attorney would have advised him to do.
>
> For his subscribers, the site was simply an
> information source. It crunched numbers and
> provided lists of candidates. Selection for
> trades was entirely up to the subscriber. The
> results were mine and not John’s. I miss the
> tool.
>
> Mark’s right, people are out to screw you.
> That’s why I choose to be a self-directed
> trader and investor. If this is the biggest
> loss I experience from the financial
> community, I will be well ahead of the pack.