Every three months publicly owned corporations release a series of financial statements to their shareholders. These reports are packed full of information that it seems only the top management of the company, analysts who make earnings estimates and a few of us in the investment management business actually read. These reports cover details of each business over the previous three month time frame in addition to the trailing one year period. Although these reports are available for all in written form, most companies will also schedule a telephone conference call to discuss the results and make comments concerning business activities that will impact the future profitability of the company.
It is these traditional one-hour long conference calls that set the stage for analysts' revisions, news articles and a host of comments on the "tone" of the conference call. Most of us would find better use of our time burying our heads in the written reports and disregarding the vocal comments. Instead, the short term impact on share price seems to be driven more from these quarterly updates on management's outlook than seems reasonable. Comments on the future are treacherous. If a Chief Executive Officer of a major corporation wants to keep his job, he must under-promise and over-perform. The same holds true for Wall Street's sell side analysts.
This "career risk" appears to be an unwritten rule of the quarterly reporting season games, which began just last week with the release of Alcoa's earnings and will continue unabated, for the next few weeks. On Friday, a report titled "Execs pessimistic about recovery, survey says" began with this statement; "Most CFOs and comptrollers feel that the economy will stay about the same or get worse in the next six months". These are the results of a survey conducted by Grant Thornton LLP and reported by InvestmentNews. Here are a few additional comments from the article:
"Only 23% of 530 chief financial officers and senior comptrollers canvassed said they thought the economy would improve in six months.
"A full 77% said the economy would stay the same or get worse, and 39% expected their company to reduce the number of employees".
"The majority of those surveyed, or 87%, reported that they believed the country would stay in recession for the rest of the year".
When you read these types of headlines, remember they are part of the game of keeping expectations low so that actual results will look impressive. From this survey, the ONE ITEM you should take to heart is this; "39% expected their company to reduce the number of employees". Why is this the most important item? Because far more than half - 61% are telling you that their companies have no intent on laying off additional employees and that there is a real possibility that they will need to add employees in the coming months. This comment is the one comment that is truly under the control of these corporate executives and a better indicator of their company's realty.
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