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RUSSIAN ROULETTE

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Making trades in front of corporate earnings reports in July was like playing a dangerous game of Russian Roulette. While the overall indexes enjoyed a productive month, individual stocks were all over the map, and the risks were too great to play in front of announcements.

As of today (Aug. 1) more than 2/3 of publicly held companies have announced 2nd quarter earnings, and while 70% have generally met or exceeded expectations, it’s been the pronounced reactions to their reports that has left many scratching their heads and mourning some heavy losses.

One of the darlings of Wall Street, Facebook, dropped a whopping 42%, shedding over $100 billion of value in less than 24 hours. Yes, that’s billion with a “b”, and it was officially the largest one-day value cut in stock market history. Twitter looked mild in comparison when it fell only 26%, and it may not be done. Netflix tanked 20%, Trip Advisor 14%, both Biogen and Haliburton 13%, Wynn’s Resorts 12%, and Western Digital over 10%. Those are social media, biotech, oil services, gaming, and technology, so pretty much across a wide gamut of industries. Amazon climbed $80 overnight just after their earnings report, only to lose it all back before the following close of business.

Then there were the companies that shot out of earnings. Cliffs Natural Resources blasted up 30%. Southwest Airlines flew 13%, while Expedia rose 12% and Snap-On added 11%. Many others were up well over 5%.

The number of companies in the S&P 500 alone that went up or down at least 3% would take up the remainder of the Newsletter, so we will spare you. Some curiously retreated after posting record numbers, while others climbed after missing their estimates. So if anyone has a risk free method of front running earnings we would love to hear it, otherwise we’ll pass and wait for the report and decide what to do. As we’ve said many times, it’s not the earnings that matter, but the reaction to the earnings that counts.

Though it just wasn’t worth placing any bets in front of 2nd quarter roulette earnings season, this cycle will be coming to a close shortly giving way to opportunities on both the long and short sides. Just make sure your company has reported before pulling any trigger.


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