“Beat and Lower”

“Beat and Lower” is the new earnings season routine, according to one prominent hedge fund manager.

Greenlight Capital president David Einhorn (who gained fame shorting Lehman Brothers in 2007, and then doing the same again with high-flyer Green Mountain Coffee Roasters in 2011) has taken note of yet another sluggish earnings season. And he has the formula for success all figured out…

“During the first few years of the market recovery, the formula for higher stock prices was ‘beat estimates and raise guidance.’ Not anymore. Now it’s enough to beat the current quarter, and make it easier to beat the next one too by simultaneously lowering forward expectations,” Einhorn explains.

“Beat and Raise” didn’t last—and it has morphed into “Beat and Lower,” Einhorn says. While common sense might dictate that the lowering of expectations should have bearish implications, it has actually had the opposite effect.

So far this earnings season, 70% of companies in the S&P 500 beat esitmates, he says, while firms continue to lower guidance.

“At this point in the cycle, lowering the bar seems to be treated as bullish because it increases the likelihood of future earnings beats,” Einhorn concludes.

Of course, this type of environment won’t last forever. And it’s not particularly ominous that investors are fine with the low bar companies have set.

In fact, the reason that this earnings season has had little to no effect on the broad market is because investors’ minds are elsewhere.

Slowly but surely, every single market watcher is getting sucked into the Fed circus. Speculation about who will follow Bernanke continues to build. It will probably reach fever pitch by the end of next month. Earnings be damned! All eyes and ears are on a potential September Taper. Or hints about Yellen vs. Summers…

Revenue growth and solid earnings will matter again. But as I have told you many times this year, the bar is low enough to prevent any terrible earnings misses from scaring investors.

Don’t get too wrapped up analyzing earnings this week. There’s a ton of data hitting the wires (along with Bernanke comments later this week) that will steal the spotlight.

Regards,

Greg Guenthner
for The Rude Awakening