AGING LEMONS AND DISTORTED EARNINGS

Everyone is biased except you and me.  And I have my doubts about you.

Wall Street is one of the places on the planet more biased than a sports fan. You need to keep that in mind. Keep your eye on earnings. Do they beat or underperform expectations. 

Back in the tech craziness days before the bottom fell out of what was then called TMT, technology, media, telecommunication, a noted tech darling beat earnings by one penny for something like 14 quarters in a row and Wall Street loved it, pushing the stock higher and higher.

Few among the masses apparently thought to ask what are the odds of a company with a huge market cap beating quarterly earnings by exactly one penny for 14 straight quarters.  A lot like booze, good times and bull markets distort judgment.

Back then they were laying fibre everywhere. Companies like Montana Power, a stodgy utility provider to Global Crossing, one of the era's high fliers, got caught up in the fibre craze. Both are no more. Back then TMT was hotter than my old girlfriend.  

Hot stocks are like hot water bottles. After a while they eventually lose their heat. Think Apple.

According to an article in the recent issue in Barron's, 67% of companies beat the lowest estimate on their earnings, a figure above the usual 63% average. Revenue, however, is another story. Only 43% beat their revenue benchmark well down from the 62% average.

So what's the take home lesson? Cost-cutting. That''s what firms do in slow times. And that leads to the next question: How much more excess can they squeeze from that aging lemon?