A Bullish Beginning to the Earnings Season
On the 12th of April, the Earnings Season started amidst conflicting statements from WFC (Wells Fargo & Company) and JPM (JPMorgan Chase & Co).
During the start of the trades, shares in Wells Fargo attempted to rise higher than previous records but struggled and consequently closed at 46.49 USD. Whereas the JPMorgan stock opened considerably above its previous close and went on increasing through the duration of the day until it closed at 111.21 USD.
Both JPMorgan and Wells Fargo exceeded their earnings predictions, with WFC thrashing its 1.10 USD consensus estimate for each share by 0.10 USD, and JPM thrashing its 2.35 USD consensus estimate by 0.30 USD.
“A consensus estimate is a figure based on the combined estimates of analysts covering a public company. Generally, analysts give a consensus for a company’s earnings per share (EPS) and revenue; these figures are most often made for the quarter, fiscal year, and next fiscal year. The size of the company and the number of analysts covering it will dictate the size of the pool from which the estimate is derived.”
Nevertheless, earnings reports are figures and statistics from the past. Despite the significance of the earnings report figures, investors generally concentrate and focus their interests on the company’s intentions for the future as opposed to what has gone on in previous months.
John Shrewsberry, the Chief Financial Officer for Wells Fargo released forward-looking statements on the company’s future business that forecasted a decrease of around 2 and 5 percent. As a result of competition amidst banks this could suggest both a yield curve that is leveling out and an increase in the rate of deposits.
As a result of Wells Fargo’s gloomy forecast of contraction, sales of shares in the bank increased, whereas JPMorgan gathered investments from new investors following its reassuring consumer banking figures.
Despite the failure of shares in Wells Fargo to rise on April 12th, JPMorgan’s success provides encouragement for the remaining major banks that are scheduled to release earnings reports in the near future. Should similar positive earnings reports follow in the footsteps of JPMorgan then the S&P 500 could beat its previous records for this year’s earnings season.
Moving on now to the S&P 500 which reached a 2019 record high for rising in early trades to 2,910.54, but ultimately closed slightly behind at 2,907.41.
The contraction of the health care sector persisted as UNH (United Health Group Inc) fell by 5.18 percent and ANTM (Anthem, Inc) plummeted by 8.48 percent.
Similarly, NFLX (Netflix, Inc) stock fell by almost 4.5 percent as a result of Disney’s (DIS) disclosure of the new Disney plus service, that offers video streaming for a monthly membership fee of nearly 7 USD. This may prove damaging for Netflix after it has increased its monthly membership charge regularly.
What does the CBOE Volatility Index or VIX mean and what does it do?
The CBOE (Chicago Board Options Exchange) Volatility Index is defined by Investopedia.com as:
“Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments. It is also known by other names like “Fear Gauge” or “Fear Index.” Investors, research analysts and portfolio managers look to VIX values as a way to measure market risk, fear and stress before they take investment decisions.”
- “The CBOE Volatility Index, or VIX, is a real-time market index representing the market’s expectations for volatility over the coming 30 days.”
- “Investors use the VIX to measure the level of risk, fear, or stress in the market when making investment decisions.”
- “Traders can also trade the VIX using a variety of options and exchange-traded products or use VIX values to price derivatives.”
Investors usually purchase put options on the S&P 500 when there are concerns that the index could at some point decline. Theoretically, an increase in the put options would counter the losses should the S&P 500 index drop.
What is a put option? A put option is a contract that gives an investor the ability to sell a certain amount of a bond, interest rate, currency, stock or commodity at a particular price and within a particular period of time.
On the other hand, if investor sentiment is not troubled by the possibility of the S&P 500 declining, the purchase of put options generally decreases. This drop in put options tends to make the level of volatility drop, which then has a direct impact on the VIX.
Indications suggest that investor consensus is swaying towards a positive bullish sentiment for this year’s earnings season because of the fact that the VIX closed at such a low level which was last seen at the end of October 2018.
Earnings Season: What are a few tactics that companies use during earnings season?
Some public businesses will employ a number of tactics during Earnings Season with the intention of covering up anything that could discourage or sway investors towards a bearish or negative sentiment.
- Various public companies sometimes try to manipulate an investor’s interest by using eye-catching fonts in their earnings report on specific areas that they feel would be most beneficial to the company. By bringing certain information to the forefront, through the use of bold and eye-catching fonts the remaining information that the company may wish to keep under wraps, gets pushed to the sidelines.
- Repurchasing company shares occurs when a company decides to purchase all of its remaining shares that were accessible to public investors. By doing this a company minimizes the number of shares that investors can buy, which then consequently drives the price of the leftover shares upwards.
- Some companies blend positive and negative announcements into a mixture when reporting during earnings season. This is done with the intention of blurring the reality of the company’s earnings report and distracting the investor’s attention away from the undesirable news.
- A company that wants to hide or take away the impact of a bad earnings report will look to publish their earnings report at a time when investor activity is at its lowest levels and will use language that conceals and camouflages the truth. For example, instead of saying ‘company earnings were halved this month’ they may say ‘due to a challenging month the company’s earnings were not as high as we hoped for.’
During earnings season if a company wants to protect its share prices due to a bad earnings report it could employ one or all of the aforementioned tactics to try and hide the truth. An experienced investor will take care and pay attention to all the details on the surface and behind the lines, in order to understand each earnings report fully.
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