Numbers game

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Get Ready for Misleading, Meaningless Q4 Earnings

Alcoa (NYSE:AA) starts the Q4 earnings season after the bell today. But as investors prepare for the quarterly drumbeat of profit and sales numbers, they should keep in mind two important points:

  1. Q4 was full of easy excuses, including Superstorm Sandy and the fiscal cliff.
  2. Q1 and the rest of 2013 is full of “uncertainty” to cloud forecasts — from the debt ceiling and sequester in America to European recession and debt woes to geopolitical unrest in the Middle East and all things in between.

Given these two defining characteristics, then, investors should forget about trading the headlines and the hard numbers. Because chances are those numbers will change, and the facts are mighty slippery.

Stock guru Jeff Macke of Yahoo! Finance puts it best in this Breakout video. This great quip starts around the 0:55 mark:

“This to me is the revenge of the liberal arts quarter in the sense that none of these numbers matter. All the finance guys with their models and their spreadsheets are going be trumped by the fact that every CEO on earth is going to come out and say ‘it’s uncertain. We had uncertain uncertainty, and so we’re uncertain what our numbers were and so we certainly are pushing them back.”

Macke goes on to say you have to trade the guidance, the “body language” of the market, instead.

“(It’s) a bunch of soft stuff, a bunch of squishy things that the finance majors mock but they’re not going to make any money this quarter — the liberal arts guys are.”

I absolutely love this take — partially because I myself am a squishy liberal arts major and not a Wharton MBA, but also because I think it speaks to where the market and investors are right now.

Namely, in a place where numbers don’t matter that much. Sentiment is everything.

We’ve seen this with the high correlation between assets as well as the emergence of the “risk-on/risk-off” trade. Fundamentals for individual stocks matter much less than the direction of the market generally.

We’ve seen this with the recent rally despite that earnings are going to be pretty darn ugly. According to Bespoke Investment Group, the rolling four-week total of negative EPS revisions has exceeded positive EPS revisions for nearly six months now. Yet somehow tech also-rans Research in Motion (NASDAQ:RIMM) and Nokia (NYSE:NOK) are both up 50% since Nov. 1 despite a bad balance sheets and a horrible outlook in the face of Android and the iPhone. Clearly, ugly earnings in general and troublesome outlooks specifically haven’t hurt these struggling tech stocks.

And now we’re about to see it again with sentiment trumping earnings in the next several weeks. Excuses can and will be made about earnings misses and poor guidance, and it’s going to be up to investors to decide which companies they want to believe in.

If any.

So read the headlines this earnings season, but don’t trade them. Instead you should trust your gut and your squishy feelings to find out the winners and losers here — at least in the short-term.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Alcoa.

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