Friday, December 8, 2017

Do Earnings Really Not Matter?

Christopher Barcelo emails:
Good morning Robert. Saw this article on ZeroHedge on earnings and pulled up the original article here. Wondering what you thoughts are on this and figured it may be a good EPJ commentary. 

I think that they are correct in pointing out that earnings are not everything, but the degree to which they are not and projections are intrigues me when thinking how ABCT could relate to this. I am always thinking about how the global economy, and it's capital markets, have been distorted by decades of financial experiments and wondering if you would take this to be a result, and / or possible warning sign, of these.

I always enjoy your blog and can't thank you enough for posting and sharing everyday. I have learned so much simply from reading your original work or the work of others that you highlight,  analyze, or even criticize. The Daily Alert (I subscribe under my business email now) is one of the greatest value adding services I subscribe to and you're practically giving it away. Thank you again.
The analysis in the original strikes me as a combination of nonsense and confusion.

All capital investments, which includes stocks, are ultimately valued based on their flow of earnings.

The analysis seems to want to split earnings flows and count one type but not the other. But earnings flows are, indeed, considered in both cases. There are earnings flows from rather stable producing assets, and flows which emerge from the creation of new products. But they are both about earnings flow, just different kinds of earnings in terms of, among other things, ease of forecasting.

As for ABCT, it is also about earnings flows. During the boom phase earnings growth will emerge in sectors of the economy that are different than during the bust phase. The bust phase is basically a readjustment of valuations (because of a change in earnings flow--because of a change in central bank money manipulations). To be sure, the bust phase also includes bubbles where the uninformed chase imaginary gains, but that is something that would end if Fed manipulation ended. But the paper really is not getting into these bubble advances--just confusion about different true earnings flows.


No comments:

Post a Comment