How to really read a finance report

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Check this out: I’m going to add a little skepticism to the many, many articles that are floating around the Internet right now, bemoaning the condition of stocks and the market in general.

Background: Lots of companies are reporting their earnings and, combined with inflationary worries and a possibly slowing market, everyone is throwing their hands up in worry. Everyone in the press, at least.

Fortunately, people who read this site are a little smarter. Let’s look at a recent report from CNN Money and actually dig a little bit:

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Ooh, lots of gloomy words! Let’s count:

  • “Tumbled”
  • “Lowest point”
  • “Sank”
  • “Lost”

…and that’s just in the first 3 paragraphs!

If you actually read the article, you’ll discover a few things that make all the handwringing seem stupid. First, the 78238532-size font that screams NEW LOWS actually is about new lows this year. Uh, we’re only in April. In fact, upon closer inspection, CNN Money notes that the Dow Jones is at its lowest point since…October 28, 2004.

THAT’S LESS THAN 6 MONTHS AGO!

Then, at the bottom of the page, you see a lot of stocks with mostly lower stock prices. Fair enough–stocks fell this week. But as I am trying to drill into everyone, it doesn’t matter what happens this week, next week, or even next month. We (the readers of this site) have a 10-year outlook (better: 30) and small aberrations in price simply don’t matter.

Here’s what’s actually happening: Investors aren’t saying that these companies performed poorly. In fact, in many cases these companies beat expectations, but their stock price sank anyway. Investors are doing 2 things: First, they’re reacting to new CPI and other economic data that shows the economy may be slowing, leading to less demand and investment, leading to lower stock prices. In short, they are pulling their money out of their stocks and waiting to see where better investments may lie. Second–and this is important–they’re reacting to everyone else. If you’re a fancy mutual-fund or hedge-fund manager in New York, you can’t just sit around calmly while everyone around you is screaming and throwing paper around the office when the new economic data comes out. You have to do SOMETHING! So you sell, just as everyone else is doing, simultaneously incurring lots of trading fees and taxes. But as least you did something. The main point here is that the fundamentals of many of these companies didn’t really change today; instead, the environment did.

In fact, look back at the companies the article references. Among them are Exxon, Caterpillar, Yahoo, IBM, and Intel. if you still think the fundamentals of the companies are good–notwithstanding the short-term results–these stocks are literally on sale. It’s just like buying shampoo at Target, except that these companies employ thousands of people, have worldwide operations, deal with complex machinery and millions of customers’ relationships, and…well, I guess it’s not really the same. But you know what I mean.

Update: Look what CNN reported less than 24 hours after I wrote this initial article:

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I love when the news makes my point for me.

Now what?

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