If a world where corporate earnings are completely predictable is a "10" and a world where they cannot be predicted at all is a "1", most of the last several years have been in the "7" or "8" range. That has changed so much in the last two quarters that predictions have become hard to make and going into this earnings season the job may become impossible.
Chaos theory says that behavior that appears to be random is not. The future dynamics of chaotic systems are always defined by their initial conditions. Even the most unruly process cannot defy prediction. That may work for people who have PhDs in math but for the balance of investors chaos is chaos, plain and simple. (See pictures of the Top 10 scared traders)
With just a few days to go until the nation's largest banks report earnings, forecasts for how they will do diverge wildly. Of the analysts covering Citigroup (C) the most optimistic believe that firm will lose $.47 a share. The most pessimistic number is a loss of $1.57. For a company covered by as many researchers as Citi is, that spread is extraordinary.
The forecasts for Bank of America (BAC) are even more troubling for investors who want some comfort in certainty even if the numbers are bad. The high estimate for losses in the last quarter is $.25. One analyst is taking the bullish case with $.59 a share profit. No one believe that the best numbers so it is hard to understand why they are even still on the books.
The circumstance for most large cap stocks is the same. Spreads between high and low forecasts for the same company have widened even for firms which have had highly predicable numbers. For Microsoft (MSFT) there is an 8-cent difference between best and worst case scenario of $.45 per share profit and $.53. For AT&T (T) the numbers range from $.63 per share to $.69 per share. This may not seem like much, but for a corporation with revenue of $125 billion a year and 5.9 billion shares outstanding, it is.
The ability to predict earnings probably deteriorates with the economy. Some professor at MIT has probably proved that but he is not telling. He has studied the dynamics of the correlation between EPS and GDP so that he can game the system and make hundreds of millions of dollars day trading S&P futures. His secrets will accompany him to the grave.
None of this should make stockholder fell better. Chaos and the difficulty of making predictions in chaotic time has even the most gifted traders, the hedge funds and institutions, by the throat and it throttling the life out of investors. In a market in which nothing is certain or nearly certain the people who own equities become more panicked by the day and their trading becomes less disciplined.
It is like having The World Series of Poker played by four-year-olds.
Douglas A. McIntyre
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