Markets Move Higher as Earnings Parade Begins

When each man sets his own house in order, the whole world will be in order. John Andreas Widtsoe 

Many young men are notoriously uncaring about their personal habits like cleanliness.  I was one such individual, especially during my twenty something years.  As one begins to mature, you recognize a haphazard approach to daily habits only restrains your potential in areas which matter, and some which may only appear to be insignificant.  In the capital markets, companies are rewarded for growth and efficiency, and in many cases, penalized for deficiencies in either department.  Over the last week, the avalanche of quarterly earnings reports from the largest companies in the world began rolling in.  Some of the enterprises telling all included IBM, Netflix, Microsoft, Yahoo, Goldman Sachs, Lockheed Martin, Phillip Morris, UnitedHealth Group, American Express, Qualcomm, Chipolte, United Rentals, and plenty more.  You can see, just from the few businesses I mentioned, the range of industries is vast and one can gain a full glimpse of the state of affairs in the business world by reading through these releases.  Most of these companies earned billions or hundreds of millions of dollars in profit, but the absolute numbers alone have to be put in context with the projections provided by the company, and just as important, how efficient the company is in achieving it’s figures.  So, we circle back to our quote from above, about getting ones house in order, and it applies to the capital markets as well.

Apparently, Jamie Dimon and Warren Buffett aren’t too impressed with the corporate world these days, as they recently convened a summit from the world’s business leaders to discuss the sorry state of affairs in the corporate governance area.  Two main areas which they brought up were earnings guidance and dual class shares with different voting rights.  Guidance has always been a pet peeve for Mr. Buffett and he urged companies to not engage in the projection game of quarterly figures (guessing).  The difference in voting rights for various share classes is one issue which hits close to home.  Many companies in the technology area have adopted dual class structures with different voting levels for each class, Facebook and Alphabet (the artist previously known as Google) come to mind.  My own opinion about this does not line up with corporate governance experts and Mr. Buffett.  When you are a passive shareholder, you are depending on the leadership of these companies to be honest stewards of capital and you want the best people you can find.  The best leaders want control of their companies in order to make decisions which will ultimately be best for shareholders over a long period of time.  Often, these decisions do not lead to results in a short time frame.  Believe it or not, in business, changing the direction can take two, three, or up to five years to reap the benefits of past actions.  As such, these different time horizons can lead to conflicts if management does not own a  large percentage of the voting equity.  Each investor has to make their own decision about what they are willing to live with, and often it gets down to returns.  You may have noticed Buffett, Bezos, Malone, and Welch get a little more leeway than say, Marissa Mayer or Jack Dorsey.  Imagine that.

Next week, technology based companies like Facebook, Alphabet, Amazon, Apple, and Tweety Bird (Twitter) reveal their quarterly numbers.  As the Nasdaq has underperformed the other indexes over the last year or so, many will be focused on what these heavyweights have to say.  The largest companies in the oil and gas industry also will weigh in on the state of affairs in their neck of the woods.  With oil well off its lows, one would expect better numbers across the sector, although the strength will be in refining and not from production.  Both tech and energy are areas where investors have plenty of exposure so these reports will have immediate and medium term reverberations.  Stay tuned.

Finally, as expected, the Republican national convention was more of a show than a coronation.  Some may refer to it as a circus, and it did have aspects one historically might not expect.  Allegations of high school type plagiarism in speeches, a leading rival to the candidate getting booed off the stage, and ultimately, the lead clown proclaiming he is indeed the only savior to the countries problems are not, shall we say, typical of past presentations.  Even worse this week, the alternative party will surely display their wares in a mostly unified way.  The Democrats will be a house in order, sans the Sanders wing.  Of course, the inability to address our fellow citizens concerns about terrorists who want to decapitate or believe in Sharia law probably won’t be mentioned, no small matter, either.  Neither will Mrs. Clinton’s penchant for, ahem, engaging in, at the very least, hypocritical, or potentially unlawful behavior.  Not good, not at all.   It is discouraging to have to choose between bad and worse, probably for you as well.  Which is why, like the beginning quote, it is best for me to concentrate on my own house.   

Thanks for reading the blog this week, and if you have any comments or questions regarding it, please email me at [email protected] 

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.