Articles

Earnings Expectations

In Uncategorized on July 20, 2010 by tomtom577

Another category of momentum model is based on consensus estimate revision data and earnings surprise. This approach is as old as organized securities markets. Keynes pointed out in The General Theory (Chapter 12)”an investor can legitimately encourage himself with the idea that the only risk he runs is that of a genuine change in the news over the near future, as to the likelihood of which he can attempt to form his own judgment, and which is unlikely to be very large.” Therefore, the value rationale that will appeal to earnings momentum money managers is the one that closes the gap from “Street” expectations to the current business picture. This contrasts with the value rationale, which would appear to the fundamentalists, which closes the value gap from current price to the achievements your company has already made, compared to the competition or other standard you want to use.

And why is this useful? Keynes points out later that this approach is appropriate because of the very existence of an organized market–who would sell today if he thought the price would be 25(shillings in his time) next week compared to 20 today? And it appears that the existence of an organized market with instant liquidity helps business raise capital. Who would buy stocks and bonds if they were as difficult to trade as is real estate?

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