The market unraveled. There were signs it was going to happen. Key among them was the behavior of Google before, during, and after its earnings release.
I especially like the phrasing of the update in the Financial Post on Friday morning: "Responses to second quarter earnings reports released overnight were disturbing." GOOG reported second quarter earnings of $6.45 per share. This was only $0.07 worse than the Thomson-Reuters consensus, $6.52. Further, J.P. Morgan analyst Imran Khan had, the previous week, amended JPM’s estimate for the quarter to $6.38, because of the very visible and easily calculated impact of the weaker Euro against the dollar, costs of currency hedging, plus an estimate of the effects of loss of revenue from direct sales of the Nexus One phone.
Microanalysis of the technical movements reflected despair settling onto the market. GOOG had ceased upwards momentum in the days running up to the release, pausing near 490. Some commentators were expecting little reaction of the stock to its announcement, with a few putting a near term target of 510 into the Blogosphere. Last minute pressure ran the price to 495 finally in the final moments of 7/15. But the earnings announcement blasted the stock in the postmarket, pushing it down $20.
Do the math. The stock price was able to fall 4 percent for a 1 percent miss in earnings – which was actually an earnings beat if you look at some recent revisions such as JPM’s. This kind of critical market response to what was actually an "in line" result is one of the best market bellweathers we can have today. It told us that despair ruled, and that there was little future for the current earnings season rally. If the market had a face, it would have turned white with fear, looking at the abyss.
Confirmation was as close as the next morning in the Premarket, when no "overreaction buying" followed the "Day 2 effect". No Dead Cats today, as futures confirmed the general readings, and the Premarket broke down for GOOG, followed by heavy dumping as the market opened. Friday continued with a 2.5% general market slide, of the low volatility type, which is bad news indeed.
Now the valuation talk starts. Barrons put up an article saying that Google can gain 35% in the next months. Shall we all rush to buy? Not in this particular market. Let’s wait until October, after GOOG may have settled even more. Then Barrons will say there is 45% upside, and it might be time to listen to them.
By Skymist
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