Stock Take

TRUE EARNINGS: Earnings season in the US has ended, with many commentators almost breathless in their enthusiasm over the ongoing recovery in corporate earnings.

However, Bespoke Investment Group points out that the notion that earnings are incredibly robust “couldn’t be further from the truth”. Of the 2,132 US companies that reported, just 59 per cent beat estimates. That’s below the historical average, way below the 66 per cent “beat rate” seen in the last quarter, and by far the lowest recorded since the bull market got under way over two years ago.

The beat rate, of course, is not the only statistical measure of merit, and things are better in large-cap land. Only four of the 30 Dow components missed earnings, while overall operating earnings of SP 500 companies rose by 17 per cent, the sixth consecutive double-digit increase.

In Europe, however, the situation has undeniably soured. Bloomberg data shows that profit growth estimates for the Stoxx Europe 600 index dropped by 4 per cent this year. The three-month reduction in estimates is the biggest since September 2009.

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GOLD DUMPING:George Soros has been busy dumping gold of late. Despite calling gold the "ultimate bubble" last year, he continued to buy the metal enthusiastically, saying six months ago that conditions were "pretty ideal" for continued price rises. However, he offloaded nearly $800 million of gold during the first quarter, the vast bulk of his holding.

Soros’s thoughts on bubbles and trend trading are worth considering. In Soros on Soros, his 1995 book, he writes that investors are typically punished if they fight the trend. He seeks to “disengage from the trend” when he spots “telltale” signs of exhaustion.

Exhaustion need not imply a gold crash, however. “If I think a trend has been carried to excess, I may probe going against it”, he writes. Until Soros shorts gold, it would be premature to think he foresees a bubble about to burst.

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STOCK STUDY:A new and extremely bizarre study has found that air pollution may result in lower stock returns.

Previous studies detected a link between moods and risk aversion. Bad air quality causes bad moods, prompting the authors to examine data from the Air Quality Index and equity returns from four US stock exchanges between 1997 and 2007.

Even controlling for other variables, the study found smoggy days were bad for stocks. The relationship becomes weaker the further an exchange is from a polluted area. “If air pollution is negatively related to stock returns, one can devise an investment strategy that can lead to abnormal profits,” it concludes.