Why The Big Beats?

Company earnings are coming in way above consensus expectations. Why the many, and why the big beats?

Couple of thoughts. (1) When the economy was in freefall nobody had any clue what the future looked like. In the panic that followed, companies erred on the downside and set us up for the current round of big beats [managed expectations]. (2) It appears that companies have a lot less operating leverage than we give them credit for [earnings have fallen less than topline declines would imply]. (3) We are borrowing earnings from the future to win in the present [accounting manipulation]. (4) Companies were pretty quick on the trigger to fire workers [lots of fat in the system].

Several implications. Analysts are playing catch-up by raising forward estimates, but they'll soon be getting closer to reality, and that means the lowered expectations game will be tougher to play ["we're onto you"]. If it was too much fat in the system, then we are likely stuck with high level structural unemployment [dead weight costs to economy and one-off gains for company earnings]. If it was simply management hitting the panic button, then we are on the mend [operating leverage will propel future earnings but be counterbalanced by rehiring costs...highlights the short sightedness of some managements]. As far as I am concerned, management is always suspect with regard to their accounting policies, assumptions and treatments, and their attempt to manage and massage earnings [that is a gross generalization, but probably not far from the truth]. This time is no different, and it will be interesting to see how and where they try to manage earnings going forward [lots of moving parts on this one].