MorningWord 1/22/13: As Enis described in his MacroWrap this morning, Q4 earnings, at least the smattering that we have seen so far have been fairly divergent. The beginning of earnings season can be a fairly dangerous time for traders as trends have yet to emerge and the options market may price in a bit more risk at the onset of this period than it will towards the end. Take bank earnings last week (WFC, JPM, C, BAC, GS & MS) for example; for the most part, all of the implied moves were higher than the 4 qtr trailing moves, and only one of the six stocks outperformed the options market’s expectations, MS up ~8% on Friday following better than expected results. MS’s massive out-performance suggests that market participants had fundamental expectations well in-check for the others and underestimated something as it related to MS’s Q4 prospects or outlook.
As a result of that data set, and others to emerge, as we get deeper into the earnings cycle, options traders will get a better sense for emerging trends in volatility following individual earnings reports. They will likely begin to reflect some of the perceived trends in their forecasts for those companies yet to report. For now it may be a bit early in the cycle, but rarely will we see expectations for high or low volatility remain constant from start to finish for the 2-3 weeks of each earnings period that occurs once at the beginning of each quarter.
After today’s close, we will get results from 2 tech heavyweights, IBM and GOOG.
IBM implied move on earnings/ 4 qtr avg move: ~3.2% /4.16%
GOOG implied move on earnings/ 4 qtr avg move: ~5.6% /5.85%
While both are considered bellwethers, I would argue that despite each sporting market caps over $200 billion, making them 2 of the 15 largest companies by market cap in the world, each company’s results will offer much different implications for the broad market and economy. IBM’s commentary can have a fairly definitive read across for demand for technology products from different segments like business and governments and across geographies as ~58% of their sales come from outside the Americas.
GOOG on the other hand, while it also gets about 52% of their sales from overseas, is a bit more dependent on consumer trends as the company gets about 80% of their sales from web-search, which can reflect trends from both advertisers and consumers. In my opinion GOOG, which is expected to have a little over $12 billion in sales in the quarter just ended, offers only mild read-through for the health of the tech sector.
I guess the final point I would make here is that the options market is NOT pricing moves for these 2 tech giants that is greater than the average moves over the last 4 quarters. Has the lack of volatility in the banks stocks following their results last week already begun to dampen volatility expectations for other sectors?