INVESTING: Don’t wait for the market to reward strong earnings

Analysts are once again telling us the S&P 500 will post double-digit earnings growth, continuing a streak from early 2003. And I am going to continue with a theme I’ve been bringing up here lately: If earnings are up double digits for the last few years, why isn’t the stock market following suit? Waiting for the earnings, then making an investment decision, will never give you the returns you want.

The last time the S&P 500 was up double digits was in 2003. Since then, earnings seem to be going up a bunch, without taking stocks with them. The latest sales pitch from the robotic buy-and-hold crowd is that stocks will now start going higher and catch up to the earnings. I guess these people haven’t taken the time to look at a chart recently. If they did, they would clearly see the stock market is in for a rough ride.

As for earnings, I am hearing from the few fundamental analysts who actually make good predictions that the earnings growth in the S&P will peak this quarter. If that does happen, that will add another piece to my growing list of evidence that earnings are not leading indicators. Remember that earnings peaked in September 2000, six months after the market topped.

On a shorter time frame, I’ve been saying for a month that the market could rally a bit from that June 13 low. I thought the S&P could bounce 5 percent to 6 percent before beginning the next down leg. Even though we haven’t reached those levels yet, we still might. Either way, trying to pick the precise top of a bear market rally is like swimming with sharks with bloody steaks tied to your body.

This rally should end within a few weeks, then the downtrend that started May 10 will resume. And when the selling does kick in again, keep in mind that a total train wreck, while not a strong probability, is somewhat possible. The best course is to evacuate and come back when the storm passes.

No pity for Emmis shareholders

There has been a lot of media coverage in the local market about Emmis Communications Corp. The stock has been suffering for a while, and the chairman, Jeff Smulyan, launched a bid to take the company private. (Longtime readers of this column may recall that in early 2002 I accurately predicted Emmis’ troubles due to the rise of satellite radio.) Smulyan put a bid out for around $15 a share, and the stock reacted quickly and moved up to that level.

The stock’s rise is to be expected, but what came after is turning into a legal soap opera. Investors both big and small are suing Smulyan because he won’t entertain any other offers but his own. He can do that despite owning only 15 percent of the stock, because he owns more than 60 percent of the voting-class stock.

And you know what? That’s his right. He controls the votes, he can do anything he wants. Anyone out there complaining and tying up precious resources in lawyer’s fees should have thought of that before buying the stock. Never buy a stock set up the way Emmis is.

I hope the judge looks at the defendants and says, “You don’t like it, then sell the stock.” You are getting what you deserve.

Hauke is a local money manager. His column appears weekly. Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at

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