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Earnings Surprises?

     Do you recall what happens when a doctor strikes your knee with a rubber reflex hammer? That type of reaction is what is happening with the stock market when a company releases negative earnings news. You don't have to use your brain to make your lower leg kick up after your knee is struck, nor do you need to will or plan the response. It just happens. Investors are conditioned to quickly sell on negative earnings news. This was a reliable reflex action earlier in the year but does it make sense at this time? Stocks in many sectors have been beaten down and a slower economy is common knowledge. The slower economy is already factored into the stock market. Is it any real surprise if a company adjusts slightly downward its top line (revenue) and bottom line (earnings) forecasts for the coming quarter? Is it a valid response to slam down a stock on such news when it's already factored into the market? We believe not. If you place a rubber band between your thumb and first finger and then pull it towards you until it's taunt, and then pull it further towards you, and then if you dare to, pull it even further towards you, where do you think the rubber band will find equilibrium? The markets aren't going to climb to new all time highs in the next week, but it should reach equilibrium at higher levels. If a company has strong management, good products, and is in an industry expected to have strong growth over coming years, then it most likely is attractively priced at current levels. If stocks of this description get slammed down by investors when they adjust their earnings to more closely match the economy, there is likely a buying opportunity for long-term investors. Accumulating stocks in strong companies on any market pullback is prudent.


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