The American Spectator

Going into earnings season, the time of year when most companies declare their quarterly revenues and earnings and make projections about what they’ll do in the future, investors watched Yahoo, the Internet portal, very closely. Along with eBay, Amazon.com, and a few other names, Yahoo had survived the Internet bubble market of the 1990s, become a real company, and started earning real money. Its market capitalization is $27.7 billion, it has 650 million or so shares outstanding, and it trades an average of 12.7 million shares a day.

Granted it trades at 100 times earnings, but that’s an Internet stock for you. All told, it’s a healthy hunk of market action.

Yahoo’s earnings, comparing a quarter this year to the same quarter the year before, have been increasing at a rate of about 100 percent. So as Yahoo’s reporting deadline approached, after market close on Wednesday, October 8, people paid attention. The Reuters consensus was that Yahoo would earn nine cents a share for the quarter. Late Wednesday, Deutsche Bank weighed in with the opinion that Yahoo would actually beat that figure by a penny. Projected fourth quarter revenues, so said Reuters, would be $337.2 million.

Those figures set the stage. The stock market lives on expectations, fulfilled, met, disappointed, or beat. What would Yahoo do? And how would the market interpret it?

In the event, it was comical to watch the after-hours traders swinging one way and then another. The stock closed at $38.79. Post-bell, the first “bid” was up to $42. That rapidly dropped to just under $40.

Why? Yahoo reported earnings of 10 cents a share. Given the Deutsche Bank preview issued earlier, that did not constitute an “earnings surprise.” (Never mind that Yahoo had once again doubled earnings, year over year.) The kicker came in the revenue projections for the quarter to come, which traders did not manage to digest until the next morning.

The company, reported briefing.com, “sees Q4 revenues of $462-502 mln, which includes OVER contribution.”

Let me translate. Yahoo had bought Overture, a browser company, earlier this year. Take out the $102 million projected revenue from the Overture acquisition, and Yahoo’s revenues fell into approximate line with Reuters’ projections.

You could watch the prices change after-hours and practically hear the traders yelling.

“Buy, buy! Look at those revenues!”

“Wait, wait! That’s Overture! Sell, sell!”

By the next morning, the heavyweight brokerage houses had digested the information and decided that money was money. Several issued upgrades — meaning they rated the stock a better buy. Yahoo ended the day up almost four dollars. And it dragged a whole lot of other stocks, and the market, right along. It dragged the market so far up, in fact, that all the major averages hit 18-month highs, and that triggered some technical selling toward the end of the day.

So why recap all this action? What does it mean?

The stock markets hit their bottom in mid-March of 2003, and have been climbing dramatically ever since. Remember the line that if the Dow was over 8500, the Republicans win, and under 8500, the Democrats win? That was last November. As I write, on Friday the 10th, the Dow stands at 9684.

So everybody should be happy, right? Well, not really. For most of the summer and into the fall, heavy pessimism has hung over the markets. The most conspicuous symptom: Some big stock would declare earnings, good earnings, increasing earnings, and sell down. This is called “selling on the news.” It happened more times than I care to name.