by Larry Swing - September 4 2005

Education

We have previously discussed the power of seasonally unexpected earnings (SUEs) in predicting future stock price performance.  A recent paper published in the Journal of Accounting Research sheds light on why SUEs predict future stock price movements. 

The authors show that much of the predictive ability of SUEs comes from their relationship to inflation.  They conclude that investors discount the value of future earnings by an appropriate inflation value, but fail to include the effect of changes in inflation on future earnings. 

Stocks whose future earnings are positively related to inflation do better after inflation rises, and do poorly when inflation falls.

Reference:

Chordia, Tarun; Shivakumar, Lakshmanan "Inflation Illusion and Post-Earnings-Announcement Drift," Journal of Accounting Research, Sep2005, Vol. 43 Issue 4, p521-556

Analyses of ETFs

We are neutral on all Holdrs.

We are slightly bullish on the QQQQ because of the channel breakout we covered last week.

Analyses of Individual Stocks

MCD

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