Earnings Hooliganism

If you'd asked me, I 'd have thought that "hooligan" was certainly Dutch in its lexigraphical derivation. In actual fact, the OED tells me that it is derived from "Hooley's Gang", an apparently tough Irish group of thugs wreaking havoc at the turn of the century. It comes to mind because the latest interim earnings earnings season has yielded to a singular mob-like behaviour in dealing the short-term fortunes of stocks in Japan. Some academics have previously termed it the "MBE" phenomena where there is a decided post-announcement drift divergence effect in the performance of securities that "meet of beat" expectations, while the guillotine awaits those that don't. Mind you, if it were just the Japanese domestic investors, they might be forgiven for quarterly earnings announcements and all the pathetically panicked and outsized portfolio readjustment that results is new to the island, a bone to the foreign institutional demanders of transparency, despite the stupidly myopic short-termism it has has brought to American markets, poignanly discussed by Rappaport in his damning paper on the subject.

Of course we've seen this before. Certainly, in the US, where systematic earnings yob-ism is the norm, and to an increasing extent in Europe, and at least since 2004 when the Gaijin returned to Japan, without guns and uniforms. Historically, the effect was confined to the smaller cap names, at least according the numerous academics. But the perrformance-incentivized hooligans now so prevalent in Japan have driven a post announcement wedge between the perceived good & seemingly bad (at least as determined by the most recent 9mo interims) unlike anything we've seen to date. But interestingly, in Tokyo, the hooligans are unconcerned by size, or other attributes, perhaps ass a reuslt of the inferior expectational data and more limited liquidity. But it IS better if its got positive ex-ante momo and it MBE's. This may be the result of short covering, or mischievous elves trying to force them to cover, or mechanical bots trying to capture some post-revision drift. However, is history is gauge, except for the cheaper secs., they will likely be paying too much.

But since they are aggressively shorting the ones that do NOT MBE, this is where the opportunity lay for the patient. Make no mistake, I have nothing against a punter making a calculated short-term bet. In fact I thrive on it because they are creating opportunity. History may tell them it's a good one, in the short term. They should just hope they are asking the correct question. And that they do not oversize their position. For, in Japan, when they begin drilling reasonably hig-quality names to the tail of the dsitribution, despite contextual fundamentals, for a few bp's of hopeful short-term performance, potential buyers should take note, and use the mechanical myopia to wisely and patiently acquire positions, for they will be returning shortly to reverse their positions.