The Earnings Are Fine

 | Oct 20, 2011 | 6:14 AM EDT
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The rumbles are in.

I am getting them from all over the place: it is a bad earnings season.

"They aren't coming in as I thought they would," someone said to me last night at dinner.

"These earnings are really nothing to write home about," someone emailed me as I was on the way home.

Guy in the hall: "Jim, you are too bullish about earnings."

Wait a second. The earnings are FINE! It's the stocks that are bad. That's right, all the stocks with good earnings have had a monster move here and I have to tell you that I don't even care what they say, the stocks won't work.

In fact, I want to make a bold prediction. Let's use a really good company for the test: Honeywell (HON). The company reports on Friday. Street is looking for a buck and I figure it comes in at $1.02 a share. I think Dave Cote, the terrific CEO, will say that the five-year plan is intact and that the climate control and materials and aerospace businesses are all enjoying the better part of their cycles.

Because Dave Cote is honest, at one point he will be asked about Europe. He will say that while he sees no particular slowdown, he is wary, as we all are, going into the negotiations. He will say that no deal will be reached and that will damage confidence.

On that caveat, we will then sell the stock. It will get knocked back to $45. Or maybe even $43, where it was before this move up. We will then say that it wasn't a good quarter, that there was this item or that item that was disappointing and we will decide that HON actually missed.

All of this is one huge joke on everyone. In truth, HON's managing through this and creating value and doing everything right. It is taking share. It is set up for long-term higher oil prices which we all know are coming even as we sell those stocks down, too. It benefits from the super number of orders from all airline companies for all different kinds of planes. Its automotive division is smoking.

That doesn't matter. What matters is that the stock is at $48 and not $43.

What's the punchline? If HON were at $43 when it reports, you know what would happen? The stock would go to $45 and we would hale it as a better-than-expected quarter and congratulate Cote for being a winner.

Yep, we all know it. Because it isn't the earnings, it's the stock. And right now the stock is too high for the report we are going to get.

And that's all she wrote.

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