The whisper is back on Wall Street.
That's the whisper number—the time-honored instrument to which in-the-know investors look to gauge what company earnings reports will really show, rather than just the analyst consensus to which everyone has access.
After six quarters of bare-bones survival, companies are once again trying to live up to whisper-number expectations that are influencing the market's reaction to earnings numbers.
"It's very important that companies trying to make huge moves come in close to the whisper numbers," says Dave Rovelli, managing director of US equity trading at Canaccord Adams. "This isn't just two analysts looking at it. These are a bunch of intelligent people's views on the stock."
Too much whisper-number optimism can be a bad thing, as the market is discovering.
If earnings keep outpacing consensus expectations, the whisper numbers are likely to keep growing and that could work as a detriment to the market. Prior to Tuesday's earnings, which generally outpaced expectations, 78 of the 103 Standard & Poor's 500 companies that reported beat consensus estimates.
"I'm a little bit nervous about the overall market," says Dirk Van Dijk, chief equity strategist at Zacks Equity Research. "It seems like the market is discounting one heck of a recovery in the economy, and I just don't see that happening."
Goldman Sachs thus far has been bitten the hardest by the whisper-number bug.
The venerable Wall Street institution last Thursday saw its shares take a beating even though the company easily beat not only bottom-line profit but also top-line revenue projections.
The reason: A day earlier, JPMorgan Chase blasted an earnings grand slam, far outdistancing analyst estimates for both profit and outlookand setting the whisper number aflame for Goldman. When Goldman came back with earnings that didn't match JPMorgan's, investors blanched.
"JPMorgan just set the bar absurdly high," Van Dijk says. "There's probably that whisper effect out there but it's hard to say with any degree of analytical certainty what's going on."
The whisper differs from the consensus number that comes from professional analysts who comb through balance sheets and review other company documents, then weigh those numbers against economic conditions to determine expected earnings. Organizations such as Thomson/Reuters and First Call compile analyst consensus estimates that are then used to determine whether companies beat or miss earnings.
Historically, whisper numbers have been passed along through Wall Street traders who formulate the number by polling each other and their clients, as well as through trader Web sites. Whisper numbers often move markets not only the day of the release of earnings but also in the time leading up to the report as traders look to cover short positions.
At one time, the whisper number was considered chiefly the property of market insiders who were privy to the chatter on trading floors that determined the real expectations.
"It is becoming everyman's number. You just have to go on the Internet," says Quincy Krosby, general strategist at Prudential Financial. "They've gotten to middle-of-the-road clients who talk about whisper numbers. What's shaping the so-called whisper number is not just the Wall Street traders but it has become democratized."
To be sure, the number's ubiquity has called into question its ability to correctly predict earnings.
Tighter disclosure regulations over the past decade have made insider data generally less available to retail investors. At the same time, though, the explosion of business news Web sites and blogs has provided investors with a trove of opinions that are used to formulate the whisper numbers.
"There are underlying stories developing above and beyond earnings," says Jeffrey Beamer, portfolio manager for the Lacerte Guardian Fund in Dallas. "I'm really looking for (whisper numbers) to increase volatility a little bit. Either we're going to hit real numbers and push higher, or take a pause here and give up a little bit."
Of course, the whisper-number effect works both ways.
Apple's whisper number was around $1.50 a share—eight cents higher than consensus but a full 32 cents below actual earnings released after the bell Monday. While the earnings beat likely would have pushed shares up regardless, the topping of whisper numbers really ignited investors and sent Apple stock soaring.
"The thing with Apple is it usually trades down the next few days because they always give lukewarm guidance," Canaccord Adams' Rovelli says.
True to form, Apple remained conservative with its guidance, but that was even better than some had expected.
"People want to see top-line growth. That's what they're looking for more than anything," Rovelli adds. "With Apple they wanted to see a huge beat."