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Monday, November 17, 2008

Why Does Anyone Rely on Estimates?

MarketWatch reported:

Freddie's third-quarter loss came to $19.44 a share, far larger than the $1.2 billion, or $2.07 a share it lost in the year-earlier period. Much of that loss came from a $14 billion non-cash charge to write down the value of tax credits it had built up. Doubts about the ability of the company to make money in the future and utilize those tax credits caused that charge.
With all the troubles in the market, analysts surely saw this coming right?

As James Surowiecki points out at the New Yorker:
They were “looking for a loss of 89 cents per share.” So they only missed it by that much.
Remember this the next time you hear equities are cheap based on estimated future earnings.