U.S firms are resorting to sophisticated forms of manipulation otherwise known as fraud to prop their earnings. The goal is to create an illusion that all is well when in fact it is not; it’s like the band playing happily away on the Titanic just before it sank. The data manipulation is quite sophisticated, so it is almost impossible to get a true glimpse into the financial performance of a given company. Soon, you will have to resort to the time-tested metric of allowing a monkey to shoot darts at a random list of stocks, to find you next winner.
In a nutshell, there’s a standard known as generally accepted accounting principles, or GAAP, which encourages some uniformity in how companies will report financial results. Unfortunately, the strict standards of GAAP often force companies to report big one-time, non-recurring items that will distort quarterly earnings, in turn making them a poor reflection of underlying operations. And so, many companies will make adjustments for these items and separately report adjusted or non-GAAP financial results.
All of that’s well and good. But there’s an unsettling trend we’ve been witnessing: the gap between GAAP and non-GAAP numbers is widening. Specifically, this “GAAP gap” is widening in such a way that more and more costs and expenses are being removed to make underlying profits look higher. “The gap between GAAP (reported) and pro forma (adjusted) EPS continued to widen in 4Q, with the GAAP/Pro forma ratio of 0.74 still at its most extreme levels since 2009,” Bank of America Merrill Lynch’s Savita Subramanian said on Monday. “Trailing four-quarter (2015) GAAP EPS came in at $87 vs. $118 for pro forma EPS.” Full Story
Another topic we spoke of that is coming to fruition; the rise in fraud; we are in the “what’s love got to do with it” era. Whatever crap corporations can get away with they will put to use, in their quest to ensure that they lock in massive bonuses. This is why we stated that corporate debt and fraud would reach insane levels before this bubble blows up. When people were talking about margin debt soaring last year to match 2007 levels, we said so what, when they spoke of hot money supporting the market, our response was the same. You need to understand that there is a new trend in motion, a trend that the world has not seen before. There is nothing more than 90% of the populace is not willing to do for money; if the price is right, they will sell their soul. So get used to this new trend and be careful who you call your friend, be especially careful of family members for they are the ones that quite happily and willing stab you in the back, and they usually stab very deep. If you understand the problem the solution is easy; in this instance, it means that the markets will soar to levels that will appear sane only after you smoke a combo of crack and cocaine. So don’t bother trying to figure out the markets, go with the trend, it’s your friend, everything else is your foe.
Other Stories Of Interest:
Federal Reserve existence based on Fraud (March 30)
Fossil Fuel Era over: End of Crude oil (March 25)