Corporations have been FAKING their earnings numbers through Financial Engineering on a record scale. Now it's not just a conspiracy theory because the Associated Press and Capital IQ have done a study that proves everything I've been saying about earnings this year.
As I have been saying when we analyzed recent earnings quarters, companies have been presenting misleading versions of their results that ignore a wide variety of normal costs of running a business to make it seem like they're doing better than they really are. What's worse, the financial analysts who are supposed to fight corporate spin are often playing along. Instead of challenging the companies, they're largely passing along the rosy numbers in reports recommending stocks to investors.
"Companies are tilting the results," says fund manager Tom Brown of Second Curve Capital, "and the analysts are buying it."
This sort of thing is not a "victimless crime" that benefits the market in the same way that giving unqualified people sub-prime loans ended up being a catastrophe. Sub-prime lending inflated housing prices well over their actual value and led to a tremendous crash and inflated profit reports drive up the price of stocks and will eventually lead to a similar correction.
Analyzing the S&P, Capital IQ found that one in five companies had inflated their profits by MORE THAN 50% and that some of the companies that seem profitable on an adjusted basis are actually losing money. The adjustments made companies look better by leaving out things like costs related to laying off workers, a decline in the value of patents or other "intangible" assets, the value of company stock distributed to employees, or losses from a failed venture.
Quarter after quarter, the differences between the adjusted and bottom-line figures are adding up. From 2010 through 2014, adjusted profits for the S&P 500 came in $583 billion higher than net income. It's as if each company in the S&P 500 got a check in the mail for an extra eight months of earnings.
As you can see from the 52-week low chart, it has become obvious that many of these Emperors actually have no clothes as 1/3 of the S&P is now making 52-week lows as one by one, the earnings shenanigans are being uncovered. This is nothing new to us at PSW, as we cashed out on those phony-baloney gains and went short on the market. If you are a bull and buying the F'ing dip – don't say we didn't warn you.
- /NKD at 20,000 – up $3,000 per contact
- /CL at $59.25 – up $1,500 per contract
- /YG at $1,182 – up $225 per contract
- /RB at $2.05 – up $2,940 per contract
See how much fun Futures trading can be? Today's Webinar is for Members Only but next week we plan on doing a free one for all you cheap people – it will be a good chance to see some of our trading techniques put into play.
There's still plenty of stocks to buy – not all of them are cheating and, fortunately, we're pretty good at digging into those financials and arriving at the truth. We don't play a lot of momentum stocks – we prefer solid companies with solid earnings profiles and THEN we use options to leverage our positions. It's the only rational way to trade these crazy markets!
Be careful out there, the NYSE has become our first index to blow the Must Hold line (11,000) and that 5,000 line on the Nasdaq would be a terrible thing to lose and the Russell is facing a critical test at 1,250, below which it makes a great short (with tight stops above). We already have TZA as a major hedge, of course:
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