“Profit is an Opinion; Cash is a Fact”
As the DJIA shot up 300 points yesterday, the New York Times reported,
Halfway through the first quarter of the year, analysts now expect profits of companies in the S&P 500 to decline by 1.7 percent from the same period last year, according to data from John Butters, senior earnings analyst at FactSet.
Stephen Grocer points out these same analysts last October had projected earnings to surge 6 percent from a year ago. Then at the start of this year, the analysts trimmed their guesses to a 3.3 percent increase. Now, they are catching up with self-described drama queen Stephanie Pomboy who appeared on Fox Business January 2nd. She predicted negative earnings reports would drive the markets lower by 30 to 50 percent. Pomboy is president of MacroMavens, which provides macroeconomic research and commentary to the institutional investment community.
Grocer echoed Pomboy’s point that negative earnings will drive stocks down,
Corporate profits are by no means a perfect proxy for the health of the United States economy, the world’s largest. But they exert heavy influence over the direction of the stock markets.
And while Jerome Powell sees no recession in sight, Grocer writes,
If companies’ first-quarter performances turn out to be as weak as analysts expect, the United States will be on track for what the financial community calls an earnings recession, which occurs when corporate profits shrink for two straight quarters.
Last year sported boofo earnings growth, so there is no where to go but down. But, what do earnings and financial statements really tell us? In his brilliant book “Finance and Philosophy: Why We’re Always Surprised,” Alex J. Pollock explains, “Unfortunately, by the very nature of accounting and of human minds, it is impossible for financial statements to be simply matters of ‘objective fact.’”
Pollock, distinguished senior fellow at the R Street Institute in Washington and former president of the Federal Home Loan Bank of Chicago, cites accounting expert David Solomons, who said the “setting of accounting standards is as much a product of political action as of flawless logic.”
“Profit is an opinion; cash is a fact,” is the investment proverb.
Profit calculations are,“matters of opinion and philosophy, not matters of fact or mathematical proof,” writes Pollock. “They can be and are endlessly argued about and are subject to large shifts in current fashion.”
Yes, and the current fashion according to Michelle Leder, reporter and founder of Footnoted.com, who appeared recently on Jim Grant’s podcast, is “companies are just making up metrics.” Ms. Leder says investors must read the fine print and reminds us that publicly-traded companies empty their financial trash on Fridays after the market closes.
There is now such a thing as adjusted, adjusted, adjusted EBITDA (earnings before interest taxes depreciation and amortization). Silicon Valley companies are especially prone to eschewing GAP rules and creating financial statements in a form that suits their fancy. All the while, the SEC looks the other way.
As earnings, good or bad, are announced, remember, the numbers have been massaged to look better than they really are.
With that, David Rosenberg tweeted today, “We are on the precipice of an earnings recession and the market is soaring.”
Perhaps, not for long.
