Pleasant Surprises This Earnings Season Will Lead to Unpleasant Future Surprises 15 comments
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With FASB demonstrating no backbone this Thursday and voting to change mark-to-market rules with not a single dissenting vote (demonstrating that not a single FASB board member has the guts to stand up for what is right), the Big Deception is now in play for earnings season which starts tomorrow on April 7th. Despite the fact that the consensus is for earnings to be brutal and consequently, for the global stock market rally to end, here’s what I think will happen.
The timing of FASB’s ruling was in no part coincidental. There was a rush to approve the suspension of mark-to-market rules that allows U.S. financial companies to use their “significant judgment” to value illiquid assets such as mortgage securities and mortgage-backed securities.
This is all wonderful considering that it was the fine judgment of U.S. financial companies that is largely responsible for creating this entire global economic quagmire we find ourselves in at the present time. Furthermore, a Marketwatch article notes that, “The FASB approval comes after an effective lobbying campaign on Capitol Hill by the American Bankers Association and other interest groups. Roughly 800 bankers gathered in Washington earlier this week, in part, to meet and press lawmakers to send a message to FASB that the accounting rules needed to change.”
Does anyone but me find it immensely hypocritical that these very same bankers took full advantage of the mark-to-market accounting regulations when distorted market values aided the climb of their stocks to gross overvaluations and billions of bonuses were paid out based upon these gross overvaluations? And since I have heard arguments that FASB’s decision to suspend mark-to-market accounting laws was right because the fair value rule created gross misstatements of assets during bull markets, let me quickly illustrate that this argument is a circular one and holds no weight.In October of 2008, a CNNmoney.com journalist wrote:
“The one fact everyone agrees on is that the current financial crisis centers on trillions of dollars worth of mortgage loans that were packaged together into financial instruments known as mortgage-backed securities, or MBS. Those securities were purchased by banks and Wall Street firms.”
Forgive me for adamantly disagreeing, but the one fact this journalist states that “everyone agrees on” is not even a fact. This is the very “fact” that those who support the end of the “fair value” rule falsely use to justify their position. They state that the MBS market would not have been so greatly distorted and trillions of capital would not have vanished if companies had not been allowed to mark these assets on their book at their highly distorted mark-to-market values.
To attribute our current global financial crisis solely to faulty mortgages or to their faulty valuations demonstrates little understanding of this current crisis. An unsound, fraudulent monetary system based upon fiat currency is what has enabled and created every significant distortion in housing markets and stock markets for nearly the entire past century.
With a sound monetary system, the creation of a $700 trillion derivatives gorilla would have been impossible, huge distortions in real estate markets would have been impossible, huge distortions in stock markets would have been impossible, and the subprime mortgage problem that the author attributes to creating the current global financial crisis would never have grown to its peak inflated state.
Consequently, to state that mark-to-market accounting laws created huge distortions in the mortgage market that created this crisis is an invalid, disingenuous, circular argument at best and a flat out lie at worst. But such is the state of financial reporting today – investigative journalism has flatlined and instead almost always rallies to the official party line fed to the media by bankers and government officials.
Though the FASB changes may have come too late for U.S. financial institutions to restate their earnings for the first quarter 2009, and I’m wrong about the “good surprises” occurring during first quarter earnings announcements, the only possible future outcome of this accounting change will be surprises to the upside with second quarter earnings announcements. With expectations already so negative for first quarter earnings in U.S. markets, all negative expectations have already likely been factored into the market.
Furthermore, since financial executives now have carte blanche to assess asset valuations of their debt securities based upon some Alice-in-Wonderland fantasy land internal valuation model, I would not at all be surprised if some companies, despite the tight deadlines, succeed in convincing external auditors to work overtime to produce revised earnings statements in time for this month’s earnings season. Yes, I do understand that external auditors must approve the bank management’s revised valuation schemes, but given the failure of Moody's, Standard and Poor's, the SEC, and most recently FASB, to protect the retail investor as of late, somehow trusting auditors hired by a financial firm to serve as the firm’s gatekeeper in keeping the firm honest provides me with little reassurance.
Additionally, if you have not been aware, financial companies had already been cooking their books to make their earnings appear better than reality before the suspension of the fair value accounting rule. For example, consider this story from Dow Jones Newswires in January of 2009 that reported that Wells Fargo (WFC), in reporting its 2008 4th quarter earnings, expanded its definition of bad debt from 120 days delinquent to 180 days delinquent to improve its earnings statement. Even if the corporate revisionists don’t beat the deadline for this earnings season, it merely means that the Big Deception will merely be postponed until 2nd quarter earnings are announced.
In any event, the modus operandus of the financial corporations has already been revealed as follows: (1) Plant stories in the media about huge losses and worst case scenarios for earnings prior to earnings season; (2) With expectations so low, release news that is still negative but not as negative as expected, and thus can be spun into positive news; (3) Sucker in the suckers on more spun stories that the “bottom is in”; and (4) Sit back and watch the short-term rally. If this scenario happens this earnings season, it is near guaranteed to also cause a continuing temporary setback in gold prices and the prices of gold mining stocks as the masses fall victim to this ploy. However, this in no way detracts from the long-term strength of gold.
In the past, many readers have criticized the negative tone of my articles but I would firmly disagree with anyone that claims my articles are “negative”. One of my primary goals is to merely report the stories that the mainstream media fails to cover. If my search for the truth reveals a negative economic environment, then that’s what I report. I will gladly report optimism when I uncover reason to be optimistic.
Secondly, in a global market so fraught with risk, and still fraught with grave risks, this doesn’t mean one can’t be profitable. One only needs to take advantage of investment strategies that are different than the masses and one can be strongly profitable. Being profitable in such an environment only takes the courage to zig when everyone else is zagging.
If you wonder why you should be so concerned about the FASB rule change, consider who was instrumental in getting the law changed and the parade of cheerleaders this decision has consequently inspired. Before the passage of the rule change, William Isaac, chairman of the Federal Deposit Insurance Corp. from 1981 to 1985, called fair value “a major cause of the credit crisis”.
Robert Rubin, the former Citigroup senior counselor and U.S. Treasury secretary, concurred and claimed that the fair value rule caused “a great deal of damage”. After the decision to suspend the fair value rule, Citigroup chairman Richard Parsons responded, “Good decision.” Edward Yingling, chief executive officer of the American Bankers Association applauded the decision as well: “Today’s decision should improve information for investors by providing more accurate estimates of market values.”
If you trust the above group of people, then buy into the rallies that will occur when U.S. financial companies start announcing earnings surprises, whether they occur this quarter or next. Otherwise, sell into these “fake” rallies if you’ve entered traditional stock markets in the past couple of months and move your assets accordingly into assets that will continue to climb higher as this monetary crisis deepens.
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good article...with lots of truths...but beware...its been proven that the powers to be can and will do ANYTHING to try and hold the system together....
Please keep your so-called negative articles coming. Let the financial media educate those CNBC watchers until they learn that being gullible and lazy guarantees their financial destruction. In the meantime, those of us who appreciate your insights can steer clear of shark infested waters.
Isn't the off balance sheet accounting of derivatives a big enough loophole for financial institution to hide trillions of losses from their own shareholders enough? Or the billion dollar government secret siphon to lie about their quarterly losses enough? In the end all this trickery is fraud not to run America and Americans into bankruptcy even if that is the ultimate outcome.
The real fraud is much different, simple, and insidious. It is a fraud by executives on how to pay themselves a lot, retain their power, and continue to lie and decieve their masters, the owners of companies aka. the shareholders. Once you see it for what it is. In that crystal clear context. You will know the truth.
The economy is buring due to crime as simple as petty theft and fraud but on a scale of billions and trillions. It is the same as how to steal money out of a cash register day in and day out without anyone ever noticing: First you lie about earnings. Then you break the camera (the accountants monitoring you). Then you forge the bank balance sheet (change the aconting rules). Then you bludgeon the owner over the head with an economic crowbar. And then when the police come you take the country into economic hostage.
But nearly every one of them suffers from the same flaw - stuck inside it is the eternal iteration of "BUY GOLD!"
I'd find a lot more credibility in them if the authors stopped with that mantra and let investors take what they will from the piece without the free advertising from the gold bugs.
The bad news will not end until the recognition and reciprocity for bad behavior begins in earnest.
So far I have only seen minor scapegoating.
Will they be able to repair the curtain. OZ is just not the same since it became tattered.
Be Kind To Your Neighbors - We Are All In This Together.
The market technicals are starting to paint a strange picture. The discretionary consumer spending area (XLY) is starting to lead a turn up just as they led the turn down by several months in '07. And the more discretionary, the better. Now they have failed to make a new bottom along with the broad market on March 6 and may be breaking their decline technicals. What the heck is the market thinking? The gold technicals, despite the current pull back, also point to a big climb in the coming months. So what kind of world does that imply? Well if you have the government printing money and mailing us all "stimulus" checks, maybe all that makes sense. Impossible? It already started with the previous president, and the printing presses weren't even revved up yet. Would that create a mark-to-smokescreen GDP?
I have been extolling the merits of gold since 2006, with some of the gold investments I advocated back then well over 200% profits now, so my comments regarding gold are not jump -on-the-bandwagon opportunism. In fact, my belief in sound money is so strong that I have even adopted a gold standard for my business which you can read about here.
www.smartknowledgeu.co...
I believe that more and more businesses will adopt the same gold standard as I in the future as this monetary crisis deepens.
I truly do believe wpdragon, that gold is one of the most conservative investments anyone could own right now. It is my belief that this monetary crisis will become much worse than anyone anticipates at this point. When it does, though there will be other assets and not just gold that will soar at this point, I believe that those who hold gold or who have held gold for many years, adding on every correction, will be very glad they have done so.
And I believe that severe inflation may very well result from our efforts to reflate, and it could cause a broad group of commodities to perform well... that would obviously include gold (and silver, platinum, etc.), also the base metals, agriculturals, etc.
I do believe however that from a technical standpoint gold is overbought right here and that the johnny-come-latelies (not you, obviously) are jumping on the bandwagon here and coming late to a crowded trade - the same type of crowded trade that exists in short equities, long treasuries, long VIX and cash... that is what the charts have been telling me for the past couple of months. Whether these are sustainable trends depends of course on whether the "stimuli" gain traction.
For me, charts are the truth tellers, for after doing my fundamental analysis they tell me what people are actually DOING, not what they SAY they are doing. And they tell me that as of today the Armageddon trades are unwinding.
But here, beyond all else, is my big concern. The very things that will cause us to adopt a gold standard are the very things that will have delivered the world to the brink of Armageddon, and if things do degenerate to the point that gold, or lead bullets, or childrens' beads become the currency du jour, I don't think that civilization would survive in any recognizable form... the house of cards that would collapse when our 700 TRILLION $$ of derivatives fall like dominos (many tens of trillions of which would be the CDS's of course) would render fiat currencies, gold, and everything else a moot point.
Maybe the cockaroaches will do a better job than we have done at ruling the earth in that case.
Best of fortune to you, for we live in interesting times.
On Apr 06 03:19 PM J. S. Kim wrote:
> A very quick comment in response to wpdragon. I only extol the virtues
> of gold not because I truly believe that the monetary system we currently
> employ is not only unsound but also fraudulent. Thus I truly believe
> that gold as a currency with zero counterparty risk is the only true
> currency among the lot of fiat currencies and that every steep brief
> correction we receive, including the current one, is a buying opportunity
> for those that have remained unconvinced about the merits of holding
> gold.
>
> I have been extolling the merits of gold since 2006, with some of
> the gold investments I advocated back then well over 200% profits
> now, so my comments regarding gold are not jump -on-the-bandwagon
> opportunism. In fact, my belief in sound money is so strong that
> I have even adopted a gold standard for my business which you can
> read about here.
>
> www.smartknowledgeu.co...
>
> I believe that more and more businesses will adopt the same gold
> standard as I in the future as this monetary crisis deepens.
>
> I truly do believe wpdragon, that gold is one of the most conservative
> investments anyone could own right now. It is my belief that this
> monetary crisis will become much worse than anyone anticipates at
> this point. When it does, though there will be other assets and not
> just gold that will soar at this point, I believe that those who
> hold gold or who have held gold for many years, adding on every correction,
> will be very glad they have done so.
Actually I don't think that this is an option but a necessity for those of us that care about the future, but this is a story for another day that I will soon address as well.
I've been following your articles, and I've read your book. I guess this comment is for everyone, and I'm sure everyone would like to hear your opinion. I was recently sent this article by a friend. I will include the link below. Basically, it contradicts what you've been teaching. I encourage everyone to look at it, not from a standpoint of disagreeing, but I'd really like to hear what Mr. Kim has to say in rebuttle. Enjoy!
fatasmihov.blogspot.co...
P.S. I'm a believer in what Kim teaches, but I'd like some explanation!