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Earnings Inflation, Analyst Misrepresentation & Goldman Nation

|Includes: Goldman Sachs Group Inc. (GS)
Good article from Bloomberg, an organization that usually partakes in the CNBC consortium of filtered optimism.
An excerpt:
As Wall Street tells it, the employee stock options Google Inc. granted in the second quarter didn’t cost its shareholders $293 million.
Google, according to generally accepted accounting principles, earned $1.48 billion, or $4.66 a share, in the period. Not enough for Wall Street, which prefers to say the company earned $5.36 a share, leaving out the cost of stock options.
It’s the same pot-stirring accounting manipulations that ushered us to the brink last year.  Like the FASB 157 modifications on April 2, 2009, this stuff just churns what little earnings profitable companies have (or don’t).  It fuels the great American Ponzi scheme.  What has economically changed since GDP was falling at an alleged -5.5% annually 1q09?  Nothing.
Today, 2q09 GDP came in at -1.0% (better than the -1.5% expected).  BUT, that -5.5% from last quarter was revised down to -6.4% in concerto with the 2q numbers release today, more than erasing the better-than-expected 2q numbers.  Don’t forget, government spending was up 5.6% from 2008.  So, I’m telling you corporate earnings are bunk, but why hasn’t the system collapsed?  Because the government has plugged the holes beyond its means, and because we’re in the business of inflating numbers—like 1q09 GDP—then revising once they’re irrelevant.
From Edward Harrison at Credit Writedowns:
...the 2008 numbers were revised down. Q1 2008 was revised from positive 0.9% to negative –0.7%. Q2 2008 was revised way down as well from 2.8% to 1.5%.  Q3 2008 was also very negative, now –2.7%. This confirms the December 2007 recession call.
Investors have already put their chips on the table, having bought Treasuries and waded in corporate securities under the premise of [a now inflated] 1q GDP number.  Explicitly, the government may continuously revise GDP reports, but downward revisions have been all the rage lately, and this most recent one is huge!  Whatever keeps people buying our debt...
 
To top it off, the egregious concessions to Goldman get worse and worse.  They became a bank-holding company to get bailout money from the Feds and access to zero interest lines of credit at the Feds’ discount window.  That means they leave the investment bank title behind, they forfeit the loose regulation of the SEC, and they enter the scope of “strict” FDIC oversight.
We all know GS reported record revenues & profits last week.  They also reported record risk exposure, because the FDIC granted GS a never-before-seen exemption to capital adequacy minimums & risk restrictions.  They allowed GS to keep its PROPRIETARY Vaule-at-Risk (VaR) model to self-regulate their capital adequacy.  Then what’s the point of FDIC oversight?
I’ve been all over this in the blogosphere for months now, in addition to the illegal “flash trading,” “high frequency trading,” “program trading,” and “supplemental liquidity provider” programs that finally hit mainstream media on Tuesday. (If anyone’s interested, fell free to ask me about those scandals.)  Rest assured, I’ll be sending complaints to the SEC, FDIC & Congress… not that it’ll help.
A quick synopsis:
Flash Trading- Exchanges allow some outfits to pay a fee for the right to install computer servers next to the exchange's servers. Because of the proximity, data is received and delivered milliseconds sooner than it would be via off-site servers; the lag is literally due to the time it takes the electronic information to travel through physical wires/networks.  This opens the door to inequal information & frontrunning.
PT & HFT- Trading outfits write complex algorithms to fire off huge orders or a series of smaller orders that amount to a huge position within milliseconds.  They can buy and sell almost simultaneously, or submit a bid and cancel a bid simultaneously.  There’s no human pushing the button, it’s got a mind of its own.  This stuff can move markets by manipulating the spread higher or lower, wider or tighter.  They can execute an order at their manipulated price, then cover immediately while prices return to an unmanipulated equilibrium.  PTs can realize hundreds-of-thousands of small per share gains in a session... or millions of gross profits over time.
SLP- All the recognized American exchanges offer rebates to liquidity providers (depending on the exchange, ~$0.003/100 shs), as an important initiative to keep spreads tight and liquidity high.  These select providers can only collect rebates on proprietary trades--not agency or principal.

Add that together: Flash Trading + PT + HFT + SLP = manipulation.
HFT programs allow SLPs to enter huge, simultaneous Buy & Sell orders, just to gather rebates.  With a Flash Trading kicker, HFT can frontrun, then move markets to harvest realized gains AND collect on liquidity rebates.  Is that how GS does it?  Sure looks feasible given the Aleynikov scandal on July 7.

Disclosure: no positions