If you want more evidence that the U.S. stock market is disconnected from the actual economy, you only need to look at its performance during the third-quarter earnings season.
Since earnings season began in early October, the Standard & Poor's 500 Index, Dow Jones Industrial Average, and NASDAQ Composite Index have climbed 5.7%, 5.2%, and 6.1%, respectively. The S&P has recently closed with consecutive record highs for four trading sessions and ended above the previous close on 13 of the last 17 trading sessions.
But the actual earnings results don't support this trend.Here's what's going on - and what you should do about it...
Earnings Today: Citigroup (NYSE: C), Coca Cola (NYSE: KO), and Johnson & Johnson (NYSE: JNJ)
Third-quarter earnings season has picked up, with a number of companies posting earnings today before the opening bell and two tech giants set to report after the close.
When Q3 earnings kicked off a week ago, analysts estimated third-quarter earnings would come in 6.5% higher than the same quarter a year ago.To continue reading, please click here...
How to Protect Your Portfolio Against One of Wall Street's Greatest, Best Kept Secrets
"Can't anybody tell the truth anymore?" an exasperated Bob J. asked me at a recent cocktail reception.
"Evidently not" I told him.
Bob had seen me earlier that afternoon on Fox News. I appeared on the show to respond to a new study on corporate earnings by Professors Ilia Dichev, Shiva Rajgopal of Emory University and John Graham of Duke.
The study found that a full 20% of publicly traded companies lie about their earnings.
The shocking thing is that the figure wasn't much higher. Twenty percent strikes me as abnormally low. Earnings manipulation is one of Wall Street's greatest, best-kept secrets and has been for years.
In fact, CFOs I've met over the years have told me they could routinely swing things within 5-10% of the target earnings per share (EPS) if needed - a figure in line with the one cited in the study.
But lie is a big word.
As I noted during my interview, there are all kinds of reasons why companies manipulate the numbers, beginning with the terribly flawed system itself.
As appalling as this thought may be, the system actually encourages this kind of behavior.
Under the current system, the law requires quarterly performance reports when many publicly traded companies actually operate in business cycles that are 1, 3, 5, or even 7 years long.
This creates a disincentive to report what's actually happening and an incentive to "lie" about the numbers or at least "fudge" them, depending on your perspective. And, the longer the business cycle, the more a company must make estimates about quarterly results with the risk, of course, that things don't turn out as management expects.
So while some companies may have lost their ethical and moral compasses, what they are doing is entirely legal.
Why Companies Lie About EarningsHaving spent more than 20 years in the markets, I believe the reason for this comes down to three biggies, for lack of a better term. Companies may "lie" to boost stock prices, smooth earnings and jack up compensation packages.
Virtually every publicly traded company draws on reserves and engages in all kinds of financial hocus-pocus in an effort smooth things out.
Take Boeing Co. (NYSE: BA), for instance.
To continue reading, please click here...