Start the conversation
It's earnings season. In fact it's prime time for companies' first-quarter earnings.
For company players the game is about trying to beat analysts' estimates, to get your company's stock to pop so you look better than your reflection.
But, the game is rigged.
What! Another rigged game on the purposely muddied fields where Wall Streeters play?
Yep. Another rigged game.
And like high-frequency trading (HFT) and so many other "institutionalized" games on the Street that are sucking the life out of other people's dreams, it's not illegal.
This is the norm…
The game is called managed earnings, or managing earnings.
The most successful gamers play with a gusto that crosses over the legal border. They juggle their books to shove losses and profits into columns, drawers, and boxes depending on what their objective is for that particular accounting period.
Maybe they made too much money and want to hide some for another quarter where they don't make what analysts expect. Maybe they bury losses somewhere so they don't look as bad in a reporting quarter.
It's about manipulation.
That part of the game is illegal. But because it's merely accounting hocus pocus, the worst a company gets – when the facade of its magic show is blown – is a slap on the wrist.
If you want a history of how to play this part of the game to perfection, look how General Electric under Jack Welch, performed – I mean managed – their earnings. All I'll say is you just can't have your earnings come out to the penny quarter after quarter after quarter without internal prestidigitation.
While that locker room game is for seasoned pros, every company plays the field game.
On the field it's all about what analysts' estimates are.
If your company earnings beat what analysts expect, you're a winner. If your earnings fall short, you're a loser and so is your stock.
And where do these highly touted Wall Street analysts get their estimates from?
I'll tell you where, but you're not going to believe it…
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.