What's Wrong with Today's Earnings Picture?

A look at why bear markets are often the best auditors.

Apple, Intel, Microsoft, Caterpillar, Dell, Bank of America and many other companies beat their earnings forecasts.

That is good news, but will this translate into higher stock prices? Time will be the ultimate judge, but for right now, it seems like we might see a sell off similar to what occurred earlier this year in January and April.
Enthusiasm preceding this earnings season has been the same as in April and January.

Two headlines in April read: "Wall Street Gets Lift from Higher Earnings" (from the Associated Press) and "JPMorgan Earnings Increase 55 percent on Outlook for Economy" (from Bloomberg).

Two headlines from this month read as follows: "U.S. stocks Rise on Speculation Earnings Will Trigger Rebound" (from Bloomberg) and "Earnings: Investors Hope for Good News, Look for Clues to Future" (from the New York Times).

In January, the major indexes declined 9 percent. And following the release of April earnings, the major indexes declined 17 percent or more.

Shouldn't we know better by now and not bet the farm, even if earnings are positive?

One lesson to be learning is that higher profits do not translate into rising stock prices. After all, last-quarter earnings provide a snapshot of the last quarter, nothing more.

Another question that's becoming increasingly apropos is the reliability of the actual numbers companies report.

Earlier this month, Bank of America admitted to utilizing an accounting trick very similar to what Lehman Brothers did. According to Bank of America, this was "unintentional." It just happened to occur right before earnings were reported in six quarters from 2007-2009.

Last week, Dell announced that it had falsely portrayed the means by which the company met earnings targets from 2001 through 2006. Dell failed to disclose large payments it received from Intel for not using competitors (AMD) processing units.

Without the payments from Intel, the SEC said, Dell would have missed analysts' estimates every quarter during that time.
This may just be the tip of the iceberg.

The ETF Profit Strategy Newsletter just discussed an unethical -- but legal and popular -- accounting trick that might hide more than $2 trillion in losses from banks balance sheets.

Bear markets are the best auditors, and eventually the psychology behind falling prices will draw dirty laundry out of the - thus far - tightly sealed closets.
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