Tag Archives: financial engineering

Despite Financial Engineering and Clever Reporting Schemes, S and P 500 Earnings per Share Stuck for 3+ Years, but Stocks Soar, by Wolf Richter

Posted on March 21, 2017 | Leave a comment

Wall Street has been putting lipstick on a pig—earnings have gone nowhere for three years, which means that a rising stock market has elevated price-earnings ratios into the stratosphere. It’s dangerous up there. From Wolf Richter at wolfstreet.com:

$1.7 trillion blown on making EPS look less bad.

The S&P 500 index, closing today at 2,373, hovers near its all-time high. Total market capitalization of the 500 companies in the index exceeds $20 trillion, or 106% of US GDP. In the three-plus years since the end of January 2014, the index has soared 33%.

And yet, over these three-plus years, even with financial engineering driven to the utmost state of perfection, including $1.7 trillion in share buybacks and despite “ex-bad-items” accounting schemes that are giving even the SEC goosebumps – despite all these efforts, the crucial and beautifully doctored “adjusted” earnings-per-share, perhaps the single most manipulated metric out there, has gone nowhere.

“Adjusted” earnings per share are back where they’d been at the end of January 2014. It’s a sad sign when not even financial engineering can conjure up the appearance of earnings growth.

Companies report earnings in two ways:

1. All companies report as required under GAAP (our slightly inconvenient Generally Accepted Accounting Principles). These earnings are often a loss or way too small and shrinking, instead of growing, and hence not very palatable.

2. So most companies also report pro-forma, ex-bad-items, “adjusted” earnings, based on the companies’ own notions of what matters. Analysts and the media hype that metric. This is just a method of reporting the same results in a more glamorous manner.

Then there’s financial engineering. Companies borrowed heavily over the past few years and used those funds to purchase their own shares. This hollowed out equity and left companies with piles of debt. Over the past three years, companies blew $1.7 trillion on share buybacks. This money was not invested in productive activities that would have expanded the company and the economy, and generated cash flow to service this debt. All it did was reduce the number of shares outstanding. This has the effect of increasing earnings per share (EPS) though the company didn’t actually make more money.

Add this system of share buybacks to the system of “adjusting” earnings per share via reporting schemes, and the result should be a miracle of soaring “adjusted” EPS. But no.

To continue reading: Despite Financial Engineering & Clever Reporting Schemes, S&P 500 Earnings per Share Stuck for 3+ Years, but Stocks Soar

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“A Total Illusion from QE and Financial Engineering” by Harry Dent

Posted on April 22, 2016 | Leave a comment

Unlike your typical bubble-headed, blow dried “expert” on tout TV, Harry Dent is refreshing free of financial, economic, and demographic illusions. He’s been quite bearish, which also sets him apart from the so-called experts. From Dent at wolfstreet.com:

When the Fed was created in 1914, it was set to task of controlling short-term interest rates in an attempt to iron out financial cycles. It succeeded for many years. But by avoiding the natural rebalancing (and occasional pain) from free markets, we just got a bigger bubble into 1929. Then, when it finally burst, we got the greatest depression in all of modern history!

Since the Fed and other central banks were created, they have always manipulated short-term interest rates to try to encourage borrowing and spending in slowdowns – to make the natural economic cycle “go away.”

And every time, it suppresses the economic cycles that were already in place, until finally they come roaring back.

So it always strikes me as funny to see highly educated, seemingly reasonable people in pin-striped suits and pantsuits stand in front of us and basically say that there’s a free lunch after all – that we can get something for nothing!

To them, economics is no longer a matter of supply and demand, free markets and rebalancing. They think we’ve found a way to program the economy so we never have a recession again.

All the apparent education and sophistication of these top economists, financial officials and central bankers boils down to this simple automaton explanation: if we don’t keep taking more of the financial drug that we used to keep the bubble going, like zero interest rates and QE, we will collapse and go into detox.

It’s the same logic of any extreme addict. When a serious drug addict comes off a high, he realizes the only non-painful choice is to take more of the drug.

As Charlie Sheen said: “the key to drinking is to not stop.”

My interpretation: you don’t get something for nothing, and by going into denial and doing things that make you feel better today while ignoring the consequences, you simply make the inevitable comedown worse.

To continue reading: “A Total Illusion from QE and Financial Engineering”

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Financially Engineered Stocks Drag Down S&P 500, by Wolf Richter

Posted on November 18, 2015 | Leave a comment

From Wolf Richter at wolfstreet.com:

Magic trick turns into toxic mix.

Stocks have been on a tear to nowhere this year. Now investors are praying for a Santa rally to pull them out of the mire. They’re counting on desperate amounts of share buybacks that companies fund by loading up on debt. But the magic trick that had performed miracles over the past few years is backfiring.

And there’s a reason.

IBM has blown $125 billion on buybacks since 2005, more than the $111 billion it invested in capital expenditures and R&D. It’s staggering under its debt, while revenues have been declining for 14 quarters in a row. It cut its workforce by 55,000 people since 2012. And its stock is down 38% since March 2013.

Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in the past decade, compared to $82 billion in R&D and $18 billion in capital spending. 3M spent $48 billion on buybacks and dividends, and $30 billion on R&D and capital expenditures. They’re all doing it.

“Activist investors” – hedge funds – have been clamoring for it. An investigative report by Reuters, titled The Cannibalized Company, lined some of them up:

In March, General Motors Co acceded to a $5 billion share buyback to satisfy investor Harry Wilson. He had threatened a proxy fight if the auto maker didn’t distribute some of the $25 billion cash hoard it had built up after emerging from bankruptcy just a few years earlier.

DuPont early this year announced a $4 billion buyback program – on top of a $5 billion program announced a year earlier – to beat back activist investor Nelson Peltz’s Trian Fund Management, which was seeking four board seats to get its way.

In March, Qualcomm Inc., under pressure from hedge fund Jana Partners, agreed to boost its program to purchase $10 billion of its shares over the next 12 months; the company already had an existing $7.8 billion buyback program and a commitment to return three quarters of its free cash flow to shareholders.

And in July, Qualcomm announced 5,000 layoffs. It’s hard to innovate when you’re trying to please a hedge fund.

CEOs with a long-term outlook and a focus on innovation and investment, rather than financial engineering, come under intense pressure.

To continue reading: Financially Engineered Stocks Drag Down S&P 500

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IBM Discloses SEC Investigation, Plunges to Worst Level since 2010, Even Share Buybacks Don’t Work Anymore, by Wolf Richter

Posted on October 27, 2015 | Leave a comment

This doesn’t pass the smell test: using a corporation’s credit to borrow money buy back the corporation’s shares or pay dividends to support the share price and not coincidentally “enhance” the value of employee stock options. As IBM is proving, such tactics can redound to the corporations long-term detriment. From Wolf Richter at wolfstreet.com:

Financial Engineering bites back.

When IBM announced earnings last week, it talked about all the great things it was accomplishing to compensate for the fact that revenues had plunged 14% from a year ago to $19.28 billion, and that even “revenues from continuing operations,” after accounting for operations it had shed, dropped 1%. It was the 14th quarterly revenue decline in a row. Three-and-a-half years!

It’s not the only American tech company with declining revenues. There are a whole slew of them, mired in the great American revenue recession, including Microsoft, whose revenues plunged 12%. So they – big tech – are in this together.

But turns out, IBM’s revenues, as bad as they have been, might have been subject a little more financial engineering than normally allowed.

Today, IBM disclosed that the Securities and Exchange Commission is investigating how it has accounted for these lousy revenues. The one-sentence disclosure was tucked away in a footnote on page 45 of its SEC Form 10-Q, which it filed today:

In August 2015, IBM learned that the SEC is conducting an investigation relating to revenue recognition with respect to the accounting treatment of certain transactions in the U.S., U.K. and Ireland. The company is cooperating with the SEC in this matter.

“A company spokesperson wasn’t immediately available to elaborate on the probe,” according to the Wall Street Journal.

As I’m writing this, IBM is down 4% to $138, a new 52-week low:

To continue reading: IBM Discloses SEC Investigation, Shares Plunge

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The Big Blue Canary In Armonk, by David Stockman

Posted on October 22, 2015 | Leave a comment

From David Stockman at davidstockmanscorner.com:

The IBM unbeat goes on. Its sales plunged again for the 14th straight quarter while its net income was down by 14% from last year. Even management’s dodgy ex-items earnings guidance for 2015 was lowered by 6% with only one quarter to go.

Nor is this a passing swoon. IBM’s Q3 revenues were actually back to 2002 levels. As the Zero Hedge chart demonstrates, it is hard to find a worse trend in revenue since Bethlehem Steel disappeared a few decades ago:

But the ugly sales charts above aren’t the half of it. The real story is that IBM’s relentless decline is proof positive that financial engineering is a destructive toxin that is leeching the lifeblood of the nation’s business enterprises.

Indeed, IBM is a Big Blue Canary. The abysmal facts of its self-destruction over the last decades should be a wake-up call to the bubble-blind Keynesians who run the Fed.

But these academic theoreticians and power-obsessed apparatchiks haven’t noticed—–even as they continue to jabber about the sheer noise emitted by the BLS. When it comes to what is actually important—–like the health and stability of the financial system——they have no clue about the manner in which their so-called “extraordinary” policies of ZIRP and QE have actually booby-trapped the financial system with explosive time-bombs.

Thus, IBM’s share price plunge of 35% since its peak valuation of $215 two years ago is a hint of things to come—-a warning that even the casino gamblers will dump and run when the destructive and unsustainable effects of financial engineering become sufficiently evident.

Stated differently, IBM has lost $100 billion of market cap since its 2013 peak. But that wasn’t due to a fundamental deterioration in its business model or a quantum change in the competitive environment in which it operates.

To continue reading: The Big Blue Canary In Armonk

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