by Dave Kranzler, Investment Research Dynamics:
The stock market – specifically the S&P 500 and the Dow have become important propaganda tools of Fed/US Government. After all, a rising stock market means that investors are “discounting” future economic and earnings growth, right? As long as the stock market keeps hitting new records, any negative economic reports have to be invalid.
Of course, like everything else that hits the mainstream headlines these days, 90% of the time the opposite is the truth. We can call this “Bernays’ Theorem.” If you don’t know who Edward Bernays is, please use Google to look him up.
Corporate earnings have become mindblowingly fraudulent, which means that a fraudulent stock market is “discounting” fraudulent corporate earnings reports.
As an example, Microsoft reported earnings yesterday. But companies can’t just report traditional GAAP earnings statements. We get a highly unreliable version of GAAP that has been liberalized over the past 20 years to enable companies to distort the true earnings “snapshot,” enabling the presentation of reported net income that exceeds actual net income.
But the policy deciders didn’t just stop with that bastardization of quarterly earnings reports. They now permit companies to report “non-GAAP” numbers. The literal translation of “non-GAAP” is, “if all this good stuff happened that didn’t really happen and might never happen, this what our earnings might look like.” “Non-GAAP” is a complete fairy-tale.
So yesterday MSFT reports “GAAP” numbers, which we already know are distorted, in which its Fiscal Q4 operating income declined nearly 7% from FY Q4 2015. Even worse, giving MSFT the benefit if using “non-GAAP” to compare against GAAP, MSFT’s net income plunged 38%. The source of the decline in operating income was “revenue deferrals.” Huh? “Non-GAAP” allows MSFT to pretend the revenue deferrals never occurred. This revenue that may or may not ever hit MSFT’s top line.
MSFT’s GAAP numbers missed the Street consensus expectations badly. And yet through the magic of make-believe numbers, MSFT was able to smooth out any non-existing economic revenue and net income to that enables investors to act as if MSFT’s FY 4th quarter numbers were something they were not.
The Fed propaganda part: MSFT is being attributed for driving the Dow and SPX to a new record close. MSFT’s earings miss is now magically being reported as a “beat.” Beat this.
Why was my colleague, Scott,” left speechless? Because despite GAAP revenue and operating that declined measurably for its fiscal Q4 – AND revenues year over year declined nearly 9% – the stock spiked up 5.3% today. It’s inexplicable OTHER than the fact that the Fed is juicing the stock market in order to obscure the truth.
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