David Stockman; "THE “EARNINGS EX-ITEMS” SMOKE SCREEN"

"...Wall Street’s institutionalized fiddle of GAAP earnings made PE multiples appear far lower than they actually were, and thereby helped perpetuate the myth that the market was “cheap” during the second Greenspan stock market bubble. Thus, as the S&P 500 reached its nosebleed peaks in mid-2007, Wall Street urged investors not to worry because the PE multiple was within its historic range.

I believe what was/is reported as the value of companies

is not comparable to the values before "ex-items" was/is compared historically,
which in my view is fraud on the investing public

assented to by federal regulatory authorities

governed by our elected representatives.

In fact, the 500 S&P companies recorded net income ex-items of $730 billion in 2007 relative to an average market cap during the year of $13 trillion. The implied PE multiple of 18X was not over the top, but then it wasn’t on the level, either. The S&P 500 actually reported GAAP net income that year of only $587 billion, a figure that was 20 percent lower owing to the exclusion of $144 billion of charges and expenses that were deemed “nonrecurring.” The actual PE multiple on GAAP net income was 22X, however, and that was expensive by any historic standard, and especially at the very top of the business cycle.

I believe the investing public was lied to by large companies

with permission from federal regulators governed by our elected representatives,

including the Federal Reserve, the SEC among others.

During 2008 came the real proof of the pudding. Corporations took a staggering $304 billion in write-downs for assets which were drastically overvalued and business operations which were hopelessly unprofitable. Accordingly, reported GAAP net income for the S&P 500 plunged to just $132 billion, meaning that during the course of the year the average market cap of $10 trillion represented 77X net income.

...Wall Street claimed that the S&P 500 posted cumulative net income of $2.42 trillion. In fact, CEOs and CFOs required to sign the Sarbanes-Oxley statements didn’t see it that way. They reported net income of $1.87 trillion. The difference was accounted for by an astounding $550 billion in corporate losses that the nation’s accounting profession insisted were real, and that had been reported because the nation’s securities cops would have sent out the paddy wagons had they not been.

...from peak-to-bust-to-recovery, the S&P 500 had thus traded at an average market cap of $10.6 trillion, representing nearly twenty-three times the average GAAP earnings reported during that period. Not only was that not “cheap” by any reasonable standard, but it was also indicative of the delusions and deformations that the Fed’s bubble finance had injected into the stock market.

...the four-year average experience for the 2007–2010 market cycle is illuminating.

It looks like many current valuations are not what they appear to be,
when compared to valuations from most of our financial market history.

The Wall Street “ex-item” number for S&P 500 net income during that period overstated honest accounting profits by an astonishing 30 percent. Stated differently, the time-weighted PE multiple on an ex-items basis was already at an exuberant 17.6X. In truth, however, the market was actually valuing true GAAP earnings at nearly 23X.

It seems to get the economy to "recover",

federal regulators governed by our elected representatives

gave large companies permission to lie.

This was a truly absurd capitalization rate for the earnings of a basket of giant companies domiciled in a domestic economy where economic growth was grinding to a halt. It was also a wildly excessive valuation for earnings that had been inflated by $5 trillion of business debt growth owing to buybacks, buyouts, and takeovers."

http://www.zerohedge.com/news/2014-01-11/non-gaap-non-sense-david-stockman-slams-earnings-ex-items-smoke-screen
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I believe our elected representatives consented to a fraud on the public.

 

I believe our elected leadership on both sides of the isle are responsible for the fraud.

 

I believe a good chunk of the economic "recovery" has been a façade.

 

If artificially imposed stability created more uncontrollable instability

we may be in the midst of the biggest financial bubble in the history of the world,

as the rest of the financial world takes many of its cues from the US.

 

On March 16, 2009, the financial crisis ended after federal regulators,

pressured by some of our elected leadership, proposed to change the rules

as to how some assets were valued.

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"On March 16, 2009, FASB proposed allowing companies to use more leeway in valuing their assets under "mark-to-market" accounting, an act that could ease balance-sheet pressures many companies say they are having during the economic crisis.

...FASB issued the official update to FAS 157 that eases the mark-to-market rules when the market is unsteady or inactive.

...It was anticipated that these changes could significantly increase banks' statements of earnings and allow them to defer reporting losses.

The changes affected accounting standards applicable to a broad range of derivatives, not just banks holding mortgage-backed securities.

Opponents argue that the implications for investors are that the valuation of assets underlying such securities will be increasingly difficult to analyze, not less so. An example would be determining a company's actual assets, equity and earnings, which will be overstated if the assets are not allowed to be marked down appropriately."

http://en.wikipedia.org/wiki/Mark-to-market_accounting.
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I believe the investing public has been misled

by some of those who stand to profit and/or retain or increase political power.

 

I think many of those who were responsible for creating the financial mess in the first place were let off the hook for responsibility, and then profited greatly from the aftermath, at the expense of everyone else.

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"The Fed will cut mortgage bond purchases to $35 billion from $40 billion. Treasury purchases will go from $45 billion a month to $40 billion a month."

 

http://www.forbes.com/sites/samanthasharf/2013/12/18/bernanke-begins-to-slowly-taper/

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$40 billion per month x 12 = $480 billion per year

 

The Federal Reserve is now financing $40 billion per month of federal spending
and subsidizing the real estate industry with $35 billion per month
with money that didn't exist beforehand. 

 

Funny money.

 

Our elected leaders are allowing it to happen,

so they can remain in office.

 

Our elected leaders are stealing from the poor to give to the rich
to maintain a more pleasant present for themselves and their cronies

at everyone else's expense, via a control fraud on the public.