Lying about Earnings

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  • Thu, Jan 08, 2009 - 07:16pm



    Status Bronze Member (Offline)

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    Lying about Earnings

Several days ago the CEO of Satyam Computer Services, one of the largest outsourcing companies in India, revealed that it had inflated its earnings by over $1 bn.  The shockwaves hit the company and the Indian stock exchange hard.  It turns out that this was not a one time event; the company had been fiddling the books for years.


This morning, December 8, 2009, a gentleman named Marshall Mays from a company called Emerging Alpha’s Asset Management was on  He is an intelligent looking fellow in a large bow tie who, in commenting on the Satyam debacle stated unequivocally “All companies lie about their earnings.”  He went on to use the example of GE who he said had been “smoothing out” their earnings for years.  Perhaps what was so remarkable about this three minute interview was that there was not a scintilla of outrage or shock on the part of Mr. Mays or the interviewer.  Such malfeasance has become expected; the implication is that only a fool would ever believe anything a publically held company disclosed about its financial position.


I suspect that Mr. Mays is right.  Increasingly most, if not all of us are coming to the conclusion that Mr. Mays is right.  Aside from the ramifications of what that conclusion means for the financial markets it has a more fundamental consequence.  You cannot have a civil society based on core truth that everyone lies.  It may seem sophisticated for a brief period of time but in the near term basic institutions start to crumble.


We know from quantum physics that everything is in motion, everything changes.  Heisenberg discovered that energy is a wave and only appears to be a particle when it is observed.  In that moment of observation the infinite field of the wave is collapsed into a particle.  It is analogous to the human experience of choosing from virtually limitless facts and experiences and telling a story.  In telling the story we collapse everything into a point in time.


We have been telling the story of the free market for some time.  It has increasingly occupied our awareness as the money supply has exploded over the past four decades and more and more of us became involved in the markets, either as investors or passive participants via the mutual funds in our 401k’s.  The story said that the unfettered market was good and it produced vast amounts of goods and services as it seemed to grow and expand.  Except it didn’t really.  Now we are learning that the wealth that it produced is largely illusory.  And now we know that the whole system was cooked, from the development of worthless derivatives to the ratings agencies that validated them as triple A to the accounting firms who certified their worth (more to come in the news about the accounting firms, by the way) and now even the CFO’s who supposedly got religion after Enron and WorldCom.


The problem with this story is that it cannot be contained to a segment of the market like the bubble and it is truly global in its scope.  There is no place to run or hide or sit in judgment.  This story is getting worse and worse, not only in terms of the numbers on the exchanges and the balance sheets but in the exposure of the human folly that has brought it on.  And yet Madoff is still out on bail, the rating agencies are hopelessly tardy in following the downward curve with belated downgrades and the free market is being swallowed up with government bailouts and buyouts as true believers proclaim that it should all be allowed to collapse.


There is something perversely addictive in watching the news roll in day after day.  It is much like looking at the aftermath of Katrina, seeing people rescued by helicopter, watching the crowds at the Superdome, understanding that our image of ourselves as a nation had been dealt a body blow.


But let’s understand that there are many other facts out there to fashion a story with.  The rate of scientific discovery is compounding as is the progress towards free energy sources.  Medicine is beginning to shrug off the grip of the pharmaceutical companies and expand the use of treatment modalities that have heretofore been relegated to the lunatic fringe.  Information on virtually any subject abounds on the Internet.


We need to start telling ourselves a different story as the current one ceases to hold together.  We need to find some truth other than everything is a lie.  Our survival depends on it.


  • Fri, Jan 09, 2009 - 10:25am



    Status Silver Member (Offline)

    Joined: Aug 21 2008

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    Re: Lying about Earnings

Countless times I have heard a CEO make a statement and only days later the
numbers show something else.  Could be years later a company’s earnings
are restated for years or quarters.  I have come to the conclusion not to
believe any of them.  I have no idea who cooks the books and who does not.  I
don’t invest in any company, I trade.  Make my profits, close the position and
move on to the next trade.
ETFs have no earnings.

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