Behold The Magic Of Accounting In First Half Earnings

Tyler Durden's picture

Now that Q2 earnings season is over, here is a summary of how all those hundreds of billions in stock buybacks have done.

According to Deutsche Bank, in Q2 EPS, or rather non-GAAP EPS, for S&P 500 stocks rose to $29.50, an impressive increase of 7.9% from the $27.23 a year earlier. This follows a not too shabby 4.4% increase in Q1's Y/Y increase from $26.76 to $27.95.

The problem, as we showed last quarter in "The Truth About First Quarter S&P 500 Earnings", is that virtually all of this increase is due to non-GAAP adbacks, in effect nullifying the impact of the major drop in shares outstanding as companies scramble hand over fist to issue debt and buyback their float. In fact, as we showed last quarter, GAAP EPS declined 2.2% Y/Y.

So what about GAAP Q2 EPS: the answer - a nearly meaningless 1.8% increase, or over four times less than the non-GAAP increase.

So how does the GAAP vs non-GAAP change compare for Q1 and Q2? We show it in the chart below.

Finally, now that we can compile the first half data using the first two quarter data for both 2013 and 2014, we can conclusively state that if it weren't for the accounting magic behind non-GAAP, which includes such addbacks as tens of billions in litigation costs for the TBTBF utilities, pardon banks, pension addbacks, and not to mention hundreds of billions in restructuring addbacks resulting from the mass termination of hundreds of thousands of workers who miraculously fail to trickle through to the BLS' own "survey" data, things would hardly be as rosy as portrayed by the sellside. In fact, EPS growth in the first half was either 6.5%... or 0.2%. Depending on whether or not one believes in accounting magic.


Finally, those wondering what the benefit from buybacks to the bottom line has been, here is the breakdown, as well as the EPS growth by sector.

In other words, excluding buybacks, GAAP EPS in the first half would have been negative.

To summarize: for all your non-GAAP adjusted "magical" accounting, "growth" propaganda, there is the mainstream media. For everything else, there is Fed-induced multiple expansion.

Source: Deutsche Bank

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NotApplicable's picture

Good thing that non-GAAP is generally acceptable.

AldousHuxley's picture

Sarbanes Oxley act of 2002 to prevent another Enron fraud gave way to exempted startups like facebook and twitter with Obama's JOBS ACT.


Non-GAAP and SOX exemption = dotcom bubble 2.0


but they are starting to hire SOX experts now, so popping is in the works.

TheRideNeverEnds's picture

stocks up, bonds up, oil up, dollar up, gold up, VIX up


Its magic bitchez, aint gotta explain shit!

FightingtheFed's picture

Can we just end this madness and eliminate Wall ST with all of its crooks?


My  hate for this filth grows each and every day..

Doubleguns's picture

NonGAAP my paycheck please.


deflator's picture

 They probably are cooking the books with your paycheck.

AldousHuxley's picture

well...your paycheck goes back to the TBTF banks where you have checking account with or have mortgage with.


and only after uncle sam gets his cut.

Sean7k's picture

Isn't this the reason all the different surveys are created? To sell bullshit? Is this not the raison etre for statistics in the first place?

There are very few numbers we need: production, capital investment, research and consumption. If, and this is a big if, they are reliable, then we can effectively diagnose the economy.

LawsofPhysics's picture

"Mark to fantasy" forever!!



AldousHuxley's picture

that's magic available for TBTF firms.


non-GAAP scam is available for all corporate personhoods. 


none of which are available for individual tax accounting.

Rainman's picture

This Douche Bank disclosure will be on the front page of the Financial Times tomorrow !


Ban KKiller's picture

It all starts with lying accountants. Enron, Worldcomm, etc. 

Why not do away with GAAP anyhow? Or FASB? The trust is LONG GONE! Anyone who believes any figures from D.C. or NYC is an idiot...or a consumer. 

Death, by law, to the banksters and their stooges. 

Hired an attorney to speak for me in court re:foreclosure complaint. Going after them for forged note. Gonna have a crowd! 

ejmoosa's picture

Starts with an overly complex tax code that justifies the hiring of lying accountants....

AldousHuxley's picture

accountants using lawyer's playbook to job security.

increase complexity to a point where jobs are created to sort through the complexity. Then add on state certifications to limit those who can practice.

Squid-puppets a-go-go's picture

besta luck with your case

spend some time on 4closurefraud website if you afrent already familiar with it

JenkinsLane's picture

*Off Topic"

Just saw a Malaysia Airlines ad on ZH - that's my WTF moment for today.

kchrisc's picture

The new TV ad for Malaysian Air has Clint Eastwood saying:

"Do you feel lucky punk? Well, do you? Malaysian Air; All out of snake-eyes?"

Drunk In Church's picture

The whole economy will soon burn.  I don't see the DOW getting past 17.  Deflation, deflation, deflation.  Learn it, live it, love it.

Squid-puppets a-go-go's picture

lol its prolly algorithmic targeted marketing that has mistaken your disinformation investigations for travel interest

kchrisc's picture

"It's not lying if it's all bullshit."

An American, not US subject.


"Dear IRS,

According to my non-GAAP rules, I not only had no income in the latest period, but you owe me $1Bil.

Please remit to the same account of mine that you normally steal from.

Thanks and cold regards,

A victim of yours."

HUGE_Gamma's picture

Why are share buybacks not a valid reason for stock price appreciation- according to you?

huggy_in_london's picture

Well, I don't think that is the issue here.  No one denies that everything else being equal less script will mean higher prices.  But the issue is that the drift away from non-gaap (ie non standardised in effect) accounting is giving investors a false reality and a fake basis to expand multiples.

HUGE_Gamma's picture

Isn't that the point for investors? Higher prices? Why does it matter if the company makes more money or it gets bought out at a premium by a competitor?

taraxias's picture

Because one is real, the other is fantasy. And fantasies have a habit of blowing up in people's faces at the worse possible time (hint: retirement). 

FreeMktFisherMN's picture

The thing is, it own't matter in the end, because if the Fed keeps inflating and buying bonds to suppress rates, DCFs will look good still as they won't be discounted properly as they should as the denominator with the rate is so low. But it won't matter how lofty the prices get because in real  terms it won't mean real wealth is increasing. Aka, Zimbabwe stocks probably did pretty well but in real terms wouldn't buy anything.

Purchasing power cannot be printed. So I would say short the hopium not via TBT because they will print to maintain the illusion of solvency, but rather short hopium and go long reality via PMs, agriculture, guns, companies with exposure abroad with trends of economic liberalization and resources, and commodities. 

Sean7k's picture

Stock value is based on future earnings and profits. If a company invests in buybacks rather than capital and research, future earnings and production will be compromised. Thus, the value should drop to reflect this. While it enhances the present value of the stock via a smaller number of shares divided by current value, it is not a worthwhile investment in a longer run.

To confuse stock values in a liquidity laden environment just makes it worse.

farmboy's picture

I can add to that that mostly these buybacks are financed by issuing debt that is short term and long term a drag on earnings and significantly raises the risk profile of the company.

Squid-puppets a-go-go's picture

farmboys answer is the most salient one to your question, hugegamma.

If the buybacks were conducted out of CAPITAL / PROFIT, then your insinuation has merit.

But as they are only funded out of newly acquired debt - especially in a context of historically absurd debt and P/E ratios - it is simply a recipe for magnifying the severity of the next downturn

AldousHuxley's picture

Stock buyback means corporate managers clueless as to how to grow the compay using capital so they use the money to just increase the value of their options bonuses temporarily before they bolt.


When you buy what you are selling with your own money, it is not real sales revenue. But if it is not real, then why would anyone do it? Because acting like doing something gets you bonuses.

seek's picture

The appreciation is bogus. Because the Fed set the interest rates so low, companies can borrow at close to no cost. So they borrow to buy back stock, inflating the stock price at the expense of higher debt with low serving costs. This is a fucking time bomb if rates ever increase and the need to to roll the debt, and it's a profit sponge if they intend to pay it off.

In a nutshell, it's an unsustainable, Fed-induced sugar high accounting game. None of this actually helps the company -- indeed long-term it exposes the company to risk and/or lower profitability. But it's done because short term it raises the EPS making it look better on paper. It also means that when senior management's options vest, they're more valuable as well. So basically everyone is incentivized to make a short-term decision with long-term consequences that aren't consistent with the apparent increased value of the stock.

E.g. it's a lie.

TheSecondLaw's picture

Why are share buybacks not a valid reason for stock price appreciation- according to you?


Because the idea of business in a sane world is to grow your profits, not to shrink into them.

HDaryl's picture buying back shares with copious amounts of cheap money on short terms.......



hairInTheSoup's picture

one guy have nicely imaged once on zh :

it's like you take 100$ from your right pocket then put it in your left pocket & says you've just made 100$.

but are you really 100$ richer ?


as simple as that (as simple as eco would be if not for this bs reserve rate to create debt paradigm)


TheSecondLaw's picture

Two guys decide to make a couple of bucks out of the crowds at a football game by selling beers in the parking lot.  They each buy a sixpack and set off to the game.  It's a hot day and quite a distance to the stadium.  After they've been walking for a while...

Guy A:  How much are you charging for a beer?

Guy B:  Two bucks.

Guy A:  Okay, I'll buy one.

Guy A pays Guy B $2 and drinks the beer.  After a while...

Guy B:  So how much are you gonna charge for a beer?

Guy A: Same as you - two bucks.

Guy B:  Okay, I'll buy one.

Guy B pays Guy A $2 and drinks the beer.  After a while... etc etc

By the time they reached the stadium they had both sold all their beers to each other and neither was richer by a dime.

FrankTrades's picture

You're kidding me, right?  One can borrow money to buy back shares without producing anything and you want that credited to earnings?

FrankTrades's picture

You're kidding me, right?  One can borrow money to buy back shares without producing anything and you want that credited to earnings?

RaceToTheBottom's picture

I get 150 NON-GAAP  MPG with my 2002 Ford Escape.

I don't like to say that my real MPG is 15 MPG

SanfordandSon's picture

Ode to the Bull

Yields down

Stocks up

That's the way ...

Seasmoke's picture

The snake eating its tail, comes to mind.

starman's picture

Well they're generally accepted no? 

The_Dude's picture

Had a thought run through my head yesterday.....what happens when corp bonds go illiquid like MBS in 2007/8 due to this outrageous bond bubble?  Especially the junky variety.  Shit show extraordinaire or a chance for the FED Crony Cartel Bank to pick up a major piece of the US Corp on the cheap.

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." - Thomas Jefferson

FreeMktFisherMN's picture

it's all contingent on 'high quality collateral', aka Tnotes. Low rates mean the denominator in DCF statements is minimized, so future flows don't get discounted in any economic sense. That is what is making for these phony valuations. 

There are so many fools/desperate people out there chasing yield that it seems there will be buyers for junk once again to dump onto, and even if not, TARP 2.0 can always be implemented. 

Interest rates cannot go up because debt expense on interest is already huge.  And they will try to keep rates suppressed via inflation, because contrary to conventional thinking, high rates does not mean strong currency. Low rates means currency is desired and debt issued in it is well bid. High rates means people demand more fiat in to compensate for the risk. Low rates are only warranted though when savings are abundant. Rates deserve to be a lot higher on the FRN but the Fed and the entire educational propaganda system teaching debt is wealth and nothing about sound money is what they are literally banking on. 

High rates will not crush PMs. High rates means more interest expense means moar printing to 'pay off' debt, aka, the end game. 

At EOD, nobody knows how this 'unwinds' but bottom line is living standards will go down, entrenched corporations and banks will do what Jefferson says in your quote above, and neo-feudalism will emerge, and not even at least like that of way back in  Europe, where there was some ability for people to roam (whether they had leverage to do so notwithstanding) as now surveillance state is what also accompanies this, and any technological advances more and more are not really benefitting society at all but just leading more so to police state.

Darksky's picture

So today is the first day of classes for getting my MBA. I was getting prepared for the Financial Accounting class. Just finished reading and outlining chapter 1 which was on GAAP framework and related concepts. Walk downstairs to check ZH and read this article. Heading back upstairs to rip up my outline and tear the first chapter out of the book. What a waste of time today was.

HDaryl's picture

Fear not, the Auditing class will be even more fun. That's where you'll learn what audits should be, how they should be conducted, what rules should be applied, and why. Yet, you'll read the news and learn that the exact opposite happens in real life.


Try eating some mushrooms before you go to any accounting or auditing class, and the overlay with reality will make more sense, and be more entertaining.



scubapro's picture



where can a regular person find GAAP earnings?   the sp indices site likes to use 'as reported' (non gaap it appears) and 'operating' earnings.   the sources noted IBES and DB...where is their data on the net?

socalbeach's picture

Firms repurchasing shares vs paying dividends should have no effect on share price.  See question 2(b) at the following link:

Singelguy's picture

You cannot make that generality. If a firm is paying dividends and has cash in the bank and uses that cash to repurchase shares, then that assertion is correct. However, if a firm paying dividends borrows the money to repurchase shares, equity is replaced with debt. If the interest rate on the debt is less than the dividend rate, the firm saves money, in the short term, but the balance sheet is weaker. When interest rates finally begin to rise and the interest rate on the debt exceeds the dividend rate, net income declines, and earnings per share decline. Share repurchase with borrowed money is a short term method to increase EPS which boosts share price, which boosts management bonus but it is a gross misallocation of capital. It does nothing to grow the firm or grow the economy.