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Running Out Of Accounting Gimmicks: EPS Addbacks Surge Most Since Lehman
Over the past month we have seen a veritable cornucopia of "worst since Lehman" announcements. And with 2015's first quarter earnings season about to be unleashed and lead to the first of at least three and likely more sequential Y/Y EPS declines in a row, we decided to give the "better than expected" Q4 earnings season - a season which would have been an absoolute disaster without the contribution of just one company - one last look. What we found was another indication that as we headed into year end we had, we just had another, you guessed it, "worse since Lehman" moment.
The following chart created using Deutsche Bank data shows total quarterly, non-GAAP EPS for the S&P. On the surface the number is great, because at 30.35 it has never been higher. There is, however, a big red flag lurking just below the surface and flagged on the chart below appropriately enough, in red. See if you can spot it.
Still don't see it? Here is just the red bar shown on a quarterly basis: it represents the amount of pro-forma EPS, and other non-GAAP writeoffs added to the bottom line which are not earnings in any conventional sense but merely accounting adjustments meant to boost the bottom non-GAAP line.
It should be much clearer now:
And here are the biggest "addback culprits":
As can be clearly seen above, the amount of non-GAAP addbacks boosting the S&P "earnings" to their latest quarterly high has never been greater. In fact, the last time the absolutely notional value of pro-forma addbacks was anywhere near this close was in the Lehman "kitchen sink" quarter, when companies took advantage of the biggest bailout in capitalist history, to square their fudged income statement and balance sheet with accounting reality, resulting in an addback that was greater than the actual GAAP print!
Worse, this shocking divergence is finally being acknowledged by the serious people. Here is Deutsche Bank: "Mind the gap: 2014 S&P GAAP EPS is $102 or 86% of $118 non-GAAP EPS." This is the highest share of pro-forma addbacks to the EPS line since, you got it again, Lehman.
It also means that on a GAAP P/E multiple basis, the S&P is trading well above 20x!
More improtantly, if only looks at the only trend that matters, tht of GAAP, unadjusted, unfudged earnings, Q1 2015 will not be the first quarter that posts a Year over year decline. In fact, on a GAAP basis not only are 2014 EPS lower than 2013 (down 4.3% from 107.4 to 102.8), but there have already been three quarters in the past year in which GAAP EPS was lower.
The only difference is that now, with all possible non-GAAP addbacks having been exhausted, for the first time since Lehman we are actually going to see a non-GAAP EPS decline, and then another, and then another. Because, as we warned in December, the US is now in a profit recession which, as also shown here last week, explains why the US economy itself has also likely in a full blown economic recession as well.
And now, with all that said, bring on Q1.
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New Enron model disquising another crafted character to [burn baby burn].
Mr Lay....are you smoking crack?
It's gotta be one of my fondest memories.
Fair enough Tylers,
but wake me when any government, anywhere on the planet adopts an honest accounting system.
You want massive failures? That's where they are and will be.
Fundermentals
I'm busy building neural pathways. Plenty of work to be done this recession.
We keep Lehmaning some folks.
And this is happening even as shares are bought back to help boost EPS.
To remove that effect, it would be interesting if the Tylers could put up a graph of total GAAP and non-GAAP net income (not per share, but gross earnings) for the S&P 500 and Dow companies.
++++++++
Fuck Lehman, and other televised Libor scandals, not to forget MF Global. These fucker's are going down based on Quantitative Easing faked printed money. It's called conterfeiting the Universal Dollar Status under petrodollar advancement to achieve further theft. We will hunt you down. It will be executed and exposed to top level of the kangaroo Department of Justice and SCOTUS. We will bring down this curruption within. The gift wish of new advancement won't arrive in the mail.
Excellent analysis Tyler(s). Thanks!
If I had a nickel for each ZH article that metions, "since Lehman", I would be multi-millionaire!
Probably because your too fucking stupid to make the Bear Stearns connection.
http://www.jpmorgansecurities.com/pages/am/securities/home
How can you wrap up denial cunt?
Ahh lemme get this right: You are referencing the JPMorgan web site home page to prove your point, which seems to be to call another poster a bad name?
I have an immeadiate case of cognitive dissonance...It's like the US President referencing the 4th Amendment to the Constitution to justify signing the NDAA (which he may have done, come to think of it).
Dude, you maybe could have picked a little better reference and been a bit more specific about it before using it to justify calling someone else 'too fucking stupid'...
Please give me a fucking break. Sorry to hurt your friends feelings. Go seek counseling. Now fucknuts, where did the Bear Sterns money vanish and who's account ledger?
Answer that simple question twat. I gave you a link. Jamie was a rockstar back then.
You have been saying that since Lehman.
Hey wait a minute man... M2M says the Fed and the market have already priced this stuff in & shit... And you just wait and see the cornsumer and March autos sales. That'll show ya...
/s
This assumes REAL earnings matter. As long as the algos are on the loose the market is going higher....up, up, and away...
GAAP is a baaaad word...
GAAP is a baad four letter word;)
CEOs that pander to Wall Street every quarter are part of the problem. In order for them to fight their recession in profits and addbacks they'll attack the operating costs on their balance sheet. So expect to see many more job losses in the near future. This of course will fail as you can't cut costs to profitabilty you need to innovate. BUt these bonus sucking CEOs know that and will quietly retire early and leave the chaos to the next guy. Take note, the collapse in corporate America has begun.
"Take note, the collapse in corporate America has begun."
Let us hope you are right. It is only when the Fascist (and Socialist/Comminist et. al.) segments of society are purged that we can begin anew.....
In 2002, investors were outraged over the accounting shenanigans that were discovered at Worldcom, Adelphia, Enron, etc. Today, they all seem to welcome it with open arms.
Well yeah. Investors have been replace by algos - didn't you get the memo?
The outrage occurred because the investors lost their capital on their shares of Worldcom, Enron, etc. As long as the value of their equity investments is rising, no one cares about accounting shenanigans. Wait a year or two when the equity markets go down and shady accounting becomes more apparent - the "outrage" will return.
"Running out of accounting gimmicks to artificially boost your quarterly non-GAAP EPS?" - Better call Saul.