GAAP

Update: For those curious to learn more about this phenomenon, here is ZeroHedge's first take on this paradox from April 2009!

Stocks added to their rally today when Gasparino leaked news that MS was going to have a "solid" quarter and they were going to beat GS. Morgan Stanley has $187 billion of public debt according to Bloomberg.  Just eyeballing it, the average maturity looks close to 4 years, but let's be conservative and assume it is 3 years. So MS 3 year bonds widened by over 300 bps during the quarter.  3 year MS CDS widened by 380 bps (from 113 to 493), so the move in bonds actually outperformed the move in CDS. Is MS planning on taking a massive gain on marking their own bonds?  There were stories of MS buying back their own bonds - a great move if they though they were cheap, but a critical move if they were planning on taking a gain and didn't want to have to give it back in the future if their credit spreads tightened. Goldman has slightly less debt at $178 billion, but the spread widened far less. Is this why the MS CEO is so confident they will have a good quarter and beat GS?  I honestly hope not.  If the CEO of MS is playing accounting games (totally legal, but stupid) on their own spreads and thinks the markets will respect that, than I am very nervous about what is going on there.

Looks like the Silvercorp story is not going away any time soon. Just released by Rui Feng, SVM's CEO and Chairman, is the latest hastily written (with some glaring typos) refutation of today's allegations by Alfred Little (and the "short industry" in general apparently) that the Chinese company is merely another fraud. This is hardly the last word in this ongoing fiasco, and we fully expect Muddy Waters to get involved as well.

Earlier today, we cynically predicted that by purposefully leaking the Autonomy news, HPQ was merely "doing its best to mask ugly news later." Sure enough, HPQ has just released earnings early, with the stock being halted, and for a good reason. In the PR we find the following stunner (totally expected to Zero Hedge readers): "HP estimates full-year FY11 revenue will be approximately $127.2 billion to $127.6 billion, down from its previous estimate of $129 billion to $130 billion. FY11 GAAP diluted EPS is expected to be in the range of $3.59 to $3.70, down from its previous estimate of at least $4.27, and FY11 non-GAAP diluted EPS is expected to be in the range of $4.82 to $4.86, down from its previous estimate of at least $5.00. FY11 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $1.16 to 1.23 per share, related primarily to restructuring and shutdown costs associated with webOS devices, the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges." Whoever followed our advice to pound the robot driven spike earlier, congratulations.

After it was disclosed that Bank of America's firesale of its China Construction Bank is not going as well as expected, Moynihan's company, which was trounced by the market in the past week, continues to shed assets, this time offloading its $8.6 billion Canadian credit card portfolio to TD Bank for an unknown amount, a deal about which all BAC said was that the "transaction is expected to have a positive impact on the company's Tier 1 common and tangible common equity and the respective ratios." So it may also have a negative impact? That's encouraging. This news follows earlier disclosure that BAC has sold its UK and Ireland credit card business. Unfortunately for BAC shareholders, as long as the CFC bad bank is not nationalized by the Fed (sending its tracking CDS to parity with US default risk) such incremental asset sales will continue. Which also means that as BAC retains the non-performing assets, it is forced to sell its cash-generating trophies. At what point will there be nothing left of BAC but a husk that promises to everyone that going forward its Tier 1 ratio will be over 6% for real this time. And how long until the next Reps and Warranties lawsuit against BAC's mortgage handling practices?

Yes, we know Apple is a cash juggernaut, and could easily lever up its cash and equivalents balance, retain a 10% Tier 1 Capital Ratio and be one of the largest (and perfectly solvent) banks in America (just think of what $760 billion in fractional reserve power would do). But what about the benefit to Uncle Sam? Well, we decided to pull the cash taxes paid Apple disclosed on its cash flow statement for the purest definition of actual taxes paid each quarter, avoiding all that GAAP vs Tax accounting mumbo jumbo, and compare it to the cash the company has had at any given quarter end period. Prepare to be surprised...

Here is what the street expects:

• Revenue:$25,020.4
• Operating Income: $7268.8
• EBITDA: $7869.9
• EPS GAAP: $5.87
• EPS: $5.87

The actual results are due out any minute.

Stock volume, hiding for so long, finally made an appearance. The all dominating ES, which determines the stock price for virtually every other security in the stock market, surged to 3.7 million shares, the 3rd highest in 2011, with only the post-Fukushima nuclear explosion panic from March, when the Nikkei briefly went bidless, higher, and also the third highest since the Flash Crash days of last May. As reported earilier, now that all support lines have been breached, the next bounce can be expected at around 1,244 or the 200 DMA. Should that be taken out and it will be to make way for Operation Twist 2, we will promptly see the 1,150s once again. After that, we are straight down to Jackson Hole levels.

We are about to experience the consequences of decades of really bad decisions.

Following the report of the leaked HP memo which indicated much more weakness in the current quarter than expected, the firm was forced to scramble and released earning early, with the full number coming out at 7:30 EDT. And neither the market, nor John Paulson who recently bought a $1 billion stake in the company, is happy with the disclosure. While the company beats on current quarter top line and EPS, ($31.63 billion vs $31.55 billion exp. revenue, $1.24 EPS vs $1.21 EPS expectation), it was all about the outlook. The firm said it is "revising full year GAAP diluted earnings per share outlook down to at least $4.27 and non-GAAP diluted earnings per share outlook down to at least $5.00." This is a problem as previously it had seen the full year EPS range at $5.25-$5.28, and the outlook was $5.24. It also said that for Q3 "HP estimates revenue of approximately $31.1 billion to $31.3 billion, GAAP diluted EPS of approximately $0.90, and non-GAAP diluted EPS of approximately $1.08." For the full year HP now expects revenue in the range of $129 billion to $130 billion. Previously this was $130-$131.5 billion. And for all those scratching their heads how long before the Japan get out of jail free card is used, here it is: "HP’s revised outlook for the third quarter and the full year fiscal 2011 reflects an expected near-term impact from the Japan earthquake and related events, continued softness in sales of consumer PCs, and reduced operating profit expectations for Services. "

• Diluted EPS:
  • GAAP: $2.31, up 17 percent;
  • Operating (non-GAAP): $2.41, up 21 percent; Consensus of $2.30
• Revenue: $24.6 billion, up 8 percent, up 5 percent adjusting for
  currency; Consensus of $24.0 billion
• Gross profit margin:
  • GAAP: 44.1 percent, up 0.5 points; Below consensus of 44.6%
  • Operating (non-GAAP): 44.5 percent, up 0.8 points;
• Cloud revenue 5 times first-quarter 2010 revenue;
• Full-year 2011 Operating (non-GAAP) EPS expectations raised to at
  least $13.15 from at least $13.00.

Just as JP Morgan, Bank of America takes accounting manipulation to the next degree and lowers its credit loss provision to $3.8 billion, down $6.0 billion from a year earlier, and $2.3 billion from Q4, even though the actual amount of charge offs sequentially barely declined from $6.7 billion to $6.0 billion. "The provision for credit losses was $3.8 billion, which was $6.0 billion lower than the same period a year earlier. The provision was lower than net charge-offs, resulting in a $2.2 billion reduction in the allowance for loan and lease losses, including the reserve for unfunded commitments, in the first quarter of 2011 (net of reserve additions of $1.6 billion related to consumer-purchased credit-impaired portfolios as noted below). This compares with a $1.0 billion reduction in the first quarter of 2010." Even so, the company still was unable to goal seek its EPS consensus of $0.26, coming in at $0.17. Without this accounting gimmick, BAC would have had a sizable loss in Q1.

Alcoa misses revenue, which prints at $5.96 billion: a $100 million miss to consensus. EPS in line with GAAP expectations of $0.28. EBITDA (cash flow proxy) of $955 million misses by a major $60 million. CapEx of $204MM is massively lower than consensus of $475MM (granted from one analyst): capital spending continues to be latent.

A stock falling due to a cut in FY outlook is nothing new. However, a stock cutting its outlook due to its biggest customer refusing to accept contracted shipments "until it reduces inventory levels" is probably the first confirmation we have ever seen of the massive inventory overbuild in China. The plunge in AMSC stock afterhours by over 40% is not surprising considering its entire business model is now turned upside down. What also should not be a surprise is when ever more companies delivering into China commence with comparable announcements. And with China drowning in excess inventory of virtually everything, this certainty is just a matter of time.

Large US corporate defined-benefit pension plans experienced record sponsor contributions last year, consulting firm Milliman Inc. reported in a study, saying a decline in discount rates fueled record levels of pension expense and cash contributions.

I first published this essay in the Summer of 2009. At that time the whole world believed Obama’s Stimulus Program was working at that the stupid greenshoot recovery was underway. Today I’d like to reprint this essay because the same structural issues that plagued the US in 2009 are still valid and because this piece proved, two years ahead of time, that the US would suffer a massive economic collapse.