Lowered Earnings

I would like to refer to an article that was pointed out by TBP. I think this article points toward a pretty bleak future, as I understand it. See

http://www.chron.com/business/article/Corporate-profits-aren-t-what-they-seem-3079696.php

They allude to some numbers from another company, without quoting directly the numbers or the method used to derive them, so like anything else, this may be inaccurate when taken out of context. So this may be another example of yellow journalism, but it agrees with what I’ve been looking at and fearing.

Earnings are coming down. It’s hard to explain why job numbers are going up, but earnings are coming down. To paraphrase the article, if AAPL and AIG were removed, the S&P earnings would be about 1.1% higher for the 4th quarter of last year (2011). A rate that is substantially below the first 3 quarters.

I don’t look at earnings, because the books can be easily cooked, making earnings look better (or worse) than they are. Like DMND didn’t pay for their nuts on time. But it is scary to think that without the two big guns, the total increase in the S&P is 1.1% in the quarter. Cooked books or not.

This quarter, around 66% of the reporting companies met or exceeded analysts’ expectations for earnings. But as the article points out, and as we pointed out last December, those estimates were being reduced. Even Bloomie had a vignette on that in January.. But until this article came out, I had no idea it was that drastic.

My indicator is to look at operating cash flow and levered cash flow for a determination of the health of the company. A company like GOOG has a huge 25% of revenue reported as levered free cash flow. (Levered free cash is kind of what’s left over, that you can invest back in your company or put in the bank). If I have time, I would like to see the ratios for the last several quarters, but I can’t find that information compiled and published anywhere, except in the balance sheets of the corporations on Edgar. That’s painful to extract..

The other thing I’d like to point out is that the article said “In cutting profit forecasts for 2012, Procter & Gamble and Pfizer both cited the stronger dollar.” I looked at the dollar curve, did a simple piecewise linear integration of 2010 and 2011, got it that the dollar went down by 12% in 2011, but PFE’s earnings only went up 4% (from the TDAmeritrade “earnings” graph). Doesn’t make sense to me. (But of course, earnings are simply cooked books, but you’d think they’d have to live with their untruths, wouldn’t you?) In any case, it looks like the companies want to say that lowered earnings “ain’t our fault”.

We know fundamentals don’t matter in our market today. But if one day they do, the article’s author’s conclusion might be right.