Wall Street’s Proctological Exam

It’s that time of year again…

It’s earnings season.

The time when America’s corporations pump their quarterly report cards.

Wall Street positions earnings reports as vitally important for your investment decision-making.

We’re told they give us a true and fair look at each company’s current value… and insight into where stock prices are headed.

Hold on.

After the last 15 years, tracing all the way back to the dotcom bubble, do you still believe that propaganda?

The way Wall Street presents earnings reports feels like an invasive, irritating medical procedure performed by a quack doctor.

These reports are riddled with dirty tricks, accounting sleight-of-hand and brazen conflicts of interest.

Let me show you how it all works…

Gaming the System

First, corporations themselves provide earnings guidance to Wall Street analysts who set “consensus” earnings estimates.

It’s like giving your parent’s advanced notice of the high school grades you’re going to get. It’s a clever way to manage expectations.

And that’s exactly corporate America’s process.

They provide earnings guidance that underestimates eventual earnings.

So a company can report earnings that show it made less money than last year. But what’s the headline you see in the media?

“Scam You Again, Sucker” Corp. beats Wall Street analysts’ expectations. Great news! Its share price hopefully goes higher.

The analysts play along with numbers provided by corporations because:

  1. They fear losing access to management, which they need to perform their jobs.
  2. They fear alienating the same corporations their employers are trying to win other business from.
  3. They get swept up by a herd mentality and cooperate because everyone else is doing it.

Starting to feel uncomfortable? You should.

But there’s more…

Inside Information

There’s also something called a “whisper” number.

This is the unofficial earnings forecast that gets passed among Wall Street insiders.

The whisper number is what analysts really think a company’s future earnings will be, not what the company’s guidance is.

It’s also different than the analysts’ consensus figure given out to the public.

You and I don’t get this information. Whisper numbers are only shared with the wealthiest Wall Street clients and insiders.

And here’s what it means in the real world…

An average investor may lose money because he thought a stock would rise after its actual earnings beat a consensus estimate.

But a Wall Street insider won’t. He gets the “whisper” earnings number.

And he knows that if actual earnings beats the consensus, but fails to beat the “whisper,” shares will fall.

If you don’t know the whisper number, you can’t play the “big boy” game.

How are you feeling now? Even more unsettled and violated?

But wait. There’s more…

Cooking the Books

Executive compensation is tied to a company’s share price.

If a company misses earnings projections it can destroy a stock. And a declining stock price means declining executive pay.

So there’s immense pressure and incentive for executives to do whatever it takes to hit or beat consensus earnings forecasts, even if it’s all theater.

And that’s precisely what happens.

They use slick accounting maneuvers to help hit the numbers.

I’m talking about things like prematurely recognizing revenue before a sale is complete… improperly deferring expenses… or releasing reserves that were for a later date.

These are just some of the “fast and loose” gimmicks creative accountants unleash on Wall Street suckers, I mean investors.

Of course, Wall Street calls massaging of figures “earnings management.” It’s corporate America’s standard operating procedure.

It’s also known as “cooking the books.”

The whole process seems dirty, right?

But you know what? I can’t really care. The game is rigged… and has been for some time. So what. Deal with it. And that’s what I do.

In Price We Trust

The dog-and-pony show playing out in financial media every earnings season is just that… a show.

The earnings numbers earnestly parroted by CNBC teleprompter readers give no reliable insight into your next trade.

They provide no tangible insight into the direction of stock prices…

And they serve no interest other than that of insiders who profit from the perverse insider knowledge system called “pump and dump.”

Thankfully, there’s a much better way.

Look, in an increasingly uncertain and downright unfriendly world, it is most efficient and effective if our decision-making is based on this single, simple, reliable truth.

I am talking “price.”

You see, the constant barrage of fundamental data we get makes trading and investing way more complicated than it needs to be.

Think about this.

An CNBC anchor once pondered:

“At some point, investing is an act of faith. If you can’t believe the numbers, annual reports, etc., what numbers can you believe?”

That misses the point.

It doesn’t matter whether you can or cannot believe the earnings statement. All of these numbers can be doctored, fixed, or cooked.

But the traded market price can’t be fixed. It’s the only number you can believe.

That’s why trading price is at the root of trend following. It’s the only real, reliable way to make money in the markets.

No games. No gimmicks. Just the comfort that comes from relying on truth.

Please send your feedback to coveluncensored@agorafinancial.com. I’d love to hear your thoughts.


Michael Covel
For, The Daily Reckoning

The Daily Reckoning