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Wall Street porky pies!

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Wall Street Analysts Keep Telling Big Earnings Lie

Thus reads the headline of an article, July 30th, on Bloomberg.com.  Written by David Pauly it alleges that Wall Street analysts keep telling lies (porky pies – English expression, do you Americans use it as well?).

Here’s Pauly’s opening paragraph:

At a time when the financial industry’s credibility is at an all-time low, you would think Wall Street’s finest would break their necks providing transparency.

Not so. Stock analysts continue to promote corporate earnings lies, insisting that net income isn’t really what investors need to know.

Pauly quotes results from Intel, Google, Viacom, Time Warner, Textron and more showing that earnings per share results aren’t all they could be.

Here’s an example from the article:

In analystspeak, Intel Corp. wasn’t hit with a $1.45 billion fine from the European Union in the second quarter for anticompetitive practices.

After setting aside funds to cover the fine, which Intel is appealing, the semiconductor-maker had a quarterly loss of $398 million, or 7 cents a share. Disregarding the fine altogether, analysts maintain the company earned 18 cents a share, beating their average estimate of 8 cents.

Words fail me just now!

By Paul Handover

P.S. I was commenting about this article on a recent post over at Baseline Scenario more or less in the above tone.

Dr. Sherry Jarrell very gently put me in my place by responding:

Another good link, [the Bloomberg article] discussing the differences between current reported earnings and analysts’ stated earnings. Luckily, the capital market uses all available information to forecast a stock’s future cash flows and risks, and both current earnings and analysts’ opinions are but a small part. In fact, my research has shown that only about 20% of the stock prices we observe today are driven by the cash flows projected over the next five years; the rest occurs over the longer horizon. In addition, most reliable studies show that even though investors can be snookered in the short run with false or inflated claims about a company’s performance, we learn, and we learn quickly. So when you say you can’t trust the stock market, I think you mean you can’t trust it to accurately reveal value? That it is a biased estimate of how a company is going to perform? Well, the stock price is not a crystal ball or a guarantee of future performance, but it is on average an accurate unbiased picture of future performance. In other words, the price is as often wrong on the low side and by about the same amount as it is on the high side, and investors cannot profit by trying to time the market or by trying to find underpriced or overpriced stock. They earn an average rate of return that compensates them for their time and risk taken. If they make a killing, it is due to luck, not skill or superior information. Does that help?

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Written by Paul Handover

August 1, 2009 at 09:00

Posted in Finance

Tagged with ,

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