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Forex Blog - New TV Game Show Idea - Iron Accountant America

As much as I think rating agencies are a joke and played a crucial role in creating the credit bubble, there is another financial market ruse that should be equally put under scrutiny as the rating agencies…corporate accounting. 

 

How is it that every quarter when firms report earnings the “Street” consensus earnings estimates are usually within pennies of the actual and more often than not above consensus?  How can outsiders at Wall Street firms come so close on earnings and revenue forecasts (and special factors) without collusion quarter after quarter?  Company analysts at broker and advisory firms are told where earnings are likely to come in around.  The “analyst” then decides what specific micro factors might shade his or her forecast around the guidance…like a surge in mortgage origination in May when rates troughed or like when Apple pitches a new I-phone or Mac.  If the firm reporting plays a key role in forming market expectations for a firm’s quarterly result, why is it any mystery that most firms come in above consensus on earnings (often there are lots more moving parts on the bottom line than the top line)?  It is a bloody joke.

 

Asset sales, currency changes (never spelled out – almost discretionary on how much this plays in figures), deferred profits/costs treatment, TARP payments/receivables…just to name a few.  If you know any fortune 500 accountants they will tell you that the CFO asks for a number and the department cuts the foot to fit the shoe. 

 

This is not to say that accountants can turn the worst economic recession since the Great Depression and make firm earnings smell like roses…sometimes macro events dictate results.  But even in macro constrained reporting periods, firms consistently beat estimates.  Whether you buy on earnings or sell on earnings has more to do with how new the downturn is and right now it is pretty damn old and making money in risk assets like equities is (has been since March) tied to betting on things getting better not worse and not even stagnant.  Q1 earnings surprises to the upside were more muted than Q2 yet Q1 was when equities had more explosive advance. 

 

So in light of this quarterly game of financial cookery I think it would behoove the likes of CNBC or FBN to come up with some evening programming around the idea of a Iron Accountant – borrowing from Iron Chef.  Accountants are given an hour and a bunch of data on a make believe firm’s earnings including market consensuses on top and bottom lines and told to cook up the best results with members of a panel of CTA’s, CFA’s and FASB members voting on the best report.  Could even squeeze the 1 hour devoted to cooking books to 30 minutes of program time and allow 20 minutes for “conference calls” with equal weighting for both exercises. 

 

And economists are the butt-end of financial conference jokes? 

 

And markets (equity markets) are rational most of the time? 

 

The fact that bonds and FX trade on corporate earnings hits, misses and beats is proof that irrationality in financial markets is not limited to equity markets.

So write CNBC and FBN with Iron Accountant idea for evening filler TV time and we may end up with a much better idea of what is really behind the quarterly earnings seasons…more carnival than purported asset  pricing signal.

 

David Gilmore

 

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