About those corporate earnings. With over capacity rampant executives have used earnings and debt to buy back stocks in record amounts. Data from Compustat, Deutsche Bank and others show that buybacks reached a peak early last year. In fact dividends and stock buybacks topped $1 trillion in 2015 for the first time ever according to Standard and Poors Capital IQ Global Markets Intelligence. After all if you reduce the number of shares outstanding, earnings per share goes up even if earnings in Dollar terms don’t. The earnings game of steadily reducing expectations as the wire approaches so there is always a good beat ratio recently caught the eye of legendary investor Warren Buffet who in his annual letter to shareholders pointed out numerous accounting shenanigans that made a mockery of Sarbanes-Oxley, while using EBITDA or Earnings Before Interest,Taxes, Depreciation and Amortization instead of GAAP or Generally Accepted Accounting Principles to manipulate the numbers and keep the casino going. To wit data from Deutsche Bank and others show that S&P 500 non-GAAP earnings were essentially flat in 2014 and 2015.Using GAAP results, earnings per share plunged by 12.7%, the largest decline since the forgettable year of 2008. Add share buy backs and the earnings decline is closer to 15%. It goes downhill from there as the discrepancy between GAAP and non-GAAP earnings was 26.5% in 2015 a figure that increased 6-fold in the previous 2-years and second only to the 35.5% seen in 2008 based on recent data. Which leaves one to wonder about real valuations, and reinforces my conviction to not recommend individual stocks as investments, you can’t trust the numbers, the executives or the analysts as history has proven beyond the shadow of a doubt this millennium.
This is Caleb Lawrence Registered Investment Adviser Scotts Valley Drive and Willis Road in the Scotts Valley Plaza, Suite 202 or call me toll free at 888-RICH PIG / 888-742-4744.
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Advisory services offered through Caleb Lawrence Registered Investment Adviser Inc.