Fleckenstein: Earnings Are A Spin Game

Thursday, 30 Jul 2009 02:23 PM

By Gene J. Koprowski

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Companies are rigging their earnings reports to make it look like general economic conditions are better than they actually are, but savvy investors are no longer being duped by the scam, says Bill Fleckenstein.

"It's beat-the-number season when corporate earnings are reported," writes Fleckenstein on MSN Money.

"Let's look at what a game it is."

Fleckenstein notes that several months ago General Electric claimed it would abandon the practice of giving guidance to investors and analysts. GE reaffirmed this new position when it reported second quarter results.

"I think that is a potentially important development, at least if one would like to see the investment business become more about thought, research, and managing risk, rather than hype, momentum, and gamesmanship," writes Fleckenstein.

Fleckenstein notes that the hype and hucksterims reduces Wall Street to "some sort of video game."

But, he reckons, GE's new commitment to earnings-guidance abstinence is going to cause other companies to come clean, stop the game playing, and rethink how they communicate with investors.

"GE — led by Jack Welch — played and perfected that game as well as anyone, though it ultimately blew up in the company's face," writes Fleckenstein.

Fleckenstein thinks that IBM may become the "new GE" in terms of how it reports its earnings.

"IBM saw its revenues do worse than expected again," writes Fleckenstein. But, he noted, IBM was able to "do far better than folks had expected on the earnings front. Even though it saw revenues fall 13 percent year-over-year, paced by hardware sales dropping 26 percent, year-over-year, earnings per share somehow miraculously rose 18 percent from the same period a year before."

Fleckenstein thinks there may be some weird sort of arbitrage going on at IBM, and, whatever the case may be, investors should be wary of the "positive" earnings from Big Blue for the foreseeable future, at least until it alters the kind of guidance it gives investors.

Shares in America's corporate giants are looking good — some of them, anyway, says Jeremy Grantham, chief investment strategist of Grantham Mayo Van Otterloo & Co., an investment management firm with headquarters in Boston. The company has $78 billion in its portfolio.

"The easy winner of the cheapest equity subcategory contest is still high-quality U.S. blue chips," Grantham said in his quarterly newsletter, published on the firm's Web site.

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