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BUILT ON SMOKE & MIRRORS

October 28, 2003

You’ve heard the phrase before. Flim-flam men, snake-oil vendors, and con-artists all ply their wares with “smoke & mirrors”. The list is a lot longer than just these three but you know that. Why mention car salesmen, politicians, and market analysts?

It seems as though we’re seeing the fruit of the fraud every day as someone else is indicted but that will do little good if we don’t go to the root of the fruit. It’s not so much MEN but the SYSTEM that men have built. I could mention several systemic problems but let’s just refer to two.

First, there’s the “pro-forma” BULL that makes people think a corporation is making money when they’re not. Why doesn’t the SEC FORCE corporations to use generally acceptable standard accounting rules (GAAP) when reporting earnings instead of the “pro-forma” crap that means nothing and deceives many?

And then there’s the pension fund game. The liabilities in this area are staggering and totally out of control. John Mauldin’s article on October 25th was both riveting and scary. He has concluded that IF proper reporting in the pension fund area was done correctly earnings for the S&P500 would be 42% LESS! This is staggering.

He concludes by sayings, “The 15 largest companies on the Nasdaq (37% of it’s market value) had pro-forma earnings of $25 billion. Use GAAP principles, and take away the pension liability, and the profit is a mere $423 MILLION. Take MSFT out of the 15 and the remaining 14 have a NEGATIVE earnings of $3.5 BILLION.”

And you think we’ve started a new BULL market run? BULL! You can’t build anything on smoke & mirrors- two times in a row.

Written by Ernie · Filed Under Daily Commentary 

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