Profit From Wall Street’s Earnings Manipulations

Posted On May 2, 2017 By Dave Gonigam

  • The seamy side of earnings season: How Wall Street manipulates numbers
  • You can turn Wall Street’s manipulations to your advantage
  • Wall Street takes Trump seriously but not literally (finally)
  • D.C. agreement includes good news for penny pot stocks
  • Why black-market weed is still a big deal in a state where it’s totally legal
  • Another zombie budget… how Congress’ 10-year clock affects plans to “reform” your 401(k)… reader suggests how we could “do America a big favor”… and more!

The quarterly charade known as “earnings season” is now about 60% done.

Of the 300 companies in the S&P 500 that have reported so far, 75% have beaten the vaunted “analyst expectations,” according to a report this morning from the Swiss money-management firm Julius Baer. Joining the ranks of that 75% within the last few hours are MasterCard and Pfizer.

If that sounds like a sign of gangbusters corporate performance, it’s not. “Earnings manipulation is prevalent throughout the ranks of publicly traded companies,” wrote David Trainer at Forbes in 2015.

The incentives for manipulation are widespread: CEOs’ bonuses often depend on “earnings beats.”

And the methods of manipulation are many: For example, say you collect a lump-sum payment for services you’ll provide over the next five years. Well, that money gets booked as sales in the current quarter… even though you’ll be shelling out the cost of providing those services for the next 19 quarters!

And that’s just the accounting trickery. Then there’s the whole expectations game.

Legions of Wall Street analysts spend their days forecasting what quarterly earnings will be for thousands of publicly traded companies. Those companies are keenly aware of this process.

So if a company anticipates a lousy quarter for one reason or another, it’ll put out a press release a few weeks before the scheduled earnings release — getting the bad news out early and prompting the analysts to lower their estimates. “Guiding lower,” the process is called.

Then when the day comes to release earnings, the company delivers a number that beats those lowered expectations. It’s magic!

Some companies are better at earnings manipulation than others.

The classic case was when Jack Welch ran General Electric during the 1980s and ’90s. Quarter after quarter, GE would beat analyst estimates by exactly a penny per share.

That was a case of being too good at earnings manipulation; eventually, even the most dunderheaded of Wall Street analysts figured out what was going on. And the rest of Corporate America realized they’d have to be a little more clever.

If it all sounds to you like a “rigged” process, our small-cap specialist Louis Basenese says you’re absolutely right.

Between earnings “beats” — and the rare misses — Wall Street analysts end up being wrong a staggering amount of the time.

“Consider how Wall Street analysts performed during the fourth quarter of 2016,” Louis says: “According to data from FactSet, they got their earnings estimates right just 12% of the time.”

And out of those 88% of blown estimates… two-thirds of the time, the company delivered a “beat.”

“Statistically speaking,” Louis tells us, “this should not happen. But it does. Quarter after quarter… year after year. Wall Street issues its quarterly earnings predictions. Companies come out and crush those estimates by a country mile.”

The reason? “When companies ‘surprise’ on the upside, their stocks tend to soar,” Louis goes on.

“Essentially, if you can rig the game to where you constantly ‘surprise’ on the upside… you can get very rich. And that’s exactly what Wall Street has done.

“But here’s the thing: Nothing’s stopping ordinary investors from profiting from this behavior. If you see what’s going on, you can make an absolute fortune playing Wall Street’s most ‘rigged’ stocks to the upside.”

Which is exactly what Louis expects to happen with seven stocks… starting next Monday, May 8. And he just finished refining a strategy to squeeze maximum gains out of these announcements. This strategy could have delivered a $2.22 million payout starting last November.

No, you wouldn’t have collected that payout immediately. You’d have had to wait 96 days.

You could probably wait that long for a $2.22 million payout, right?

So we can’t promise you instant riches starting on May 8. You’ll have to exercise a little patience. If you think youve got that in you, click here to learn more about Louisstrategy.

The markets are a snooze today. The Dow is up a little, the S&P 500 is down a little.

Gold took another spill as we went to virtual press yesterday, but it’s stabilizing again — the bid now $1,255. Crude continues its slide of late, now below $48.50 a barrel.

Wall Street has finally figured out that trope we mentioned months ago about how President Trump should be taken “seriously, but not literally.”

During an interview yesterday with Bloomberg News, Trump let it drop that he’s looking at breaking up the big banks — pushing Congress to reinstate the Glass-Steagall Act, which was repealed in 1999.

“I’m looking at that right now,” he said. “There’s some people that want to go back to the old system, right? So we’re going to look at that.”

The story went out shortly before 1:00 p.m. EDT yesterday. Here’s the reaction in XLF, the big financial-sector ETF. The movement looks extreme, but check out the scale on the left side of the chart: Over the last 24 hours, we’re looking at less than 30 cents of movement in an ETF that trades  for over $23.

Wall Street Takes Trump Seriously, Not Literally

Traders quickly figured out it doesn’t matter because this president has the attention span of a gnat. This is progress compared with three months ago, when CNBC would trot out fancy full-screen animated graphics screaming, BREAKING NEWS: TRUMP TWEET”… and a defense or pharma stock would plummet 4%.

Buried within the new budget bill in Washington is a crucial provision for legal marijuana. It ought to make “penny pot stock” investors breathe easier.

“The bill,” reports the McClatchy newspaper chain, “bars the Department of Justice from using funds to interfere with medical marijuana use in states where it is legal.”

True, that’s just medical marijuana. Theoretically, the feds could still interfere with recreational cannabis… but for all his huffing and puffing about demon weed, Attorney General Jeff Sessions has given every indication he’ll stick with the “Cole Memo” — the 2013 document laying out the Justice Department’s hands-off approach to marijuana that’s regulated at the state level.

From the ham-fisted regulations department: Recreational marijuana is legal in Alaska… but users still prefer the black market.

The legal stuff is, by and large, more expensive. An eighth of an ounce of the legal stuff runs $60–88. Go the underground route and it’s only $40 — at least in Alaska’s urban areas.

One wholesaler says he charges $5,000 a pound — in contrast with an average wholesale rate in Colorado of $1,471.

It’s true that nearly everything in Alaska is more expensive. But when it comes to legal weed, Alaska’s taxation scheme has at least as much to do with it.

In Colorado and Washington, the tax is a percentage of the sale cost. “But Alaska’s system is different,” says the Alaska Dispatch News. “A flat rate of $50 an ounce, or $800 a pound, means that regardless of how much a pound sells for, the state will always bring in the same amount of money for the product.”

Eggheaded economists believe Alaska’s method is the better way to go for state governments. One fellow from Stanford argued in The Washington Post that the revenue is more predictable and not subject to price fluctuations.

Well, yeah. Unless so much business gets driven underground that the revenue doesn’t materialize in the first place…

[Ed. note: It wouldn’t surprise us if Alaska lawmakers have a change of heart. And from an investing standpoint, that’s fine. That means it’s still early days for penny pot stocks… which means the best opportunities to trade in and out of these stocks for big gains are happening  right now.

If you’ve dipped your toe into penny pot stocks and you feel as if you’re ready to move up to the next level, heres where you can get started.]

“So our congressional ‘leaders’ coughed up a deal to keep the federal government running through September,” writes one of our regulars. “According to MSM newswires, it’s a thing of beauty: 1,600 pages of pork and $1 trillion of spending.

“Congress must have rolled up their sleeves and really done some due diligence to achieve this remarkable feat so quickly after their latest break. It’s why they get paid the big bucks!

“Anyway, now they can catch their breath before pivoting back to that pesky debt ceiling issue. Then after that, they can lurch back to avoiding the next shutdown.

“They just keep re-tossing the same boomerangs — and pretending the music won’t stop. It’s surreal.

“Love The 5!”

The 5: Yeah, shades of the “zombie budget” negotiated between Obama and Paul Ryan in October 2015.

We can’t wait to discover some hidden nugget or other they stuck in there. The zombie budget killed off the “file and suspend” strategy for maximizing Social Security benefits — something we figured wouldn’t happen until Obama’s successor took office.

On the subject of possible changes to 401(k) plans, a reader starts out with a figure we cited yesterday:

“Congress’ Joint Committee on Taxation has already run the numbers: If they zeroed out pretax retirement contributions, the feds would rake in another $584 billion from 2016–2020.”

Our reader inquires: “Did they run the numbers on future revenue they wouldn’t collect if some of these contributions became Roth and therefore grew tax free? Of course, it would be years or decades from now. Kick the can down the road!”

The 5: Well, there’s more to the story than that — more than our 5 Mins. allowed for yesterday.

The trade journal Investment News makes the very point you do: “Of course, this supposed ‘lost’ revenue only appears lost due to a budgeting gimmick, observers said.”

But here’s the thing: “The government eventually recoups tax revenue from these pretax deferrals decades in the future when individuals retire, but the revenue falls outside the 10-year budget window Congress uses for tax scoring.”

Thus, mandating a certain level of Roth contributions instead of pretax contributions — as Congress is looking at — would pull more of the tax revenue within that 10-year window.

So it’s all about congressional accounting gimmicks. Ain’t Big Government fun?

Our discussion of these new taxation schemes for retirement plans brought to mind the “myRA” for another reader.

“How about Obama’s slip of the tongue,” he writes, “during one of his State of the Union addresses when he suggested the government might force IRAs to invest in only (worthless) government bonds? Anyone keeping an eye on that?

“I have never invested in an IRA or 401(k) because, to paraphrase a biblical saying, the government giveth and the government taketh away. They can always change the rules and screw us.”

The 5: Heh… We had some fun with the “myRA” the day after Obama trotted it out (complete with Raquel Welch!). The freaky thing is how we anticipated yet another mandatory scheme as a consequence. File that one in the back of your mind.

“Why don’t you know-it-alls do America a big favor,” writes our final correspondent, “and give the government the benefit of your superior intelligence by informing them of the proper way of fixing things in our country?

“People will be forever grateful to you. You’re welcome.”

The 5: Hey, we tried!

More than a decade ago, after our fearless leader Addison Wiggin published the book Empire of Debt with Agora Inc. founder Bill Bonner, we sent a copy to every member of Congress.

Fat lot of good it did; Ron Paul needed no convincing, and the other 534 were oblivious to their argument.

More recently, Trump’s son-in-law and confidant Jared Kushner reached out to our own David Stockman — knowing David’s history as Reagan’s first budget director and later as a high-powered investment banker. David replied to Kushner with a full menu of economic policy recommendations.

“When he replied, ‘Thanks,’ by email,” David recalls, “I took that as a sign that more help was wanted.

“So I turned my musings and recommendations into a book called Trumped! and worked night and day to get it out by early September. I wanted to do my part to help stop Hillary and the Deep State regime she had served for a lifetime.”

Alas, Trump “didn’t take my advice,” says David. “And it’s clear the Deep State rules like never before in American history.”

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. Far from the power centers of Washington, D.C., David Stockman sees storm clouds gathering for one of the biggest sectors of the U.S. economy.

And he has reason to believe the skies will open up on May 11 — nine days from now.

But — and we don’t mean to drag out the storm analogy too far — David’s identified a way to chase rainbows in the aftermath and make up to 29 times your money. Check out his exclusive video at this link.


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