It does not matter if you are an active trader or investor. The information in this post is valuable and should be recognized so you don’t get caught up in the ridiculous earnings and accounting being reported. While this is great for share prices and market sentiment, evnetually the music will stop and those who cannot spot a market top will be the one left holding all the overprices shares and lose 30-60% of their investment when stocks do indeed correct and a bear market takes hold.
Matthew Benkendorf, CIO of Vontobel Asset Management in New York, said “We are in a low-interest-rate environment for valuations and that has driven them higher everywhere. The key question is when and how high does the FED go? We do expect the Fed to increase rates a few times this year which will shake the foundations of valuations. We have had decades of lower and lower interest rates which is now leading to a floor. So, any reversal in the trajectory is an interesting inflection point changing the foundation of where we are.”
Remember the markets in 1987, 2001 and 2007. The ‘talking heads’ on all of the financial media outlets are saying, “I think it will go higher because it will go higher”. Stop and think about it!
The only vehicle that will make their theory materialize is based on tax reform and infrastructure spending. I believe that we need to see over 20% growth in earnings this year in order to keep this rally going. Wall Street Analysts are always in abundance when it comes to forecasting optimism in future earnings expectations. Their estimates are always higher regardless of the economic trends. They have a game of calling “lower the earnings bar until companies can beat earnings to justify the ‘buy’ the bullish memo”
Have you heard the one about the company that needed to hire a chief corporate accountant? In the last interview session, each finalist was given financial information and asked, “What are the net earnings?” All applicants but one dutifully computed the net earnings but none of them got the job. The candidate who landed the position answered the question by replying, “What do you want your net earnings to be?”
The story demonstrates how a company’s reported earnings may not necessarily be an objective measure of their economic reality. For one thing, “generally accepted accounting principles” , allow an accountant to select from various methods while computing earnings and other financial measures which could lead to lower quality financial information, depending on the accounting methods used. Furthermore, company managers can “manage earnings” subjectively by timing business activities or the reporting of those activities.
Earnings management becomes fraud when companies intentionally provide “materially” misstated information
A Definition of Earnings Management:
Companies manage earnings when they ask, “How can we best report desired results?” rather than “How can we best report economic reality (the actual results)?”
Earnings management includes selecting GAAP methods with concern for appearance rather than reality. It also includes subtle techniques such as changing reported earnings through “performance timing.” For example, a manager seeking to reduce expenses in the current period might defer scheduled routine equipment maintenance until the next accounting period. The result is higher reported earnings in the current period but the maintenance delay, of course, may be detrimental to the company’s future operations. Also, a company may vary the timing of performance reporting. Recording inventory “obsolescence” is required under GAAP, for example, but choosing when to record “obsolescence” is fairly subjective. A manager may know some part of the company’s inventory has become obsolete, but if earnings in the current period are lower than desired, he may defer recording the loss, or “write-down,” until a future period.
The U.S. government’s priority should be to redesign our economic and social systems. They should consider the global interconnectivity and the growing impact of ‘The Fourth Industrial Revolution’ which is becoming more sophisticated and the individual more empowered.
Many times big earnings numbers, both good and bad will create huge moves in individual stock prices that have a lot of momentum behind it. You can take full advantage of these moves using our own Momentum Reversal Method (MRM) over at ActiveTradingPartners.
‘The Fourth Industrial Revolution’ (https://www.forbes.com/sites/bernardmarr/2016/04/05/why-everyone-must-get-ready-for-4th-industrial-revolution/#1d9d67e93f90 ), will provide its’ citizens with great opportunities for enhancing their lives. This will become the new future economy as it is realized and embraced!
I provide real time market updates. The key to any trade in the market is to understand the potential moves and watch for confluence and volatility in other markets. Did the surge in momentum, which fueled the early 2017 rally, to new all-time highs across indexes stall out?
A new rally will reach a new high after this current correction completes.
We believe the next few weeks/months will be very telling. If we are correct, we’ll see new highs in the US markets.
Being on the right side of all the financial markets are discussed in my early morning daily videos which updates you where you need to be in these markets to take the opportunities that are presented. Today, there are unique trading setups in which you can make HUGE profits in.
Be prepared and profit from these uncertain and volatile times.