Saturday, April 11, 2009


Anyone else tired of company executives and their hired accountants using "non-recurring expense" and "one time charge" to make the income statement look prettier? Earnings are earnings and that is what we should look at. The income tax statement would be even better if we had it available. Any other metric is noise and should be a red flag to investors.

The biggest red flag being raised at the moment is by the banking industry and its use of "operating income". Tell me the value of earnings pre provision for loan losses and asset impairment. They could be wonderful and the bank could still lose a huge amount. Unfortunately the market has seized upon statements of positive operating earnings at BofA, J.P. Morgan, and Wells Fargo and driven those stocks upward and took along the remainder of the financial industry.

There is no doubt that the Fed has engineered an environment, the upward sloping yield curve, where banks will be able to generate significant amounts to fund loan charge-offs. But those amounts may not be sufficient in face of deteriorating home equity and credit card loans plus the soon to be problem areas of commercial real estate and commercial lending. I can't think of a time when lenders had all portfolios struggling at the same time. Financial stock prices may have gotten ahead of where they should be. Accounting alchemy should not be the basis for investor enthusiasm.

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