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Gordon T Long: How To Distort Corporate Fundamentals

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    April 8, 2014

    I recently spent some time with my friend Gordon T. Long of Market Research & Analytics discussing the current state of the markets. This is not a new issue and is something that I havediscussed each quarter as we assess the “quality” of earnings rather than the “quantity” as remains the focus of mainstream analysts.

    As I wrote in “The Truth About Wall Street Analysts:”

    Companies depend on their stock prices rising because it is a huge part of executive compensation packages. Corporations apply pressure on Wall Street firms, and their analysts, to ensure positive research reports on their companies with the threat that they will take their business to another “friendlier” firm. This is also why up to 40% of corporate earnings reports are “fudged” to produce better outcomes

    This “fudging” of earnings through the use of stock buybacks, using off balance sheet leverage, and other accounting gimmicks to inflate the bottom line is nothing new to the financial markets particularly since FASB rule 157 was repealed in 2009.

    For a thorough discussion on the various tools used to inflate balance sheet measures read “4 Tools Of Corporate Profitability.”. However, as I discuss with Gordon, the long term consequences of such actions are not good. While there is no doubt that corporate profitability has surged from the recessionary lows, there is a point where cost cutting, wage suppression, labor hoarding and stock buybacks, along with a myriad of accounting gimmicks, fails to be effective.

    The problem for mainstream analysts who continue to extrapolate the current rate of earnings growth indefinitely into the future, history suggests that this is unlikely to be the case.

    I hope you enjoy the discussion with Gordon.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

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