Earnings vs. Earnings Ex-Government Help

It was a heated day on many levels. Here in Massachusetts is was over 80 degrees for only the second time. Across the markets things were running hot as the indices blew higher and the vitriol was running high. I will have my own addition to the "this is getting out of hand" theme in a bit.

Frustration Starting to Show
When I wrote that things were getting heated, I did not mean a bunch of players of a bearish bent were getting upset they were getting toasted by the market rally. Most professionals know that the market can hit you where it hurts and I did not see any real whining about the rally in the context of just higher prices.

What I saw instead was a overflow of frustration over the blatant manipulation of number, news, estimates, and shady dealings that have been the market norm since last October. It seems things finally came to a head today and i say about time at that.

First up was a Interview with Max Keiser on a French TV show where he rips into Goldman Sachs. (Disclaimer, Keiser is affiliated with Iranian TV and thus his slant may be biased, but his calling out of the angst is what I am highlighting).
See Video here via Zero Hedge.

Second at bat was representative Dennis Kucinich being dumbfounded CNBC host Larry Kudlow's defense of BAC's Ken Lewis over the Merrill Lynch deal. Plenty of choice quotes by Kucinich in the video.

The third sign of how bad things are becoming came when CNBC (among others as well) totally mischaracterized some comments by Nouriel Roubini. Major news outlets across the spectrum credited Roubini with a "Recession is over" call. Of course he said no such thing. Roubini even had to issue a formal statement to clear up his position later in the day. CNBC video of how twisted things got was pretty weird.

You can see both videos over at The Housing Time Bomb who has them already embedded.

Now I am aware there is a more bullish bent to media, nobody likes to be a doomer. Now things are getting moved over the line as data, quotes, and events are now clearly being not just spun, but just outright presented any which way it is deemed best. This is not a good direction.

Earnings vs. Earnings Ex-Government Help
Now for my own addition to the frustrated masses!

Today I saw a link at many blogs to a write up by Economic Policy Institute that had the title of "Behind Goldman Sachs’ second quarter profit" by Lucas Puente. with a title like that you know I am going to read it! Full article here.

The article was sharp right from the beginning:

This week, Wall Street superpower Goldman Sachs announced second quarter net profits of $3.44 billion, far exceeding expectations. Earnings per share also rose, to $4.93 from $4.58 a year ago. This is a promising sign that the battered financial industry is on the mend, but it should be noted that Goldman didn’t do it alone. In fact, at least some of these profits were made possible by guarantees, low-cost loans and other assistance from the federal government.

Fair analysis. GS did great, but with a bit of help from their friends. As examples of that help the author cites:
-AIG funnel program for full payouts to GS
-TGLP access which allowed capital raising at basement prices (called "an infinite subsidy whose value could not be calculated" (wow that's pretty big!)
-Full FED discount window access which precludes any panic about liquidity as it is practically unlimited

The author even covers the ballooning "Value at Risk" (VaR) profile for GS:

Altogether, this government support essentially enabled Goldman to return to its traditional model of business: accepting risk in order to magnify profits. Specifically, Goldman boosted its “value-at-risk”—the estimated value of its trading activities on a given day under a worst-case scenario—to $245 million this past quarter from $182 million in the same quarter last year.

In summation, the author offers this:

Indeed, the profits announced this week by Goldman Sachs are an encouraging sign that the financial markets are starting to return to normal. But they are by no means evidence of a full-fledged economic recovery. In fact, without the support of the aforementioned government programs, Goldman’s profits would have been incalculably lower.

I remember this morning when I read that last paragraph thinking "What!??"

So without all this help from the government, GS earnings would have been "incalculably lower" but somehow, some way this is "an encouraging sign that the financial markets are starting to return to normal"? Color me puzzled on that one.

I remember when Barry Ritholtz coined the term "Inflation, Ex-Inflation" when inflation was running wild in the 2002-2006 time period (I know, impossible to believe deflationistas!) but all measures of it were lost due to all kinds of funny number play.

Tonight I coin (mint?) "Earnings, Earnings Ex-Government Help".

Subtract all the AIG payouts, artificial cheap money, explicit government guarantee of liquidity, and loss of all competition and then we shall see where the banking giants stack up. What would GS's earnings have been in a free system? We can never know. I propose all earnings statements from last October until all the aid programs end must be marked with an asterisk (*) as they have no bearing on any historical measures and do not apply directly.

Even More Points of Contention
I have another point of contention (POC, I love acronyms)to add tonight. This one has to do with earnings estimates and the beating of them.

Today JP Morgan announced earnings that blew away estimates. JPM posted 28 cents a share vs, estimates of 4-6 cents. That was a huge 5-7 times trouncing of the Wall Street estimates. Or was it? That depends on when you ask.

from Zacks we see that (scroll down to "Magnitude - Consensus Estimate Trend"):
-90 days ago estimates for JPM this quarter averaged 34 cents. Now I would say a ton can happen in 90 days, so we will leave that one be.
-60 days ago average estimate was 30 cents
-30 days ago average estimate was 25 cents
-7 days ago average estimate was 11 cents

That is quite the takedown of estimates. Just what did polled analysts see that pointed to a 11 cent quarter when JPM had a 28 cent quarter? Strange indeed.

I highlight this because there has always been a clear bias in earnings estimates to the low side. I get that. I understand the "grease to the wheels of machine" and all that. It is the way the game is played. Analysts say estimates are for say 30 cents a share, and then company X posts 32 cents a share and all make out on an up day "surprise to the upside". Fine.

This is different. If you pull up the same Zacks data for Goldman Sachs you see that estimates trend UP for the last 90 days on in to earnings. GS even beat those raised estimates. Perhaps there was some pressure to make sure JPM "blew past the number" just like GS and thus estimates were lowered to fit the picture. One year ago I would have said this was insane. After this week I actually would give this scenario greater weight than confused analysts not sure about JPM earnings.

I wish I could miss a timeline at work by a factor of 5-7 times. I think I would get away with it once. Maybe once!

Addendum: Be sure to get your Friday Night Entertainment request in on the comments. Music, film, pictures, humor anything goes!

Have a good night.