Down goes the Dow

Thanks for the tip.

I was reading the earnings call transcript from Ford motor company last week. It was a good case study in GAAP vs non GAAP.

Ford had a good year in 2016. Before special items they had a near record year in profits of $10.4 billion in profits. However, GAAP earnings includes special items. Ford maintains a huge pension. To estimate their expense in any given year they have to comply with various arbitrary rules including setting a discount rate. If the discount rate goes down in any signficant way Ford has to report a big expense for pension. That is what happened. Ford had to report a $3 billion expense to comply with GAAP. It was a "one time" adjustment to the valuation of the pension.

So GAAP earnings for Ford was much lower in 2016 than adjusted operating earnings. But, it was a NON CASH expense. Moreover it was to pensions. Its completely useless in knowing how Ford is performing in operationally in the current year. For anyone wanting to know how Ford performed operationally over the year then it is necessary to remove that pension expense. Adjusted earnings does that. That is a good thing and important.

On the other hand, just because a pension adjustment is a non cash expense based on some arbitrary GAAP rule doesn't mean it isn't real. Over recent years bond yields have kept going down and down. For pension funds trying to generate low risk cash flows to meet their pension obligations, that is a big problem that has to be accounted for.

Sure enough, buried in Ford's conference call, management said that Ford will have to pay $200 million/year more into their pension fund for the foreseeable future. In other words, that $3 billion non cash expense for pensions kind of is a cash event. Moreover, that $200 million extra Ford has to pay in cash in future years will be a payment that is not reported as an expense. Therefore non-GAAP adjusted earnings will look better than it really is.

Point is, there is a good reason to use GAAP earnings. Its not some annoying method of accounting that forces corporations to include expenses that are not really expenses to under report profits. It is true that in any given year GAAP rules requires companies to report "one time" adjustments that do not reflect the current year. But that is why CAPE is a good metric to use. By using GAAP earnings over a 10 year period it smooths out those adjustments. Not to mention the cyclical ups and downs. of a company.

GAAP offers a standardized, if incomplete, picture. It's not perfect, but it's the best we've got (assuming typical investor/advisor laziness associated with an unwillingness to dig into the non-GAAP data).

Non-GAAP EPS is highlighted by Wall Street and corporations to create a narrative of growth. Investors/advisors are duped into believing it justifies paying up for a unit of earnings. Laziness is only surpassed by foolishness.

Hi, Igy/K5! Does this mean you no longer think using an unregistered name is cowardly, or are you just being hypocritical again?

Portia, a beautiful name for a woman. Especially a beautiful woman.

That answers the question. Hypocritical!

youse might want to take a look at these import/export prices.

Inflation is really picking up steam - that could force the fed's hand.

although some of this is higher oil prices, which is only sort of inflationary, and transient.

http://bloomberg.econoday.com/byshoweventfull.asp?fid=477788&cust=bloomberg-us&year=2017&lid=0&prev=/byweek.asp#top

I, along with many others, knew inflation would be coming, which is why I'm in commodities, metals, oil, currencies. Really easy to see this was coming in the US and elsewhere.

Tell us something we didn't know.

agip and Maserati,

Lacy Hoisington of Hoisington Asset Management argues that low GDP growth and demographic trends make it virtually impossible to accelerate inflation. On top of that, any hit to equity markets provides support for the bond market.

http://www.mauldineconomics.com/outsidethebox/hoisington-quarterly-review-and-outlook-4q2016#

We have a warming trend here, in the 50s today. We will cool off overnight, which will be good for a little Saturday evening skiing.

Have a good weekend.

Igy

New intraday high for the S&P!

Still nowhere near late 20th or early 21st century numbers.

Whew, thanks I was worried.

Your welcome.

But isn't the Cape 10 just below Black Tuesday of 1929? Should I be worried about that? Back in 1997-2000 I was getting stock advice from my plumber?

Trolling For Stock Ideas:

https://www.google.com/?gws_rd=ssl#q=nasdaq+composite

Correlation is not causation. Look at all the times it's been higher without any market trauma. It's really not a very reliable metric.