Like all publicly distributed data, from government reports to corporate filings, a prudent investor evaluates it with a healthy dose of skepticism.

As we enter the season of quarterly releases, it’s important to remember you can’t trust an earnings report by its cover. Yes, it’s tempting to trade earnings reports, especially after witnessing Tuesday’s monster jump in NFLX.

The movie-streaming company posted earnings of 86 cents a share on sales of $1.27 billion. Analysts had expected the company to report earnings excluding items of 83 cents a share on $1.27 billion in revenue, according to a consensus estimate from Thomson Reuters.

Going forward, it’s important to know what to watch for. Here are a few ways companies can manipulate their EPS according to the investing caffeine blog.

Distorted Expenses: If a $10 million manufacturing plant is expected to last 10 years, then the depreciation expense should be $1 million per year. If for some reason the Chief Financial Officer (CFO) suddenly decided the building would last 40 years rather than 10 years, then the expense would only be $250,000 per year. Voila, an instant $750,000 annual gain was created out of thin air due to management’s change in estimates.

Magical Revenues: Some companies have been known to do what’s called “stuffing the channel.” Or in other words, companies sometimes will ship product to a distributor or customer even if there is no immediate demand for that product. This practice can potentially increase the revenue of the reporting company, while providing the customer with more inventory on-hand. The major problem with the strategy is cash collection, which can be pushed way off in the future or become uncollectible.

Accounting Shifts: Under certain circumstances, specific expenses can be converted to an asset on the balance sheet, leading to inflated EPS numbers. A common example of this phenomenon occurs in the software industry, where software engineering expenses on the income statement get converted to capitalized software assets on the balance sheet. Again, like other schemes, this practice delays the negative expense effects on reported earnings.

Artificial Income: Not only did many of the trouble banks make imprudent loans to borrowers that were unlikely to repay, but the loans were made based on assumptions that asset prices would go up indefinitely and credit costs would remain freakishly low. Based on the overly optimistic repayment and loss assumptions, banks recognized massive amounts of gains which propelled even more imprudent loans. Needless to say, investors are now more tightly questioning these assumptions. That said, recent relaxation of mark-to-market accounting makes it even more difficult to estimate the true values of assets on the bank’s balance sheets.


With a veritable snooze fest in the markets Monday after the holiday weekend, I thought I’d turn my focus to the private sector and discuss their current shenanigans.

While there’s been plenty of well-publicized corporate blunders (From General Mills attempting to use their website as a gatepost against arbitration to General Motors having yet another massive recall), my favorite comes from the folks at Yahoo, specifically Marissa Meyer.

It turns out that Yahoo told Chief Operating Officer Henrique De Castro to pack his bags because he wasn’t doing such a great job. Oh yes, he also got a severance package worth $58 million for 15 months of work according to filings with the SEC.

Using simple math that breaks down to $3,866,666 per month. Not bad. Mayer hired the top Google sales executive to revive Yahoo’s advertising not long after she left Google to take the helm at Yahoo in 2012. While the actual cash payout in the severance package was only $1 million and the original stock amount was valued at $17 million, the figure rose significantly along with Yahoo stock thanks to its huge stake in Chinese Internet giant Alibaba.

Well during his tenure, Business Insider has a video of De Castro bumbling through a presentation of his vision for Yahoo. When Yahoo hired De Castro, its board believed “he had a unique set of highly valuable skills and experiences that would be key to returning the Company to long-term growth and success,” the filing said.

Yahoo’s shareholders disagreed. On March 14, they filed suit, claiming the board wasted corporate assets and breached its fiduciary duty to understand how much De Castro would be entitled to receive.

It would certainly make the creative job numbers from the government more palatable if the rest of us got some juiced up stock thrown at us when we are shown the door.


Now that the Holy Week for many people has passed, with a closed-day last Friday, we will be starting a new full week Monday. And that sounds like a good thing since last week ended on a serious slowdown of both volume and volatility.

The coming week, however, doesn’t offer many surprises; but then again – I guess that’s what makes surprises. We never really know.

Monday gives us the LEI, which is a FED-controlled data point, that makes it irrelevant in my opinion but will come out at 10am ET, if you’re interested.

Tuesday gives us housing information; FHFA at 9am EST, and Existing home sales at 10am ET. Oh, but if you needed more B-level info, Richmond Mfg Index comes out at 10am ET.

*** As this new time on the calendar grinds-on, we will find out – SADLY – that the new week is the old week: nothing has changed. Whether your religion likes the tax-and-spender clowns or the lower-tax & more-war clowns is irrelevant; unfortunately, neither side gets to win. Both sides continue to be fed more drivel of how this week is special, but sadly it isn’t. Whatever “economic” data we read over the coming 5 days will be muted, I’m sure.

The remaining week’s economic data can be found on your favorite blog, which will surely include Friday’s Consumer Sentiment data at 9:55am ET.

This week – do something different. ANYTHING. Make it a NEW WEEK.


Two influential members of the Fed gave speeches today – Yellen and Fisher. Neither member said anything that was earth shattering; however, they were at least noteworthy.

In Janet Yellen’s first major policy speech that she delivered to the Economic Club of New York, she calmed any investor’s potential fears that she may have left after her last public discourse. In a nutshell, she will continue to do whatever it takes to keep equities going higher. Here are several headlines of the speech.







Richard Fisher, on the other hand, was against QE3 from the beginning. From Bloomberg we read

“We are seeing shortages of labor” for jobs in technology, engineering, auditing and among truck drivers, Fisher said in a speech in Austin. “We are seeing a skills mismatch around the country,” he said. Both U.S. schools and immigration policy “are not meeting our needs,” he said.

Fisher said the Fed had provided liquidity to support job creation, which he said has been held back by tax, regulatory and fiscal policies. The latest Fed Beige Book review of regional economic conditions highlighted the pinch, with six of the 12 districts — Dallas, New York, Cleveland, Richmond, Chicago and Kansas City — reporting difficulty finding skilled workers.

“We at the central bank cannot affect structural unemployment,” Fisher said.

He said that there is a shortage of highly skilled labor but I don’t buy it. The millions of Americans that are unemployed cannot all be uneducated low-skilled people. It seems impossible. But the last bit is the most interesting: Fisher admits that one of the Fed’s mandates isn’t possible. It can’t bring down unemployment.


If you have been following the markets this week, you may have a case of motion sickness. Gone are the days of small ranges as we slowly grinded higher.

Tuesday had monster manic action, yet the moves have been seemingly unexplainable or shall I say comedic. The market opened higher with indiscriminate panic buying because the market never goes down on the second Tuesday of the month or on tax day or odd number days in April or whatever random reason you can make up.

But a few hours into the trading session the market couldn’t sustain these panic highs. Things were reported to be getting dicey in the Ukraine or maybe somebodyflashed a sell sign, and poof there was a more than100 point drop in the NASDAQ off the highs

But you can’t keep a bad market down, and proving once again how insanely non-sensical this bad-news-is-good-news market has become, the market ripped higher toward the end of the trading session.

The reason for today’s rip – an economic assessment downgrade for Japan which smahed USDJPY higher and through magic of carry, lifted US equities. There was no let-up in Ukraine, no data to confirm growth hype, no US news… but the Russell and Nasdaq managed a 2.5% bounce in a straight line after the Japan headline

Buckle up and hold on for the ride!


The European Union is talking tough about the High Frequency Traders and unlike the tough talkers here at home, who seemingly talk and talk (pre-election) with no follow through (post-election), something may actually happen.

As I’ve been writing about for the past couple of weeks, the mainstream has finally woken up to the unfair advantage of High Frequency Traders with the release of Michael Lewis’s latest book “Flash Boys”

I have been writing about this for a long time, but now there may finally be some action . The EU’s financial chief has promised to get tough.

According to Bloomberg:

European Union lawmakers are poised to approve some of the toughest restrictions in the world on high-frequency trading, the first actual crackdown

The curbs are part of revamped EU markets legislation ranging from commodity derivatives speculation to investor protection. The high-frequency trading limits include standards meant to keep the price increment for securities from being too small, mandatory tests of trading algorithms and requirements that market makers provide liquidity for a set number of hours each day.

“With these rules the EU is putting in place one of the strictest set of regulations for high-frequency trading in the world,” EU financial services chief Michel Barnier said in an e-mail. “While HFT trading might bring some benefits, we need to make sure that it doesn’t cause instability, and isn’t a source of market abuse. That’s what these rules set

The draft rules, which predate Lewis’s book, are “the most comprehensive regulatory response yet to HFT,” Christopher Bernard, financial regulation lawyer at Linklaters LLP in London, said in an e-mail.

While the assembly will vote on the measures this week, their ultimate impact will depend “to a large extent” on technical measures to flesh out the law that are still under discussion, Bernard said.

At least it’s a step in the right direction from the EU, will the US follow? Who will ultimately walk the walk?


Bulls may have to look for the Easter Bunny (does Janet Yellen wear costumes) this week. Things could be dicey with renewed geopolitical jitters as Ukraine moves back into the forefront.

Oleksander Turchinov said in a televized address that Ukraine has mobilized its armed forces to launch a “full-scale anti-terrorist operation” against pro-Russian separatists. Furthermore, knowing the only real escalation Kiev can engage in is in the war of words department, Ukraine set an 0600 GMT Monday deadline for pro-Russian separatists to give up their weapons and leave buildings they have occupied in the east of the country, a presidential decree said. It is unclear if this would be the catalyst to launch the military operation, but should Kiev indeed bring in the army it is certainly clear that Russia will respond in kind.

The Markets were slightly lower in Asia (Nikkei 225 -0.36%) after the reports of exchanged gunfire with pro-Russian militants. This sentiment carried over into the European session with stocks lower across the board (Eurostoxx50 -0.71%). Probably more important is that Draghi said any further strengthening of the EUR would warrant further action by the ECB, including non-standard measures such as quantitative easing – it is amazing how frequently and often the Virtu algos still fall for Draghi’s jawboning trick which has now become all too clear will never be implemented and certainly not if he keeps talking about it daily, as he does.

Which animal will dominate this week?


The market was hammered so hard on Thursday that the word “hammer” kept entering my mind throughout the day. I thought “Wow, the Nasdaq is getting hammered” and “Look at Gilead; it’s getting hammered.” The word stuck with me so much that I started to sing MC Hammer’s “You Can’t Touch This” with his catchphrase “hammer time.”

You know the lyrics, right

The, the, the selling hit you so hard

Makes me say “Oh my Lord”

Thank you for blessing me

With a mind to think and two quick feet

It feels good, when you know you’re short

A super dope homeboy from the CHItown

And I’m known as such

And this is a beat, uh, you can’t touch

I told you (long-only) homeboy (You can’t touch this)

Yeah, that’s how we trade it and you know (You can’t touch this)

Look at my eyes, man (You can’t touch this)

Yo, let me bust the funky lyrics (You can’t touch this)

Fresh new shorts, advance

You gotta like that, now you know you wanna dance

So move, outta your seat

And get a broker and catch this treat

While it’s rolling down, hold on

Pump a little bit and let ‘em know it’s going on

Like that, like that

Cold on a mission so fall them back

Let ‘em know, that you’re too much

And this is a beat, uh, you can’t touch

Now go into your closets, dust off your parachute pants from 1990 and sing along.

OK, seriously though, Thursday was a good reminder that one should have a few shorts positions in their portfolio when the market is weak. And since the market had already been weak for some time, one would already have been short stocks like TWTR, GM, GILD, TSLA, almost any biotech, and more.


Wednesday’s trade was framed by the minutes of the last FOMC meeting. Although we already heard directly from Janet Yellen, traders wanted to hear what the discussion was like behind closed doors. Moreover, traders wanted to know if the other voting members of the Fed, that make up the FOMC, agreed with Yellen’s comment of a 6-month time span after QE tapering ends when she would raise rates.

They did not settle upon that timeframe; therefore, stocks exploded. More easing via ZIRP was the agreed upon outcome of the FOMC minutes.

Part of the minutes read -

Almost all participants agreed that it was appropriate at this meeting to update the forward guidance, in part because the unemployment rate was seen as likely to fall below its 6½ percent threshold value before before long. Most participants preferred replacing the numerical thresholds with a qualitative description of the factors that would influence the Committee’s decision to begin raising the federal funds rate. One participant, however, favored retaining the existing threshold language on the grounds that removing it before the unemployment rate reached 6½ percent could be misinterpreted as a signal that the path of policy going forward would be less accommodative. Another participant favored introducing new quantitative thresholds of 5½ percent for the unemployment rate and 2¼ percent for projected inflation. A few participants proposed adding new language in which the Committee would indicate its willingness to keep rates low if projected inflation remained persistently below the Committee’s 2 percent longer-run objective; these participants suggested that the inclusion of this quantitative element in the forward guidance would demonstrate the Committee’s commitment to defend its inflation objective from below as well as from above.

So actually they seem confused. I’m not sure why it matters anyway; after all, Fed projections are horrible. Nevertheless, the market “heard” more QE and went wild buying everything in sight.


When the lunatics are running the financial asylum, I will celebrate the small victories.

Yesterday we learned the eight biggest U.S. banks must boost capital levels by a total of about $68 billion under new rules. The new rules are attempting to limit the big banksters reliance on debt. By 2018, banks must rely more on funding sources such as shareholder equity, rather than borrowing money.

According to Bloomberg:

Banks’ insured subsidiaries face tougher limits and must boost capital holdings by a total of about $95 billion, regulators said.

Officials said most firms are already on track to comply and could meet the requirements by retaining earnings, or could shrink or restructure some assets to reduce capital needs.

The final rules show regulators are unwilling to budge from an increasingly tough stance on banking requirements, as they seek to shore up banks after the 2007-2009 financial crisis.

“In my view, this final rule may be the most significant step we have taken to reduce the systemic risk posed by these large, complex banking organizations,” said Martin Gruenberg, chairman of the Federal Deposit Insurance Corp (FDIC).

The rule would apply to JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street.

The Financial Services Roundtable, a trade group for large banks, issued a statement blasting the limits, which are more stringent than the international Basel III agreement.

“This rule puts American financial institutions at a clear disadvantage against overseas competitors,” said Tim Pawlenty, the group’s chief executive.

The FDIC, Federal Reserve and Office of the Comptroller of the Currency approved the rules, implementing a portion of the Basel III agreement known as the leverage ratio, which is calculated as a percentage of a bank’s total assets.

The rules require the eight biggest bank holding companies to maintain top-tier capital equal to 5 percent of total assets. Insured bank subsidiaries must meet a 6 percent ratio. That’s higher than the 3 percent ratio included in the Basel agreement.

The banks have till June to pony up. It will be interested to see what happens.