The by-line on Fox Business this a.m. was that stocks were down because of “DC grid-lock.” Is this some kind of joke? How about stocks are down because they are more overvalued than at anytime in history by every single financial metric except the highly manipulated GAAP accounting net income calculations.
Speaking of which, the entire financial reporting apparatus has become one of the biggest jokes – if not an outright fraud – in financial markets history (with all due respect to the Ponzi scheme’s currently in operation at Amazon and Tesla). Target’s earnings report this morning is the perfect example.
Target’s stock “pop” was being attributed by the cable tv financial “reporters” to the fact Target’s sales and earnings per share “beat” Wall Street estimates. That’s not hard to do because the highly exalted “beat” is a rigged game played by company management and Wall Street, as management slowly “guides” Wall Street’s penguins into a series of reduced “estimates” leading up to the earnings release. By the time the results are reported, the earnings bar is low enough for a paraplegic to “jump” over.
The financial tv sock-puppets were reporting that Target’s sales had increased. Well, maybe vs. “guidance” but unfortunately none of these faux-reporters bothered to look at Target’s actual earnings report. There we find that Target’s sales declined year over year by 1.1%. Gross profit dropped 2.5%, which means Target likely engaged in predatory price-cutting to stimulate its online sales vs. Amazon.
Targets earnings before interest and taxes – its EBIT – plunged 10.2%. Provision for taxes increased quarter over quarter by $74 million, or 26%. So how did Target “beat” earnings?
Target’s “interest expense” using GAAP accounting manipulation declined by $271 million, or 65%. This is despite the fact that TGT’s debt level increased by $55 million year over year for Q1. What gives? Anyone who bothered to read TGT’s earnings release after seeing the headline report, likely nobody except me, would find this disclosure:
The Company’s first quarter 2017 net interest expense was $144 million, compared with $415 million last year. This decrease was driven almost entirely by a $261 million charge related to the early retirement of debt in first quarter 2016.
Target refinanced debt in Q1 2016 and paid a premium to the par (book) value of the debt. This was added in to Target’s interest expense in Q1 2016. It was a one-time charge that could have just as easily been stripped away and disclosed as a “non-recurring loss” in order to keep the income statements comparable for comparison purposes. Adding the $261 million non-operating GAAP charge back into the Q1 2016 EBIT boosts TGT’s earnings before taxes that quarter to $1.158 billion. In Q1 2017 TGT’s earnings before taxes was $1.034 billion. As you can see, TGT’s “apples to apples” earnings before taxes declined by $124 million. From there Targets net income and earnings per share on the true “adjusted-GAAP” basis would show a decline, not a gain.
This type of earnings gamesmanship that goes on between corporate America, Wall Street and the zombified sock-puppet financial “reporters” is endemic to the giant U.S. Ponzi Scheme. Using earnings “sleight of hand” and allowable GAAP accounting earnings management gimmicks, Target was able to transform deteriorating revenues and economic profitability into something that is being touted in the fast-food financial reporting machinery as “an earnings POP.” Bad news was converted into good news and Target’s stock jumped 4.4% at the open today despite a 1.1% drop in the S&P 500.
This is the type of financial analysis that you will find in the Short Seller’s Journal and it’s why subscribers were able ride Sears (SHLD) from $11.92 to $7.89 in 5 weeks and KATE from $23.67 to $17 in 8 weeks. You can find out more about this unique subscription service here: Short Seller’s Journal.
You can’t throw darts at the market and win every time just yet. At some point everything will no doubt head south, but for now its great having your analysis to pick the ones with best chance. In all honesty mate, the recommendation I am most looking forward to in the SSJ and the MSJ is what bar we all meet at in a couple of years time for some celebratory brewskis. – subscriber “James” from the UK