I hope all my freinda are well and in good health, please PM me to catch up..I miss many of you..you all know who you are.
I urge everyone to fully understand the points I am trying to get across here.
This is a very serious warning and a prelude of sthings to come in my humble opinion.
SEC Cautions Companies, Alerts Investors to Potential Dangers of "Pro Forma" Financials
FOR IMMEDIATE RELEASE
2001-144
Washington, DC, December 4, 2001 — Today we are issuing cautionary advice that companies and their advisors should consider when releasing "pro forma" financial information. We believe it is appropriate to sound a warning about the presentation of company earnings and operating results on the basis of methodologies other than Generally Accepted Accounting Principles (GAAP).
We are also issuing an "Investor Alert" that describes how "pro forma" financials should be analyzed, including a reminder that they should be viewed with appropriate and healthy skepticism. Because "pro forma" financial information by its very nature departs from traditional accounting conventions, its use can make it hard for investors to compare an issuer's financial information with other reporting periods and with other companies.
We believe that – with appropriate disclosure – accurate interpretations of and summaries of GAAP financial statements benefit investors. The cautionary advice and investor alert are part of our commitment to improve the quality, timeliness, and accessibility of publicly available financial information.
The Investor Alert on "pro forma" financials and the Commission's release on cautionary advice on the use of "pro forma" financial information can be accessed on the SEC's Website at www.sec.gov and then clicking on "SEC Issues Caution, Alert on Pro Forma Financials."
Cautionary Advice on the Use of "Pro Forma" Financial Information
Alert on "Pro Forma" Financial Info
sec.gov
I urge all Investors, Retail and Institutional to fully understand what is being said here. It is of my opinion that when the go ahead is given it will severly put a cap on aggressive earnings reportings and put a serios cap on many companies of many sectors and industries(not just tech) ie. liek Donald Trumps company that recently was in the news for abuse. ORCL, which is one of the very few in the Nasdaq 100 that reports GAAP had a very somber report only a few days ago...so that reinforces my opinion.
NASDAQ 100 Companies Report Combined Losses Of Over $82 Billion To The SEC While Reporting Profits Of $19 Billion To Shareholders
1/23/2002 12:25:00 PM
ALBUQUERQUE, NM, Jan 23, 2002 (INTERNET WIRE via COMTEX) -- For the first three quarters of 2001, the one hundred companies that make up the NASDAQ 100 reported $82.3 billion in combined losses to the Securities and Exchange Commission (SEC). For the same period, these companies reported $19.1 billion in combined profits to shareholders via headline, "pro forma" earnings reports--a difference of $101.4 billion or over $1 billion per company.
The five largest NASDAQ 100 companies (by market capitalization) had combined profits both on a GAAP and a pro forma basis; however, Microsoft (MSFT), Intel (INTC), Cisco Systems (CSCO), Oracle, and Dell reported combined real profits of $4.4 billion to the SEC, but they reported $13.4 billion headline profits to shareholders via pro forma earnings--$9.0 billion more. Thus, sixty seven percent of this group's headline pro forma profits resulted from net positive pro forma adjustments made to GAAP earnings.
These findings of a recent research study were released today by SmartStockInvestor.com, LLC. The complete report of the study is available at www.smartstockinvestor.com/commentary.html. It includes discussion of Cisco and Intel earnings releases. For the first three quarters of 2001, Cisco lost over $3 billion on a GAAP basis, but reported pro forma earnings of $0.7 billion that "beat the street." Intel's "beat the street" headline earnings were more than three times GAAP earnings.
Reports to the SEC (10Q's and 10K's) are regulated, must follow Generally Accepted Accounting Principles (GAAP), and are subject to audit. Headline, pro forma earnings are unaudited, and, in a poor economy, are varying more and more from GAAP as companies struggle to meet earnings projections.
Outgoing SEC Chief Economist Lynn Turner says pro forma earnings are effectively "EBS" earnings--"Everything but the Bad Stuff."
As seventy five percent of NASDAQ 100 companies used pro forma reporting to significantly improve GAAP earnings by an average of $1.6 billion per company, study author John May, MBA, suggests the research indicates that the SEC's promised crackdown on pro forma reporting should happen sooner rather than later.
SAFE MONEY REPORT www.savemoneyreport.com
Cover Story -- February 2002
2,467 LISTED COMPANIES SUSPECT OF COOKING BOOKS!
8 CORPORATE EARNINGS KILLERS ABOUT TO SMASH WALL STREET!
The twin towers of the Enron Corporation in Houston were not struck down by hijacked airliners. Nor did they implode in a mushroom cloud of dust and debris.
But in the rubble of the Enron collapse, the public is finally starting to see the truth -- America's most powerful CEOs lying about their corporate earnings ... the world's most prestigious accounting firms helping to cook the books ... brokers and rating agencies knowingly hiding the truth ... investors and employees getting wiped out.
We warned you about this long ago. Way back in September of 1999, the Safe Money headline declared:
"28% OF US COMPANIES ARE TELLING HALF TRUTHS OR OUTRIGHT LIES ABOUT THEIR EARNINGS."
Then, in April of 2001, Safe Money's "Corporate Earnings Blacklist" flagged Enron itself as a company "suspect of manipulating its earnings."
Six months later, the SEC began its investigation. Another six weeks later, and the company was in bankruptcy court. And today, Enron's implosion is so earth-shattering, the news has even eclipsed the coverage about the war on terrorism. Strangely, however ...
The Ivory-Tower Economists Still Don't Get It!
They don't realize Enron is just one of many accounting scandals that will bust wide open in 2002. Indeed, in our current Corporate Earnings Blacklist, there are 2,467 other companies that we feel are suspect of earnings manipulations.
Already, we have the largest corporate bankruptcy in history (Enron) ... the largest retailer bankruptcy in history (Kmart) ... and the largest telecom bankruptcy of all time (Global Crossing).
What's next?
First, hundreds of companies with murky or complex accounting are going to get dumped mercilessly by angry investors. If the company discloses the dirt, investors will sell. If it refuses to disclose, investors will sell even more! The most recent examples: Tyco, Williams Companies, GE, PNC Financial Services, Cendant.
Second, dozens of other major companies will fail in the coming months. Big names. One shocker after another.
Third, hundreds of companies will soon be writing off up to $1 trillion in goodwill -- the same bogus asset that I've been warning you about all along.
Fourth, millions of companies in the US and around the world will be struck by the twin forces I told you about last month -- debt and deflation.
What about the so-called "recovery" so many economists are talking about? It's a mirage. A fantasy.
Never forget: The key force driving the US economy and stock market is EARNINGS. And right now, I count at least 8 Corporate Earnings Killers that are about to crash into Wall Street.
Corporate Earnings Killer #1
The Bankruptcy Crisis
Nothing can kill earnings more swiftly than the after-shocks of large bankruptcies. Even the earnings of financially healthy companies are vulnerable.
Just with Enron, the list of creditors is fifty-four pages long! Most will never see a penny of the money they're owed.
We see the same pattern at Kmart and at Global Crossing. And we'll see it again and again at any other major company that goes belly up.
Some observers are hoping these companies will soon come out of Chapter 11. The facts tell a different story:
Fact: Even in good times, three out of four companies that file Chapter 11 never emerge from bankruptcy.
Fact: Among the few that do come out, 30% fall right back into bankruptcy, filing Chapter 11 a second time. Examples: Memorex, Cherokee, and LTV. TWA filed three times in the last 10 years!
Fact: Kmart alone will ravage the earnings of hundreds of suppliers. Some examples:
* American Greetings, Kmart's exclusive supplier, has been counting on sales of at least $250 million per year from Kmart. That will soon be history.
* Eastman Kodak, Kmart's exclusive film developer, stands to lose up to $300 million in sales, killing 7% of Kodak's earnings.
* Revlon, steps away from bankruptcy itself, is expected to lose up to $74.8 million; Procter & Gamble, up to $2 billion.
* Church & Dwight, Dial, Clorox, Gillette, Playtex, Rayovac, Cardinal Health, Scotts Company, Fleming Company, Footstar, and Martha Stewart stand to lose anywhere from 5% to 50% of their business.
* Kmart's landlords -- Kimco Realty, New Plan Excel, Developers Diversified, and Glimcher Realty -- will be devastated as their lease agreements are ripped up to shreds. Kmart's transport companies -- such as Swift Transportation and Roadway Corporation -- will suffer a big blow.
And don't forget Kmart's banks! Kmart has borrowed $1.46 billion of its credit lines from a consortium of banks lead by J.P. Morgan Chase.
Right off the bat, I figure the banks will get stuck with more than $700 million in bad Kmart loans: Fleet Boston with $119.9 million, J.P. Morgan Chase -- $117.8 million, Bank of New York -- $104.5 million, Wachovia -- $81.9 million, just to name a few.
Wall Street will try to pooh-pooh this. But if you're in business yourself, you know exactly what happens when a major corporate customer goes bankrupt: You lose when they fail to pay you for goods already delivered ... and then you lose again when you stop selling to them in the future.
That's what happened when Burlington Industries filed for bankruptcy in November 2001. Some of its largest suppliers got clobbered.
That's what happened with Bethlehem Steel, Polaroid, and Phar-Mor ... and what's happening AGAIN with Enron, Kmart, and Global Crossing.
This is the natural pattern. It's largely immutable. And it's going to continue to strike the earnings of good and bad companies alike.
Corporate Earnings Killer #2
Deflation Will Sabotage The Pricing Power of Tens of Thousands of Companies
When deflation strikes, the simple act of buying now and selling later becomes a treacherous proposition.
Back in 1992, when steel prices plunged by $50 a ton, Sharon Steel was forced back into bankruptcy, never to recover. The same has happened to scores of other companies that have been socked by falling commodity prices.
More recently, when dot-coms went bust, they flooded the market with second-hand computer servers, drove down their prices, and all but wiped out the profitability of PC and server makers. Sun Microsystems last reported a $431 million loss. Hewlett Packard and Compaq Computer have also gotten caught in the melee.
Another situation: Delphi Automotive Systems is an auto parts manufacturer with over 80% of its sales to General Motors. In the fourth quarter of 2001, parts sales actually increased in volume. But as deflation ravaged prices, the company's earnings plunged from a profit of $26 million in the third quarter to a loss of $131 million in the fourth.
When profit margins are slipping, what do companies do?
* They cut back on research and development. Already, the growth in R&D spending is slipping sharply -- from 9.5% between 1995 -- 2000 ... to 5.4% according to the most recent estimates ... and probably to zero or less as the recession deepens. The earnings of companies like Sigma Aldrich and Electronic Data Systems that provide equipment and support services for R&D will get slammed.
* They slash business travel to the bone. In 2001, 65% of travel budgets were down 10% or more; and most businesses spent 28% less on travel. I expect they will spend even less in 2002. The earnings of travel companies like Carlson Wagonlit and Navigant will get killed.
* They severely cap executive expense accounts. Major victims: High-end restaurant chains like Smith & Wollensky and upscale hotel chains like Hilton, Hyatt, and Marriott.
* And of course, they cut jobs. In January alone, Gateway announced it was cutting loose 2,250, SBC Communications cut 5,000, Procter & Gamble -- 1,440, Federated Department Stores -- 6,000, Toys 'R' Us -- 1,900, Lucent Technologies -- another 7,000. Ford Motor -- 35,000.
This Is Not Just A Forecast. Corporate Spending Is Already Falling Off A Cliff!
Back in 1990, corporate investment spending in the US plunged $80 billion. Now, it's fallen by TWICE that amount -- over $167 billion. And it's just beginning.
Airlines are not buying new airplanes. That's why Boeing's orders plunged 45% last year.
Hotel chains are struggling with huge vacancy rates. That's why demand for new hotel construction is falling.
In the semiconductor industry, companies have slashed the usage of their factories and production from 90% to 60% of their capacity. This is what's gutting the demand for new facilities, new equipment, more workers.
For PC manufacturers, utilization has plunged from 89% to 61%, killing off even more demand.
Communications equipment manufacturers were using 87% of their plants a couple of years ago. Now they're down to a meager 58%.
And if you think that's bad, look at the giant American steel companies, now suffering from so much excess capacity that their profitability is the worst in 40 years!
How in the world are companies in this kind of a squeeze going to step up their capital spending?
Right now, they're doing exactly the opposite. They're scurrying to mothball their factories or close retail outlets: Ford Motor is closing five plants in North America. Emerson Electric is closing 50 plants worldwide. JDS Uniphase is shutting down its US facilities, planning on moving them to China. Drugstore chain CVS is shuttering 200 pharmacies. Sears plans to close 89 underperforming stores. On top of the lay-offs I mentioned a moment ago, Toys 'R' Us just announced 64 store closings.
And they say this is a recovery? Give me a break!
Corporate Earnings Killer #3
Corporate Debt!
Corporate America is swamped with debt to the tune of 156% of GDP. That's 44% more than a decade ago. It's also bigger than the debt load Japan faced before their stock market bubble busted back in 1990.
Right now, many companies are so deeply buried in debt that they can't even think about spending money on new plants or equipment.
For every single dollar of stockholders' equity, Maytag has $5.09 in debt; Xerox, $5.22; Sprint PCS, $12.09; Nextel, $18.52; Ford, $21.00!
How bad is that? Well, even just one dollar of debt per dollar of equity is usually too much. When you start seeing companies with more than double, five times, or even TWENTY times the debt level they should have, the drag on earnings -- not to mention the danger of failure -- is literally off the charts.
Corporate Earnings Killer #4
Goodwill Write-Offs To Hit $1 Trillion, Bashing Earnings Even Further
Goodwill is the same kind of often-bogus, intangible asset that the savings and loans used back in the 1970s to make weak or bankrupt institutions look strong and healthy. By the time the public finally caught on, thousands of S&Ls were down the tubes and the entire industry was threatened with extinction.
You'd think Corporate America would have learned something from that lesson. They didn't.
In the tech boom, if a company paid, say, $10 billion for a dot-com with just $1 billion in assets, the missing $9 billion would often be booked as "goodwill." That was supposed to represent the value of the company's customer lists, its "good name," its "great ideas," etc.
Baloney! It was mostly bogus, and I told you back then that these companies would soon have to face their day of reckoning. Now, in the wake of the Enron collapse, that day has arrived.
How big is the problem? Monstrous! And it shows up when companies are finally forced to write off goodwill and other assets with so-called "one-time charges."
Back in 1989, one-time charges to earnings among the S&P 500 companies totaled around $10 billion. That was considered pretty big in those days.
Now look! In 2001, extraordinary charges to the S&P 500 companies reached $360 billion. Can you imagine that? THIRTY-SIX times more than 1989!
And you ain't seen nothin' yet. Just with goodwill alone, there is now $1 trillion out there, most of which will probably have to be written off.
Already, AOL-Time Warner has warned of a whopping $40-to-$60 billion charge against earnings due to "impaired assets." Tyco has $30 billion in goodwill on its books but so far refuses to disclose the details. AT&T, Viacom, Crown Cork & Seal, and Qwest Communications are just a small sampling of other companies expected to announce huge write-offs in the first quarter.
And watch out, because some of the largest write-offs have been the prelude to major bankruptcies:
* In July 2001, Bethlehem Steel took a $1 billion unusual non-cash charge against earnings to write off the value of a deferred tax asset. Three months later, it filed for Chapter 11.
* Excite@Home, the provider of high-speed Internet access, took a $4.63 billion charge against earnings in the fourth quarter of 2000. Nine months later, in September 2001, it was in bankruptcy court.
* Ditto for Enron: The last and final warning of the collapse came in October of last year -- a $1.01 billion charge due to investments gone sour.
Lesson to be learned: By the time write-offs are announced, you should be miles away ... and if you're not, it's your last warning to sell.
Corporate Earnings Killer #5
Pension Plan Gains Disappearing
Don't ask why, but under Generally Accepted Accounting Principles, if a company's employee pension fund has excess assets, the company is allowed to count them as income.
It has nothing to do with their operations. It's not even the company's own money. But many large companies do it anyhow -- legally. Now it's returning to haunt them.
Actuarial firm Millman USA reports that 50 of the largest US pension funds collectively lost $38 billion last year! So far, due to rules that allow the companies to average out their pension plan's performance over several years, it hasn't hit their bottom line.
But, now, as the market heads south for the third consecutive year, the truth will finally come out. Earnings will be chopped even further.
Corporate Earnings Killer #6
Plunging Currencies!
Foreign currencies have been plunging for years, and the trend is now accelerating. This socks the earnings of US-based companies in two ways:
First, with every major country selling everything they produce in cheapened money, they are effectively running permanent, worldwide fire sales. American firms, still selling at top-dollar, cannot compete and will continue to lose sales.
Second, when US firms bring their foreign earnings home, they have to translate them back into dollars. Since the foreign currencies are falling, they inevitably wind up with less and less.
Blue chip earnings most vulnerable to falling currencies are:
US-Based Company Foreign Exposure
(% of sales)
Exxon Mobil Corp 69.3%
McDonald's Co 63.1%
Coca-Cola Co 61.2%
Intel Corp 58.7%
IBM 57.9%
Eastman Kodak Co 51.4%
Oracle Corporation 49.0%
Boeing Co 47.2%
Procter & Gamble 48.2%
Du Pont 42.5%
JP Morgan Chase & Co 32.8%
General Motors Corp 26.1%
Corporate Earnings Killer #7
Derivatives!
As I told you last month, an estimated $24 trillion in derivatives lurks off the balance sheets of US corporations. This was one of the big time bombs that blew up at Enron. It will happen again at many others.
Corporate Earnings Killer #8
Litigation!
In 2000, 216 companies were named as defendants in class-action shareholder lawsuits. In 2001, that number more than doubled to 487. Watch that number explode again this year, further ripping apart earnings. |
