View Full Version : What the ....

01-31-2002, 11:58 PM
So early week sell-off was attributed to "accounting fears". Thank goodness people got over that. When I read that I laughed so hard. Could people really sell of the market so hard on that issue? What do you posters think?

I will tell you this, if its true then I give market participants a big fat F! Of all the things you can choose to color your perspective that has to be among the stupidest I have ever heard. After all that would prove the markets aren't paying attention to what should be the true mantra of Wall Street, say it with me CASH IS KING! Accounting is an art, not a science. There are a good 40 accounts I could legally choose to work with to manage earnings and yet investors treat earnings like words from God. Its ridiculous and I would think some influential analysts would get it to stop, then again maybe they liked the buying opportunities it gave. If companies restate their earnings from the past, people need to remember that it doesn't necessarily mean anything. Earnings are the result of accounting gains/losses and don't always reflect real world gains that result in cash in the bank. Further you must remember that stocks are best valued as a future stream of cash payments. If so and so goes back and restates their earnings in the past, but its purely from a mistake that has no bearing on future business, you are killing yourself if you downgrade that stock on that alone, or on the flipside you were making a terrible estimate of its future to begin with. I would say half or less of the restates recently have had any plausible affect on future operations, the other half were more like "oops we goofed on a couple of deals and recognized a bit too much revenue too soon". Yet they hammer each and every one like its the same.

Here is my favorite method. Learned it a long time ago. If you are truly worried about your stock's accounting or financial condition, try this out. Get two numbers, EBITDA and operating cash flow from the cash flow statement. Don't trust a company's EBITDA, do the math yourself. Now do that over a 2-3 year period for every quarter if you can. Look at the trends they produce. If the cash flow isn't keeping up with the EBITDA, be worried! That is a company that could run into troubles over time. You can fake earnings and sales, but you can't fake cash or lack of it in the bank. These two numbers should trend fairly well, maybe cash flow lags a quarter due to timing. If they aren't trending together at all, that is something I would look at. There you go...POOF most of your accounting "fears" are resolved.

02-01-2002, 08:00 AM
Certainly there are many market participants that do at least the minimal analysis that you specify here regarding operating cash flow and EBITDA. Certainly what is reported in the media regarding the reasons for market activity should be viewed skeptically. I think that most of the concerns regarding accounting have to do with M&A activity and how the accounting is done after the mergers. I'm not real familiar with Tyco but from what I understand Tyco has been buying companies for years and has used very "aggressive" accounting procedures in doing so. There have been many questions regarding the "quality" of Tyco's earnings and whether or not the company is being totally accurate in it's financial disclosure statement. These questions about Tyco have been debated for years now and I would think that by now it's financial statements would have been extremely well scrutinized at this point. Tyco is trading near a multi year low that was seen when a perma bear named David Tice trashed the companies accounting practices in late 1999. Tyco has run up to 60 a few times since then so perhaps it's just in a wide trading range and the accounting practices issue will surface every now and then in a cyclic kind of way.

02-01-2002, 07:12 PM
I think the markets are quite edgy these days... equities have already priced in an aggressive V-shaped recovery so any disappointment to the downside could trigger further selling.

The story is even more so in the corporate bond market. Spreads on investment grades are quite high and the yield curve is still fairly steep making the carry game in the 5 year sector quite attractive. Still a lot of fund managers who got burned by Enron are very reluctant to go overweight corporates.