Notwithstanding the canons of Sarbanes-Oxley, managements still have plenty of tools to manipulate their earnings. This is especially true during the interim periods, when auditors are more willing to accept management positions.
I'm fairly confident that a substantial portion of the respectable earnings we are witnessing are more a function of reversals of prior period adjustments and front-end-loaded cost cuts than they are true economic earnings. Accounts receivable reserves, inventory reserves, self-insured health care accruals and the like are all easily subject to manipulation. As I wrote previously, managements cannot cut their way to prosperity. Businesses require true earnings and revenue growth.
My sense of it is that managements wrote off everything they possibly could in the fourth quarter, with the notion that the overall economy and markets were so lousy across the board it didn't matter what they reported. A clever management can slowly bring these earnings back onto the income statement without causing too much of a ripple.
I'm not being cynical when I say this. Rather, I am just presenting these practices for the reality they represent. Moreover, I don't think it is part of some grand scheme at any particular company. Instead, this behavior is a function of each manager along the way trying to make his or her own numbers for the year.
One of the reasons I like oil and gas royalty trusts such as BP Prudhoe Bay Royalty Trust (BPT - commentary - Cramer's Take) and Permian Basin Royalty Trust (PBT - commentary - Cramer's Take) is that the earnings aren't subject to manipulation. In fact, there are no managers -- just trustees that remit the royalties. In this environment, that is money in the bank.
P.S. Will you be there when Cramer makes his next move?
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Market Commentary Beyond the Lede: Celgene Takes Its Knocks 5/4/2009 1:31 PM EDT The company leaves its Revlimid target set too high, setting it up for disappointment.
At the time of original publication, Atayan had no positions in any stocks mentioned, although holdings can change at any time.
Christopher Atayan is chief executive officer of AMCON Distributing Company (NYSE:DIT), an $860 million distributor of branded consumer products and retailer of natural products. He also serves as a director of several companies, a private-equity adviser to a family office and a fixed-income adviser to a leading hedge fund.
Atayan has been active in the private-equity and investment banking industry for 27 years and is a managing director of Slusser Associates, a middle-market private-equity and merger boutique he helped establish in 1988. Previously, Atayan was with PaineWebber Incorporated in High Yield and Leveraged Buyouts, Goldman Sachs in Equities and Morgan Stanley in Mergers and Acquisitions.
He is a graduate of the University of Wisconsin with a BBA with honors in finance and economics; he attended the University Of Chicago Graduate School Of Business, where he was a Vehon Scholar. Under no circumstances does the information constitute a recommendation to buy or sell securities.
Atayan appreciates your feedback; click here to send him an email.
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