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I really feel that the article missed the biggest reason why "the stock market may never recover", i.e. accounting fraud. Today's case in point, Cisco (CSCO).

by rada 16y ago

I really feel that the article missed the biggest reason why "the stock market may never recover", i.e. accounting fraud. Today's case in point, Cisco (CSCO). First, this early morning post from a respected financial/economic blog: Reading headlines alone, one might wonder if two headlines from today on Cisco were from the same quarter. Bloomberg reports Cisco Misses Estimates on Sluggish Corporate Spending. Meanwhile, the Wall Street Journal reports Cisco Profit Jumps 79%. Sounds like a great opportunity to go long Cisco, right? It's trading down 9% on the missed estimates news while in reality, having your profits up 79% and same-quarter sales up 20% over last year, especially in this economy, is not a bad thing. But wait, here is a later post from another equally respected blog: The book cooking continues. CISCO comes out with "great" earnings but hidden in there is the fact that they're writing their own financing - and holding it off-book. Better hope $21 holds, because if it doesn't it's a LONG way down. Wait a second - so those supposedly realized profits are really just an I-owe-you note from Cisco to itself? Ok then. Here is my point. Almost every company out there is hiding assets and liabilities off balance sheet where nobody can see them. It's fun to talk about complex economic theories but come on, the biggest reason the average investor can't get performance out of the stock market is the book cooking. Had the banking industry not held all that subprime risk off their books, the market would not have seen all that volatility, and we would have seen real Dow growth. As things stand, value investors short of a team of private investigator-style analysts simply cannot afford to trust their own judgement. When the SEC stops focusing on Martha Stuart's insider trading and start going after the real issues, the stock market will recover, democratization or not.

cynicalkane 16y ago
There's all kinds of things wrong with what you said, but I'll focus on the off balance sheet asset claim. Sure, almost every company "hides" assets and liabilities off balance sheet because it's standard accounting practice. There's lots of rules about it and it's perfectly reasonable to do in many situations. For instance, securitized risk is held off balance sheet because it effectively isn't an asset, liability or risk to the company that securitized it anymore. (That's the whole point of securitizing risk.) It is in general not true that "nobody can see them", since stuff like this generally has to be declared in financial reports. Yeah, you can't see it... if you're a lazy investor who just reads the quarterly financial statements and thinks that constitutes responsible investing. There are some companies that try to cook the books and game the rules. Surprise. Whenever there are rules people will try to game them. All this tin-foil hat nonsense about "book cooking" as reported in "respected blogs" leading to the ruin of "almost every company" and the entire stock market seems too silly be true.
- rada 16y ago
  I think you are making some very valid arguments however I disagree with the principle of your position. 1. Status quo. Yes, it's standard accounting practice to move huge amounts of liabilities off the balance sheet. Yes, whenever there are rules, people will try to game them. So what? It's wrong, and the status quo doesn't make it less so. When people like me call it out, it's not because we were born yesterday and have somehow missed the big bad world in front of our collective face. It's because we recognize that complexity (as applied to this situation) is made up to maintain the above mentioned status quo. When I had my startup, I chose to book profits on a cash basis instead of an accrual basis because I felt it was the sane thing to do. Would it have been perfectly legal for me to choose the accrual basis? Of course. Would it make any sense to pretend that I've made thousands of dollars where I've made zero? I don't think so. I am not comparing myself to Cisco but I don't think it's right for Cisco to pretend that their fantom profits are real either. Lucent did that and they are now bankrupt. 2. Lazy investor. My apologies for the dramatic comparison, but the "lazy investor" argument is a bit like the rape victim argument. First you are going to say that the investors who do not pore over financial disclosure documents deserve being "misled" because they are lazy. Then you are going to say that the Nigerian scam victims deserve it because they are gullible. How long before you say that a young woman is "asking for it" when she goes to a bad neighborhood at night, alone? I am not saying you personally would subscribe to that argument of course, I am just pointing out that if you take that logic to its conclusion, only the strong survive, and that excludes all of us. It's no more realistic to keep up with miles and miles of financial disclosures and other assorted small print than to keep out of bad neighborhoods at all times. 3. Tinfoil hat nonsense. I am not the biggest authority on the stock market but is there not a clear consensus that the current devaluation was caused by the financial firms' failure to recognize mind-boggling amounts of liability on their balance sheets? Perhaps I am misunderstanding what you are trying to say but it seems to me your last point was that that's just a wacky conspiracy theory. What do you attribute the devaluation to then?
  - bmm6o 16y ago
    > So what? It's wrong You're defining "wrong" to mean something other than "against the rules". If you can't get the rules changed, it doesn't matter what you wish they were. > First you are going to say that the investors who do not pore over financial disclosure documents deserve being "misled" because they are lazy I'm not the OP, but I wouldn't have said "lazy". However, intelligent investing takes time and skill that most people don't have. If you don't read the financial reports, why do you think you have enough information to decide whether to invest in a company? Reading WSJ headlines does not make an informed investor. The rest of your paragraph is a hyperbolic effort to put words in another's mouth.
joe_the_user 16y ago
Or they could have missed the possibility that the originally claimed "equities premium" never existed. As I recall, many claims of a historical equities premium vanished when the listing and de-listing of stocks was taken into account.

by rada 16y ago

cynicalkane 16y ago

There's all kinds of things wrong with what you said, but I'll focus on the off balance sheet asset claim. Sure, almost every company "hides" assets and liabilities off balance sheet because it's standard accounting practice. There's lots of rules about it and it's perfectly reasonable to do in many situations. For instance, securitized risk is held off balance sheet because it effectively isn't an asset, liability or risk to the company that securitized it anymore. (That's the whole point of securitizing risk.) It is in general not true that "nobody can see them", since stuff like this generally has to be declared in financial reports. Yeah, you can't see it... if you're a lazy investor who just reads the quarterly financial statements and thinks that constitutes responsible investing. There are some companies that try to cook the books and game the rules. Surprise. Whenever there are rules people will try to game them. All this tin-foil hat nonsense about "book cooking" as reported in "respected blogs" leading to the ruin of "almost every company" and the entire stock market seems too silly be true.

rada 16y ago
I think you are making some very valid arguments however I disagree with the principle of your position. 1. Status quo. Yes, it's standard accounting practice to move huge amounts of liabilities off the balance sheet. Yes, whenever there are rules, people will try to game them. So what? It's wrong, and the status quo doesn't make it less so. When people like me call it out, it's not because we were born yesterday and have somehow missed the big bad world in front of our collective face. It's because we recognize that complexity (as applied to this situation) is made up to maintain the above mentioned status quo. When I had my startup, I chose to book profits on a cash basis instead of an accrual basis because I felt it was the sane thing to do. Would it have been perfectly legal for me to choose the accrual basis? Of course. Would it make any sense to pretend that I've made thousands of dollars where I've made zero? I don't think so. I am not comparing myself to Cisco but I don't think it's right for Cisco to pretend that their fantom profits are real either. Lucent did that and they are now bankrupt. 2. Lazy investor. My apologies for the dramatic comparison, but the "lazy investor" argument is a bit like the rape victim argument. First you are going to say that the investors who do not pore over financial disclosure documents deserve being "misled" because they are lazy. Then you are going to say that the Nigerian scam victims deserve it because they are gullible. How long before you say that a young woman is "asking for it" when she goes to a bad neighborhood at night, alone? I am not saying you personally would subscribe to that argument of course, I am just pointing out that if you take that logic to its conclusion, only the strong survive, and that excludes all of us. It's no more realistic to keep up with miles and miles of financial disclosures and other assorted small print than to keep out of bad neighborhoods at all times. 3. Tinfoil hat nonsense. I am not the biggest authority on the stock market but is there not a clear consensus that the current devaluation was caused by the financial firms' failure to recognize mind-boggling amounts of liability on their balance sheets? Perhaps I am misunderstanding what you are trying to say but it seems to me your last point was that that's just a wacky conspiracy theory. What do you attribute the devaluation to then?
- bmm6o 16y ago
  > So what? It's wrong You're defining "wrong" to mean something other than "against the rules". If you can't get the rules changed, it doesn't matter what you wish they were. > First you are going to say that the investors who do not pore over financial disclosure documents deserve being "misled" because they are lazy I'm not the OP, but I wouldn't have said "lazy". However, intelligent investing takes time and skill that most people don't have. If you don't read the financial reports, why do you think you have enough information to decide whether to invest in a company? Reading WSJ headlines does not make an informed investor. The rest of your paragraph is a hyperbolic effort to put words in another's mouth.

joe_the_user 16y ago

Or they could have missed the possibility that the originally claimed "equities premium" never existed. As I recall, many claims of a historical equities premium vanished when the listing and de-listing of stocks was taken into account.