Born yesterday: The mismatch between fundamentals and share price started long before DJT
On the other hand, Donald Trump has certainly been a bad influence on investors', and citizens', perceptions of reality for a very long time..
“I said that the third era started “like three years ago,” because that’s when GameStop Corp.’s stock went to the moon and inaugurated the era of meme stocks, stocks that trade purely on sentiment and attention rather than anyone’s views about fundamental value. But really I think the third era started a bit earlier, with cryptocurrency.”
I like Matt and his writing. (He knows because I often message him nearly instantaneously after his column arrives in my inbox!)
He is prolific. He seemingly gets away with writing gobs of stuff with very little editorial intervention. Today’s first newsletter entry is 2000 words and that is only the first of five entries, not counting the extra links section and footnotes. I admit I envy his perch.
But every once and awhile his relatively young age shows. (Wikipedia says he is about 45-46.) The disconnect between fundamentals and share price started before meme stocks and before crypto.
Matt is right about one thing: Donald Trump had something to do with moving the needle. Trump was the first to be prosecuted by the SEC for the abuse of alternative non-GAAP metric while communicating quarterly results. His Trump Casino was “innovative” in its use of pro-forma metrics to say anything you want to investors and drive a positive share price reaction, regardless of fundamental GAAP earnings.
The SEC took its first ever enforcement action for misleading earnings against none other than current GOP presidential candidate Donald Trump’s Trump Hotels & Casino Resorts Inc. in 2002, for statements in its third-quarter earnings release three years before.
The company had used a net-income figure that differed from net income as calculated under GAAP. Trump Hotels’ chief executive officer said the company’s positive results and improvement from the third quarter in 1998 were the result of improvements in the company’s operations. The SEC alleged that the company violated the law in highlighting “purportedly” positive results but failing to disclose that those results had occurred because of an unusual one-time gain rather than ongoing activities.
Stephen M. Cutler, the director of the commission’s enforcement division at the time, said in the press release that the case starkly illustrated how pro forma numbers “can be used deceptively” and demonstrated “the mischief that they can cause.”
The Trump company settled with the SEC by agreeing to a cease-and-desist order.
A while before I wrote that in 2016 I wrote about how Carl Icahn and George Soros were proving, in real-time, that fundamentals just did not matter anymore.
All the devils — Icahn, Soros, Bill Ackman, and PwC — are in this one from 2013:
Last Monday, legendary hedge fund investor George Soros made a big “long” or buy bet on Herbalife, joining the iconic Carl Icahn. Soros and Icahn can’t possibly justify these investments based on a thorough vetting of the company’s financial disclosures. Why not?
Icahn’s and Soros’ trades aren’t driven by real audited numbers. Herbalife’s numbers for the last three years and the most recent 10-Qs are now unreviewed and unaudited by an independent certified public accounting firm after the scandalous resignation of auditor KPMG in April because of insider trading by its partner in charge. In other words, all bets on financial reporting integrity and completeness are off. Icahn and Soros are simply swinging big sticks to move the market their way.
Maybe Soros and Icahn just want to bet against William Ackman, the head of hedge fund Pershing Square who holds a 20 million shares short position. That’s primal enough. Ackman’s trade, a gutsy move too, required selling borrowed shares on the expectation that the price would fall and the borrowed shares could be repaid with cheaper ones. That’s a $1 billion bet that is based on fundamental beliefs— Ackman feels strongly that Herbalife is a pyramid scheme, a fraud that investors will soon abandon and regulators will eventually shut down. Herbalife says it spent approximately $15.1 million after-tax in the first six months of 2013 to respond to Ackman’s allegations.
In the meantime, Icahn’s and now Soros’ investment pushed the stock price higher and made it hundreds of millions more expensive for Ackman to unwind his trade, assuming he has not already begun to reverse course.
So, whether it’s big swinging sticks putting their weight behind a stock, justified or not, or it’s a company manipulating the perceptions of its results by using misleading metrics, the gap between fundamentals and share price is bigger than ever but not a new phenomenon.
Also, I hardly think that Einstein and Galileo would agree that you can’t do complex math without Excel. Heck, I learned how to do it with Lotus 1-2-3!
© Francine McKenna, The Digging Company LLC, 2024