You never realized how powerful accountants can be when instructed by scumbag CEOs and CFOs to make the numbers work. In the real world, profits are generated by increasing revenue. You can marginally increase profits through efficiency gains, but you must increase revenue to increase profits over the long haul. This chart shows the power of accounting shenanigans and “creativity”. Since 2009 Earning Per Share of S&P 500 companies has increased by an astounding 230%. This is the highest jump in history after a recession. Meanwhile, Sales increased by a pitiful 26% over this same time frame.

Guess what happened in March of 2009? The FASB caved in to Bernanke & Geithner and agreed to let the Too Big to Trust Wall Street Banks value their toxic debt at whatever they chose. Mark to fantasy was born. The financial industry has produced hundreds of billions in fake accounting profits ever since. No revenue was required to book billions in profits. The $3 trillion of free Bennie bucks used by the Wall Street banks to produce billions of risk free profits negated any need for banks to actually lend money to real people in the real world. That is so 1998.

The titans of industry have also used their company’s cash to buy back their own stock at record highs. Boosting EPS through reducing the number of shares is much easier than increasing sales. That requires a strategy, along with execution. Who has time for that?

Then we have Uncle Ben and his zero interest rates allowing debt saturated corporations to refinance loans at a much lower rate. Extend and pretend does wonders for EPS.

Then we had Obama and his Keynesian acolytes doling out hundreds of billions in subprime student and auto loans to artificially boost consumer spending, while the bad debt losses accumulate on the government books for future generations.

But even accountants aren’t God. Eventually you run out of reserves to relieve and ways to hide your losses. That time has arrived. Zero Hedge provides the facts:

The first quarter GDP data revealed a $213bn, 10% annualized slump in the US Bureau of Economic Analysis’s (BEA) favored measure of whole economy profits, defined as profits from current production. Also known as economic profits, the BEA makes adjustments to remove inventory profits (IVA) and to put depreciation on an economic instead of a tax basis (CCAdj). Edwards shows the stark difference between the BEA’s calculation for post-tax headline profits (up 5.3% yoy) and economic profits (down 6.8% yoy) in the chart below. In short: the plunge in actual corporate profits in Q1 was the biggest since Lehman!

You gotta love a government that can report a 5.3% increase in corporate profits when they actually fall by 6.8%. What I notice in this chart from Albert Edwards is the discrepancy between the headline number and the true number usually track each other closely. It seems they deviated greatly during the last bubble from 2005 through 2008, and then we enjoyed a massive dose of reality in the 2008/2009 crash. It seems we have had another huge deviation from 2011 through until today. Real corporate profits are plunging. I wonder what happens next?

Look out below!!!!

25 thoughts on “ACCOUNTING MAGIC”


    Average automotive loan term reaches record high of 66 months; loans with terms 73-84 months grew by 27.6%

    For new vehicle loans, the average credit score was 714, down from 722 in Q1 2013.

    As Experian notes,

    The average loan term, average monthly payment and average amount financed for a new light-vehicle hit record highs in the first quarter, signaling U.S. consumers continue to extend themselves to afford pricier cars, Experian Automotive reported today.

    Lease penetration also hit a record high in the same period in another sign consumers are willing to leverage their spending power to afford more expensive vehicles.

    “As the cost of purchasing a new vehicle continues to rise, consumers clearly are stretching the loan term to help lower monthly payments, keeping them at a manageable level,”

    Experian Automotive said the average new-vehicle loan term reached 66 months in the first three months of the year

    Also in the first quarter, the average amount financed on a new-vehicle loan was $27,612, an increase of $964, or 3.6 percent. For used vehicles, the average amount financed was $17,927, up $395 or 2.3 percent.

    At the same time, Experian Automotive said leasing hit a record 25.6 percent of all new-vehicle sales volume in the first quarter, up from a previous high of 24.2 percent in the fourth quarter of 2013.

    As it seems cash-for-clunkers as well as recent sales is maintaining prices in the used car market and thus reducing the cost of leasing (depreciation) relative to buying (financing)…

    Market share for nonprime, subprime and deep subprime new vehicle loans rose slightly in Q1 2014 to 34.34 percent.

  2. Accountants with Excel are as dangerous as banksters.

    The only thing you left out is corporations and banks are using much of their toxic asset garbage as phantom collateral with counter-parties that also use phantom collateral. The whole system is built on assets that are fraudulent. Once collateral starts being called to cover, when the market tanks, just like in 2007/2008, the entire credit system will freeze (like in 2007/2008), it will seize, and nobody will loan money to anybody. LIBOR will seize up again, no paychecks, no inter-bank lending, shipments stop, stores cleared out, no gasoline deliveries. It’s all going to happen again, only debt is 30% worse now than last time. And the Fed is out of ammunition, their balance sheet is already North of $4 trillion, and the government is now $17.5 trillion in debt, where is the bailout money to cover Wall Street/banksters gambling losses going to come from? It isn’t. We’ll be wiped out. It’ll make the great depression look like a field day.

  3. Or, if you prefer, another explanation of what will happen:

    So here’s the Classics Comic Book version of Minsky’s financial instability hypothesis. Speculative private debt bubbles develop as part and parcel of a business/credit cycle. This is driven by innate human greed (or as McCulley puts it, humans are naturally “pro-cyclical”), and tends to be exacerbated by deregulation or laissez-faire government policy. Ultimately the debt burdens created during these periods of market euphoria cannot by met by the cash flows of the stuff that the borrowers bought with their debt, which causes the banks and shadow banks to withdraw credit in a spasm of sudden fear. Because there’s no more credit to be had for more buying and everyone is levered to the hilt anyway, stuff either has to be sold at fire-sale prices or debts must be defaulted, either of which just makes the banks withdraw credit even more fiercely. The Minsky Moment is this spasm of private credit contraction and the forced sale of even non-speculative assets into the abyss of a falling market.

  4. “For new vehicle loans, the average credit score was 714, down from 722 in Q1 2013.”
    ———— 1st article posted by Admin

    714, while sub-prime, is still a pretty good score. I believe a prime score is 720 and above. Just sayin’.

    When I was doing mortgages, I would guess that of the mortgage applications that were not approved …. somewhere around half were due to DTI (Debt To Income) ratios being too high ….. and that was usually due to excessively high car payments. It was not all that unusual to see 25% of income devoted to car payments. That’s just nucking futs.

    1. Market share for nonprime, subprime and deep subprime new vehicle loans rose slightly in Q1 2014 to 34.34 percent.

  5. The Average Russell 2000 Stock Is Down 22% From Its Highs

    Submitted by Tyler Durden on 06/03/2014 14:49 -0400

    It’s hard to “fully commit” to this rally given “corroded internals,” warns FBN Securities technical analyst JC O’Hara in note. As we previously noted, new highs are extremely negatively divergent from the index strength, as are smarket money flows, but what has O’Hara “very disturbed” is the fact that the average Russell 2000 stock is over 22% below its 52-week highs. As O’Hara notes, investors are ignoring “technical signals that have historically forewarned” of a drop; they’re “jumping onto a plane where only one of the two engines is working. The plane does not necessarily have to crash but the risk of an accident is much higher when the plane is not firing on all cylinders.”

    And as we noted previously, the negative divergences are mounting…

    As Louise Yamada notes,

    S&P 500 emerges from 3-month symmetrical continuation pattern to set all-time high even as “fewer and fewer” stocks set new highs, which has “history of not boding well,” writes independent technical analyst Louise Yamada in June monthly note.

    In addition, Piper Jaffray technical analyst Craig Johnson writes in note,

    the drop in 10Y Treasury note yield “not a bullish sign for the economy” or stocks and divergence between rising Dow Jones Industrials and falling Russell 2000 Index of smalll cap stocks linked to higher volatility and “meaningful” corrections in years past.

    Also notes “fading” relief rally in former high fliers SPLK, DATA, NOW, N, FEYE and negative summer seasonality during mid-term election years as reasons to expect drop in stocks

    Sees correction taking S&P 500 down to 1,600-1,650, implies drop of as much as 17%

    Still, there’s always the non-economic indiscriminate buyer of last resort… the desperate to shrink their float and flatter EPS – corporate buybacks.

  6. Not sure how many prime borrowers are left. Not too many. 714 may not be prime, but it isn’t a bad credit score by a long shot. Seems like 730 was the cut-off for the best rate, the last time I borrowed any money. Hell, I barely score that on a good day.

    1. I think the key takeaways are the average term of loans is an all-time high at 66 months, the percentage of leases is an all-time high, and the percentage of non-prime loans is 34%.

      Over 25% of all auto “sales” are really leases. That isn’t a sale, it’s a rental.

      How can auto sales be surging when household income is lower than it was in 1999?

      How much do you want to bet that a 714 credit score today wasn’t a 714 credit score ten years ago? Just change the rules and all is well.

      If these people have such fucking good credit scores why aren’t they putting more down and taking out shorter term loans?

  7. “Over 25% of all auto “sales” are really leases. That isn’t a sale, it’s a rental.” —– Admin

    True, but only if one returns the car after the lease period ends. One can always purchase the car at the end of lease. The payment is calculated in part by GUESSING at the car’s residual value. If they over-estimated, one can get a pretty good deal on the purchase. Yes, I also know the vast majority just return the car …. a 3 or 4 year rental.

    Credit scores not only change from year to year … they change monthly, I swear. Prior to funding an approved mortgage, the lender (or, broker) will run a final credit check. I have seen scores change (up and down) even though there was no change whatsoever in credit history …. no new accounts, no accounts paid off, etc. I swear. Not that anyone can EVER prove it …. Credit Scoring is a fucking better kept secret than Coke’s formula …. it’s a fucking goddamn scam, I tell you.

    I also believe banks/lenders WANT borrowers to have a subprime score, but not my much. Why lend to a 720 borrower at 7%, when you can lend to a 710 borrower at 10%? Subprime is where the real money is at.

  8. If auto sales are booming why are GM, Ford and Chrysler profits plunging?

    Inquiring minds want to know.

  9. “If these people have such fucking good credit scores why aren’t they putting more down and taking out shorter term loans? ” ————- Admin

    Easy peasy;

    1) People are fucking stupid because ……

    2) PAYMENTS, baby!!!! It’s ALL about the monthly payment. 95 out of 100 people don’t give a flying fuck about the total cost of the loan. It’s all about the monthly nut. And that’s not just Joe the Plumber. It also applies to very smart people …. doctors, lawyers, even accountants ….. I would shit-my-pants the few times a year a borrower actually asked about the cost of the loan.

  10. When I told the Honda dealer I was putting 20% down and taking the 3 year 0.9% financing option for my Insight, I thought he was going to shit his pants. He was stunned.

    We now have four cars in the family with no car payments.

  11. Admin,
    2 cars and 1 truck, no payments. They are getting up there in miles, but I have enough equity in the truck to get 30 % on a $25,000 loan. If I wasn’t helping pay for college for my two kids I am sure I could have a very expensive sports car (by my standards) or have my house paid of (only 3 years left). I do not want to see my kids burdened with excessive college debt, and I really do not need a fancy car to make me happy. I have seen this happen to others as the family spends all it has and the kids end up like the parents as debt slaves. I have taught my kids to abhor debt. Maybe when the collapse comes and much of this debt is wiped out as is any savings and 401Ks my wife and I have saved are wiped out we will be seen as the fools. I am just not sure if I want to find out though.

  12. Stucky,
    One of the first things I say to the salesman when I am looking at a new vehicle is, ” If you ask me once, just once what I want my payment to be I will walk out without a word and will never come back to this dealership again.” That seams to set the tone. I go in with a number in mind, negotiate a fair price and make the deal. I care not one bit if the dealer makes money on me, as long as I get the deal that I did my research on, says is fair. I try to be reasonable, but not stupid. I find most car salesman are not very bright.

  13. Two of the major credit card companies are closing many lines of cards – the losses are growing too great. Various centers throughout the country are slated for closure…..I got that from a really, really good source. 84 month auto loans, 120 – 200 month loans for camper trailers……on and on, we’re fucked folks. When she goes it’ll lock up like a crab’s ass at 20 fathoms. Even the builders know they’re on borrowed time – several have told me its just too good.

  14. I maintain my shit as good as I can so don’t have to talk to a salesman – as bad as he is, the parts man is my friend.

  15. ree things –

    1) What is these things “auto loan” and “mortgage”? 😉

    2) I, out of curiosity, got my “credit score”. That was a waste of time. Turns out you need to borrow/owe in order to get a good score. Asked my banker about it, and said if I want a good credit score I need to borrow some money and pay it back on time. I told him like fuck I will.


    3) I strongly advise folks not to buy new cars if they cannot afford to pay cash (for instance, Admin I suspect could afford to pay cash, but chose not too. That is a different decision).

  16. Admin says: “Over 25% of all auto “sales” are really leases. That isn’t a sale, it’s a rental. ”

    Sorry, but those cars are indeed “sold”. They are sold to the entity that then leases them.

    1. llpoh

      The company selling them is the same company leasing them. GM sells cars to their own dealers and their own leasing company and finances them with their own finance company. And somehow they manage to lose hundreds of millions.

  17. The first things to tell a car sales person is 1) I am trading my current car (I NEVER trade my current car), and 2) I am financing it. Also tell them they will get the service on it (where they REALLY make their money), then get it serviced elsewhere, except for warranty issues.

    Then get 1) their best price on the car you want (they think they are making money on the trade and the loan), and offer them significantly less. When the price cannot be squeezed lower, write them a check and watch them crap their pants.

  18. I read on ZH the manufacturers count a “sale” as when the car is “sold” to the dealer, not the consumer.

  19. I don’t know, have never known, and I could care less what my credit score is. I pay cash. If you can’t pay cash then you’re buying more than you can afford.

    People are totally oblivious to how much of their money gets sucked out of their pockets to cover the interest costs.

    Just can never seem to get ahead—DUH!

  20. FWIW, even if you do not intend to borrow money and therefore do not care what your credit score is, be aware that a bad credit score affects you in many ways nowadays. My understanding is that automobile, life, health and homeowners/renters insurance rates are based on your credit score now. Beyond that employers are using credit scores to help select employees for jobs you might be applying for. I’m sure your credit scores are used against you in other ways as well.

  21. @Stucky, 720 is prime, this is from the Office of the Comptroller, which apparently is our credit god.

    “…The OCC Mortgage Metrics Report uses standardized definitions for three categories of mortgage creditworthiness: prime, Alt-A, and subprime. These are defined using ranges of FICO credit scores at the time of origination, as follows: prime — 660 and above; Alt-A — 620 to 659; and subprime — below 620…”

    So anything above 660 is prime.

    All fiscal reporting seems to be based on unicorns and lollypops.

    The color and number of said metrics is getting deeper.

    Jeesh, a loan for SEVEN years for a car? Screw that.

    Three paid for vehicles and although I would love to drive a nicer car, the thought of the hives that would come with the cost of sale and payments is enough to keep me smiling in my bought and paid for car.


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