Mon, Jun 12, 2023|Whitney Tilson

Business Is Slowing. So Companies Are Juicing Profits.; Small-cap stocks catching up; VC investments in crypto firms down 97%; Crispin Odey to leave hedge fund after assault claims; I mashed my head and needed seven staples

1) Kudos to the Wall Street Journal for shining a light on the accounting shenanigans companies are playing to juice their earnings and inflate their stock prices: Business Is Slowing. So Companies Are Juicing Profits. Excerpt:

More companies are beating analysts' expectations and by bigger amounts. Businesses' nontraditional earnings metrics are beating reported earnings by a lot more than last year, and a measure of the likelihood of earnings manipulation is at its highest level in about 40 years.

Companies have long engaged in earnings management, by which executives use the flexibility in accounting rules to improve reported earnings per share.

The moves, many of which are allowed under accounting rules, nonetheless have detractors. In a letter to investors earlier this year, Warren Buffett called the practice "one of the shames of capitalism."

One way companies are trying to make their results look better is to provide numbers that don't adhere to accounting standards – what are often referred to as pro forma measures – alongside the official data.

A report published Thursday by research firm Calcbench compared the net income based on accounting standards for 200 randomly selected companies in the S&P 500 with their adjusted net income, which can include or exclude items that would normally be counted. The adjusted numbers were higher by $1.1 billion on average last year, an increase of more than 130% over a similar sample from the year prior.

Another measure used to predict the likelihood of earnings flattery is the Beneish M-score, named for its creator, Indiana University accounting professor Messod Beneish. Recently, academics found the aggregate score of a sample of nearly 2,000 companies was at its highest level in more than 40 years, the most recent data shows. Historically, the aggregate score peaks ahead of a downturn.

First-quarter earnings exceeded expectations by an unusually large amount. Of the 485 companies on the S&P 500's roster that had reported first-quarter earnings as of May 26, 77% surpassed analysts' expectations, according to data provider Refinitiv. Since 1994, 66% of companies beat expectations in an average quarter.

The magnitude of the overperformance also stands out. Companies in aggregate are reporting earnings 6.9% above expectations, compared to a long-term average of 4.1%, according to Refinitiv. Some of that outperformance was the result of changes in the way the numbers were calculated.

The heightened use of the measures comes as regulators are scrutinizing nontraditional calculations and earnings manipulation. The Securities and Exchange Commission as recently as December warned companies that pro forma measures that replace traditional accounting methods with individually tailored disclosure could violate its rules.

2) After massive outperformance by big-cap stocks, especially tech ones, for most of this year (see: Eight Megacap Stocks Make for a Funny Sort of Bull Market), small-cap stocks have been catching up – a healthy trend for the market:

3) Here's another healthy trend:

4) Here's a follow-up on Thursday's and Friday's e-mails about London-based hedge fund manager Crispin Odey, the subject of an in-depth article in the Financial Times about 13 women who've accused him of sexual assault.

Over the weekend, his partners removed him from the business, though he warned he'll fight it: Crispin Odey to leave hedge fund after assault claims, partners say. Excerpt:

Partners at Odey Asset Management said that founder Crispin Odey would leave the firm after 13 women accused him of sexual misconduct.

The high-profile financier and his firm have been at the center of a growing crisis after the Financial Times reported on Thursday that 13 women alleged Odey had sexually assaulted or harassed them in various incidents over a 25-year period.

"Mr. Crispin Odey is leaving the partnership. As from today, he will no longer have any economic or personal involvement in the partnership," Peter Martin, chief executive, and Michael Ede, chief financial and operating officer, wrote in a statement seen by the FT on Saturday.

They added that Odey Asset Management Group Limited, a holding company that is part of the group and majority owned by Odey, would also be removed as a member and that the partnership would now be owned and controlled by remaining partners.

OAM, which had $3.8bn of assets under management in 2022, said that it "has been investigating allegations concerning Mr. Odey" but said it could not comment in detail for confidentiality reasons. It said that "further communications" with clients would follow over the weekend.

Reached by phone at lunchtime on Saturday, Odey confirmed he had been notified of the firm's decision but suggested he would fight it. "You have to have willing buyer, willing seller," he said. He did not provide additional comment.

Here are two related articles:

5) On my drive home from New Hampshire yesterday, I took a 90-minute detour to run the Tough Mudder race at Stratton Mountain, Vermont.

I've run roughly three dozen Spartan and Tough Mudder races, including six 24-hour World's Toughest Mudders (see write-ups here), so I'm an experienced veteran and should have had no trouble running a quick six-mile lap and getting back on the road. But that's not the way it turned out...

Here I am right before the race, with a net climb named Mudderhorn in the background:

Just over two miles and 38 minutes into the race, at mid-mountain, I was cruising along and came upon the ninth obstacle, called Ladder to Hell:

There were two women straddling the top – like in this picture, which was taken later – and the one in the middle seemed to be quite nervous.

I quickly climbed up the right side, keeping an eye on her, and was about to offer to help her get down when... BAM!... my head smashed into the piece of wood sticking out.

It has yellow padding on it in the picture above – but didn't when I was climbing it. Here's what it looked like then – I've marked my route up with the white arrow and circled in red what I hit...

I never saw it and don't ever recall seeing a plank stick out like this in the dozens of previous races I've done with this obstacle. It's beyond me why they didn't saw off this excess wood, or wrap it in the yellow padding they added after I whacked myself, or even put bright yellow tape on it...

They later inscribed the plank, before wrapping it with a pad, with the words, "Whitney was here," which is pretty funny:

After I hit it, I was in a lot of pain. But I wasn't seeing stars, didn't lose consciousness, or, thankfully, come close to falling backward (which could have been really bad, from 12 feet up). And I was wearing a hat, which protected my head somewhat, so my immediate reaction, as I stood near the top of the obstacle, was to suck up the pain, climb over, and keep running.

But then blood started pouring down my face, arms, and legs, and people started freaking out, telling me to climb down, so I did.

I sat on the ground while the Tough Mudder guy staffing the obstacle, Benny, radioed for a medical ATV and two nice young women gave me their shirts to staunch the blood and put pressure on the wound. Here's what I looked like:

At this point, I thought it was a minor cut and wanted to continue the race, but every time I removed the shirt, more blood poured down my face and the six to eight people who had gathered around and saw the wound shook their heads and told me I was going to need stitches.

Soon, a nice guy named Hank, who had some medical training, arrived in an ATV and, after wrapping up my head, drove me down to the clinic at the base of the mountain:

There, a nurse named Enge gave me a couple of washcloths to wipe off my arms and legs and cleaned out the wound, using a little swab to remove my hair in it:

I don't want to include gory pictures in this e-mail, so if you want to see what my five-centimeter gash looked like and how the doctor stapled it up, see my post on Facebook here.

I've been taking four ibuprofen every four hours, which is working well to reduce the pain and swelling.

In two weeks, I'll have the staples removed and will be good to go!

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.