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Back in August, we joked that in the Tesla press-release the one most often used word was Non-GAAP (43 times). Conveniently, we provided a word cloud of the company’s Q2 release for the visual learners to grasp just this:

That TESLA’s earnings were an epic non-GAAP adjustment joke was only further cemented by the fact that the company itself provided a bridge between its GAAP and Non-GAAP earnings.

Of course, back then TSLA stock was merely the latest bubble frenzy so pointing out the obvious: namely that the realty behind the numbers presented for public consumption was far uglier than most expected.

Now, the euphoria is over and  the story is different, as not only has the company’s self-reported and erroneous record of making the safest car in the world gone up in flames, but the momentum appears terminally broken and following today’s most recent 11% drop, TSLA stock could soon be headed for double digit territory again.

More importantly, however, the end of the momentum story means that those who care about such anachronisms as fundamentals can once again look beneath the hood of TSLA to get the true story of what is really going.

There, with the help of Bloomberg’s forensic accounting sleuth Jonathan Weil one uncovers nothing but cockroaches.

From Weil:

Most companies that play the non-GAAP game goose their numbers by excluding expenses. Tesla does this, too. It backs out stock-based compensation, for example. But the biggest kick to its non-GAAP earnings comes from an increase in top-line revenue.

 

The company reported third-quarter non-GAAP revenue of $602.6 million, which was about 40 percent more than its GAAP revenue. It achieved such a boost by transforming $171.2 million of liabilities into sales.

 

Here’s how it worked. In April, Tesla started a new financing program under which customers have the option to sell their vehicles back to the company after three years for guaranteed minimum amounts. The accounting rules say Tesla can’t recognize all of the revenue immediately in those instances and must account for such transactions as leases. So after Tesla takes customers’ cash, it records liabilities for “deferred revenue” and “resale value guarantee” on its balance sheet.

 

Mahoney noted two main problems with including so much of those amounts in non-GAAP revenue. Some customers wouldn’t have chosen Tesla cars were it not for the financing program. So the non-GAAP revenue isn’t comparable to Tesla’s sales before the program began, and it may overstate the true growth and demand. Plus, by adding back the resale-value guarantee, the company “assumes that nobody is going to return the vehicle, for purposes of the non-GAAP revenue,” he said.

 

Lots of companies use gimmicky benchmarks in their earnings releases. What makes Tesla special is that it behaves as if it doesn’t know the proper way to present its non-GAAP numbers. In an ironic twist, two attorneys at Wilson Sonsini Goodrich & Rosati, which helped take Tesla public in 2010, penned a lengthy article in 2008 explaining the legal requirements and best practices for earnings releases; it’s still on the law firm’s website.

 

“GAAP comparison numbers in an earnings release must be set forth with equal or greater prominence to the non-GAAP numbers,” attorneys Steven Bochner and Richard Cameron Blake wrote. “For instance, if an issuer announces GAAP and non-GAAP earnings per share in its press release, it should report the GAAP earnings per share prior to the non-GAAP earnings per share.”

 

The bigger concern here should be what some investors call the “cockroach theory”: Where there is one problem, there probably are more. Tesla has disclosed compliance failures before. In March, its management concluded that Tesla’s ‘‘internal control over financial reporting was ineffective as of Dec. 31, 2012.’’ Its auditor, PricewaterhouseCoopers LLP, concurred. In a related matter, Tesla had to restate its cash-flow numbers for much of 2011 and 2012. In its latest quarterly report, filed last week, Tesla said its controls still weren’t effective as of Sept. 30. 

Because the only thing better than one flaming cockroach are many flaming cockroaches.

Weil’s conclusion:

None of these flubs has been especially damaging. Yet taken together, they suggest a company that lacks basic skills in accounting and disclosure, which could be a serious problem for a young manufacturer with a $17 billion stock-market value that loses money and trades for 9.5 times its revenue for the past four quarters. The next time Tesla messes up because of poor controls, the consequences could be worse.

 

As Tesla said in its latest annual report: ‘‘If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock.’’

Oh well, at least the fully spontaneously combusted Tesla Model S (because the safest car in the world is never expected do something as silly as run over a metal object while on the road) makes for a very handy, if slightly smoldering, paperweight.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Wdoq6Tcxejg/story01.htm Tyler Durden

Back in August, we joked that in the Tesla press-release the one most often used word was Non-GAAP (43 times). Conveniently, we provided a word cloud of the company’s Q2 release for the visual learners to grasp just this:

That TESLA’s earnings were an epic non-GAAP adjustment joke was only further cemented by the fact that the company itself provided a bridge between its GAAP and Non-GAAP earnings.

Of course, back then TSLA stock was merely the latest bubble frenzy so pointing out the obvious: namely that the realty behind the numbers presented for public consumption was far uglier than most expected.

Now, the euphoria is over and  the story is different, as not only has the company’s self-reported and erroneous record of making the safest car in the world gone up in flames, but the momentum appears terminally broken and following today’s most recent 11% drop, TSLA stock could soon be headed for double digit territory again.

More importantly, however, the end of the momentum story means that those who care about such anachronisms as fundamentals can once again look beneath the hood of TSLA to get the true story of what is really going.

There, with the help of Bloomberg’s forensic accounting sleuth Jonathan Weil one uncovers nothing but cockroaches.

From Weil:

Most companies that play the non-GAAP game goose their numbers by excluding expenses. Tesla does this, too. It backs out stock-based compensation, for example. But the biggest kick to its non-GAAP earnings comes from an increase in top-line revenue.

 

The company reported third-quarter non-GAAP revenue of $602.6 million, which was about 40 percent more than its GAAP revenue. It achieved such a boost by transforming $171.2 million of liabilities into sales.

 

Here’s how it worked. In April, Tesla started a new financing program under which customers have the option to sell their vehicles back to the company after three years for guaranteed minimum amounts. The accounting rules say Tesla can’t recognize all of the revenue immediately in those instances and must account for such transactions as leases. So after Tesla takes customers’ cash, it records liabilities for “deferred revenue” and “resale value guarantee” on its balance sheet.

 

Mahoney noted two main problems with including so much of those amounts in non-GAAP revenue. Some customers wouldn’t have chosen Tesla cars were it not for the financing program. So the non-GAAP revenue isn’t comparable to Tesla’s sales before the program began, and it may overstate the true growth and demand. Plus, by adding back the resale-value guarantee, the company “assumes that nobody is going to return the vehicle, for purposes of the non-GAAP revenue,” he said.

 

Lots of companies use gimmicky benchmarks in their earnings releases. What makes Tesla special is that it behaves as if it doesn’t know the proper way to present its non-GAAP numbers. In an ironic twist, two attorneys at Wilson Sonsini Goodrich & Rosati, which helped take Tesla public in 2010, penned a lengthy article in 2008 explaining the legal requirements and best practices for earnings releases; it’s still on the law firm’s website.

 

“GAAP comparison numbers in an earnings release must be set forth with equal or greater prominence to the non-GAAP numbers,” attorneys Steven Bochner and Richard Cameron Blake wrote. “For instance, if an issuer announces GAAP and non-GAAP earnings per share in its press release, it should report the GAAP earnings per share prior to the non-GAAP earnings per share.”

 

The bigger concern here should be what some investors call the “cockroach theory”: Where there is one problem, there probably are more. Tesla has disclosed compliance failures before. In March, its management concluded that Tesla’s ‘‘internal control over financial reporting was ineffective as of Dec. 31, 2012.’’ Its auditor, PricewaterhouseCoopers LLP, concurred. In a related matter, Tesla had to restate its cash-flow numbers for much of 2011 and 2012. In its latest quarterly report, filed last week, Tesla said its controls still weren’t effective as of Sept. 30. 

Because the only thing better than one flaming cockroach are many flaming cockroaches.

Weil’s conclusion:

None of these flubs has been especially damaging. Yet taken together, they suggest a company that lacks basic skills in accounting and disclosure, which could be a serious problem for a young manufacturer with a $17 billion stock-market value that loses money and trades for 9.5 times its revenue for the past four quarters. The next time Tesla messes up because of poor controls, the consequences could be worse.

 

As Tesla said in its latest annual report: ‘‘If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock.’’

Oh well, at least the fully spontaneously combusted Tesla Model S (because the safest car in the world is never expected do something as silly as run over a metal object while on the road) makes for a very handy, if slightly smoldering, paperweight.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Wdoq6Tcxejg/story01.htm Tyler Durden

Carl Icahn, who is currently speaking at the Reuters Global Investment Outlook Summit, just poured cold water over the Fed’s 16,000 DJIA EOD price target.

• ICAHN: ‘VERY CAUTIOUS ON EQUITIES, MARKET COULD EASILY HAVE BIG DROP‘
• ICAHN SAYS MANY COS. EARNINGS ARE A ‘MIRAGE,’ REUTERS SAYS
• ICAHN: DOESN’T WANT FIGHT WITH APPLE,NO PLANS TO WALK AWAY

But… but.. two POMOs… Still, not too late for K-Fed and his merry unlimited balance sheet trading men to pull a record third POMO today and keep the “wealth effect” illusion going.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/nJ_NDt2f0Zo/story01.htm Tyler Durden

Carl Icahn, who is currently speaking at the Reuters Global Investment Outlook Summit, just poured cold water over the Fed’s 16,000 DJIA EOD price target.

• ICAHN: ‘VERY CAUTIOUS ON EQUITIES, MARKET COULD EASILY HAVE BIG DROP‘
• ICAHN SAYS MANY COS. EARNINGS ARE A ‘MIRAGE,’ REUTERS SAYS
• ICAHN: DOESN’T WANT FIGHT WITH APPLE,NO PLANS TO WALK AWAY

But… but.. two POMOs… Still, not too late for K-Fed and his merry unlimited balance sheet trading men to pull a record third POMO today and keep the “wealth effect” illusion going.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/nJ_NDt2f0Zo/story01.htm Tyler Durden

It’s almost never openly admitted in public, but the reality is that few if any investors actually beat the market in the long-term.

 

The reason for this is that most of the investment strategies employed by investors (professional or amateur) simply do not make money.

 

I know this runs counter to the claims of the entire financial services industry. But it is factually correct.

 

 In 2012, the S&P 500 roared up 16% including dividends. During that period, less than 40% of fund managers beat the market. Most investors could have simply invested in an index fund, paid less in fees, and done better.

 

If you spread out performance over the last two years (2011 and 2012) the results are even worsen with only 10% of funds beating the market.

 

If we stretch back even further, the results are even more dismal. For the ten years ended 1Q 2013, a mere 0.4% of mutual funds have beaten the market.

 

0.4%, as in less than half of one percent of funds.

 

These are investment “professionals,” folks whose jobs depend on producing gains, who cannot beat the market for any significant period.

 

The reason this fact is not better known is because the mutual fund industry usually closes its losing funds or merges them with other, better performing funds.

 

As a result, the mutual fund industry in general experiences a tremendous survivor bias. But the cold hard fact what I told you earlier: less than half of one percent of fund managers outperform the market over a ten-year period.

 

So how does one beat the market?

 

Cigar Butts and Moats.

 

“Cigar butts” was a term used by the father of value investing, Benjamin Graham, to describe investing in companies that trade at significant discounts to their underlying values. Graham likened these companies to old, used cigar butts that had been discarded, but which had just one more puff left in them.

 

Like discarded cigar butts, these investments were essentially “free”: investors had discarded them based on the perception that they had no value. 

 

However, many of these cigar butts do in fact have on last puff in them. And for a shrewd investor like Benjamin Graham, that last puff was the profit potential obtained by acquiring these companies at prices below their intrinsic value (below the value of the companies assets plus cash, minus its liabilities).

 

Graham used a lot of diversification, investing in hundreds of “cigar butts” to produce average annual gains of 20%, far outpacing the S&P 500’s 12.2% per year over the same time period.

 

So when I say that you can amass a fortune by investing in Cigar Butts, I’m not being facetious. For this reason, cigar butts, or deeply undervalued companies, will be a focus of this newsletter. And like Benjamin Graham, we’ll only be holding these companies in the short-term: until they reach their intrinsic value.

 

The other term, “moats” is in reference to the investments Warren Buffett, a student of Ben Graham and arguably the greatest living investor, seeks out…

 

Buffett amassed his enormous fortune through a systematic investment philosophy consisting of a few key ideas. However, the single most important one was buying companies with “moats” around them meaning that they have a competitive advantage that stops competitors from breaking into their market share.

 

Focus on these two approaches and you will fare well.

 

For a FREE Special Report on how to beat the market both during bull market and bear market runs, visit us at:

http://phoenixcapitalmarketing.com/special-reports.html

 

Best Regards

 

Phoenix Capital Research

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/8w7SuGeLfEs/story01.htm Phoenix Capital Research

"Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies" is the title of today's Senate hearing (from Homeland Security) on th eperils of Bitcoin. We are sure the exaggeration and exasperation will run high as Government offers up its Financial Crimes (and missing and exploited children) directors, and the de-centralized unregulated crypto-currency faces them down…

 

Live Stream (via Senate)

 

 

Witnesses
Panel I

    Jennifer Shasky Calvery
    Director, Financial Crimes Enforcement Network
    U.S. Department of the Treasury
    Mythili Raman
    Acting Assistant Attorney General, Criminal Division
    U.S. Department of Justice
    Edward W. Lowery III
    Special Agent in Charge, Criminal Investigative Division
    U.S. Secret Service, U.S. Department of Homeland Security

Panel II

    Ernie Allen
    President and Chief Executive Officer
    The International Centre for Missing & Exploited Children
    Patrick Murck
    General Counsel
    The Bitcoin Foundation, Inc.
    Jeremy Allaire
    Chief Executive Officer
    Circle Internet Financial, Inc.
    Jerry Brito
    Senior Research Fellow, The Mercatus Center
    George Mason University

 

The best "brief" summary of what is Bitcoin…

 

Here is coindesk.com's color on what to expect…

Given the title, it’s perhaps unsurprising that Silk Road features heavily in some testimony. In particular, Mythili Raman, acting assistant attorney general for the US Department of Justice’s Criminal Division, uses it in his prepared statement as an example of why regulation of decentralized currencies should be “sufficiently robust”.

Anonymity vs privacy

Silk Road, the online black marketplace taken down by FBI investigators in October, highlights “challenges investigators face when they encounter these systems, some of which may ultimately require additional legal or regulatory tools,” Raman said, singling out the difficulty of accessing customer records as one of the most significant challenges facing law enforcers dealing with virtual currencies.

Ernie Allen, president and CEO of the International Centre for Missing and Exploited Children, is also worried about anonymity in virtual currencies. In his testimony, he will voice his concerns over the use of virtual currencies including bitcoin for child pornography and sex trafficking payments.

“In our consultations with law enforcement worldwide, we have heard the argument that there is a difference between privacy and anonymity. Law enforcement leaders embrace the broadest possible privacy protections for individuals, but emphasize that absolute internet anonymity is a prescription for catastrophe,” he says. “Our challenge is to find the right balance.”

Other testimony challenged those concerns about anonymity, though. “Anonymity is also a two-way street,” says Patrick Murck, general counsel for the Bitcoin Foundation, in his prepared statement.

“A top dealer on Silk Road was actively working with federal law enforcement, the anonymity of Silk Road making it easier for them to make undercover drug deals and subsequent arrests,” he explains.

Murck also has some feedback for those that hold up Silk Road as an example of bitcoin’s dangers, cautioning against tying bitcoin and Silk Road too closely together. He cites the Genesis Block’s analysis of the contribution that Silk Road made to bitcoin pricing.

In late December 2010 and early 2011, people buying bitcoins to make Silk Road purchases may have spiked the price from $.30 up to $.80. The price was then boosted by mainstream media attention, before settling at around $5, he says. Further price spikes were unrelated to Silk Road, and even its takedown in October had little long-lasting effect.

“The less this colors public and policymaker assessments of Bitcoin, the better,” he argues in his testimony. “Criminals do turn the beneficial instruments of society to their ends. But overreacting to this simple and obvious fact because Bitcoin is exotic and new could delay Americans enjoyment of Bitcoin’s benefits, which are vastly greater than its potential costs.”

Decentralized vs centralized currencies

Jerry Brito, a senior research fellow at the Mercatus Center at George Mason University and director of its Technology Policy Program, testifies that a decentralized currency like bitcoin would in any case be less appealing to online crooks than a centralized digital currency, like Liberty Reserve, which was taken down after its founders were arrested.

“While of growing concern, to date, virtual currencies have yet to overtake more traditional methods to move funds internationally.”

“Serious criminals looking to hide their tracks are more likely to choose a centralized virtual currency run by an intermediary willing to lie to regulators for a fee, rather than a decentralized currency like bitcoin that, as a technical matter, must make a record of every transaction, even if pseudonymously,” Brito points out.

Brito compares centralized digital currency Liberty Reserve’s estimated $6bn in crime-related revenues to under $200m in drug sales via Silk Road. He adjusts the Silk Road revenues down from the oft-quoted $1bn figure to reflect bitcoin value over the entire period.

At least one regulator seems sympathetic. FinCEN director Jennifer Shasky Calvery points out in her testimony that virtual currencies have yet to overtake more traditional methods to move funds internationally, whether for legi
timate or criminal purposes.

“Any financial institution could be exploited for money laundering purposes,” she points out, adding, “While of growing concern, to date, virtual currencies have yet to overtake more traditional methods to move funds internationally, whether for legitimate or criminal purposes.”

Inter-departmental collaboration

FinCEN itself is hard at work, and several FinCEN virtual currency experts gave a comprehensive presentation on the topic to an audience of Federal and state bank examiners at an FFIEC Payment Systems Risk Conference, Calvery says, adding that the agency also works with the FBI, with the Treasury Cyber Working Group, and “a community of other financial intelligence units”.

This inter-departmental collaboration is an important strut of the government’s approach to law enforcement in virtual currency, says Raman, especially in the context of the Government’s Strategy to Combat Transnational Organized Crime. The Department of Justice works closely with FinCEN and the State Department, and it was this relationship that enabled the co-ordinated targeting of Liberty Reserve, he says, adding:

“Such coordinated actions are integral tools in combating illicit finance. Investigations into illicit virtual currency businesses therefore often require considerable cooperation from international partners.”

He highlighted the fact that the Liberty Reserve takedown involved co-operation between 17 countries.

The Foundation is eager to talk up its relationship with regulators, even if Murck finds “details on which we might quibble,” such as the Foundation’s desire for a notice-and-comment process before FinCEN issued its new virtual currency guidance in March. However, the Foundation has found federal regulators welcoming on the whole, he says.

Harsh words for state regulators

He reserved harsh words for regulators at the state level, however, particularly calling out “one state regulator”, which he said issued 22 subpoenas to bitcoin-related businesses, and made TV statements about “narcoterrorism”. He’s referring to New York’s Department of Financial Services, who made that statement on the air.

“Irresponsible public statements like these make it more likely that legitimate bitcoin businesses will relocate to more welcoming countries,” Murck said.

However, he added that he saw positive signs among both state regulators and banking executives, indicating that greater understanding is coming.

Calvery echoed Murck’s conciliatory overtones, talking about an outreach effort to court the bitcoin community. FinCEN met with the Bitcoin Foundation in late August, and has invited it to present to a Congressionally-chartered forum, the Bank Secrecy Act Advisory Group (BSAAG) scheduled for mid-December.

Jeremy Allaire, founder of merchant payment services firm Circle Internet Financial, which recently received $9m in funding, also wants a collaborative approach to regulation. He identifies several dangers for an unregulated bitcoin community in his testimony, including tax dodging, fraud, and terrorism. Illiquidity and volatility are two other dangers, he warned, predicting wild price fluctuation if central banks and institutional investors are not able to act as market-makers in bitcoin.

“I believe we are at the forefront of another twenty year journey of Internet-led transformation, this time in our global financial systems, and the opportunity is to foster that economic change while simultaneously putting in place the safeguards that only government can enable,” he says.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/QRmxpEcRIPs/story01.htm Tyler Durden