The $23 Trillion Argument Against Dismantling U.S Earnings Rules
(Bloomberg) -- Are U.S. companies penalized because they’re forced to report results each quarter? Investors basking in a nine-year bull run that is currently three times the size of the rest of the world’s aren’t so sure.
Flexibility and lower costs were the reasons given by President Donald Trump in ordering regulators to consider spacing out earnings reports to six months. In a market where $23 trillion of value has been created since 2009, some money managers wondered it if was a solution without a problem.
“The new reporting standard could potentially do the opposite of what it is supposed to,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland. “You might increase volatility in the market but not do a whole lot to lengthen the planning period or the evaluation period.”
Stock performance isn’t everything -- plenty of people argue that an obsession with quarterly performance blinds executives to the long-term consequences of their acts. And nobody is saying earnings regulations are the key to the market’s success. But many money managers shared a sense that the quarterly regime exemplifies candor that is absent in the rest of the world, a quality that contributes to the U.S. market’s resilience.
“Investors continue to look for increased transparency from the market and this could be a step in the opposite direction,” Michael Gabelli, managing director at Gabelli & Partners, which manages about $1.5 billion. “I would need to see official language of what the exact change would be before taking a position.”
To be sure, meeting a quarterly schedule takes a toll on firms and analysts. The rules that make companies answerable every three months are the same ones that inform a quarterly farce in which executives guide estimates just low enough to be beaten. Anything that examines that ritual has supporters.
“A lot of analysts and portfolio managers feel like they’re always on the treadmill and they’re jumping from one earnings season to the next,” said Chris Harvey, head of U.S. equity strategy at Wells Fargo. “There’s a lot of busy work just to get those numbers out and sometimes there’s not a whole lot of additional information.”
Still, many investors were unclear on what the rule change would achieve. For every chief executive railing against short-term focus, there’s a money manager extolling the virtues of transparency. Companies may spend millions of dollars complying with reporting rules, but it hasn’t kept them from expanding earnings by more than 20 percent this year.
“The more transparency you have, the happier your shareholders are, and the happier you are as a company executive,” said Jonathan Golub, chief U.S. equity strategist at Credit Suisse. “If you’re not doing a good job as a company executive and you’re thinking that reporting earnings every six months will make your life easier, you’re wrong.”
An irony is that stock market success is often held up as a charity grant for the 1 percent. But not by Trump, who regularly features the Dow Jones Industrial Average in tweets trumpeting his economic policies. While the president may view reducing the reporting burden as deregulation, much was made Friday about how the policy would partially align him with liberal firebrands like Elizabeth Warren.
Trump cited job creation as a potential motive for the tweak. But the U.S. economy has added more than 14 million jobs over the last nine years and the unemployment rate is hovering near an 18-year low. Combined expenditures on fixed investments jumped 24 percent in the second quarter, the fastest rate in seven years.
Could the plan hinder more than it helps?
“Given the limited level of financial disclosure required of public companies today, any reduction of disclosure requirements would be detrimental to investors,” Glen Kacher, who founded the hedge fund Light Street Capital Management, said in an email. “Reducing the frequency of corporate reporting would significantly reduce investor’s ability to assess the health of public companies in a timely fashion.”
Accounts of corporate myopia are easy to find. A perennial target is share buybacks, by some estimates on track to reach a trillion dollars in 2018, the highest ever. Others cite the market’s frenetic focus on short-term goals as a reason the number of initial public offerings has fallen by 75 percent since the mid-1990s.
Then again, the six biggest companies in the world and eight of the top 10 are American. Two have gone public since 2000 -- Alphabet Inc. and Facebook Inc. -- while three others listed after 1980: Apple Inc., Microsoft Corp., Amazon Inc. The S&P 500 is in the middle of a bull market that by some definitions will be its longest ever as of this week.
In a world where the U.S. and China and Europe are throwing daily mud at each other on the topic of trade, some analysts wondered if the solution is really giving less timely information to investors. Companies have used earnings calls to relay how the trade dispute could affect their financial results, information that would have been delayed or perhaps not even addressed under a bi-annual disclosure schedule, said Sandy Peters, head of financial reporting policy at the CFA Institute in New York.
“If there are events that create financially relevant consequences to a company, six months is a long time to wait to find out what those consequences are,” Peters said. “We think it creates a lot of squishiness about what gets released over a long period of time.”
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