It’s earnings season and once again, the new set of data allows us to evaluate the fundamentals. As I have written before, I used to love earnings season but I don’t anymore. I am sure it’s the media spin and the public reaction, but it really is sad for traditional investing. As far as I am concerned, earnings season and the way it is used is Fundamentally Flawed.

Yesterday was a perfect example. Here is the headline summary from Bloomberg U.S. Stocks Break Six-Week Slump as Citigroup Beats Estimates. Please read that and then take a look at what I wrote last earning’s season about the same stupid assumption.

From Analyzing Analysts on April 18, 2008

Let’s look at C back then….

What was the opening price per share of Citi on April 2nd, 2007? $51.31

• What was the Forward PE if you bought into Citi on April 2nd, 2007? 11.4 - Sounds cheap! Doesn’t it?
• What was the Expected Earnings Growth Rate? 9.6% - Wow, a PEG ratio of about 1.2. Sounds doubly cheap!
• What was the Dividend Yield? 4.2% - Fantastic and besides, they’d never cut that dividend. Right? Wrong!

So one year later on April 1st 2008, the price was $22.61 and the trailing 12 month PE was 33.6. OOPS! That’s quite a bit off from the 11.4 projected last year. But don’t fear, today’s Forward PE based upon the analyst estimates is only about 8. Sounds cheap! Doesn’t it?

So as a followup, I am going to pick on Citi’s earnings loss reported this quarter. It was a loss, not a profit. Revenues were down significantly from the year ago quarter. And if you can seriously buy into this notion that they beat estimates, please take another look.

• 90 days ago, average analyst estimates for Citi’s quarter just ended 6/30/08 was +$0.57 per share. Not a loss of 57 cents but a profit of 57 cents.
• 60 days ago, the average estimate for C was 36 cents per share and 30 days ago it was for a profit of 31 cents.
• 7 days before the report, suddenly analysts are down to a loss of 59 cents per share.

Is that impressive to you? Did Citi really beat estimates as per the media’s claim? It depends which estimates you believe. And if you believe the estimates for next quarter, just for the record, it’s a 34 cent per share profit. 90 days ago, the same estimate was for 68 cents per share profit. I look forward to checking back on this 90 days from now. Oh and by the way, the forward PE is 8. Magically, that’s the same “cheap” ratio that we had last quarter based upon the same group of incorrect estimates. Doesn’t it bug anyone that C has maintained positive 12-month forward earnings expectations each quarter since this whole thing began? Those are the fundamentals we were supposed to believe in? Excuse me but they have lost more than a few billion the past 4 quarters. So despite those quarters being losses and analysts had expected that the worst was over a long time ago….we now are supposed to buy into the current fundamentals being better than analyst expectations and future earnings that are going to be good. Okay, I got the message….the worst is supposedly behind the financials.

Earnings season is a volatile time. Crap earnings are sensationalized as beats just because the analysts pump them up 90 days ago and then wipe them out before they are announced. And the media buys into it. And apparently, based upon the market reaction…so do investors relying on “fundamentally flawed” information. Fundamentals are being overrun by media hype and a belief in estimates that are chronically wrong. Then… when the historical data comes out, we are told that bad stuff is good and that the future stuff is more important anyway.

Now, in the last 3 days, we hear how Wells Fargo, JP Morgan and Citi have pushed the market higher based upon their “better than expected” reports. First, as I keep saying…”better than expected” is a pretty flawed concept and second, those are historical earnings. AHEM! I thought past earnings are not so important for all the fundamentalists who love to fantasize about discounting future earnings. And what about those future earnings or the health of the financial system is encouraging? Other than a bunch of analysts and media and executives putting a spin on the future - what fundamental info are you relying upon?

For the last several earnings seasons, we have repeatedly been told how great earnings are when you exclude financials. Suddenly ex-financial reports like GOOG and MSFT are not good and miss estimates and the market heads higher. Okay, I got it. Apparently, ex-financials are now not so important.

And suddenly financial losses and reduced revenues are looked at as a good thing. That is fundamentally flawed.