Bank stocks announce 1st quarter earnings: too early to get excited?

The stock market experienced a slight bounce recently with the double announcement of Wells Fargo earning net income of approximately $3 billion in the first quarter of 2009, with particular strength in retail banking, and Goldman Sachs posting  $1.8 billion profit. Does this meaning that we have reached bottom and the economic recovery has began?

Not quite. At the end of the day, a true recovery will most likely begin on main street and not Wall Street. More to the point, the release of these financial statements may be indicative of a trend I wrote about recently: the tendency of publicly traded companies to use financial sleight of hand to meeting earnings expectations.

As reported in various blogs, Goldman Sachs has a new trick to meet or beat earnings expectations:  it simply did not report December in its first quarter financials. Goldman Sachs changed its fiscal end from November to December which means when it reported this year, it reported first quarter financial results from January- March rather than the previous November-February.

Of course, the firm also lost $780 million in December alone. But, because December is an orphan month, it was not included in the first quarter’s financial reports. There’s a new one for you.

Why bloggers, and not the regulators, have not flagged this may be the larger, more troubling, question. Imagine if you filed your taxes today and you told the taxman that you are not including December in your return?

Wells Fargo also announced impressive earnings. One problem. It was only a pre-announcement. The formal financial report is not issued until April 22. Given that one has yet to see the assumptions behind the earnings, it is too hard to get too excited since they could merely shift the goal posts to meet their earnings. It will be interesting to see what the financial notes say.

Typically, financial stocks do lead the recovery so these stocks are worth tracking if you want to read the tea leaves into when the recovery will occur. However, given that this industry also has very complicated financial statement to understand, the morale of the story is to drill down on the details and not merely read the headlines in making your investing decisions.