The markets are still climbing, but the financial media continues to hit new lows…

Alcoa kicked off the third quarter earnings season on Wednesday, reporting a 75% drop in year-over-year earnings. That’s not good news. But the aluminum giant beat “analyst expectations.” And the company made improvements over last quarter. So the media spun the story as “a good start to earnings season.”

Our own Steve McDonald, editor of The Bond Trader, had a few choice words about it in our editorial meeting this morning. “Calling this a ‘good start to earnings season’ is like calling a house fire a home improvement,” he says. “Analysts have lowered their estimates so far that anything short of multiple defaults in the S&P 500 would be seen as a good earnings season.”

Cutting jobs and slashing expenses can improve a company’s bottom line. But it does not create wealth. At some point investors will realize that we need real sales and revenue increases to support this market – not just a slowing of losses.

More mixed news in the Alcoa announcement….

The company reported that deliveries fell 8.3% but prices for a metric ton of aluminum rose 18%. They also expect an 11% increase in demand in the second half of 2009. This was reported as good news by Reuters. But nowhere in the article did it mention how far demand had fallen.

If a stock falls from $100 to $10 – and then rises 11% – that’s a very minor improvement compared to where it was before. We suspect the same is true when it comes to Alcoa’s hoped-for 11% improvement in demand. It represents a miniscule recovery compared to demand from years past.

Why do the media conceal and manipulate the facts?

As we’ve pointed out in these pages nearly every week, the mainstream media shows a clear bias to report good news about the economy. And when there is no good news to report? They find a glimmer of improvement and put it in the headline… even when the rest of the article shows nothing but deterioration.

So what is their motivation?

That’s the question we asked in our editorial meeting this morning. Certainly the media is motivated to appease their advertisers, most of which depend on you continuing to spend money and keeping your investments in the market. And don’t forget, the media are also tools of their owners. That’s why you didn’t hear CNBC criticize General Electric (their parent company) for having to go hat in hand to the government for a $140 billion bailout. Finally, it can’t be ignored that the media is giving the new administration a pass, trying to make it appear that the stimulus and bailouts are working.

One thing is for sure. Don’t ever count on the media when it comes to making your investment decisions – unless you’re using it as a contrary indicator.

But the government would never lie to you…

Neil Barofsky is the special inspector general for the Troubled Asset Relief Program (TARP). He recently issued a report that the Federal Reserve, the Treasury Department and the FDIC all lied to the American people during the financial crisis in 2008.

Of course, they did. And they have mounted a concerted deception and disinformation campaign ever since. What is particularly galling, however, is that the lies appear to be a matter of policy. But don’t worry… it is for your own good.

Barofsky’s report is focused on the statements of former Treasury Secretary Hank Paulson on October 14th of last year. Paulson was referring to the massive government bailout of the first nine banks to receive TARP funds. He said, “These are healthy institutions, and they have taken this step for the good of the U.S. economy. As these healthy institutions increase their capital base, they will be able to increase their funding to U.S. consumers and businesses.”

The Treasury Department, the Federal Reserve and the FDIC followed up with a joint statement that “these healthy institutions” were taking these steps “to enhance the overall performance of the US economy.” In other words, if they could just get their hands on a few hundred billion dollars they would lend it out to “support” the economy.

The truth is that these institutions were not “healthy” by any standard. They were effectively insolvent. And the money wasn’t lent out. It was used to repair their balance sheets… and pay their year-end bonus checks. Some bailout.

Now here’s the kicker…

The Treasury Department recently issued a statement that “any review of such announcements must be considered in light of the unprecedented circumstances in which they were made.”

In other words, “Sure we lied to the American people. But it was for your own good. We had to do it.”

What our government and the media did was to encourage you to hold your investments. They encouraged you to keep spending to boost the economy. And they tried to lead you to believe that things were not as bad as they really were. Believing those lies led many to lose even more of their life savings, as the market plunged to new lows over the next five months.

But that was then. They aren’t still lying to us today, are they?

Ha!

Our advice about the government is the same as our advice about the media. Be very wary of government statistics and pronouncements when it comes to your investment decisions – unless you’re using it as a contrary indicator.

What do you think? Is the media lying to us? Do they have a bias to report things in a positive light? What about the government? Let us know what you think. We’ll publish your comments, especially if you believe most of what you hear from the government and the media. We could use a laugh.  Write to: feedback@investorsdailyedge.com

Corporate insiders aren’t drinking the Kool-Aid…

Several times over the past few weeks, we have pointed to the extraordinary levels of insider selling compared to insider buying. And the pace continues. For the week ending on October 1st corporate insiders sold $532 million worth of stock. They bought just $12 million during the same week. That’s a ratio of 44:1

Corporate insiders know more than anyone about the companies that make up the market. And they are voting with their dollars that the market has gotten too rich. They see firsthand that top line growth continues to deteriorate. And they know that the improvements we have seen due to cost cutting are not sustainable. Clearly, they don’t believe the earnings of their companies support such lofty valuations.

An insider who sees things the way we do…

Ken Langone is an insider’s insider. He was the financial backer behind Home Depot. He is a former director of the New York Stock Exchange. And he’s served on the boards of several NYSE companies, including General Electric.

In an interview with Bloomberg this week, Langone pulled no punches when he described the media and the government’s portrayal of economic recovery. “If we did in business what the government is doing, by saying, ‘It’s getting better… It’s getting better’ we would go to jail for manipulation or fraud. It’s not getting better.”

Langone says that he spends most of his time these days talking to the leaders who are running companies. So, what are they saying? “I’m getting it back from everybody. ‘It’s terrible. It’s getting worse. September was worse than August.’”

There is a big disconnect right now between what is going on in the economy and what is happening in the stock market…

Warren Buffett’s investing mentor was Benjamin Graham, the father of value investing. In his book, The Intelligent Investor, he wrote, “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”

The “voting” aspect of the stock market has to do with investor sentiment. Right now, investors are exuberant and hopeful. The “weighing” aspect of the market has to do with earnings and profits. Right now, both of those continue to fall.

So, what should you do?

We don’t advise that you sell, just because the market has soared and it is not supported by the fundamentals. The market could continue climbing for some time to come. We don’t try to predict where the market will go from month to month. Instead, we recommend our readers buy great companies at fair prices. And we use trailing stops to protect our profits.

But now is not the time to take on greater risk either. It is the time to play it safe. You can do that by increasing your allocation to high quality corporate bonds. And you can use this opportunity to upgrade your portfolio, shifting toward the strongest dividend-paying, global companies you can find.

You can also hedge your portfolio with options. And you should definitely protect your wealth from monetary insanity with gold and silver and precious metals stocks. More on these options on Monday. For now…

Invest Safely,

Bob Irish
Investment Director
Investor’s Daily Edge