The role of financial reporting is to provide a variety of users with userful information about a company’s performance and financial position. As borrowers grow, tap into new markets and customer bases, take advantage of revolutions in technology and as debt deals get larger and more complex, analysts must keep up, too. In recent years, the company has plowed billions in new investments, which will likely support continued growth, but which also makes for a complex, difficult-to-unravel organization (in the eyes of many analysts). The earlier declines over there had not yet had much impact over here, while our markets continued to engage in Fed-watching, trying to figure out precisely when interest rates will turn upward.
Financial institutions all over summon their risk-management units to the board room to gather data to determine where the big risks are and to devise a swift game plan to manage risks that seem uncontrollable. In 2008, the whole mess was ignited by rumblings in mortgage markets, which triggered losses in mortgage-backed securities, which led to losses in hedge funds and financial institutions, who had been forced to sell assets in fire-sales to generate cash to pay off panicking lenders.
We knew it, and we’ve seen it, but global turmoil, circa 2015, proves once again how interconnected the economies of large economic powerhouses are and how interconnected their financial markets have become and will be. What happens over there seeps into the equation variables that explain what happens over here. When investors and analysts don’t on guesses or are not befuddled or strangled by uncertainty, intrinsic value rises (and so do stock prices).
History and technical analysis show that eventually equity markets eventually bounce back, sometimes after a little bit of tweaking, sometimes when hysteria recedes. The most notable reaction has been analysts wondering out loud whether Google reorganized itself into a West Coast version of Warren Buffett’s Berkshire Hathaway, a holding company with a large portfolio of large, diverse companies. The reorganization will help analysts understand the financials and appreciate, too, how sturdy and sound the search-engine side of the company has been and will continue to be.
Analysts and investors won’t need to guess at the contributions from the search-engine operation (Google in the new organization) and fathom how much all the experimental businesses (drones, driver-less cars, thermostats, etc.) might be a financial drain. But most of us know how a tipping of a giant mortgage iceberg led to the financial crisis and Great Recession of the late 2000’s.