Once upon a time Alcoa (AA) was a great industrial powerhouse and innovator. Now it is a stumbling, pitiful giant that is a veritable wealth destroyer. And its dismal plight, which is thoroughly obfuscated by a Wall Street pleasing earnings scam called “ex-items”, is not atypical of Corporate America.

Last night, for instance,  AA reported another essentially profitless year, earning $268 million on $24 billion of sales. That amounted to a 1.1% return on sales and a US Treasury-like return of 2.1% on its $12.5 billion of book equity.

So, let’s see. These meager profits round to 21 cents per share for the trailing 12 months. Yet who in the world would pay 75X EPS for the earnings of a company that has been submerged in red ink for the past seven years, and which is now at the peak of a global aluminum commodity cycle that is heading for a thunderous fall?

The short answer, of course, is the robo-traders and fast money schemers who play the Wall Street “ex-items” game, pretending that todays AA stock price at $15.80 makes all the sense in the world because non-GAAP earnings for 2014 were held to be $0.92/share, not the actual 21 cents. Accordingly, why not pay 17X for a company who’s CEO is brimming with optimism about the future?

In fact, Alcoa projected sales growth of 7% in 2015 and CEO Klaus Kleinfeld tripped all over himself with superlatives:

“Our strong fourth quarter capped a pivotal year as we significantly accelerated Alcoa’s transformation,” Alcoa chairman and CEO Klaus Kleinfeld said in the release, adding that 2014 brought Alcoa’s strongest operating results since 2008. “As we built out our value-add businesses, we gained profitable share across exciting downstream growth markets and captured aerospace and automotive growth in the midstream. On the commodity side, our hard work reshaping the portfolio continues to pay off with improved performance for the 13th quarter in a row,” he added.

Only a CEO who is a media-obsessed spin-artist could possibly brag about the “strongest operating results since 2008″. The fact is, since the end of 2007, Alcoa has recorded cumulative net income of negative $2.2 billion. That’s right. During the past seven years AA has booked $162 billion in cumulative revenues, but during the entire course of this glorious global “recovery”, it has been chronically obliterating shareholder equity.

Indeed, Kleinfeld has been either President or CEO of Alcoa since 2007 when it ended the year with $16 billion of shareholder equity. Yet quarter after quarter as more than 20% of that figure was wiped-out,  Kleinfeld never once told the truth about AA real results and dismal downward spiral.

Why is he not a guest of the Federal government at one of its country club lock-ups?  Real simple. The Wall Street casino has evolved a parallel accounting universe called “earnings ex-items” that deletes from company financial statements reported to the SEC (on penalty of prison time for misrepresentation) any and every expense that top executives and their compliant sell-side analyst counterparts can agree is a “one-timer” or “non-recurring” item.

Thus, if the CEO undertakes a giant M&A deal that fails—–no problem. Write-off the goodwill as a “non-recurring” expense, even though good cash or company shares had been issued to make the deal. Likewise, the losses from closing plants, paying severance and health benefits for fired employees, cancelling leases, starting-up new operations and paying investment bankers and other deal costs are all considered one-timers. So is the P&L expense for executive stock options, which have become bounteous, certain pension charges and countless like and similar expenses.

In short, the Wall Street “earnings season” game amounts to institutionalized fraud. And the distortion of the true financial performance of reporting companies is not trivial. In The Great Deformation, I analyzed S&P 500 results for the four year period 2007-2010, thereby capturing the top, bottom and rebound of the last business cycle.

During that four-year period the S&P 500 companies averred that that they had posted $2.42 trillion of profits, and the Wall Street analysts cheered them on with endless “good job” accolades. However, the CEOs and CFOs signing their Sarbanes-Oxley attestations reported something altogether different. Namely, GAAP net income of only $1.87 trillion or 23% less.

Needless to say, the $550 billion difference that they fest up to in their SEC reports represented the destruction of real assets and cash wasted on deals which didn’t work, people that were fired and fixed and intangible assets which had become unprofitable. There is a reason why the accounting profession in its wisdom has insisted that these “non-recurring items” be recorded as expenses. They are!

There is also a reason why Wall Street operates a parallel universe of ex-items accounting. Namely, sooner or later the hedge funds and fast money traders need mullets and muppets on which to unload the shares they have ridden for a quick rip during earnings season when company results, like Alcoa’s last night, came in “better than expected”. And what better way to reel in the mullets and muppets than to propound that these stocks are “cheap”, their PE multiples are low, and the water is warm!

Thus, for the 2007-2010 period, the average combined market cap of the S&P 500 was $10.6 trillion and the average GAAP earnings—including the half-trillion of ex-items expense—was about $450 billion per year.  So all these so-called bargain opportunities reflected a PE multiple of 23X over the period.

The only thing that has happened since then is that the casino has become even more fraudulent, and valuation distortion games in the form of ex-items reporting and share buybacks have gotten all the more egregious. As shown below, AA actually had the nerve to claim $1.1 billion of net income—but only after adding back the astounding sum of $1.2 trillion in pre-tax charges. As Zero Hedge put it:

What about the full year? Well, GAAP EPS was a measly $268 million or $0.21 EPS. However, when one adds back a whopping $1.2 billion pretax in one-time charges, what does one get? Why net income of $1.1 billion, or $0.92 EPS. Non-GAAP that is. Because only for Alcoa is the difference between GAAP and Non-GAAP some 75%.

As shown below, just in the last 16 quarters AA has played hide the ball to the tune of $2.2 billion. The wonder of it is that the US government spends several billions per year at the SEC and DOJ policing the accounting reports of public companies and  cracking down on the occasional corporate officer who fails to get his GAAP-to-ex-items financial bridge statement in the prescribed format. Why do they bother?

There is a reason for that, too. The occasional prosecution is supposed to convince the mullets and muppets that the casino is operated in a honest manner and by the rules. Meanwhile, corporate clowns like Kleinfeld operate behind a safe harbor of phony accounting that allows them to proclaim quarter after quarter that current results have been spectacular, and that the future is even brighter.

In Kleinfeld’s case, consider this. During the last 7 reporting years, AA has generated just under $11 billion in operating cash flow. At the same time, however, the company spent nearly $11 billion on CapEx and another approximate $3 billion on dividends.

So there you have it. After over-spending the company’s operating cash flow by nearly $3 billion, Kleinfeld and Co. managed to generate $2 billion in cumulative losses. To be sure, they have all kinds of excuses, such as that the commodity end of the business (alumina refineries and smelters) has been a bummer due to massive worldwide overinvestment by the Chinese and others, and that the purpose of these massive write-offs is to reposition AA into “value-added” downstream businesses.

An one with more than a 3-month memory, of course, knows that is nonsense. Like other big integrated companies in the commodity and industrial space, including petroleum companies, AA goes “upstream” when commodity prices are high and then “restructures” to downstream “value added” fabrication and manufacturing business when commodity prices are low.

But here’s the thing. Alcoa has never once been honest about the long-term fiasco emerging in the entire integrated aluminum sector owing to years of massive global over-investment enabled the by the cheap capital that has been available during the last decade of rampant central bank money printing.

Instead, AA is a poster child for the whole ex-items scam which animates the entire Wall Street casino.

Below is a pretty good proof. The S&P 500 is now up more than one-third from its 2007 peak. Yet as shown below, inflation adjusted GAAP earnings per share are up only 8%.  And if you further adjust for the approximate $2.5 trillion of share buybacks during this period, real GAAP earnings are lower than they were before the crisis.

The cheap debt that has fueled the massive buyback machine has thus done wonders in keeping the mullets and muppets in the dark about how expensive and dangerous the casino really is.

And the ex-items scam has functioned to extinguish any doubt. Yes, Alcoa is the first reporter. And once again they have shown exactly how it is done.

S&P 500 Real Earnings data by YCharts