My thoughts as the day wraps up:

• I give the win to the bears today (finally!), as Mr. Market (thus far) has made two failing attempts to rally.
• Bonds continued to drop in price and rise in yield. As I mentioned, in response to Kim G in the Comments section, I expect only a gradual rate rise in 2015 through 2017.The 10-year U.S. note, now at about 2.24%, has probably made most of its room to the upside in yield for the balance of the year.
• Municipals were flat to slightly lower as was high yield -- though Blackstone/GSO Strategic Credit Fund (BGB) is up a penny on the day.  
• Closed-end municipal bond funds are basically unchanged on the day. As I wrote at the end of September, I don't expect any/much capital appreciation in the year ahead, but I see the funds returning their dividends (annualized appreciation of about 6%). I believe this return will outperform the U.S. stock market over the next 12 months.
• Crude ends the session at lows, down by almost $1.15 a barrel. I initiated shorts in Schlumberger (SLB) and Exxon Mobil (XOM), the latter of which went on my Best Ideas List yesterday. There will be more names as I move down the quality spectrum. The group got schmeissed today. 
• The U.S. dollar was a tad weaker; consumer nondurables -- especially of a Procter & Gamble (PG) kind -- continue to respond negatively to the overall recent trend in our currency (higher).
• CNBC Blather Index: This week I counted (when I wasn't under the influence of anesthesia) 49 bulls and three bears. Enough said --- a Bull Market in Complacency is back in force.
• Crickets from talking heads on Qualcomm (QCOM), down $10 today, and FireEye ( FEYE), down $7 today, who expressed confidence in the names and pro-forma earnings earlier in the week.  Remember: Fast talking and sound bites are not a reason to listen to these imbeciles who are three miles wide and an inch or two deep. Enough said.
• Banks continue their winning streak as the Pavlovian reaction to a rise in the 10-year U.S. note yield of 15 basis points in the last few weeks has now gotten a bit carried away. I am still long but down to tag ends and expect some serious profit-taking  in a market correction (5% to 10%). 
• In the life insurance sector, MetLife (MET) followed Hartford Financial Services Group (HIG) with weak results. MET recently was put back on my Best Ideas List (short) and I added to it and Lincoln National (LNC) short yesterday. Berkshire Hathaway (BRK.B), as a commentator mentioned in Columnist Conversation, appears to be rolling over
• Autos still skidding.
• Apple (AAPL), after a nice run, could have an appointment under $120 a share; I have been adding to my short position this week.
• The dive by Valeant (VRX) is weighing on Biowreck;  iShares Nasdaq Biotechnology (IBB) is down by nearly 2% on the day. I wrote critically about the company about a week ago. 
• Mark today. (T)FANG might have topped -- just gauge the cheerleading.
• Radian (RDN), though up 2% today, has gotten quite inexpensive; it finally is rallying a bit today.
• Thanks for the comments on my accounting analysis of Facebook (FB).  Critical analysis is always important to read.

I did my shorting yesterday, and I was aggressive. (Note: My Best Ideas short list is expanding in size).

Today I only added to my iShares Russell 2000 (IWM) short; IWM is my "Trade of the Week" on the short side.

I've only made one trade so far today.

I recently added to my short of the iShares Russell 2000 ETF (IWM) at $118.38.

Here's another excellent and well-articulated post from subscriber Kim G that mirrors some of my previous commentary and talking points:

"Here's something to think about in the context of the long-bond selloff, rising rates, and gold:

1) The global economy is clearly weakening, with trade down, capital investment down and other signs of slowing. This is typically a good environment for bonds.

2) If the Fed hikes in December, the U.S. dollar will likely strengthen further. If bonds continue to sell off into such a hike, then the interest-rate spread between the USA and places like Europe or Japan will widen. All else being equal, this will make U.S. bonds more attractive to foreign investors relative to domestic bonds.

3) If the dollar continues to rise, it will create additional headwinds to large-company earnings, and will also create disinflationary/deflationary pressures. This will tend to slow domestic economic activity, thus reinforcing Point No. 1. This, too, should be beneficial for bonds.

4) Gold is now selling off, as investors are starting to believe in higher rates. This is a normal reaction on the part of the gold market. But if bonds bottom, expect gold to rally along with bonds.

5) So, the logical conclusion from the above is that any rise in interest rates should be somewhat self-limiting. The bigger picture is one of an industrialized world in a period of deflationary stagnation. Whether you blame the world's central banks or believe in "secular stagnation" (nobody's fault; it's just happening) or something else, that bigger picture seems pretty true, and pretty persistent.

6) Look at what bonds and the iShares 20+ Year Treasury Bond ETF (TLT) did in the most recent market meltdown. If we get more equity-market turbulence, risk-off players will flock to bonds. So if you're long ProShares UltraShort 20+ Year Treasury ETF (TBT) or short bonds, you're implicitly betting on no-stock market turbulence.

So, all of this is a way of saying: 'Don't get over your skis on TBT or other bond shorts.' I personally think TLT has $2-$5 of downside risk, but could go back to its highs in a real equity bear-market scenario -- particularly if serious financial turbulence breaks out in China."

Midday musings from Sir Arthur Cashin:

"Crude stabilizes and that allows stocks to trim earlier losses. Waiting on some surprise or other from the saloonful of Fed speakers.

Run rate later."

In response to my GAAP/non-GAAP posting about Facebook (FB) this morning, ZeroHedge's Tyler Durden sent me this link to an April analysis he did that quantifies Sir Richard Bernstein's observations.

Peter Boockvar has a bead on the two-year U.S. Treasury yield today:

"The two-year U.S. Treasury yield is now creeping up to 0.849%-0.846%, the highest level since February 2011. The next key level is not far from here -- in fact, it's less than 1 basis point, as the 2011 closing peak was 0.853%. Above that takes us to levels not seen since May 2010.

This begs the question of where the two-year yield will wind up if the Federal Reserve next month raises the fed funds rate's range to 0.25%-0.50% from today's 0%-0.25%.

The spread between the fed funds rate and the two-year Treasury yield averaged 114 basis points between November 2000 and November 2007. (November 2000 was when the Fed was about to embark on a rate-cut cycle to fight off tech bubble's pop. November 2007 was when the Fed was ready to fight the U.S. financial system's implosion.)

I'm not going to take this average and say the two-year Treasury yield is going to rise to 1.50% (using 0.375% as an effective rate). But it's easy to see a yield north of 1% if the Fed actually follows through with a rate hike at its next meeting."

In response to my three-part opener today on GAAP vs. non-GAAP accounting and the latest results from Facebook (FB), Richard Bernstein sent me an e-mail reminding me of the following:

"When I was at Merrill we developed something called the 'GAAP Gap,' or the difference between reported GAAP EPS and 'operating' EPS. During bull markets when the profits cycle is accelerating, the GAAP Gap is very small.  There is no need for earnings shenanigans.

However, when profits cycle decelerate, the GAAP Gap widens.

I've never understood why any investor would look at 'adjusted' earnings when GAAP is designed to skew the analysis most in investors' favor."

I was out yesterday and Bret Jensen was handling the Daily Diary for me, but I wrote several postings on Columnist Conversations noting that I was materially increasing my short exposure.

To recap:

• I added to shorts in the SPDR S&P 500 ETF (SPY) at $211.05, the PowerShares QQQ ETF (QQQ) at $115.25 and the iShares Russell 2000 ETF (IWM) at $118.30, moving them back to medium-sized from small-sized.

• I established new shorts in United Parcel Service (UPS) at $104, Wells Fargo (WFC) at $54.58, Schlumberger (SLB) at $80.30 and Exxon Mobil (XOM) at $85.96. (I also added my XOM short to my "Best Ideas" list.)

• I added to my shorts of Lincoln National Corp. (LNC) and MetLife (MET). MET reported a large earnings-per-share miss after the close.

My first and second missives today discussed the importance of GAAP vs. non-GAAP earnings reports.

If you want to learn more about the subject, here's some helpful additional reading:

• From the Financial Accounting Standards Board (FASB)

• From the Wiley Online Library

• From The Journal of Accounting and Economics

• And two piece from the American Accounting Association (click here and here)

As I discussed in my opening missive, it's important for investors to look at GAAP vs. non-GAAP earnings -- especially when assessing rapidly growing social-media stocks like Facebook (FB).

Facebook delivered better-than-expected non-GAAP results after the bell yesterday, in line with similar upside surprises during the last few quarters. The business media widely heralded FB's earnings and the stock rose by about 4% to a new all-time high in after-hours trading.

But Facebook's balance sheet presents the critical issue of earnings adjustments -- and the non-recording of compensation -- that lies within the company's quarterly income statement:

Source: Facebook; Seabreeze Partners Management

To summarize my more-critical assessment of Facebook's latest report:

• Revenue rose 41%

• But total costs and expenses rose 68%

• Income from operations (including all costs/expenses) increased 4%

• But total share-based compensation expenses climbed 114%

Next, let's look at a chart that shows the wide gap in the 2011-to-present period between Facebook's reported EBITDA margins (in blue) and its "adjusted EBITDA margins (in red):

Source: Seabreeze Partners Management

Now, Facebook isn't alone in its liberal use of accounting; that's de rigueur for many social-media companies.

For example, here's a similar chart for LinkedIn (LNKD):

Source: Seabreeze Partners Management

And here's the combined trend of EBITDA margins (adjusted and unadjusted) for Zillow (Z) and Trulia (TRLA):

Source: Seabreeze Partners Management

And even Twitter (TWTR) -- one of my favorite stocks -- is aggressive in its adjustments:

Source: Seabreeze Partners Management

What This All Means

"Price is what you pay, value is what you get."

-- Warren Buffett

As Jim "El Capitan" Cramer expressed this morning, Facebook is a remarkable company and has been an amazing growth engine -- and FB investors have profited mightily as a result.

The stock is certainly this market cycle's darling, but investors should always ask: "What price growth and what metrics are we using to determine value?"

Facebook currently has more than a $300 billion market capitalization, which means its share trade and at more than 50x reported estimated 2015 earnings (i.e. before compensation "adjustments") and at nearly 18x this year's projected revenues.

But the shares look even more overpriced if you use GAAP earnings and include compensation-based costs, rather than just relying on the non-GAAP reporting that many technology and social-media companies seem to have adopted.

There are often profound differences in GAAP vs. non-GAAP accounting, especially among technology and social-media companies.

But David Einhorn of Greenlight Capital recently noted that this creates some big questions for investors, writing:

"Would these companies be able to retain their highly talented workforces if they stopped doling out large amounts of equity? If you are trying to determine the creditworthiness of these ventures, it might make sense to back out non-cash expenses. But if you are an equity holder trying to value the businesses as a multiple of profits, how can you ignore the real cost of future dilution that comes from paying the employees in stock?"  

Bull markets are forgiving of non-GAAP accounting -- but in a bull run's later stages, the irrational is often rationalized.

During periods of market optimism, investors rarely stop to reflect on the quality of earnings. They don't bat an eye at a falling effective tax rate, the absence of organic growth (often covered up by a "roll-up" strategy of serial acquisitions) or a vast gap between non-GAAP and GAAP accounting or other bookkeeping conventions.

But as we're learning from Valeant Pharmaceuticals (VRX) Sun Edison (SUNE), some energy MLPs and other stocks, introspection can be painful when the alleged fantasy numbers are discovered.

As I recently wrote on the subject of roll-ups:

"Zero interest rates, massive liquidity and slow global economic growth breed financial engineering, accelerated M&A activity and the proliferation of 'roll-up' strategies. That's where companies boost earnings not through organic growth, but via acquisitions.

The breeding ground for roll-ups is a flourishing mid-business-cycle condition, when liquidity is abundant, the stock market is euphoric, there's little introspection and less of a focus on earnings quality.

But problems often get exposed later in the business cycle. Accounting issues tend to arise toward a bull market's end after companies that used roll-up strategies have problems growing sales and profits further.

Marginal and/or aggressive executives with questionable business ethics often cut corners and take advantage of accounting conventions. But as the cycle matures and credit markets tighten -- as we're seeing now with widening spreads between investment-grade and high-yield bonds -- roll-ups often turn sour.

Recent questions surrounding Valeant Pharmaceuticals (VRX) and SunEdison (SUNE) could be examples of this. For all we know, so could the U.S. Securities and Exchange Commission's investigation of revenue recognition at IBM (IBM). Other firms will likely also face questions as well.

-- Doug's Daily Diary, A Word About Roll-Ups (Oct. 29, 2015)

Back in June, Barron's Andrew Bary also wrote an excellent article on non-GAAP accounting: How Much Do Silicon Valley Firms Really Earn? (Log-in required.)

And on Sunday, Gretchen Morgenson of The New York Times discussed Valeant's aggressive accounting tactics in this well-documented article.

I was originally turned on to the issue of corporate accounting by Dr. Abraham Briloff. His seminal book, Unaccountable Accounting: Games Accountants Play, and his series of scathing accounting articles in Barron's formed the basis for (and my interest in) the subject of earnings quality. Indeed, I spend much time on this subject in an MBA textbook I'm currently writing (to be published by John Wiley & Sons).

Technology companies -- emerging and rapidly growing social-media stocks in particular -- are among those that deliver the most aggressive and at times fanciful non-GAAP earnings reports these days.

Click here and here for some simple explanations of GAAP vs. non-GAAP earnings.

In my next missive, I'll discuss how all of this plays into the earnings report that Facebook (FB) released after the bell yesterday.