Contrary to your theory, when a company starts to report options as an expense on the income statement, there has been a modest positive effect due to the market's perception that management has better credibility
there really hasn't been enough time to say this conclusively. most of the option stuff has just gone on in the past year. the ink is barely dry! let's wait 5 years. obviously, all companies can't be more credible than average, so if all cos report option expenses, that will mean lower prices.
Using your logic, any company that started to report options as expenses would see an immediate stock price drop due to the lower reported profits
firstly, it's mainly old-line cos that have chosen to expense options, and they are not nearly as addicted to options as the tech cos. (notice that a lot of these cos say options will shave a penny off earnings this year or something equally innocuous.) secondly, all the cos that i know of who are opting to expense options are taking a "gradual approach". so you will not see the full impact on their earnings for some years to come.
if tech cos really agreed with you that their stocks would go up and there was no downside to expensing options, then CSCO would be first in line to tout expensing options!
options are a real expense, as more and more investors are realizing. add those expenses to the pension problem and the SPX could easily be cut in half. 300 is not at all out of the question if you still believe stocks get cheap in bear markets.
look at the current core earnings of $18. slap a multiple of 7 on that (like the early 70s) and you've got the SPX at 126. i think that's unlikely, but then again, in the fall of 1999 did you think the Nasdaq deserved to double again by March 2000?
even if one generously assumes $25 or so of normalized, non-lying earnings, and a historical 14x multiple, that puts the SPX at 350.
or assume $35 based on the historical relationship between corporate profits as a percentage of GDP, and a 14x multiple gives you 525.
round and round she goes, where she stops, nobody knows... but i can guess the direction :) |
