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Strategies & Market Trends : The Stock Market Bubble -- Ignore unavailable to you. Want to Upgrade?

To: Box-By-The-Riviera™ who wrote (2859)	8/30/1999 7:28:00 PM
From: The Ox	Respond to of 3339

From: Message 11109153 Profits Over or Understated? Let's start with corporate profits, which is where many reporters such as Alan Abelson clearly became confused. Greenspan argued that there several factors that led to both understatements and overstatements of profits. Leading the list of factors that led to understatement was the treatment of many capital outlays as expenses. His primary example was software, which most companies have considered an expense even though it clearly has long term benefits and is more appropriately considered a capital outlay. Greenspan noted that in an increasingly idea-based economy, the problem of expensing capital outlays was growing quite large, and corporate profits have therefore been significantly understated. On the side of profit overstatement, Greenspan noted the increasing use of stock options as a means of compensation. While not complaining about using stock options for this purpose, he did note that options were not properly accounted for, and that this factor has overstated profits by 1 to 2 percentage points per year over the past few years. After reviewing the factors suggesting understatement and overstatement of corporate profits, Greenspan concludes that "it is reasonable to surmise that undercapitalized expenses have been rising sufficiently faster than reported earnings to have more than offset the factors that have temporarily augmented reported earnings." That's a pretty clear statement, but apparently Abelson was too busy playing with his thesaurus to read that far. More To It Than Profits Even though profits probably have been understated in recent years, Greenspan concluded that this understatement cannot, by itself, explain the entire rise in equity market valuation. The rest of the increase reflects changes in perceived risk. These changes can be rational responses to longer business cycles created by better inventory management, or an increased confidence in long term price stability, or they can be irrational -- the herd mentality that has created many past asset price bubbles........