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Strategies & Market Trends : Coming Financial Collapse Moderated -- Ignore unavailable to you. Want to Upgrade?

To: EL KABONG!!! who wrote (614)	9/3/2001 3:56:02 PM
From: EL KABONG!!!	Read Replies (1) \| Respond to of 974

Today's column in the NY Times... nytimes.com September 2, 2001 MARKET WATCH Take Away the Window Dressing, and Who Will Buy? By GRETCHEN MORGENSON With the global economy in a stall, corporate spending at a standstill and layoffs threatening to subvert consumer spending, it is no surprise that the United States stock market is feeling overwhelmed. But something else is weighing on stocks. That is the creeping realization among investors that the momentous earnings reported by many companies in recent years may have been digitally remastered to include a lot of hype, embroidery and fluff. This is significant. Investors coming around to this view will be less inclined to trust forecasts that company executives make. Having lost faith in a company's numbers, investors will be unable to place a fair value on its stock. In the dark on valuations, many investors will shun the shares. An extreme reaction? Not at all. It is precisely the payback that companies deserve for embellishing their earnings. The quality of corporate earnings seemed a quaint concern when stocks were racing. Now, reality in company earnings is crucial. But separating reality from fantasy in corporate earnings is harder than ever. Consider the gulf between estimates of second- quarter earnings from First Call and Standard & Poor's. While First Call said operating earnings among companies in the S.& P. 500 had fallen by 17 percent from the same period last year, S. & P. reckoned that the decline at those companies was 33 percent in the quarter. Because companies have much leeway in what they report as operating earnings, perhaps the best way to assess the true state of earnings is to consult government figures. While the average annual earnings growth reported by companies in the S.& P. 500 came in at around 9 percent from 1995 to 2000, the Commerce Department's Bureau of Economic Analysis says corporate after- tax profits grew only 5 percent annually. A report from Sanford C. Bernstein & Company, a brokerage firm, supports the government's figures. The report says the 9 percent average annual earnings growth at S.& P. companies in the late 1990's was really only 5 percent if one cancels out favorable accounting for stock options and earnings boosts that companies took from stock gains in pension plans. Had companies deducted the cost of options from revenue, which they need not do, annual S.& P. profit growth from 1995 to 2000 would drop to 6 percent from 9 percent, the report said. Subtract fat gains from shares held in pensions, and earnings growth falls by another percentage point. Another stellar aspect of the technology marvel dims under the gaze of Steve Galbraith, United States equity strategist at Morgan Stanley. He says that at many tech companies, profitability per employee grew at astounding rates in the late 1990's but is now crashing. Per-worker profits at semiconductor companies, for example, are expected to fall 77 percent this year. This proves not only that technology is cyclical, but also that profit gains were largely a result of easy money, not of intellectual capital. "If this was somehow an intellectual-capital-driven business, there is no way you would have had this kind of degradation in profit per employee," Mr. Galbraith said. "Capital was free and they all spent it into this area." Advances in technology were thought to have wrought a profitability miracle in the late 1990's. Now it seems the miracle was a result of a roaring stock market and accommodating capital markets. Experienced investors know not to confuse brilliance with a bull market. The new era version of that rule: Don't confuse profits with a bull market, either. KJC