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Politics : PRESIDENT GEORGE W. BUSH -- Ignore unavailable to you. Want to Upgrade?

To: goldworldnet who wrote (177581)	9/4/2001 11:42:16 PM
From: goldworldnet	Respond to of 769667

Bubble bath Geov Parrish - WorkingForChange 08.28.01 - In the wake of the bursting of the dot.com economic bubble, one refrain is commonly heard: how was it that reasonable people could get suckered into pouring money into endless new startups that had no product and no potential for profits, in an entire economic sector that had little history of profitability? There are a lot of answers, of course: two of the least technical are the hype over new technology and the infusion of global capital seeking refuge from economic crises in Asia, Russia, Latin America, and elsewhere. But, as one of my co-editors at the Seattle publication Eat the State!, Maria Tomchick, pointed out, a recent Wall Street Journal article outlined how sometimes the delusions ran deep--and were intentionally laid. And are continuing. According to the story -- brace yourself for some eye-glazing economics jargon, but trust me, it's leading somewhere -- the problem began in late 1998, when two companies, Yahoo and Amazon.com, began excluding certain regular expenses from their net earnings (income minus expenses) calculations. This made their losses seem a lot smaller than they really were. Other dot-coms followed suit. Soon other tech companies were doing the same and, before long, "old economy" corporations had also joined the bandwagon. Many companies have even made their net losses magically disappear and net gains appear in their place. The sleight of hand is critical for far more than making annual reports look good. "Net earnings" are part of a key calculation essential to Wall Street analysts and potential investors--the price/earnings ratio. The P/E ratio is used by most investors to determine whether a stock is overpriced or a good value. It's calculated by comparing the company's stock price (P) to its net earnings per share (E). The net earnings per share is figured by taking the company's income minus its expenses and dividing that amount by the number of shares of stock outstanding (held by all the shareholders in the world). The historical average P/E for the Standard & Poor’s 500 is about 15/1; in theory, any stock that has a P/E lower than that is usually considered a value. There are some exceptions: if the company has some legal tie-ups, owns large amounts of worthless assets, or has other problems that may drive it into bankruptcy, a low P/E is a sign of trouble. That's how Wall Street analysts allegedly earn their money: assessing whether a good P/E means a money-making opportunity, and warning people off of high P/E's. But it's unreliable. The very basis of the P/E ratio -- net earnings -- is now a meaningless number. The Securities and Exchange Commission can't force companies to adhere to GAAP (General Accounting & Auditing Practice) standards, which is how companies historically decide which expenses to include in their net earnings. And so companies routinely now inflate their net earnings. As the Wall Street Journal commented: "Sometimes the results are nothing short of surreal." Naturally, this manipulation of P/E ratios is suckering lots of investors into buying stocks because they think they're getting a good value. In fact, they're not. Analysts currently say the P/E ratio of the S&P 500 is 22/1. In reality, that P/E ratio is about 36/1—240 percent over its historical average--so the market is still vastly overvalued. In other words, the bubble has burst--a little bit, and mostly in the tech sector. But there's a whole lot of bubble-bursting left to go, in old, trusted businesses as well as new ones. And a $300 tax rebate won't help. workingforchange.com * * *