two NYT items of interest--<<<October 12, 2001
FLOYD NORRIS
As Earnings Plunge, the Market's P/E Ratio Sets a Record
nytimes.com
Stocks Surge on Increased Confidence by Investors (October 12, 2001)
The bubble burst a long time ago, and now stock market valuations are far more reasonable.
So goes the Wall Street line. But a look at the numbers raises questions about that happy conclusion. The price-earnings ratio of the Standard & Poor's 500-stock index reached its highest level ever yesterday, at 35.99. That figure, based on reported profits over the last 12 months, exceeded the record of 35.82 set on April 12, 1999.
How can that be? Share prices are down a lot from the peak in 2000, but so are profits. Profits surged in 1999 and early 2000, keeping the P/E ratio from reaching new highs even as the market did. But since then the profit figures have been plunging precipitously.
It should also be noted that the historical earnings figures now being used include only a handful of companies that have reported third-quarter results. Chances are that many third- and fourth-quarter reports will be dreadful, leading to even higher price-earnings ratios.
The second quarter was bad enough. According to calculations by Bloomberg Financial Markets, S.& P. profits for the period were lower than they were in the second quarter of 1990, just before the last recession began.
Wall Street thinks such numbers are unfair. They are based on historical profits, while investors should be looking at future earnings. Though they exclude extraordinary items, they include write-offs that companies think are best ignored. Wall Street focuses instead on estimates for 2002 pro-forma operating earnings, which exclude whatever the company wants excluded. The S.& P. is trading at 19 times that forecast, which Wall Street says is cheap given the current low level of interest rates.
Wall Street's argument is reasonable in part. A company's future operations should matter most to investors, and many write-offs now being taken represent losses that should have been taken in prior years, not this one. But, says Thomas Coleman of Aequilibrium Investments, a money management firm based in London, focusing on pro-forma operating earnings in the aggregate ignores a lot of losses, and those losses are real. Moreover, the difference between reported profits and operating profits has grown over a sustained period, as companies have become more adept at making operating numbers look better. That distorts historical comparisons based on operating profits.
In a study to be released next week, economists at the Jerome Levy Economics Institute at Bard College estimate that overall earnings of the S.& P. 500 are overstated 20 percent. Like Mr. Coleman, they raise the same issue of operating vs. total profits, but add that the 1990's boom in stock options also led to a rising exaggeration of earnings because few companies treated the value of the options as an operating expense.
Does this matter? In the short term, probably not. Valuation is not very useful in market timing. The important issue in the coming months will be the economic outlook, and share prices will probably do well if investors continue to expect an early end to the recession. That hope has driven the S.& P. back to where it was before Sept. 11.
But it is worth noting that the extraordinary high multiples of the late 1990's coincided with expectations of rapid growth for the economy and for corporate profits. If those expectations come down, lower valuations may come to seem appropriate even after the recession ends. Instead of growing faster than profits, as happened in the last decade, stock prices could fail to keep up with earnings.>>>
<<<<<October 12, 2001
Stocks Surge on Increased Confidence by Investors
By MICHAEL BRICK and FLOYD NORRIS
nytimes.com
The American stock market rose sharply yesterday, providing more evidence that investors are regaining their confidence after the terrorist attacks. Most major averages in the United States, as well as several other countries, have now recovered all the losses they suffered after Sept. 11.
Wall Street was encouraged after several companies, including General Electric (news/quote), reported financial results that met or exceeded stock analysts' diminished expectations. Those reports provided some hope that American business would weather the economic storm without severe damage.
The market also seemed to reflect confidence that the military action in Afghanistan is proceeding successfully.
"Because of the attacks, investors have a renewed enthusiasm that we're going to have a V-shaped recovery," said John Forelli, senior vice president and portfolio manager at Independence Investment L.L.C., referring to the theory that a sharp fall in the economy will be followed by an equally rapid rebound. I we are re-running the V,again i see--this week could be explosive IF intel and IBM do a nice massaga job and spin-max
He argued that the market might be higher now than it would have been without the attacks, simply because the federal government is preparing an economic stimulus package that would not have been considered.
<b.Others pointed to market reasons for the gains. "Nobody wants to get in the way of the momentum," said Arthur Hogan, chief market analyst at Jefferies & Company. "The economy still is bad, and we haven't seen stabilization. But so far, it hasn't been grotesquely worse than our expectations."
Both the technology-weighted Nasdaq composite index and the Standard & Poor's 500-stock index closed slightly above their final levels on Sept. 10. The Nasdaq surged 75.21 points, or 4.6 percent, to 1,701.47, while the S.& P. 500 jumped 16.44 points, or 1.5 percent, to 1,097.43.
The Dow Jones industrial average remains roughly 200 points below its Sept. 10 close, but it gained 169.59 points, or 1.8 percent, to 9,410.45.
The enthusiasm came despite poor sales reports for September from many retailers. The exception was discount stores, which generally saw sales increases. But investors were aware of that trend, and seemed more impressed by the sales laggards. Wal-Mart Stores (news/quote) shares fell 14 cents, to $53.49, after the company reported a 6 percent gain in sales, while Federated Department Stores (news/quote), the parent of Macy's and Bloomingdale's, rose $2.12, to $31.60, despite a 13 percent decline in sales.
Immediately after the Sept. 11 attack, world stock markets sagged from fears of world recession and of continued terrorism. Since then, many markets have come back. Major stock averages in London, Frankfurt and Tokyo have all climbed above their pre-attack levels.
All those markets remain down sharply this year. Japan is mired in recession while major European economies continue to slow, with some economists forecasting that all major world economies will be in recession at the same time for the first time since 1973 through 1975, when the first oil shock jolted the entire industrial world.
Because the American economy was the most directly affected by the attacks, the recovery in the domestic stock market is in that sense the most impressive. Trading was halted for the rest of the week after the attacks, and the Dow industrials lost 14.3 percent the next week, for the average's worst week since the Great Depression. Other averages also fell more than 10 percent. But nearly all those losses have now been recouped.
Oil prices, which had fallen when investors expected a severe recession, have begun to recover, with crude oil for November delivery rising 3.6 percent to $23.44 a barrel yesterday. The price had fallen as low as $20.30 on Sept. 26. But oil shares, which had been strong the last two weeks, generally slipped. Exxon Mobil (news/quote) fell 19 cents, to $42.09.
In the technology sector, the gains were led by the stocks of large companies, including those that are typically associated with early gains in a period of economic recovery. But there were also bold gains by stocks that lost almost all of their value when the Internet bubble burst.
"The biggest, most liquid stocks are all moving," said Brett Gallagher, vice president of Julius Baer Investment Management.
At least some of the performance seems to have come from professional money managers who sold stocks after the attacks and now have cash that they do not want to leave out of the market if prices recover. With a widely held stock, "if you don't own it, and it starts to move very quickly, you can lose some relative performance," Mr. Gallagher said. does look like MFunds may get in a chasing frenzy--we will see--max
The stocks posting the greatest losses in the Dow were those of companies whose businesses would be most stable in a recession, and therefore would gain less when a downturn ends. Johnson & Johnson (news/quote) was down $1.10, to $54.94; Procter & Gamble (news/quote) fell 75 cents, to $72.59.
In the technology sector, E*Trade reported profits that exceeded Wall Street's estimates and rose $1.19, or 29 percent, to $7.85. The company raised its earnings forecast for the fourth quarter.
The gains in E-Trade and Yahoo (news/quote), which reported a day earlier, helped lift TheStreet.com's Internet index by 14.48 points, or 10.37 percent, to 154.16. That index is still down 88 percent from its peak in March 2000.>>>> |
