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To: Earlie who wrote (140096)	12/23/2001 9:33:11 AM
From: JHP	Read Replies (2) \| Respond to of 436258

Earlie, you get a honerable mention here<G> December 23, 2001 MARKET WATCH Optimists Aside, He Still Sees a 98-Pound Rebound By GRETCHEN MORGENSON With the broad stock market averages up almost 20 percent from their September lows, it is clear that investors not only believe the recession is ending almost as soon as it began, they also think the recovery will wow. But is a return to outsized earnings growth a reasonable prospect or an irrational hope? With the Standard & Poor's 500-stock index trading at about 30 times next year's earnings estimates, the question resonates. James Paulsen, chief investment officer at Wells Capital Management in Minneapolis, fears that investors' optimism is more about hope than reason. Though analysts have cut near-term earnings estimates, long-term expectations for United States companies remain high. The median estimate for earnings growth, Mr. Paulsen said, now stands at 13 percent. Adjusting for inflation, that's almost 11 percent. Although no one knows what kind of revenue growth companies will generate when recovery comes, in recent years sales growth has averaged around 5 percent. It may be lower, in Mr. Paulsen's opinion. Thus, if sales are rising 5 percent or less, companies must show a surge in profits to hit that 11 percent target. Although they can be forgiven for wanting to reprise the good old productivity miracle days, Mr. Paulsen argued that this time, the past may not be prologue. "A lot of investors are saying we went into a short-run recession but we haven't dented our long-term expectations," Mr. Paulsen said. "I think we'll come out of a recession and earnings will do better, but I don't think we're going to come back to growth." He bases his view on several things. Most important is the role of a declining inflation rate. Though low inflation would be a bonanza for consumers, it would spell trouble for companies hard-pressed to raise prices. "It seems like a good bet to me that the Consumer Price Index will be under 1 percent soon, on a year-over-year basis," Mr. Paulsen said. "That's going to make companies struggle for profits." When the economy emerged from its last downturn, in 1991, inflation was around 3 percent and climbed to 3.5 percent. That provided some pricing power to corporations. At 1 percent inflation, that power dissipates. Mr. Paulsen also said that the companies now showing strength in sales might not be able to translate those figures into profits. Auto sales have soared, but only as a result of no-cost financing. Retail sales have come mostly where price cuts have been deep. "Most everything is tied back to price discounts," Mr. Paulsen said. "We may find that we got a real boost to G.D.P. growth in the fourth quarter, but did any of those companies make money on it?" As long as bond yields remain relatively high, he added, the stock market will have difficulty. When the economy exits a recession, bond yields typically fall, fueling higher stock prices. Such was the case from mid-September through mid-November, when the S.& P. rose almost 16 percent. But since bond yields started rising in mid-November, stocks have stalled. Contrary to investors' high hopes, Mr. Paulsen notes that recessions never turn into full recoveries overnight. In the last recession, a healthy growth rate did not return until 1994, three years after the recovery began. "Between 1991 and 1994," he said, "there were many periods when optimism rose that strong growth was imminent, only to prove mistaken a few months later." Everybody knows how well the market anticipates recoveries. What few investors seem willing to recognize is how costly its too-early enthusiasm can be. regards john