To: Logain Ablar who wrote (5652 ) 2/19/2002 7:14:15 AM From: John Pitera Respond to Hi Tim, we've know about the accounting practices that have overstated earnings for the last few years. someone sent this post to me tonight.Message 15354969 pimco.com .Current stock market valuations are being supported in part by a number of dubious accounting practices that have led to earnings overstatements of as much as 30-40% annually. Peter Bernstein, in a November strategy piece, reports that over the past fifteen years, an average of 20% of reported earnings in any one year vanish five years later due to “extraordinary” write-offs. “These are not minor league numbers,” he writes, “hence how much confidence can we have in reported earnings?” Undermining confidence even further has been the use of options as a replacement for normal compensation among corporate management. The Economist magazine reports that if the cost of options were reported in American financial statements as many astute investors such as Warren Buffet believe they should be, then earnings would be reduced by an additional 20% annually. Take those wonderful earnings per share numbers then, that CNBC reports on a minute-by-minute basis, and reduce them by at least 40% to recognize future write-offs and the cost of options. The S&P 500, with a reported P/E of 25x suddenly looks more like 40x when viewed rationally or even historically. No wonder market yields are only 1%. It’s not that easy to pay dividends with phantom profits.------
