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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Enigma who wrote (6097)	5/20/2002 10:57:19 AM
From: John Pitera	Read Replies (2) \| Respond to of 33421

FASB -- S&P -- What are Operating Earnings? Now Let's Look at your follow up question. If it's not counted for EPS calculations it's difficult to see how the multiple calculation will change unless companies are forced to include some sort of notional figure in their published reports, because the so called expense will not be in the books as part of normal double entry bookkeeping FASB, the Financial Accounting Standards Board, which came into existence in July of 1973 is given authority to conduct research "in Accounting Matters using its own full time technical staff or it commissions outside researchers from the academic and financial communities ot work on specific projects of interest to the board". (Accounting Flows and Disclosures, Benjamin, Fancia and Strawser) FASB issues 3 major types of pronouncements: 1. Statements of Financial Accounting Standards (SFA's)-- These establish new or amend existing generally accepted accounting principles. 2. Interpretations. These Clarify, explain, or elaborate on SFA's, APB Opinions, or ARB's Interprestations are themselves a part of GAAP. 3. Statements of Financial Accounting Concepts (SFCA's) These set forth objectives and concepts that the FASB uses as the basis for establishing and improving generally accepted accounting principles. In addition, the FASB staff issues Technical Bulletins that give guidance on certain financial accounting and reporting problems on a timely basis. (Intermediate Accounting - Williams, Stanga, and Holder) OK, so Now we know more about FASB. The WSJ in the article you responded to states that Standard and Poors is overhauling some of their reporting methodology. and I quote right from the WSJ story here: "Standard & Poor's is expected Tuesday to announce new standards for calculating companies' so-called operating-earnings results, a move that is expected to focus a spotlight on often opaque earnings reports. The WSJ correctly points out that that FASB sets the guidelines for the corporate reporting practices of earnings in the US. But companies like S&P can use other ways to measure earnings. I again quote from the Wall Street Journal. "Generally accepted accounting principles, set by the Financial Accounting Standards Board, set standards companies must use for reporting net income. But companies aren't precluded from publicizing other earnings measures The Journal acknowleges that S&P has not enforement power, they do aptly note that if S&P adjusts it's accounting format to include the expenses incurred in the corporate issuance of ESOP's, it will be hard for the financial community to ignore. quote: S&P, best known for evaluating companies' credit ratings, has no enforcement power, of course. But its use of the new standards internally, especially when calculating such market bellwethers as the price-to-earnings ratio of companies contained in its S&P 500 index, will make its methodology hard to ignore. The logical question that this leads us to ask is.. Will S&P's new plans to include costs that will reduce earnings in the shorter term, gain traction in the financial community. That is for the future to decide. When you read an article such as Barron's excellent yearly Investment Roundtable discussion, which appears in 3 consecutive issues in early January each year, you will see that the Major Wall street Stragists are asked about what they think the operating for the S&P 500 will be for the coming year. This year, the range was from the low 40's to about $55 of operating earnings for the S&P 500 companies. If the operating earnings turn out to be $50 this year, and the S&P closes at 1000 at year end, then the PE ratio will be 1000/$50 = PE ratio of 20 based on calendar year 2002 earnings. If Operating Earnings are $40 for the SPX then the PE ratio will be 25. This leads us back to the KEY QUESTION: Are GAAP accounting principles giving us a realistic number when they are used to calculate Operating earnings of US Companies. have an increasing amount of extraordinary items which are not counted as expenses for GAAP purposes, in fact, costs of running ongoing business operations, and the reason the trend has been to exclude them is that it gives the illusion of higher earnings and profitability. Has the growth of ESOP's especially in Tech stocks distorted the actual profitability of these companies? The Market as always has the answers and It will reveal the answers to these questions in due time. This type of thing is part of what makes the financial markets so interesting, and their is clearly a perceptual component to the Reality of the Market. There would appear to be a question of what is the reality of financial earnings. ----------------------2 thoughts--------------------- 1-- Physicists tell us that Objective Reality is Subjective in Nature. So we should expect the Financial and Capital Markets to have some element of Subjectivity in the way "Price Discovery" occurs. 2-- The Oldest Market Axiom is that the Market is driven by the Emotions of Fear and Greed. These two driving emotions swing back and forth like a pendulum over the course of time. I think a healthy moment of reflection on the above two ideas should help many understand why it's been said that the Mass Psychology of Investors is what governs the market. John