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To: Joseph Moran who wrote (5738)	10/30/1998 10:38:00 AM
From: Joseph Moran	Respond to of 5812

continued from a Yahoo posting on the Pairgain thread..... continue... kameq Oct 30 1998 12:23AM EST So far in the third quarter, with data from 388 of the S&P 500 companies, First Call says that operating earnings are down 3.4% from the year earlier. The downtrend from the heady days of the 1994-1996 is absolutely clear. Growth has slowed every quarter since the Asian crisis hit in the fourth quarter last year. The picture for as-reported earnings is even worse. As-reported earnings includes all those one-time charges and write-offs that companies have become so adept at declaring. One-time charges are generally ignored for a single company, because they are supposed to reflect non-recurring events. In theory, it might make sense to amortize these costs to shareholders over an extended period, but that is not done. When aggregating for 500 companies, however, there are "one-time" charges every quarter, usually from a fairly stable percentage of the companies. It therefore makes sense to use as-reported earnings when looking at the true earnings power of a large aggregate of companies such as the S&P 500. The as-reported, true earnings picture shows that this is likely to be the fourth straight quarter of lower year-over-year earnings. This is not something that you will hear trumpeted by Wall Street. The fact that as-reported earnings show a worse trend than operating earnings also indicates that write-offs and one-time charges have been above normal levels the past few quarters. Cynics might suggest that this is due to the need to pull tricks out of the bag to make sure operating earnings hold up. Whether true or not, it definitely suggests that the quality of earnings the past few quarter is suspect. The Outlook Wall Street looks forward, not back. So, maybe the outlook is bright. The S&P 500 at Wednesday's closing price of 1068 puts the price/earnings ratio at 27.4, not far from the recent high of 30. Apparently, investors expect a significant rebound in profits. In fact, the fourth quarter 1998 consensus estimate from Wall Street calls for profits to grow 7.4% from the 1997 level. Even more impressive, the consensus is for profits for 1999 to rise an astounding 18.7% compared to 1998. Expectations of a strong rebound in profits are clearly in the market, even if not to the full degree of the ever-optimistic Wall Street forecasts. The problem of course is if the market is priced for tremendous good news, and it doesn't come. After all, Japan remains in recession, and emerging markets are no longer growth economies. Europe is in sluggish mode, and now it looks like the U.S. economy is slowing down as well. Forecasts of even 10% profit growth for 1999 seem optimistic to Briefing.com. The market has been forecasting an earnings rebound "next quarter" ever since the Asian crisis hit late last year. It hasn't come yet, but it is still expected just around the corner. Maybe the market can hold up perpetually waiting for profit growth until it actually returns. Unfortunately, the up side in the market is limited until that occurs, given current high valuations. The risk that profits continue to decline, or that the market loses faith in the "imminent" profit rebound is fairly high. When looked at from an overall perspective, the earnings picture is clearly worrisome.