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Ian McAvity's DELIBERATIONS™ on world markets Pro is to Con, as Progress is to??? WorldCom has assumed the leadership role from Enron and Arthur Andersen in the search for the villains who victimized unsuspecting investors. Xerox restated past revenues in the multi-billions, but played the PR game a little better to avoid the ‘near criminal’ or worse label. Martha Stewart, with a "Goody-Two-Shoes" image exemplifies the media glamorized celebrity focus. There are plenty of laws dealing with FRAUD already on the books. But a hyperactive Congress is going to "fix" what is broken. If CEOs are going to be threatened with jail-time to focus their minds on the efficacy of their financial reports...I would propose that every legislature take the same pledge with respect to every law and regulation they create. If it turns out to not have been fully reviewed and understood before being passed, and communicated with full, true, plain, understandable disclosure... then the legislators who voted for it (without reading and understanding it, not relying on aides to do that work) should do jail-time, too. Who are the guilty parties? The Clinton era devolved into an "anything goes" era, as long as it boosts stock prices and leaves the public "feeling good." With the bubble having burst, Mr. Market has presented the bill. Shock and indignation is the initial response. Fraud that puts prices up is apparently not as bad as fraud that hurts investors! Congress must bear the ultimate responsibility for an ever changing, ever more complicated tax code with more loopholes for special interests than there are special interests! I've said before that the "P" of P/E ratios is a fact, but "E" is negotiable...hence, nobody has ever had to restate a chart. But P/E ratios are the most widely used variation measures. The first chart shows the long-term history of the P/E for the S&P Composite from 1936 in relation to actual reported earnings. The long-term average P/E was 15.6x. It is presently 40x... |
The second chart shows the S&P 500 and reported earnings per share (EPS) times the long-term average P/E ratio. Rather than an S&P at 990, current EPS might suggest 386 is "fair value." S&P estimates multiplied by 15.6x rise to suggest 555 and 732 by December 2003 on their "as reported" earnings forecasts. But S&P recently opted for "operating" earnings and their estimates for those more closely support current levels. I suspect they may alter that practice with the legitimacy of "E" attracting flies!! I.M. 
Ian McAvity is the Editor of DELIBERATIONS on World Markets, a newsletter written for the thinking investor. Every third week subscribers get an inside look into the mind of an experienced global analyst. See his charts and read his commentary as he reviews the world's major markets. For a four-issue trial subscription, simply make your check or money order of $49 payable to "IRIS LTD" and mail it to the publisher at: IRIS Ltd. PO Box 40097 Tucson, AZ 85717, USA Mr. McAvity is not affiliated with, or compensated by, U.S. Global Investors, Inc. |
