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Tectonic Shift in Currency Markets


Switzerland enters devaluation race; global ramifications to come.

Where Have My Earnings Gone?

Barron's probably jinxed the stock market: It said the Dow won't fall to 5000, although we do have what I hope is the start of a nice bear-market rally. Part of their reasoning is that stocks are cheap. They assign a price to earnings (P/E) ratio of a lowly 13, based upon 2009 estimated earnings of $51 in operating profits - which they suggest is historically low. And I agree that 13 is toward the low end and would represent a good long-term buying opportunity - if indeed it was 13.

Actually, if you want to get really bullish, go to S&P's (MHP) website and look at their estimated earnings for 2009. They calculate a P/E of 10.89 on 2009 estimated operating earnings.

As I've written over the years, the long-term P/E studies all use "as-reported" earnings, or earnings that are reported on tax returns. Operating earnings are of the EBBS variety, or Earnings Before Bad Stuff (or whatever you want to designate as the "BS" component). Companies like to tell us to ignore all those "one-time" write-downs, which seem to happen a lot more than once, these days.

Going back a few decades, operating and as-reported earnings were very closely aligned. That relationship began to change in the mid-'90s, as management wanted to make a more bullish case - which certainly helped with their stock options. And the difference between operating and as-reported earnings is now wider than ever.

The difference between estimates for 2009 operating and as-reported earnings is almost exactly 100%. Which means that analysts are projecting there's going to be a lot of bad stuff in 2009 to be written down. The table below is a cut-and-paste from the S&P website, where they calculate the earnings for the S&P 500. Notice the difference between the P/E ratios for operating and as-reported earnings. The latter P/E is based on the previous 12 months and used Thursday's price, so if you calculate it today, it would be slightly higher.

Did you notice the as-reported estimated earnings P/E for the quarter ending September 30, 2009? In the 20 years of data on the website, the highest it ever got to was 46, in the last recession. That P/E of 181 is because of the negative earnings for the fourth quarter of 2008. Of course, this assumes that earnings estimates don't keep being revised downward, which isn't a safe assumption. They've been revised downward every quarter for almost 2 years. Seemingly, past projections aren't indicative of future results.
No positions in stocks mentioned.

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