Zeev's Turnips Patch-No Politics (ZEEV)

[Culmus]

Godfrey, concerning S&P earnings estimates, I am following them over time. You might find a chart of the quarterly estimates since April 2002 interesting, which I just updated:

http://www.ttrader.com/mycharts/display.php?p=13030&u=culmus&a=Culmus&id=508

These are "pro forma" estimates from S&P itself:

http://www2.standardandpoors.com/spf/xls/index/iee500_gics.xls

I have the last 4 quarters at $ 47.66.

I'm answering because I have two points to make. First, IMHO there indeed is a sound reasoning behind using pro forma earnings over GAAP in certain aspects. The main aspect is the writedown of acquired goodwill. There is no question that a boatload of companies have misallocated major amounts of capital by acquiring astronomically overvalued companies right at the height of the mania in 2000 and 2001. Since these acquistions mostly were stock-for-stock the result was major dilution which for most acquiring companies should have erased any possible EPS growth for many years to come. GAAP requires the goodwill to be written off. Now not on a yearly basis any more but if a re-evaluation concludes that the market value has dramatically diminished further. These writedowns can be extremely high as seen with JDSU and others and they reduce GAAP earnings by an inordinate amount. But that doesn't change anything, the dilution following these acquistions remains there while the writedowns are a non-cash charge and have no real impact on the companies' cash levels or earnings power. If anything they increase cash flow accordingly.

I therefore find it correct if these writedowns are excluded from GAAP earnings.

The second point is referring to your statement that growth expectations were "FAR" higher in January 2000 than they are now. I fear that is not quite correct, and I pointed this out at an earlier occasion. Growth expectations for listed companies in the S&P 500 are STILL in the neighborhood they were at in the beginning of 2000. I believe this is a major factor which will play a role in the coming sideways market movement we are going to see.

Check it out at the Barra site:

http://www.barra.com/research/fund_charts.asp

Choose the S&P 500 and in the drop down menue below under "Item" select "Implied Growth Rate (%, 5 yr avg)". You'll see that growth expectations for the next five years have barely been reduced since early 2000, in fact lately they have increased again as brainless (sorry brain) analysts are at their favorite game again of overestimating the future prospects.

Culmus