No. of Recommendations: 10
>>If, like me, you believe that the current market PE of 29.5 is likely to eventually return to historic norms of about 15 then look out below!<<

The Wall Street Journal had a cover article last Tuesday (8/21)discussing the rapidly changing status of the P/E ratio. According to this article, more and more companies are issuing news releases showing their operating earnings per share or pro forma earnings per share rather than earnings per share computed under GAAP.

The article stated that on 8/17, according to the information released by First Call, the S&P500 had a P/E ratio of 22.2, well above the historical average of 14.5. But, according to an analysis by the WSJ, the S&P500 P/E based on earnings under GAAP was 36.7.

So, the drop to return to the mean is more than we might think.

The article indicates there was some fudging in the past, but starting in 1998, some big name tech companies (Amazon and Yahoo) began highlighting proforma profitability standards, and got away with it. The snowball started rolling and now more than 300 of the S&P500 companies exclude some ordinary operating expenses, as defined by GAAP, from the operating earnings numbers that they "feed to investors and analysts" in news releases.

The SEC, according to the article, has issued warnings to investors "not to get suckered by 'earnings before bad stuff' news releases", but the SEC said they can't regulate news releases as long as the numbers are "mathematically accurate"

Pretty scarey stuff, huh!
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