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THE REAL P/E RATIO

The "as reported" P/E for the S&P 500 (a.k.a. earnings based on GAAP --
Generally Accepted Accounting Principals) is the historical standard for
reporting earnings. The normal range for GAAP P/E ratio is between 10
(undervalued) to 20 (overvalued). The investment sales industry would like us
to think that "pro forma" or "operating earnings" is the same as GAAP, but
operating earnings are a fabrication prone to gross distortion. There is no
standard by which operating earnings can be judged because operating earnings
are not based on real accounting -- all revenue is included, but selective
expenses are ignored. This version is becoming known as EBBS (Earnings Before
Bad Stuff). Standard & Poors has introduced a third version called "core"
earnings, which is more critical and analytical than the other two, and is
designed to reveal the true condition of the company. Our opinion is that
GAAP earnings must be used for historical comparisons, and core earnings
should be used for individual company value analysis. Pro forma earnings
should be relegated to Bandini Mountain.

As of 11/20/02 Standard & Poors reported the following earnings for the S&P
500:
"As Reported" (GAAP) EPS is $26.74; P/E is 37.02.
"Core" EPS is $18.48; P/E is 53.56.
"Pro Forma" EPS is $41.59; P/E is 23.80.


so even using pro forma, the Spx is overvalued and using core makes you want to drink the cool-aide. Oh they already did that.

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