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BEAR mkt rallies love them ,suck in more brain was, page-2

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    More Problems to Surface
    But this fall there may be more problems that surface as a result of more companies coming clean with their books. According to a review of company reports by the SEC, the agency found that over 25% public companies make mistakes in the filing of their reports. Further they found that most of those mistakes turn out to be significant and material enough to affect the price of the stock when the company is forced to amend their statements. According to the study, there are many more potential Enrons, Global Crossings, and WorldComs waiting to surface. Because so many of these types of problems are surfacing, the SEC plans on auditing every Fortune 500 firm this year. This will mean we are likely to see a lot more accounting issues begin to surface this fall. CEOs should be less reluctant to use accounting legerdemain in an effort to meet Wall Street estimates, especially now that regulators will be watching like hawks for any discrepancies. Companies will be more forthright in reporting their numbers.

    Insolvency on The Rise
    Despite a growing trend to correct accounting scandals and elevate investor confidence in the financial system, another problem the markets will have to contend with this fall is the growing debt problems of corporations and consumers. The number of companies filing for bankruptcy is headed for another record year. Last year according to Bloomberg, 255 public companies, led by Enron, put $260 billion in assets into bankruptcy protection. That was triple the record that stood for more than a decade. This year is shaping up to be another record breaker. Already 113 companies representing $149 billion in assets have filed for court protection. WorldCom, with $103.8 billion in assets, could be the next major company to file. Analysts seem to be letting up in bankruptcy filings this year, a trend that is expected to last for the next two years. Edward Altman, a professor of finance at New York’s Stern School of Business, predicts default rates on junk bonds this year will rise to 12%. The accounting firm of PricewaterhouseCoopers believes the number of companies filing this year will exceeded over 200.

    So far we have been talking about corporations. The consumer is the same bad straights. Delinquency rates are up and so are credit card defaults. Many Americans are only two to three paychecks away from bankruptcy. The high levels of mortgage debt, installment debt, and credit card debt are making it difficult for many households to make ends meet. Problems arise when one spouse loses their job, or if downsized they can’t find a replacement job that pays as well.

    These are the factors making our recovery so shaky. The ability of consumers to spend and take on more debt is reaching a limit in the same way as the ability of corporations to service their debt payments. The next shoe to fall will be the consumer. The consumer is already on edge due to the hemorrhaging of their investment portfolios and the constant threat of terrorism.

    Valuation is The Root Issue
    Wall Street is still perplexed as to why the markets haven’t recovered given the spate of good economic news. Most economists and analysts attribute the poor performance of the markets to corporate governance issues and terrorism. That may be part of it. However, the real issue stocks haven’t come back is very simple: its called valuation. The real P/E multiples for the S&P 500 are 40, and not 20 as most investors are told. The 20 P/E ratio is a pro forma ratio. Dividend yields are also miniscule, below 2% on the S&P 500 and around 2% for the Dow. Nobody in their right mind is going to buy sticks again at 100-200 times earnings. The mania is over, but not its conclusion. Not until stock prices, dividend yields, and P/E ratios approach the bargain levels will we ever get a rally, much less a new bull market that is sustainable. This is what economists and analysts don’t understand. There is no going back to the good old days -- those days are gone forever and nothing said or done by Washington and Wall Street are going to bring them back. The only thing that Washington is capable of doing is making things worse.

    Meanwhile the next edition of the earnings game is just about to begin. Relax, sit back, and enjoy the show. It promises to be entertaining. You will see companies begin to miraculously beat estimates while they lose money or their business conditions deteriorate. It will be similar to a mystery novel with investors playing the part of detectives trying to find the real earnings numbers. They won’t be available to until 45 days later when they are filed with the SEC. The most important information coming out this quarter won’t be the second quarter numbers, but what companies are saying about the second half of the year. Wall Street has some pretty loony profit projections for the third and fourth quarter. This is where the real danger is with companies trying to meet those estimates. In my opinion, it isn’t going to happen. When that reality sets in, it should take us into the next phase of the bear market, or the capitulation phase, especially if there is a war with Iraq or if there are more WorldComs and Enrons that surface.
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