Go to Jeff Salisbury LWGate Home Page.From: "Hill, Ernie" <Ernie.Hill@ElPaso.com>
Subject: RE: [CANSLIM] Now Xerox?
Date: Fri, 28 Jun 2002 17:47:44 -0500
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Sam
You, IMHO are of course right.
The mantra of "this time it is different" to me is a little humorous. I
can't help but smile as I write this (guess I am a little sadistic). History
repeats itself because of human nature, and part of human nature is the
arrogant idea that we some how have it all figure out better than those who
preceded us. The psychology of freely traded markets will never change, and
while I have no historical reference I am sure that in past investment
bubbles there were plenty of people who believed "this time it is
different".
My reference to arrogance was not directed at any individual in this group,
rather I was speaking of the mass psychology of the investment community
that propelled our recently busted bubble.
E
- -----Original Message-----
From: Sam Funchess [mailto:sam5@mindspring.com]
Sent: Friday, June 28, 2002 4:26 PM
To: canslim@lists.xmission.com
Subject: Re: [CANSLIM] Now Xerox?
Winston,
The way I read your statement is that, This time is different. We can not
look to history to provide an accurate view of our current economic times.
I ask, were you thinking the same thoughts in 1999 as the market was going
ever higher? Was the speculation bubble any different then than any other
time? I think the past 2 years has told us that this bubble was no
different. It is always nice to think that this time is different but haw
many times has it been? Sure our society has been trained to believe in the
long term fund and that over time it will average out. I ask you, the fund
managers are just as scared if not more so in today's current economic time.
Who pay's the fund managers their large salary. It is you and whoever
invests in their fund. If you have poor performance over several years, you
have a large likelihood that your customers will leave. So you are fearful
that you will not come close to the averages and lose your customers and
therefore your job. The thirty something's like myself are in for the long
haul. How about those investors that are in their 50's (what percentage of
the population is 50 or older? A Large Percentage!) They have watched
their portfolio shrink dramatically over the past couple of years and they
will become scared enough to remove their cash from funds. When will that
be? When fear has hit the market. Everybody, young and old, are still
waiting for the market to continue its "normal upward movement" and at some
point people will begin to question if the market is a good place to keep
their investment or is it better to plow all their money into a larger
house. Unless of course, the market begins its upward trend. Ask anybody
you know that is older than 50 who has large mutual fund holdings if they
have moved any of their money or if they intend to in the near future.
Please let the group know your answer.
Your comment to the "The larger population of individuals will also contain
a larger number of people who know no fear." This seems irrational at first
sight as averages stay relatively the same. As the population grows,
wouldn't it be reasonable to expect that the same percentage of risk takers
will be born? Why would the larger population mean that there is a larger
population of risk takers?
This being said, I think that anybody who believes "this time is different"
is fooling themselves and being wishful. If you are a value investor for
the long haul, you should be buying everything that you have researched and
like at a maddening pace. Are you? Are you selling?
What is the general market tell you? I read and have read for the past 2
years to be in cash. That is where I have been and am enjoying using my
cash for other non-stock market investments. I have kept two investments in
small portfolios only because I have been too lazy to remove them. i kick
myself for being so lazy as I have lost a decent amount of money. Oh well.
The market told me to get out and stay out for the time being.
Sam
Winston Little wrote:
"The market always climbs a wall of worry" is an old familiar saying. In
1965 only 10% of the population invested in the market.(Just over 50% of
trading volume was by individuals)The participation grew to 60% of the
population in April 2002 (either directly or through retirement/mutual
funds). The volume due to individuals fell to under 20%. Fund managers may
not have the same fear as an individual (it is not HIS/HER money, but
YOURS!)The larger population of individuals will also contain a larger
number of people who know no fear.Thus I wonder if the exhibition of fear
will be as large or severe as in the past.
- ----- Original Message -----
From: Sam Funchess <mailto:sam5@mindspring.com>
To: canslim@lists.xmission.com <mailto:canslim@lists.xmission.com>
Sent: Friday, June 28, 2002 3:36 PM
Subject: Re: [CANSLIM] Now Xerox?
Canslim Members,
Been a while since my last post.
With that being said, I think the "scandal's" are very good for the long
term benefit of CANSLIMers and the market. Its been a while since I've read
HTMMIS so I can't quote chapters or such, but I recall him talking a lot
about the fear factor. We have not had the "Fear" in the market yet. I
think that there is no sustainable upside to the market until the fear has
hit the market.
Just my thoughts.
Sam
Katherine Malm wrote:
Here's some background on earnings from Briefing.com for those less familiar
with EBITDA, etc. --Katherine PS Xerox's accounting woes go back *years*....
P-U....==========
The Earnings Confidence Problem - Part I
25-Jun-02 14:18 ET
[BRIEFING.COM - Robert V. Green] In the midst of the more scandalous market
problems, the earnings confidence problem is not receiving the attention it
should. Here is more on the topic.
The Market Problems
The current market suffers from the following ailments:
* Distrust of management - from excessive comp to outright fraud. Tyco
is the best example.
* Distrust of accounting - Andersen
* Distrust of analysts - Blodgett
These three problems get all the press and attention.
But a deeper problem is afflicting the buy side - a growing concern about
the validity of earnings reporting.
The Earnings Problem
Accounting rules have always been flexible enough to allow most companies a
far amount of flexibility both in revenue recognition and expense
recognition. Even when earnings reporting was somewhat standardized, some
companies were criticized for how they recognized revenue and expense.
But in the last five years, the types of earnings that companies have driven
Wall Street to focus upon have become questionable.
There are four different basic types of earnings today:
* GAAP earnings: Generally Accepted Accounting Principles - A
standards board that publishes rules on how expenses should be booked.
Generally, all types of expenses are deducted.
* As reported: Earnings excluding extraordinary items (as defined by
GAAP), changes in accounting charges, charges related to discontinued
operations (plant closings, etc.)
* Operating earnings: As reported earnings but excluding "one-time"
charges which do not fit the GAAP definition of "extraordinary"
* Proforma earnings: Loosely defined "as if" analysis. Originally
designed to provide comparison data for mergers.
GAAP accounting principles are guidelines for accountants, not investors.
The GAAP standards are guidelines for how a company should keep its books,
not how the company should report earnings.
For example, a basic principle behind GAAP is that revenue must be booked
over the time period for which services and product are delivered. If a two
year $200,000 contract is pre-paid in cash, up front, the entire $200,000
cannot be booked in the quarter in which the contract is signed. However,
the revenue does not have to be booked as $25,000 per quarter for two years.
A fair amount of flexibility, sometimes negotiated by auditors, is possible
for how much of a contract can be booked in each quarter.
GAAP covers expenses as well as revenues, of course.
As reported earnings are the historical standard for earnings. Until the
mid-eighties, in fact, there was little debate over how earnings should be
reported as everyone used "as reported" earnings as a standard. For the most
part, there was no difference between "as reported" earnings and any other
methodology because one-time charges were not as common. Furthermore,
companies did not actively seek, as they do today, to have certain expenses
classified as "one-time."
Operating earnings are designed to allow comparisons between quarters and
years for a company. One time charges in any quarter are excluded because
these would distort the comparison. Operating earnings became important when
it became clear that Wall Street would completely ignore any "one-time"
charges, and focus solely on earnings growth. This provided a strong
incentive for companies to classify large expenses as one-time charges.
An example of one company's aggressive attempt to get charges classified as
one-time was Excite's 1997 $40 million marketing deal with Netscape. Now
long forgotten, Excite paid Netscape up-front for a four-year deal to be the
principal search engine at the Netscape web site. Excite tried to classify
the entire $40 million payment as a one-time charge in a single quarter. By
doing so, Excite was almost profitable. At Briefing we highlighted this
event as an indicator of the times. The SEC later forced Excite to restate
the payment as a four-year expense. But many, many companies were successful
in getting major expense outlays classified as "one-time" which improved
income statements.
The focus on operating expenses led to the development of the "EBITDA"
concept, which is "Earnings Before Interest, Taxes, Depreciation, and
Amortization." The EBITDA concept, which has to be calculated from the line
items shown on an operating earnings report, was designed to show the basic
business model of the company, without regard to cost-of-capital. If capital
were free, then EBITDA would be earnings.
The focus on EBITDA has fallen from favor in recent times for one single
reason: Interest. The interest payments on bonds, which are excluded from
EBITDA calculations, has ruined many debt-ridden.
Only through focusing on EBITDA projections could a company like Exodus
Communications raise so much debt that their interest payments exceeded
their gross margin. That won't happen again for decades.
Pro-forma earnings are very hard to define today. The original purpose of
pro-forma earnings calculations was to show the effects of a merger in a
format that allowed a single income statement to combine only the operating
models of each company, and exclude the actual costs of making the merger.
Under the pro-forma for merger guidelines, pro-forma calculations could only
be used for one year, after which the company should start reporting
as-reported earnings for the combined entities.
However, companies soon learned that as long as they made a new merger each
year, they could continue reporting pro-forma earnings indefinitely. This
"flexibility" in how earnings could be reported led to "pro-forma" meanings
that were never intended, including stock option compensation expenses and
R&D "in-progress" write-offs.
The Erosion of Earnings Confidence
The now long-departed CFO of Amazon.com, Joy Covey, was the unsung hero of
bringing pro-forma earnings to the popularity they enjoyed. She did so by
diverting attention away from standardized earnings reports.
Ms. Covey invented the concept of "EBITMA" which was defined "EBITDA plus
marketing." She was successful in convincing Wall Street that marketing
costs were equivalent to capital investment, a concept which looks
ridiculous in retrospect. But in the early days of the internet, marketing
and brand development was equated with capturing "territory" which,
presumably, everyone thought could never be lost. (Tell that to investors in
Excite.)
Nevertheless, Joy Covey was successful in convincing investors, particularly
convertible bond investors, to focus on the EBITMA concept. It was a crucial
element in selling the $2 billion in Amazon.com bonds that built the
company. After all, if you ignore the interest payments on the bond, and you
consider spending the bond principal on marketing as "not an expense,"
Amazon's income statement would look great!.
The problem, of course, is that bond holders don't care about earnings
statements. They just care about the payments. The jury is still out on
whether Amazon.com will eventually be able to pay the principal on their
bonds. (See the Stock Brief of: 14-May-01
<http://www.briefing.com/scripts/sub/stocks/PowerAnchor.asp?varArticleID=SB2
0010514082806rvgreen> Amazon.com's Bond Problem.
After Joy Covey established the principle of EBITMA, internet companies
began using all types of non-earnings related statistics to show growth.
Page views, registered users, unique monthly visitors are just some of the
meaningless examples that became popular. (Surely you remember.)
When "non-revenue statistics" becoming drivers of stock prices, (around
1998) pro-forma earnings increased in popularity. After all, a pro-forma
income statement that showed some kind of earnings progress looked a lot
more "real" than the phony statistics being coughed up by internet
companies.
But when the bubble collapsed, everyone began questioning earnings quality.
It didn't happen overnight, and it didn't happen all at once. But as a long,
slow evolutionary force, earnings confidence has eroded, and is still
present today.
The Aftermath
The evolution of earnings focus over the past 10 years has led us to today's
situation: a basic lack of confidence in many companies income statements.
Amazon.com still reports earnings on a pro-forma basis. In their Q1 income
statement, you can take your choice of earnings:
* Pro-forma: $25 million profit
* Operating: $2 million profit
* Net (as-reported): $(23) million loss
The earnings format you choose is not relevant, frankly. It is far more
important to the stock value what format the guy next to you chooses.
After all, value to you is primarily determined by what someone else will
pay, not by what you pay.
Even GE
Even solid companies like General Electric have come under scrutiny because
of the extremely complex financial situations. Unraveling a GE earnings
report has now become a major task. Where GE only had to beat earnings
estimates by $0.01 each quarter to count on an ever increasing stock price,
today that is not enough.
GE stock is down 50% in the last two years despite having only missed one
earnings estimate in the last four years and having continual year-over-year
growth in earnings averaging 15%.
This bears repeating: GE, as representative a stock as you can get of the
overall economy, is down 50% since September 2000. During that time period,
they have grown earnings at over 11% (year-to-year basis) and beat or met
earnings estimates every quarter except one. The one shortfall was October
2001, the quarter of the Attack on America and GE was only one penny short.
Why can't GE get any respect? The only definable long-term culprit is a
decline in confidence in GE's earnings numbers. During the same eight
quarter time-period, GE revenue growth rate has been consistently falling.
From a growth rate of 24% and 20% in 00Q1 and 00Q2, growth has steadily
fallen, and even was negative for most of 2001.
Flat or declining revenue combined with continuing increasing earnings leads
to only one conclusion: you can't keep this up forever. Eventually, GE will
be unable to book the earnings number higher than previous years. When (if),
that happens, GE stock will be further devastated. Until then, the slow
erosion of confidence causes the stock price to decline.
GE is just one good example of how confidence in earnings numbers has been
eroding over time since the bubble collapse. Until greater confidence in
earnings numbers is established, you can expect further difficulties in the
market overall.
Standard & Poors is now pushing for a standardized calculation for earnings
reporting, called Core Earnings. We will have more on this concept in Part
II of this story, to appear later this week.
Comments may be emailed to the author, Robert V. Green, at
rvgreen@briefing.com <mailto:rvgreen@briefing.com>
- ----- Original Message -----
From: Winston <mailto:wlittle1@peoplepc.com> Little
To: canslim@lists.xmission.com <mailto:canslim@lists.xmission.com>
Sent: Friday, June 28, 2002 9:47 AM
Subject: Re: [CANSLIM] Now Xerox?
They all used EBITDA.. which Warren Buffett in May said is the currency of
a
crook ... they all have a smell about them.
- ----- Original Message -----
From: "Kelly Short" < kelly.short@neoris.com <mailto:kelly.short@neoris.com>
>
To: < canslim@lists.xmission.com <mailto:canslim@lists.xmission.com> >
Sent: Friday, June 28, 2002 9:46 AM
Subject: [CANSLIM] Now Xerox?
Enron, WorldCom- nothing. Xerox off by $6B. (Yes- that's "B" as in boy!)
Kelly
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<p class=3DMsoNormal><span class=3DEmailStyle18><font size=3D2 color=3Dblue=
face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial;color=
:blue'>Sam<o:p></o:p></span></font></span></p>
<p class=3DMsoNormal><span class=3DEmailStyle18><font size=3D2 color=3Dblue=
face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial;color=
:blue'><![if !supportEmptyParas]> <![endif]><o:p></o:p></span></font><=
/span></p>
<p class=3DMsoNormal><span class=3DEmailStyle18><font size=3D2 color=3Dblue=
face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial;color=
:blue'>You,
IMHO are of course right.<o:p></o:p></span></font></span></p>
<p class=3DMsoNormal><span class=3DEmailStyle18><font size=3D2 color=3Dblue=
face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial;color=
:blue'><![if !supportEmptyParas]> <![endif]><o:p></o:p></span></font><=
/span></p>
<p class=3DMsoNormal><span class=3DEmailStyle18><font size=3D2 color=3Dblue=
face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial;color=
:blue'>The
mantra of “this time it is different” to me is a little humorou=
s. I can’t help
but smile as I write this (guess I am a little sadistic). History repeats
itself because of human nature, and part of human nature is the arrogant id=
ea
that we some how have it all figure out better than those who preceded us. =
The
psychology of freely traded markets will never change, and while I have no
historical reference I am sure that in past investment bubbles there were
plenty of people who believed “this time it is different”.<o:p>=
</o:p></span></font></span></p>
<p class=3DMsoNormal><span class=3DEmailStyle18><font size=3D2 color=3Dblue=
face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial;color=
:blue'><![if !supportEmptyParas]> <![endif]><o:p></o:p></span></font><=
/span></p>
<p class=3DMsoNormal><span class=3DEmailStyle18><font size=3D2 color=3Dblue=
face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial;color=
:blue'>My
reference to arrogance was not directed at any individual in this group, ra=
ther
I was speaking of the mass psychology of the investment community that prop=
elled
our recently busted bubble.<o:p></o:p></span></font></span></p>
<p class=3DMsoNormal><span class=3DEmailStyle18><font size=3D2 color=3Dblue=
face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial;color=
:blue'><![if !supportEmptyParas]> <![endif]><o:p></o:p></span></font><=
/span></p>
<p class=3DMsoNormal><span class=3DEmailStyle18><font size=3D2 color=3Dblue=
face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial;color=
:blue'>E
<o:p></o:p></span></font></span></p>
<p class=3DMsoNormal><span class=3DEmailStyle18><font size=3D2 color=3Dblue=
face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial;color=
:blue'><![if !supportEmptyParas]> <![endif]><o:p></o:p></span></font><=
/span></p>
<p class=3DMsoNormal style=3D'margin-left:.5in'><font size=3D2 color=3Dblack
face=3DTahoma><span style=3D'font-size:10.0pt;font-family:Tahoma;color:blac=
k'>-----Original
Message-----<br>
<b><span style=3D'font-weight:bold'>From:</span></b> Sam Funchess
[mailto:sam5@mindspring.com]<br>
<b><span style=3D'font-weight:bold'>Sent:</span></b> Friday, June 28, 2002 =
4:26
PM<br>
<b><span style=3D'font-weight:bold'>To:</span></b> canslim@lists.xmission.c=
om<br>
<b><span style=3D'font-weight:bold'>Subject:</span></b> Re: [CANSLIM] Now X=
erox?</span></font></p>
<p class=3DMsoNormal style=3D'margin-left:.5in'><font size=3D3 face=3D"Time=
s New Roman"><span
style=3D'font-size:12.0pt'><![if !supportEmptyParas]> <![endif]><o:p><=
/o:p></span></font></p>
<p class=3DMsoNormal style=3D'margin-left:.5in'><font size=3D3 color=3Dblack
face=3D"Times New Roman"><span style=3D'font-size:12.0pt;color:black'>Winst=
on, </span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p></o=
:p></span></font></p>
<p style=3D'margin-left:.5in'><font size=3D3 color=3Dblack face=3D"Times Ne=
w Roman"><span
style=3D'font-size:12.0pt;color:black'>The way I read your statement is tha=
t,
This time is different. We can not look to history to provide an accu=
rate
view of our current economic times. I ask, were you thinking the same
thoughts in 1999 as the market was going ever higher? Was the specula=
tion
bubble any different then than any other time? I think the past 2 yea=
rs
has told us that this bubble was no different. It is always nice to t=
hink
that this time is different but haw many times has it been? Sure our
society has been trained to believe in the long term fund and that over tim=
e it
will average out. I ask you, the fund managers are just as scared if =
not
more so in today's current economic time. Who pay's the fund managers
their large salary. It is you and whoever invests in their fund. =
; If
you have poor performance over several years, you have a large likelihood t=
hat
your customers will leave. So you are fearful that you will not come
close to the averages and lose your customers and therefore your job. =
The
thirty something's like myself are in for the long haul. How about th=
ose
investors that are in their 50's (what percentage of the population is 50 or
older? A Large Percentage!) They have watched their portfolio
shrink dramatically over the past couple of years and they will become scar=
ed
enough to remove their cash from funds. When will that be? When
fear has hit the market. Everybody, young and old, are still waiting =
for
the market to continue its "normal upward movement" and at some p=
oint
people will begin to question if the market is a good place to keep their
investment or is it better to plow all their money into a larger house.&nbs=
p;
Unless of course, the market begins its upward trend. Ask anybody you
know that is older than 50 who has large mutual fund holdings if they have
moved any of their money or if they intend to in the near future. Ple=
ase
let the group know your answer. <br>
<br>
Your comment to the "</span></font><font size=3D2 color=3Dblack><span
style=3D'font-size:10.0pt;color:black'>The larger population of individuals=
will
also contain a larger number of people who know no fear." This seems i=
rrational
at first sight as averages stay relatively the same. As the population
grows, wouldn't it be reasonable to expect that the same percentage of risk
takers will be born? Why would the larger population mean that there =
is a
larger population of risk takers?</span></font><font color=3Dblack><span
style=3D'color:black'> </span></font><font color=3Dblack><span style=3D'col=
or:black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p style=3D'margin-left:.5in'><font size=3D3 color=3Dblack face=3D"Times Ne=
w Roman"><span
style=3D'font-size:12.0pt;color:black'>This being said, I think that anybod=
y who
believes "this time is different" is fooling themselves and being
wishful. If you are a value investor for the long haul, you should be
buying everything that you have researched and like at a maddening pace.&nb=
sp;
Are you? Are you selling? </span></font><font color=3Dblack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p style=3D'margin-left:.5in'><font size=3D3 color=3Dblack face=3D"Times Ne=
w Roman"><span
style=3D'font-size:12.0pt;color:black'>What is the general market tell you?=
I read and have read for the past 2 years to be in cash. That is wher=
e I
have been and am enjoying using my cash for other non-stock market
investments. I have kept two investments in small portfolios only bec=
ause
I have been too lazy to remove them. i kick myself for being so lazy =
as I
have lost a decent amount of money. Oh well. The market told me=
to
get out and stay out for the time being. </span></font><font color=3Dblack>=
<span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p style=3D'margin-left:.5in'><font size=3D3 color=3Dblack face=3D"Times Ne=
w Roman"><span
style=3D'font-size:12.0pt;color:black'>Sam <br>
Winston Little wrote: </span></font><font color=3Dblack><span style=3D'colo=
r:black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p class=3DMsoNormal style=3D'margin-right:.5in;mso-margin-top-alt:auto;mso=
- -margin-bottom-alt:
auto;margin-left:1.0in'><font size=3D3 color=3Dblack face=3D"Times New Roma=
n"><span
style=3D'font-size:12.0pt;color:black'> </span></font><font size=3D2
color=3Dblack><span style=3D'font-size:10.0pt;color:black'>"The market=
always
climbs a wall of worry" is an old familiar saying.</span></font><font
color=3Dblack><span style=3D'color:black'> </span></font><font size=3D2
color=3Dblack><span style=3D'font-size:10.0pt;color:black'>In 1965 only 10%=
of the
population invested in the market.(Just over 50% of trading volume was by
individuals)The participation grew to 60% of the population in April 2002
(either directly or through retirement/mutual funds). The volume due to
individuals fell to under 20%.</span></font><font color=3Dblack><span
style=3D'color:black'> </span></font><font size=3D2 color=3Dblack><span
style=3D'font-size:10.0pt;color:black'>Fund managers may not have the same =
fear
as an individual (it is not HIS/HER money, but YOURS!)The larger population=
of
individuals will also contain a larger number of people who know no fear.Th=
us I
wonder if the exhibition of fear will be as large or severe as in the past.=
</span></font><font
color=3Dblack><span style=3D'color:black'> </span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p></o=
:p></span></font></p>
<div style=3D'border:none;border-left:solid black 1.5pt;padding:0in 0in 0in=
4.0pt'>
<p class=3DMsoNormal style=3D'margin-right:.5in;mso-margin-top-alt:auto;mso=
- -margin-bottom-alt:
auto;margin-left:75.75pt;border:none;mso-border-left-alt:solid black 1.5pt;
padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=3D2 color=3Dblack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:black'=
>-----
Original Message -----</span></font><font size=3D2 color=3Dblack face=3DAri=
al><span
style=3D'font-size:10.0pt;font-family:Arial;color:black;mso-color-alt:windo=
wtext'><o:p></o:p></span></font></p>
<p class=3DMsoNormal style=3D'margin-right:.5in;mso-margin-top-alt:auto;mso=
- -margin-bottom-alt:
auto;margin-left:75.75pt;background:#E4E4E4;border:none;mso-border-left-alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><b><font
size=3D2 color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;font-fa=
mily:Arial;
color:black;font-weight:bold'>
<div style=3D'font-color:black'>From:</span></font></b><font size=3D2 color=
=3Dblack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:black'=
> <a
href=3D"mailto:sam5@mindspring.com" title=3D"sam5@mindspring.com">Sam Funch=
ess</a></span></font></div>
<font size=3D2 color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;f=
ont-family:
Arial;color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p class=3DMsoNormal style=3D'margin-right:.5in;mso-margin-top-alt:auto;mso=
- -margin-bottom-alt:
auto;margin-left:75.75pt;border:none;mso-border-left-alt:solid black 1.5pt;
padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><b><font size=3D2 color=3Dbl=
ack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:black;
font-weight:bold'>To:</span></font></b><font size=3D2 color=3Dblack face=3D=
Arial><span
style=3D'font-size:10.0pt;font-family:Arial;color:black'> <a
href=3D"mailto:canslim@lists.xmission.com" title=3D"canslim@lists.xmission.=
com">canslim@lists.xmission.com</a></span></font><font
size=3D2 color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;font-fa=
mily:Arial;
color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p class=3DMsoNormal style=3D'margin-right:.5in;mso-margin-top-alt:auto;mso=
- -margin-bottom-alt:
auto;margin-left:75.75pt;border:none;mso-border-left-alt:solid black 1.5pt;
padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><b><font size=3D2 color=3Dbl=
ack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:black;
font-weight:bold'>Sent:</span></font></b><font size=3D2 color=3Dblack face=
=3DArial><span
style=3D'font-size:10.0pt;font-family:Arial;color:black'> Friday, June 28, =
2002
3:36 PM</span></font><font size=3D2 color=3Dblack face=3DArial><span
style=3D'font-size:10.0pt;font-family:Arial;color:black;mso-color-alt:windo=
wtext'><o:p></o:p></span></font></p>
<p class=3DMsoNormal style=3D'margin-right:.5in;mso-margin-top-alt:auto;mso=
- -margin-bottom-alt:
auto;margin-left:75.75pt;border:none;mso-border-left-alt:solid black 1.5pt;
padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><b><font size=3D2 color=3Dbl=
ack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:black;
font-weight:bold'>Subject:</span></font></b><font size=3D2 color=3Dblack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:black'=
> Re:
[CANSLIM] Now Xerox?</span></font><font size=3D2 color=3Dblack face=3DArial=
><span
style=3D'font-size:10.0pt;font-family:Arial;color:black;mso-color-alt:windo=
wtext'><o:p></o:p></span></font></p>
<p class=3DMsoNormal style=3D'margin-right:.5in;mso-margin-top-alt:auto;mso=
- -margin-bottom-alt:
auto;margin-left:75.75pt;border:none;mso-border-left-alt:solid black 1.5pt;
padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=3D3 color=3Dblack
face=3D"Times New Roman"><span style=3D'font-size:12.0pt;color:black'> =
;Canslim
Members, </span></font><font color=3Dblack><span style=3D'color:black;mso-c=
olor-alt:
windowtext'><o:p></o:p></span></font></p>
<p style=3D'margin-right:.5in;margin-left:75.75pt;border:none;mso-border-le=
ft-alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=
=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0pt;colo=
r:black'>Been
a while since my last post. </span></font><font color=3Dblack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p style=3D'margin-right:.5in;margin-left:75.75pt;border:none;mso-border-le=
ft-alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=
=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0pt;colo=
r:black'>With
that being said, I think the "scandal's" are very good for the lo=
ng
term benefit of CANSLIMers and the market. Its been a while since I've
read HTMMIS so I can't quote chapters or such, but I recall him talking a l=
ot
about the fear factor. We have not had the "Fear" in the ma=
rket
yet. I think that there is no sustainable upside to the market until =
the
fear has hit the market. </span></font><font color=3Dblack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p style=3D'margin-right:.5in;margin-left:75.75pt;border:none;mso-border-le=
ft-alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=
=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0pt;colo=
r:black'>Just
my thoughts. </span></font><font color=3Dblack><span style=3D'color:black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p style=3D'margin-right:.5in;margin-left:75.75pt;border:none;mso-border-le=
ft-alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=
=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0pt;colo=
r:black'>Sam
</span></font><font color=3Dblack><span style=3D'color:black;mso-color-alt:=
windowtext'><o:p></o:p></span></font></p>
<p style=3D'margin-right:.5in;margin-left:75.75pt;border:none;mso-border-le=
ft-alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=
=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0pt;colo=
r:black'>Katherine
Malm wrote: </span></font><font color=3Dblack><span style=3D'color:black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
</div>
<div style=3D'border:none;border-left:solid black 1.5pt;padding:0in 0in 0in=
4.0pt'>
<p class=3DMsoNormal style=3D'margin-right:1.0in;mso-margin-top-alt:auto;
mso-margin-bottom-alt:auto;margin-left:111.75pt;border:none;mso-border-left=
- -alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=
=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0pt;colo=
r:black'>Here's
some background on earnings from Briefing.com for those less familiar with
EBITDA, etc. --Katherine PS Xerox's accounting woes go back *years*....
P-U....=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D </span></font><font color=3Dblack><sp=
an style=3D'color:black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
</div>
<table border=3D0 cellspacing=3D0 cellpadding=3D0 width=3D"100%" style=3D'w=
idth:100.0%;
mso-cellspacing:0in;margin-left:111.75pt;mso-padding-alt:3.0pt 3.0pt 3.0pt=
3.0pt'>
<tr>
<td style=3D'padding:3.0pt 3.0pt 3.0pt 3.0pt'>
<p class=3DMsoNormal align=3Dcenter style=3D'margin-bottom:12.0pt;text-al=
ign:center'><font
size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:=
12.0pt;
color:black'><br style=3D'mso-special-character:line-break'>
<![if !supportLineBreakNewLine]><br style=3D'mso-special-character:line-b=
reak'>
<![endif]></span></font><font color=3Dblack><span style=3D'color:black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
</td>
</tr>
<tr>
<td style=3D'padding:3.0pt 3.0pt 3.0pt 3.0pt'>
<p class=3DMsoNormal><font size=3D3 color=3Dblack face=3D"Times New Roman=
"><span
style=3D'font-size:12.0pt;color:black'>The Earnings Confidence Problem - =
Part I</span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
</td>
</tr>
<tr>
<td style=3D'padding:3.0pt 3.0pt 3.0pt 3.0pt'>
<p class=3DMsoNormal><b><font size=3D1 color=3Dblack face=3DVerdana><span
style=3D'font-size:7.5pt;font-family:Verdana;color:black;font-weight:bold=
'>25-Jun-02
14:18 ET</span></font></b><font color=3Dblack><span style=3D'color:black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
</td>
</tr>
<tr height=3D8 style=3D'height:6.0pt'>
<td height=3D8 style=3D'padding:3.0pt 3.0pt 3.0pt 3.0pt;height:6.0pt'>
<p class=3DMsoNormal><![if !supportEmptyParas]> <![endif]><font size=
=3D1
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:6.0pt;mso=
- -bidi-font-size:
12.0pt;color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>
</td>
</tr>
<tr>
<td style=3D'padding:3.0pt 3.0pt 3.0pt 3.0pt'>
<p class=3DMsoNormal><font size=3D3 color=3Dblack face=3D"Times New Roman=
"><span
style=3D'font-size:12.0pt;color:black'>[BRIEFING.COM - Robert V. Green] I=
n the
midst of the more scandalous market problems, the earnings confidence pro=
blem
is not receiving the attention it should. Here is more on the topic. =
; </span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
<h3><b><font size=3D4 color=3Dblack face=3D"Times New Roman"><span
style=3D'font-size:13.5pt;color:black'>The Market Problems</span></font><=
font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></b></h3>
<p class=3DMsoNormal><font size=3D3 color=3Dblack face=3D"Times New Roman=
"><span
style=3D'font-size:12.0pt;color:black'>The current market suffers from the
following ailments: </span></font><font color=3Dblack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font><=
/p>
<ul type=3Ddisc>
<li class=3DMsoNormal style=3D'mso-margin-top-alt:auto;mso-margin-bottom=
- -alt:
auto;mso-list:l1 level1 lfo1;tab-stops:list .5in'><font size=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0=
pt;
color:black'>Distrust of management - from excessive comp to outrigh=
t fraud.
Tyco is the best example. </span></font><font color=3Dblack><sp=
an
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></f=
ont></li>
<li class=3DMsoNormal style=3D'mso-margin-top-alt:auto;mso-margin-bottom=
- -alt:
auto;mso-list:l1 level1 lfo1;tab-stops:list .5in'><font size=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0=
pt;
color:black'>Distrust of accounting - Andersen </span></font><f=
ont
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><=
o:p></o:p></span></font></li>
<li class=3DMsoNormal style=3D'mso-margin-top-alt:auto;mso-margin-bottom=
- -alt:
auto;mso-list:l1 level1 lfo1;tab-stops:list .5in'><font size=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0=
pt;
color:black'>Distrust of analysts - Blodgett </span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><=
o:p></o:p></span></font></li>
</ul>
<p class=3DMsoNormal><font size=3D3 color=3Dblack face=3D"Times New Roman=
"><span
style=3D'font-size:12.0pt;color:black'>These three problems get all the p=
ress
and attention. </span></font><font color=3Dblack><span style=3D'col=
or:black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>But a deeper problem is afflicting the buy side - a
growing concern about the validity of earnings reporting. </span></=
font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
<h3><b><font size=3D4 color=3Dblack face=3D"Times New Roman"><span
style=3D'font-size:13.5pt;color:black'>The Earnings Problem</span></font>=
<font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></b></h3>
<p class=3DMsoNormal><font size=3D3 color=3Dblack face=3D"Times New Roman=
"><span
style=3D'font-size:12.0pt;color:black'>Accounting rules have always been
flexible enough to allow most companies a far amount of flexibility both =
in
revenue recognition and expense recognition. Even when earnings reporting=
was
somewhat standardized, some companies were criticized for how they recogn=
ized
revenue and expense. </span></font><font color=3Dblack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font><=
/p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>But in the last five years, the <i><span
style=3D'font-style:italic'>types</span></i> of earnings that companies h=
ave
driven Wall Street to focus upon have become questionable. </span><=
/font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>There are four different basic types of earnings
today: </span></font><font color=3Dblack><span style=3D'color:black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<ul type=3Ddisc>
<li class=3DMsoNormal style=3D'mso-margin-top-alt:auto;mso-margin-bottom=
- -alt:
auto;mso-list:l2 level1 lfo2;tab-stops:list .5in'><font size=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0=
pt;
color:black'>GAAP earnings: Generally Accepted Accounting Principles=
- A
standards board that publishes rules on how expenses should be booke=
d.
Generally, all types of expenses are deducted. </span></font><f=
ont
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><=
o:p></o:p></span></font></li>
<li class=3DMsoNormal style=3D'mso-margin-top-alt:auto;mso-margin-bottom=
- -alt:
auto;mso-list:l2 level1 lfo2;tab-stops:list .5in'><font size=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0=
pt;
color:black'>As reported: Earnings excluding extraordinary items (as
defined by GAAP), changes in accounting charges, charges related to
discontinued operations (plant closings, etc.) </span></font><f=
ont
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><=
o:p></o:p></span></font></li>
<li class=3DMsoNormal style=3D'mso-margin-top-alt:auto;mso-margin-bottom=
- -alt:
auto;mso-list:l2 level1 lfo2;tab-stops:list .5in'><font size=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0=
pt;
color:black'>Operating earnings: As reported earnings but excluding
"one-time" charges which do not fit the GAAP definition of
"extraordinary" </span></font><font color=3Dblack><sp=
an
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></f=
ont></li>
<li class=3DMsoNormal style=3D'mso-margin-top-alt:auto;mso-margin-bottom=
- -alt:
auto;mso-list:l2 level1 lfo2;tab-stops:list .5in'><font size=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0=
pt;
color:black'>Proforma earnings: Loosely defined "as if"
analysis. Originally designed to provide comparison data for
mergers. </span></font><font color=3Dblack><span style=3D'color=
:black;
mso-color-alt:windowtext'><o:p></o:p></span></font></li>
</ul>
<p class=3DMsoNormal><b><font size=3D3 color=3Dblack face=3D"Times New Ro=
man"><span
style=3D'font-size:12.0pt;color:black;font-weight:bold'>GAAP</span></font=
></b><font
color=3Dblack><span style=3D'color:black'> accounting principles are guid=
elines
for accountants, not investors. The GAAP standards are guidelines for how=
a
company should keep its books, not how the company should report
earnings. </span></font><font color=3Dblack><span style=3D'color:bl=
ack;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>For example, a basic principle behind GAAP is that
revenue must be booked over the time period for which services and product
are delivered. If a two year $200,000 contract is pre-paid in cash, up fr=
ont,
the entire $200,000 cannot be booked in the quarter in which the contract=
is
signed. However, the revenue does not have to be booked as $25,000 per
quarter for two years. A fair amount of flexibility, sometimes negotiated=
by
auditors, is possible for how much of a contract can be booked in each
quarter. </span></font><font color=3Dblack><span style=3D'color:bla=
ck;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>GAAP covers expenses as well as revenues, of
course. </span></font><font color=3Dblack><span style=3D'color:blac=
k;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p><b><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=
=3D'font-size:
12.0pt;color:black;font-weight:bold'>As reported</span></font></b><font
color=3Dblack><span style=3D'color:black'> earnings are the historical st=
andard
for earnings. Until the mid-eighties, in fact, there was little debate ov=
er
how earnings should be reported as everyone used "as reported"
earnings as a standard. For the most part, there was no difference between
"as reported" earnings and any other methodology because one-ti=
me
charges were not as common. Furthermore, companies did not actively seek,=
as
they do today, to have certain expenses classified as
"one-time." </span></font><font color=3Dblack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font><=
/p>
<p><b><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=
=3D'font-size:
12.0pt;color:black;font-weight:bold'>Operating earnings</span></font></b>=
<font
color=3Dblack><span style=3D'color:black'> are designed to allow comparis=
ons
between quarters and years for a company. One time charges in any quarter=
are
excluded because these would distort the comparison. Operating earnings
became important when it became clear that Wall Street would completely
ignore any "one-time" charges, and focus solely on earnings gro=
wth.
This provided a strong incentive for companies to classify large expenses=
as
one-time charges. </span></font><font color=3Dblack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font><=
/p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>An example of one company's aggressive attempt to get
charges classified as one-time was Excite's 1997 $40 million marketing de=
al
with Netscape. Now long forgotten, Excite paid Netscape up-front for a
four-year deal to be the principal search engine at the Netscape web site.
Excite tried to classify the entire $40 million payment as a one-time cha=
rge
in a single quarter. By doing so, Excite was almost profitable. At Briefi=
ng
we highlighted this event as an indicator of the times. The SEC later for=
ced
Excite to restate the payment as a four-year expense. But many, many
companies were successful in getting major expense outlays classified as
"one-time" which improved income statements. </span></fon=
t><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>The focus on operating expenses led to the developmen=
t of
the "EBITDA" concept, which is "Earnings Before Interest,
Taxes, Depreciation, and Amortization." The EBITDA concept, which ha=
s to
be calculated from the line items shown on an operating earnings report, =
was
designed to show the basic business model of the company, without regard =
to
cost-of-capital. If capital were free, then EBITDA would be earnings.&nbs=
p; </span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>The focus on EBITDA has fallen from favor in recent t=
imes
for one single reason: <i><span style=3D'font-style:italic'>Interest.</sp=
an></i>
The interest payments on bonds, which are excluded from EBITDA calculatio=
ns,
has ruined many debt-ridden. </span></font><font color=3Dblack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font><=
/p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>Only through focusing on EBITDA projections could a
company like Exodus Communications raise so much debt that their interest
payments exceeded their gross margin. That won't happen again for
decades. </span></font><font color=3Dblack><span style=3D'color:bla=
ck;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p><b><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=
=3D'font-size:
12.0pt;color:black;font-weight:bold'>Pro-forma earnings</span></font></b>=
<font
color=3Dblack><span style=3D'color:black'> are very hard to define today.=
The
original purpose of pro-forma earnings calculations was to show the effec=
ts
of a merger in a format that allowed a single income statement to combine
only the operating models of each company, and exclude the actual costs o=
f making
the merger. </span></font><font color=3Dblack><span style=3D'color:=
black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>Under the pro-forma for merger guidelines, pro-forma
calculations could only be used for one year, after which the company sho=
uld
start reporting as-reported earnings for the combined entities. </s=
pan></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>However, companies soon learned that as long as they =
made
a new merger each year, they could continue reporting pro-forma earnings
indefinitely. This "flexibility" in how earnings could be repor=
ted
led to "pro-forma" meanings that were never intended, including
stock option compensation expenses and R&D "in-progress"
write-offs. </span></font><font color=3Dblack><span style=3D'color:=
black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<h3><b><font size=3D4 color=3Dblack face=3D"Times New Roman"><span
style=3D'font-size:13.5pt;color:black'>The Erosion of Earnings Confidence=
</span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></b></h3>
<p class=3DMsoNormal><font size=3D3 color=3Dblack face=3D"Times New Roman=
"><span
style=3D'font-size:12.0pt;color:black'>The now long-departed CFO of Amazo=
n.com,
Joy Covey, was the unsung hero of bringing pro-forma earnings to the
popularity they enjoyed. She did so by diverting attention away from
standardized earnings reports. </span></font><font color=3Dblack><s=
pan
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font><=
/p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>Ms. Covey invented the concept of "EBITMA"
which was defined "EBITDA plus marketing." She was successful in
convincing Wall Street that <i><span style=3D'font-style:italic'>marketing
costs were equivalent to capital investment,</span></i> a concept which l=
ooks
ridiculous in retrospect. But in the early days of the internet, marketing
and brand development was equated with capturing "territory" wh=
ich,
presumably, everyone thought could never be lost. (Tell that to investors=
in
Excite.) </span></font><font color=3Dblack><span style=3D'color:bla=
ck;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>Nevertheless, Joy Covey was successful in convincing
investors, particularly convertible bond investors, to focus on the EBITMA
concept. It was a crucial element in selling the $2 billion in Amazon.com
bonds that built the company. After all, if you ignore the interest payme=
nts
on the bond, and you consider spending the bond principal on marketing as
"not an expense," Amazon's income statement would look
great!. </span></font><font color=3Dblack><span style=3D'color:blac=
k;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>The problem, of course, is that bond holders don't ca=
re
about earnings statements. They just care about the payments. The jury is
still out on whether Amazon.com will eventually be able to pay the princi=
pal
on their bonds. (See the Stock Brief of: <a
href=3D"http://www.briefing.com/scripts/sub/stocks/PowerAnchor.asp?varArt=
icleID=3DSB20010514082806rvgreen">14-May-01
Amazon.com's Bond Problem.</a> </span></font><font color=3Dblack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font><=
/p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>After Joy Covey established the principle of EBITMA,
internet companies began using all types of non-earnings related statisti=
cs
to show growth. Page views, registered users, unique monthly visitors are
just some of the meaningless examples that became popular. (Surely you
remember.) </span></font><font color=3Dblack><span style=3D'color:b=
lack;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>When "non-revenue statistics" becoming driv=
ers
of stock prices, (around 1998) pro-forma earnings increased in popularity.
After all, a pro-forma income statement that showed <i><span
style=3D'font-style:italic'>some kind of earnings</span></i> progress loo=
ked a
lot more "real" than the phony statistics being coughed up by
internet companies. </span></font><font color=3Dblack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font><=
/p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>But when the bubble collapsed, <i><span style=3D'font=
- -style:
italic'>everyone </span></i>began questioning earnings quality. It didn't
happen overnight, and it didn't happen all at once. But as a long, slow
evolutionary force, earnings confidence has eroded, and is still present
today. </span></font><font color=3Dblack><span style=3D'color:black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<h3><b><font size=3D4 color=3Dblack face=3D"Times New Roman"><span
style=3D'font-size:13.5pt;color:black'>The Aftermath</span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></b></h3>
<p class=3DMsoNormal><font size=3D3 color=3Dblack face=3D"Times New Roman=
"><span
style=3D'font-size:12.0pt;color:black'>The evolution of earnings focus ov=
er the
past 10 years has led us to today's situation: a basic lack of confidence=
in
many companies income statements. </span></font><font color=3Dblack=
><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font><=
/p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>Amazon.com still reports earnings on a pro-forma basi=
s.
In their Q1 income statement, you can take your choice of earnings: =
</span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
<ul type=3Ddisc>
<li class=3DMsoNormal style=3D'mso-margin-top-alt:auto;mso-margin-bottom=
- -alt:
auto;mso-list:l0 level1 lfo3;tab-stops:list .5in'><font size=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0=
pt;
color:black'>Pro-forma: $25 million profit </span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><=
o:p></o:p></span></font></li>
<li class=3DMsoNormal style=3D'mso-margin-top-alt:auto;mso-margin-bottom=
- -alt:
auto;mso-list:l0 level1 lfo3;tab-stops:list .5in'><font size=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0=
pt;
color:black'>Operating: $2 million profit </span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><=
o:p></o:p></span></font></li>
<li class=3DMsoNormal style=3D'mso-margin-top-alt:auto;mso-margin-bottom=
- -alt:
auto;mso-list:l0 level1 lfo3;tab-stops:list .5in'><font size=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0=
pt;
color:black'>Net (as-reported): $(23) million loss </span></fon=
t><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><=
o:p></o:p></span></font></li>
</ul>
<p class=3DMsoNormal><font size=3D3 color=3Dblack face=3D"Times New Roman=
"><span
style=3D'font-size:12.0pt;color:black'>The earnings format <i><span
style=3D'font-style:italic'>you choose</span></i> is not relevant, frankl=
y. It
is far more important to the stock value what format <i><span
style=3D'font-style:italic'>the guy next to you chooses.</span></i> </spa=
n></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>After all, value <i><span style=3D'font-style:italic'=
>to
you</span></i> is primarily determined by what someone else will pay, not=
by
what you pay. </span></font><font color=3Dblack><span style=3D'colo=
r:black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<h3><b><font size=3D4 color=3Dblack face=3D"Times New Roman"><span
style=3D'font-size:13.5pt;color:black'>Even GE</span></font><font color=
=3Dblack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font><=
/b></h3>
<p class=3DMsoNormal><font size=3D3 color=3Dblack face=3D"Times New Roman=
"><span
style=3D'font-size:12.0pt;color:black'>Even solid companies like General
Electric have come under scrutiny because of the extremely complex financ=
ial
situations. Unraveling a GE earnings report has now become a major task.
Where GE only had to beat earnings estimates by $0.01 each quarter to cou=
nt
on an ever increasing stock price, today that is not enough. </span=
></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
<p><i><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=
=3D'font-size:
12.0pt;color:black;font-style:italic'>GE stock is down 50% in the last two
years despite having only missed one earnings estimate in the last four y=
ears
and having continual year-over-year growth in earnings averaging 15%.&nbs=
p;</span></font></i><font
color=3Dblack><span style=3D'color:black'> </span></font><font color=3Dbl=
ack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font><=
/p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>This bears repeating: GE, as representative a stock as
you can get of the overall economy, is down 50% since September 2000. Dur=
ing
that time period, they have grown earnings at over 11% (year-to-year basi=
s)
and beat or met earnings estimates every quarter except one. The one
shortfall was October 2001, the quarter of the Attack on America and GE w=
as
only one penny short. </span></font><font color=3Dblack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font><=
/p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>Why can't GE get any respect? The only definable
long-term culprit is a decline in confidence in GE's earnings numbers. Du=
ring
the same eight quarter time-period, GE revenue growth rate has been
consistently falling. From a growth rate of 24% and 20% in 00Q1 and 00Q2,
growth has steadily fallen, and even was negative for most of 2001. =
</span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>Flat or declining revenue combined with continuing
increasing earnings leads to only one conclusion: <i><span style=3D'font-=
style:
italic'>you can't keep this up forever. </span></i>Eventually, GE will be
unable to book the earnings number higher than previous years. When (if),
that happens, GE stock will be further devastated. Until then, the slow
erosion of confidence causes the stock price to decline. </span></f=
ont><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>GE is just one good example of how confidence in earn=
ings
numbers has been eroding over time since the bubble collapse. Until great=
er
confidence in earnings numbers is established, you can expect further
difficulties in the market overall. </span></font><font color=3Dbla=
ck><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font><=
/p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>Standard & Poors is now pushing for a standardized
calculation for earnings reporting, called Core Earnings. We will have mo=
re
on this concept in Part II of this story, to appear later this week. =
; </span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
<p><font size=3D3 color=3Dblack face=3D"Times New Roman"><span style=3D'f=
ont-size:
12.0pt;color:black'>Comments may be emailed to the author, Robert V. Gree=
n,
at <a href=3D"mailto:rvgreen@briefing.com">rvgreen@briefing.com</a></span=
></font><!--(RVG)--><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p><=
/o:p></span></font></p>
</td>
</tr>
</table>
<div style=3D'border:none;border-left:solid black 1.5pt;padding:0in 0in 0in=
4.0pt'>
<p class=3DMsoNormal style=3D'margin-right:1.0in;mso-margin-top-alt:auto;
mso-margin-bottom-alt:auto;margin-left:115.5pt;border:none;mso-border-left-=
alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=
=3D2
color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;font-family:Aria=
l;
color:black'>----- Original Message -----</span></font><font size=3D2
color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;font-family:Aria=
l;
color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p class=3DMsoNormal style=3D'margin-right:1.0in;mso-margin-top-alt:auto;
mso-margin-bottom-alt:auto;margin-left:115.5pt;background:#E4E4E4;border:no=
ne;
mso-border-left-alt:solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0=
in 4.0pt'><b><font
size=3D2 color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;font-fa=
mily:Arial;
color:black;font-weight:bold'>
<div style=3D'font-color:black'>From:</span></font></b><font size=3D2 color=
=3Dblack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:black'=
> <a
href=3D"mailto:wlittle1@peoplepc.com" title=3D"wlittle1@peoplepc.com">Winst=
on
Little</a></span></font></div>
<font size=3D2 color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;f=
ont-family:
Arial;color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p class=3DMsoNormal style=3D'margin-right:1.0in;mso-margin-top-alt:auto;
mso-margin-bottom-alt:auto;margin-left:115.5pt;border:none;mso-border-left-=
alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><b><font
size=3D2 color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;font-fa=
mily:Arial;
color:black;font-weight:bold'>To:</span></font></b><font size=3D2 color=3Db=
lack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:black'=
> <a
href=3D"mailto:canslim@lists.xmission.com" title=3D"canslim@lists.xmission.=
com">canslim@lists.xmission.com</a></span></font><font
size=3D2 color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;font-fa=
mily:Arial;
color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p class=3DMsoNormal style=3D'margin-right:1.0in;mso-margin-top-alt:auto;
mso-margin-bottom-alt:auto;margin-left:115.5pt;border:none;mso-border-left-=
alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><b><font
size=3D2 color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;font-fa=
mily:Arial;
color:black;font-weight:bold'>Sent:</span></font></b><font size=3D2 color=
=3Dblack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:black'>
Friday, June 28, 2002 9:47 AM</span></font><font size=3D2 color=3Dblack fac=
e=3DArial><span
style=3D'font-size:10.0pt;font-family:Arial;color:black;mso-color-alt:windo=
wtext'><o:p></o:p></span></font></p>
<p class=3DMsoNormal style=3D'margin-right:1.0in;mso-margin-top-alt:auto;
mso-margin-bottom-alt:auto;margin-left:115.5pt;border:none;mso-border-left-=
alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><b><font
size=3D2 color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;font-fa=
mily:Arial;
color:black;font-weight:bold'>Subject:</span></font></b><font size=3D2
color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;font-family:Aria=
l;
color:black'> Re: [CANSLIM] Now Xerox?</span></font><font size=3D2 color=3D=
black
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:black;
mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p class=3DMsoNormal style=3D'margin-right:1.0in;mso-margin-top-alt:auto;
mso-margin-bottom-alt:auto;margin-left:115.5pt;border:none;mso-border-left-=
alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=
=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0pt;colo=
r:black'> They
all used EBITDA.. which Warren Buffett in May said is the currency of a <br>
crook ... they all have a smell about them. </span></font><font color=3Dbla=
ck><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>
<p style=3D'margin-right:1.0in;margin-left:115.5pt;border:none;mso-border-l=
eft-alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=
=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0pt;colo=
r:black'>-----
Original Message ----- <br>
From: "Kelly Short" <<a href=3D"mailto:kelly.short@neoris.com"=
>kelly.short@neoris.com</a>>
<br>
To: <<a href=3D"mailto:canslim@lists.xmission.com">canslim@lists.xmissio=
n.com</a>>
<br>
Sent: Friday, June 28, 2002 9:46 AM <br>
Subject: [CANSLIM] Now Xerox? <br>
</span></font><font color=3Dblack><span style=3D'color:black;mso-col=
or-alt:
windowtext'><o:p></o:p></span></font></p>
<p style=3D'margin-right:1.0in;margin-left:115.5pt;border:none;mso-border-l=
eft-alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=
=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0pt;colo=
r:black'>Enron,
WorldCom- nothing. Xerox off by $6B. (Yes- that's "B" as in boy!)=
</span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o:p></o=
:p></span></font></p>
<p style=3D'margin-right:1.0in;margin-left:115.5pt;border:none;mso-border-l=
eft-alt:
solid black 1.5pt;padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=
=3D3
color=3Dblack face=3D"Times New Roman"><span style=3D'font-size:12.0pt;colo=
r:black'>Kelly
<br>
</span></font><font color=3Dblack><span style=3D'color:black;mso-colo=
r-alt:
windowtext'><o:p></o:p></span></font></p>
</div>
<div style=3D'border:none;border-left:solid black 1.5pt;padding:0in 0in 0in=
4.0pt'>
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auto;margin-left:75.75pt;border:none;mso-border-left-alt:solid black 1.5pt;
padding:0in;mso-padding-alt:0in 0in 0in 4.0pt'><font size=3D3 color=3Dblack
face=3D"Times New Roman"><span style=3D'font-size:12.0pt;color:black'>- -To
subscribe/unsubscribe, email "majordomo@xmission.com" -In the ema=
il
body, write "subscribe canslim" or -"unsubscribe canslim&quo=
t;.
Do not use quotes in your email.</span></font><font color=3Dblack><span
style=3D'color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>
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