[CANSLIM] Fw: Ken Kam's Market Outlook

From: "Tom Worley" <stkguru@bellsouth.net>
Subject: [CANSLIM] Fw: Ken Kam's Market Outlook
Date: Sun, 28 Jul 2002 13:22:53 -0400
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This letter comes to me from the site where I maintain my VR Fund, have read
it several times, and it continues to make sense to me, even after spending
some time reading this morning about how the CEO of HPLA has disappeared,
and the company now says that the cash reported in past qtrs has not been in
possession of the company, nor is likely ever to be (last report nearly $60
million, up from under $1 million a year ago). Always amazes me how analysts
and brokerage houses can miss such trivial details before making buy
recommendations.

- ----- Original Message -----
From: "Marketocracy"
To: <stkguru@bellsouth.net>
Sent: Tuesday, July 23, 2002 2:14 AM
Subject: Ken Kam's Market Outlook


Market Outlook
July 22, 2001

Largely precipitated by accounting scandals at Worldcom and Enron,
the public flogging of corporate CEOs, both from Congress and the
President, may be backfiring. Instead of giving reassurance that the
mess will be cleaned up, it has actually convinced many people that
most of corporate America is dishonest.

These high profile scandals guarantee that more government regulation
is forthcoming. The new proposals sound great at first blush. After
all, who would oppose sending corporate executives to jail when they
knowingly release misleading financial information? However, no
amount of regulation will make equity investing a risk-free endeavor.
And bad regulation could make the problem worse.

Ultimately, though, stock prices are about corporate earnings and
their prospects for future growth, and as I see it, the earnings
outlook is improving.

   --> Earnings are rising
According to Thomson Financial/First Call, of the 221 S&P 500
companies that have reported their results for the second quarter,
59.7 percent beat Wall Street's earnings expectations, 28.1 percent
matched projections and only 12.2 percent fell short of consensus
targets. Many companies are reporting upside surprises in the second
quarter, but have given cautious guidance for the rest of the year.
In our view, the third quarter is showing signs of significant
improvement, but CEO's don't want to stick their necks out.  I
suspect this is because many executives are unwilling to expose
themselves to the risk of being prosecuted for honest mistakes.

   --> P/Es look reasonable
Despite rising earnings and falling stock prices, many believe that
the market is still expensive because the S&P 500's current
price-to-earnings ratio is still above historic averages. However, I
believe that Greenspan's model is a better gauge of the market's
value because it takes interest rates into consideration.
According to Barron's, the Fed Model, as it is known, now suggests
that the S&P 500 is 30% undervalued. This model, which compares the
yield on the 10-year Treasury with the so-called earnings yield on
the S&P 500, suggests fair value for the S&P 500 of about 1200.
Barron's also notes that other, more sophisticated models indicate
the S&P 500 is undervalued to an even greater extent.

   -->  Earnings doubts?
Leading up to the August 14 deadline for CEOs to personally sign-off
on their financial statements, the risk of more scandals raises doubt
about earnings estimates. But consider this -- the S&P 500's total
projected earnings for the year ending next March is $495 billion.
According to Barron's estimates using the Fed model, earnings could
decline by 30 percent -- or $148 billion --  and the market would
still be fairly valued. Getting to this level would require the
unlikely revelation of 39 additional Worldcom size restatements of
$3.8 billion.

Offsetting further restatements is the possibility that earnings
growth is stronger than anyone currently expects. I take solace in
Greenspan's recent testimony to Congress:

"We do have a set of profits data which, for all practical purposes,
are free of spin. ... [The national income and product accounts
numbers] are improving fairly dramatically, as indeed they must
because the necessary implications of productivity growth at a 7
percent annual rate in the average of the fourth and first quarters
is very difficult to engender without a very major increase in
operating earnings. And, indeed, that's exactly what is happening."

Translation: Behind all the spin, profits are improving dramatically.

   -->  Summary
It is impossible to pick a bottom in the market. History teaches that
if you are prepared to ride out the short-term then the long-term is
safe. Some of the best investors I know are buying equities now
because they don't expect stocks to fall much further given forecasts
for an economic recovery.

The potential for new revelations of corporate fraud makes the market
look and feel grim right now. But I don't think fraud is so
widespread as to justify the significant plunge in all major indices.
I believe that the sensational headlines about today's wrongdoers
represent a tiny fraction of the publicly traded companies. The
overwhelming majority of managements are honest and trustworthy even
when "nobody is looking." We should invest accordingly.

Ken Kam
President and CEO
Marketocracy, Inc.
July 22, 2002






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