David Rosenberg and his firm, Gluskin Sheff, just published a special report on earnings and valuations. It’s a great read, lots of historical data. He also touches on one of our favorite topics – the operating vs. reported earnings issue. See this telling chart:

pe-ratios

Earnings manipulation, or “scrubbing” as Mr. Rosenberg calls it, is clearly out of control. Look at the charts. The real P/E ratio for the S&P 500 is currently around 140. David notes how everyone is ignoring this blatant fact. They’re in denial, dismissing huge losses as a meaningless blip, a one time event.

While we will not belabour the point, when all the write-downs are included, the trailing P/E on “reported” earnings just widened to its highest levels in recorded history of nearly 140x, which is three times the levels prevailing during the height of the tech bubble…

It is interesting to hear market bulls talk about how distorted it is to be using trailing multiples that include ‘recession earnings’ (even though using ‘forward’ earnings means relying on consensus forecasts on the future and these are rarely, if ever, correct).

I’ve been harping on this subject for a while. We’ve had recessions before, and nothing has come close to these levels of corporate losses, ever. The only thing holding this market up are loss-hiding measures, government intervention, and accounting changes.

Back in August I graphed just how big the difference between “headline” and “real” earnings has become:

operating-vs-reported-earnings

I added:

Some might say, “but wait, look at Q1 2009! Looks like they’ve cleaned up their act”  Nope. That is the result of mark-to-imagination accounting. This change by the FASB “eased” mark-to-market rules just in time to make Q1 bank earnings palatable. The change boosted Citi alone’s bottom-line by $3b. Why again, are we so dismissive about Chinese accounting? Yes, they’re up to some tricks of their own. But you know what they say about glass houses. Well, we’re in one.

To get Mr. Rosenberg’s research, you have to sign up at their website. You’ll receive the PDF links via email. Unfortunately they aren’t publishing the reports on their site. I advise signing up now, as it may not be free forever.

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