Hope is alive on the side of the angels

THIS is my last, regular, Monday morning column for the Daily Mail City page, though I may crop up on occasions. It seems an obvious moment for retrospection. Some readers have long accused me of excessive pessimism. But I am fundamentally an optimist who cannot see any problem that the forces of competition, the ingenuity of business and the strength of capitalism cannot solve {provided that government does not screw things up).

My worries have long been about the high prices that investors pay for their slice of the action. Even now, despite some deflating of the bubble, prices remain high by historical standards, especially given current troubles.

Basically sound as the economy may be, I cannot recall a time of so many simultaneous threats to the stability of financial markets. We see grave difficulties for pension funds and in endowment mortgages. The split level trust sector reveals scandals. Auditors' practices are queried. Analysts are suspected of vested interests. Major companies with long standing reputations suddenly look shaky.

Yet these are modest troubles compared to Wall Street. A string of major bankruptcies and firms collapsing into the arms of their bondholders have left auditors' reputations in tatters and analysts seen as crooks. Merrill Lynch has been fined $100m and faces huge civil actions by investors. Other major investment banks are threatened.

The price of honesty was recently demonstrated when Goldman Sachs was sacked as a lead underwriter by Accenture, the world's leading consulting company, after the launch of a $1.9bn share issue. Goldman insisted the market should know that 5% of the stock had failed to find buyers. Others were less choosy. Accenture's consulting capabilities apparently exclude the issue of candour.

But at least Standard and Poor's, the venerable credit ratings business, is determined to improve truthfulness in profit reports by companies, which has been such a scandal during the bubble. This is making many of the 500 companies in S&P's main index shake in their shoes.

There have long been some remarkable variations in claimed profits - what the companies report to the Securities and Exchange Commission (which is audited), what the tax authorities regard as true profits, and what companies claim are the 'operating profits' of their core businesses (not audited).

In future, S&P will consider core profits, defined as what a company makes from its core businesses - without funny items and including the costs which firms have been so anxious to ignore. Stock options for executives will now be included. These alone could cut core profits by 10%!

S&P will also ignore bogus 'restructuring' charges used to disguise standard and regular costs, such as laying off staff. Pension fund surpluses and one-off capital gains will also be ignored.

The net effect of these and other reforms could show that 'profits' in recent years, in a meaningful sense, have been exaggerated by as much as a fifth.

Looking at analysts' forecasts for profits - not, as we know, erring on the side of caution - this could leave the 500 companies on an earnings multiple of 30, twice the historic average, instead of a more modest but still high 22 on old definitions.

You can, I hope, understand, my worry about stock market prices.

I shall not now be spending more time with my rhododendrons, tempting as this is, but with a business angels enterprise. It brings together individuals who have made their fortunes with those running small start-up companies who want to do the same. These bright, ambitious and inventive people are the future. They confirm my optimism.