No. of Recommendations: 12
The goal of CAPE-H ist not to calculate a theoretically correct fair value of a company or of the index but to remove the noise that gets introduced by big one time writedowns, i.e. companies tend to cluster the big bath write offs during recessions which then distort the CAPE calculation for years.
That does seem to be the reasoning here. They successfully tried to find a way to dampen the true earnings impact of recessions, removing the precise goal of CAPE in the first place. Recessions are SUPPOSED to drag down the earnings for years after, that's what the smoothing is for. Some of the low earnings during recessions appear as lower gross margin, and some of it appears as losses. Some of the losses are write-downs of previously reported earnings that turned out not to have been real. It's all part of the cycle and should always be counted.
Jim
