Bill Fleckenstein's Market Wrap
06:00 PM 12|04|2001
Enron: More Than 16 Footnotes In History
Last night, most markets were higher. Despite yesterday's sell-off, our overnight futures were also firm. Apparently, people decided that since the market didn't go down very much on bad news, well gee, that means it must want to go up. And so it did as the casino opened for business today. Stocks were bought out of the blocks, such that within half an hour, the S&P and the Dow were up 0.50%, and the Nasdaq was up a little better than 1%.
Piscine Pretenders To Prescience Today's lead sled dog was the mighty, mighty Sox, as dead fish recommended buying chips and chip equipment stocks because the worst has been seen -- again. I suspect they will make that claim repeatedly until we finally do get to the point where the worst has been seen, in which case they will be hit with a case of lockjaw, and that's how you'll know it really is the bottom. (Having said that, things don't have to get worse for those stocks to drop a long way, as they are plenty bad enough. The key question is really how much better things will get, and when.) In any case, that put a bid in the chip sector. We also saw a bit of a bounce in the bank sector as Enron doubled from $0.40 to $0.80 after obtaining money from some banks that had no choice but to cooperate if they had any hope of seeing some of the money previously thrown Enron's way, I suppose.
Honorable Sons Of Enron However, banks should take note, and so should investors, of the problems going on in Japanese money funds. On that subject, in today's New York Times there is a good story by Ken Belson called "Enron Causes Five Major Japanese Money Market Funds to Plunge." (Registration required.) I thought the closing paragraph was the most telling: "If the money market funds stop buying debt of lower-rated companies, it could be a serious blow to Japan's steel makers, retailers and other highly indebted companies." In other words, if the money funds don't take more risks than they should, these companies can't get funded. Just a footnote on the state of where things have come to there in Japan, and something to be alert to here, as well.
There's Always Room For Chambers If risk was on the minds of the Japanese, it was of little concern to the early-morning revelers, who today were otherwise engaged in preparations to hang on John Chambers' every word during this, the start of a two-day Cisco analyst meeting. For reasons that escape me, people still want to know what he has to say. If he opines that things are good, they are still inclined to believe him, and they are dying to believe that the worst has been seen. Why Chambers has the slightest bit of credibility is completely beyond me. Anyway, that was the scene in the early going today -- no worries and everybody happy.
Nasdaq Looks Down On Greenland In fact, the early-morning machinations were merely the tiniest of glimpses of what the day held in store. After flopping and chopping for a few hours between the morning's lows and highs, with a couple of hours to go, the tape went on a power jam, led by the Sox stocks. From about 1:30 p.m. East coast time, the Nasdaq was caught in the "tractor beam," pulled relentlessly northward, with nary a dip, to close on its high tick, up just shy of 3%. The Nasdaq 100 did better, up about 5%. The Sox was back to its monstrously volatile ways, up a little better than 6%. The bank stock index (Enron who?) was up about 1.5% as well. The biotechs also had a small bid. But today was basically about semiconductors, hardware and software, as those stocks were bought furiously by shorts who were caught and by people who wanted to pile on beta.
Top O' The Bubble To You Volume was decent as well, and a little bit higher than yesterday, so people who focus on those things will be feeling mighty good today. The Nasdaq closed over the 200-day moving average, which is also a very big deal for people who are so inclined. In short, all the stars are in alignment for the tape to see yet another jam job as we head into Intel's Love-A-Thon on Thursday, to be followed by the Fed's Ease Fest next Tuesday. Barring any piece of walloping bad news, it looks like the bulls are set to go on a rampage. Could this achieve exhaustion? Perhaps. We'll just have to see. In any case, hats off to them today, as they put the tape in overdrive.
Away from stocks, the metals gave back the bulk of their gains from yesterday, with silver down 2% and gold down 0.5%. Fixed income was up fractionally. Today the dollar was again up against the euro and the yen.
The Asset Of Transparency Turning to the news, in today's Wall Street Journal there was an interesting Op-Ed piece called "Enron: A Wake-Up Call" by Joe Berardino, a managing partner and CEO of Andersen. (Registration required for a two-week trial.) In it, he basically tries to make the case that to the best of his knowledge, Andersen followed the rules, but he does admit that the rules need changing. Until we know differently, I guess we can take him at his word that they did follow the rules. In any case, he discusses how the rules are so potentially confusing that no one knows what they mean, which is a point we have made many, many times. Before I reprise some of his comments, let me just say that if he is serious, and he is willing to lead the charge to fix our broken accounting system, then something good can come out of the Enron debacle, in the same way that if we rout terrorism, then something good will have come out of the September 11 terrorist attacks. So, bad can arise from good if people try to do the right things.
The Liability Of Off-Balance-Sheet Hideaways He makes the claim, "As the rules stand today, sponsoring companies can keep the assets and liabilities of SPEs [Special Purpose Entities] off their consolidated financial statements, even though they retain a majority of the related risks and rewards." I might say, why is this allowed to go on? In my opinion, it is one of the key problems in terms of financial land mines. Let's hope he spearheads the attempt to change that.
16 Pages, And What Do You Get? A Short In Clover And A Long In Debt Then, in addressing the issue of complicated financial statements, he refers specifically to the fact that Enron had disclosed lots of information, such as the 16 pages of footnotes in its 2000 annual report. That said, he adds, "Some analysts studied these, sold short and made profits. But other sophisticated analysts and fund managers have said that although they were confused, they bought and lost money." Well let me just editorialize here. I doubt that those who bought and lost money bothered to read the footnotes, but we'll be generous and assume that they did.
All Present And Accounted For He stresses: "We need to fix this problem. We can't long maintain trust in our capital markets with a financial-reporting system that delivers volumes of complex information about what happened in the past, but leaves some investors with limited understanding of what's happening at the present and what is likely to occur in the future." Amen. That is exactly the right point to make. And while we're at it, we need to put stiff penalties in for people who play fast and loose with the truth.
When Andersen's Fairy Tale Comes True . . . Also on the subject of change, he opines, "The accounting profession needs to acknowledge concerns about our system of discipline and peer review, and address them." Again, amen if he means what he says. He then adds, "The dot-com bubble cost investors trillions. It's time to get serious about the lessons it taught us." I would just say that it is long past time to get serious about all of this stuff. So, let's just see where this goes. To repeat one more time, if he's serious, we applaud him. Maybe he'll be the guy at the vanguard of change. Let's hope it's not a case of mouthing platitudes.
Note to new readers of the Rap: Mr. Fleckenstein often peppers his commentary with an inventive vocabulary known as "fleckisms." All is revealed in the "Insider's Guide to Fleckisms." Please be sure you've read "What Is the Market Rap" before sending e-mails to fleckrap@attbi.com. As highlighted in this outline, there are certain questions to which Mr. Fleckenstein is unable to respond.
Disclaimer: William Fleckenstein periodically publishes columns expressing his personal views regarding particular securities, securities market conditions, and personal and institutional investing in general, as well as related subjects.
Mr. Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund in Seattle, Washington. This fund regularly buys, sells, or holds securities that are the subject of his columns, or options with respect to those securities, and regularly holds positions in such securities or options as of the date those columns are published. In particular, this fund regularly holds short positions in such securities as of the date those columns are published. The views and opinions expressed in Mr. Fleckenstein's columns are not intended to constitute a description of the securities bought, sold, or held by the fund. The views and opinions expressed in Mr. Fleckenstein's columns are also not an indication of any intention to buy, sell, or hold any security on behalf of the fund, and investment decisions made on behalf of the fund may change at any time and for any reason. Mr. Fleckenstein's columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security.
The views and opinions expressed in Mr. Fleckenstein's columns are his alone and not those of Grant's Investor. Grant's Investor disclaims all responsibility for Mr. Fleckenstein's views and opinions.
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