The Enron Fever Breaks
By Igor Greenwald
Saturday February 2, 8:42 am Eastern Time
SmartMoney.com - Weekend Report
``KENNY BOY'' may have no friends left save his wife by the time he swears to tell the truth on Monday. But even if former Enron Chairman Kenneth Lay were to sprout horns and spin his head during the eagerly awaited Capitol Hill testimony, it's a safe bet capitalism would survive.
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Just as it will endure long after vigilance by rank-and-file shareholders reverts to trust in those shifty Wall Street analysts with suspect motives and precious little prescience. And that would be all right as well.
Everyone can't be an accountant, and, frankly, life's too short for the kind of obsessive scrutiny required to scope out the next shell game. Companies do many complicated things, and then quantify these things with arcane formulas that would confuse any bean-counter but their own. Some pundits expect Lay to argue Monday he didn't understand his own firm's books. Hence the customary food pyramid, in which chief financial officers force-feed their stew to open-mouthed analysts, who chew it for the benefit of journalists, who regurgitate it for credulous readers.
Like democracy, it's a bad system redeemed by a lack of good alternatives. Sometimes, it even works. Which amateur sleuth knew that AOL Time Warner (NYSE:AOL - news) is scaring up revenue by buying lots of advertising from itself, before Lehman Brothers' Holly Becker wrote it Thursday?
There's no way to know how much creative bookkeeping has knocked off the market's long-term earnings multiple. But investors are already starting to discount this risk. Of the 10 hottest S&P stocks Friday, at least five were bungee jumpers bouncing back from accounting and/or credit issues: Mirant (NYSE:MIR - news), Williams (NYSE:WMB - news), Dynegy (NYSE:DYN - news), Dollar General (NYSE:DG - news) and Tyco (NYSE:TYC - news). Enronitis seems to be a lot like chicken pox — unpleasant and potentially disfiguring, but seldom fatal.
Fact is, it hurts less to blame a selling spiral like Tuesday's on Enron than on the prices paid a month ago for a profit rebound that remains largely a rumor. Maybe the market will shed some more weight, until the analysts start the next binge by extolling bargains among tech stocks. Next up would be valuation downgrades reminding everyone it was time to purge.
``We're still stuck in a muddle,'' says Charles White, portfolio manager at Avatar Associates. ``You still don't have any clear-cut evidence — in the wake of two years of bear-market declines, two years of worsening news on earnings and the loss of investor confidence in the numbers — that things have really turned. This is not exactly the environment that you expect a roaring bull market to come out of.''
But this is the environment Cisco Systems (NASDAQ:CSCO - news) will face when it reports earnings Wednesday evening. Expectations are fairly high that the company will beat the consensus forecast for earnings of a nickel a share, but fairly low that the stock will escape the trading range it's paced the past year.
Still, Cisco earnings are fraught with excitement for shareholders and the entire Nasdaq. The last time out, the stock rose 3% the next day and helped the Nasdaq to a 2% gain. The three reports before that dropped the stock an average of more than 8% and cost the Nasdaq at least 1.9% on each occasion.
Everyone seems to agree that the company is weathering the downturn better than all of its competitors. But Salomon Smith Barney's Alex Henderson notes that his analyst colleagues expect Cisco, and Lucent (NYSE:LU - news) and Nortel (NYSE:NT - news) to increase revenues this year, at a time when their largest customers among the top telecoms are cutting capital spending by something like 20%. He warns that those estimates might prove to be a stretch, though perhaps only later in the year.
And speaking of the imperial overstretch and cash-strapped telecoms, Worldcom (NASDAQ:WCOM - news) reports earnings Thursday morning. With the stock in the toilet, the company and Bank of America can call in $184 million in loans to Chief Executive Bernard Ebbers backed by WorldCom shares, according to the Wall Street Journal. Investors might want to know whether WorldCom will once more be the gentlest of creditors to the man who built it from almost nothing into the marvel of business acumen it is today.
Also on Thursday come monthly sales reports from the retail chains, though it's already abundantly clear that the consumer will not quit until someone takes away the charge cards. And no one's about to do that.
Starting on Wednesday, Sun Microsystems (NASDAQ:SUNW - news) will torture analysts for three straight days while saying as little as possible about its financial targets. It would much prefer to talk about its plans to be the next EMC (NYSE:EMC - news), now that it knows it can't be the next IBM (NYSE:IBM - news). Meanwhile, Hewlett-Packard (NYSE:HWP - news), and Compaq (NYSE:CPQ - news) and Dell (NASDAQ:DELL - news) all plan on being the next Sun, because they can't be the next IBM either. And even IBM hasn't been its old self lately.
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