Cooler Heads Will Prevail
SmartMoney.com - Common Sense
Tuesday February 19, 1:23 pm Eastern Time
By James B. Stewart
LAST WEEK it finally happened: Enron (Other:ENRNQ) panic burst its bounds and swept the entire stock market, driving the averages to their lowest levels since early November. I suspect much of this can be traced to the numerous televised Enron hearings unfolding in Washington, with legislators falling over themselves in front of the TV cameras to warn of the dire threats lurking in balance sheets everywhere. If you take the political posturing out of last week's accounts, I noticed that there was precious little news to be found, as most Enron executives took the Fifth and kept quiet.
Last week I noted a buying opportunity in the making, and the averages soon dropped below my latest buying threshold of 1850 on the Nasdaq. So, ignoring the gloom and dire forecasts, I was in the market deploying some of my cash. Readers of this column already know that I generally follow my disciplined system of buying and selling, and after sitting on cash since my last selling spree, it was time to buy. But I didn't do it blindly. I asked myself if anything I had heard or even suspected about Enron justified an across-the-board sell-off in the markets, and my answer was ``no.'' While accounting standards no doubt need some tightening to bring them into line with simple common sense, I don't believe that all or even most accountants are corrupt or that most financial statements are deceptive.
In my view, the recent sell-off reflects a crisis of investor confidence, but not a crisis in the economy. Bear in mind that Enron was actually generating healthy revenue and profits even without the accounting shenanigans that brought it into bankruptcy court. If it had been honest with investors, and if some of its executives had been less greedy, less eager to line their own pockets with bogus partnership earnings at the expense of shareholders, Enron would be in business today. It's true that investor confidence is important, and its loss can become a self-fulfilling prophecy of doom in cases like Enron's. But it should have little effect on the economy as a whole, or on the earnings of the vast majority of most corporations. Contrast this to the economic shocks of Sept. 11, which were real if initially exaggerated, or the Asian and Russian financial crises of 1998, which threatened the international banking system. Or compare it to 1942, when the Nazi war machine seemed poised to vanquish all of Europe. Now that was a reason for a sell-off, and for three consecutive years of declining equities, the only time this has ever happened. Today, of course, is not 1942, and fortunately nothing so dire is on the horizon, even after the shock of Sept. 11.
With numerous economic indicators pointing to an imminent end to the recession, I felt unusually comfortable buying more equities last week. (I added to my natural-gas holdings, where leading companies are trading at price/earnings ratios in the single digits, as well as my position in Whole Foods Markets (NASDAQ:WFMI - news), discussed in previous columns. The market did rally a bit on Friday and Monday, suggesting that I wasn't the only one who thought investors had overreacted. But the Nasdaq remains below my buying target of 1850, so if you're looking to invest some cash, it isn't too late. I note that my ``Enronitis'' portfolio, which I unveiled last week, has moved into the black, showing a nearly 5% return in just a week. Not bad for some of the most recently scorned names in equities.
While on the subject of Enron, let me applaud Securities and Exchange Commission Chairman Harvey Pitt's pledge to put ``everything on the table'' when it comes to disclosure requirements. He needs to act to restore investor confidence in the integrity of financial reporting and to make sure that material information is made public. At the least, this should include changes in revenue-recognition policies and the disclosure of debt lurking in off-balance-sheet partnerships, as well as sales of shares by company insiders, even if those sales are back to the company itself.
But even if we get an avalanche of new and accurate information, the average investor has to rely on the financial press, corporate watchdogs and Wall Street analysts to make something out of it. Let's be honest: Do you really have the time to scour every SEC filing you get in the mail? I certainly don't. I read the letters to shareholders in the annual reports to get a sense of overall corporate strategy, and I try to glance at the footnotes in various registration statements, since that's where I usually find the red flags. But a premise of this column is that it's possible to earn above-average returns without having to turn into a full-time professional investor. It's important to remember that most of us have other careers, and other interests in life.
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btw, I think Ken Lay's Enronitis has wiped out MORE market value than Al Quaeda's 9/11 attack...Lets hope The Justice Dept. & SEC aggressively prosecute Lay, Fastow, Skilling and all other guilty parties. |
