FEATURE-Shaken investors fall out of love with Wall Street
By Martha Graybow - June 16, 2002
NY, June 16 (Reuters) - Public relations executive Julie Silver felt bad enough being burned in the 2-year-long bear market. But a wave of corporate scandal has helped turn her off stocks altogether. "All of the corporations look really bad," said Silver, a resident of Plantation, Florida, who stopped buying stocks for her personal portfolio after losing money on technology investments and watching the market tumble further recently. "They just don't interest me, they don't appeal to me, and I don't have an appetite for risk," she declared.
Silver, 40, is among the droves of investors who have broken off their love affair with Wall Street -- disenchanted by losses that just keep growing, and disgusted with corporate America amid accounting probes, bankruptcies, layoffs and alleged wrongdoing by high-flying executives. Wall Street has felt the brunt too, struggling with layoffs and sagging profits as investor appetite for stocks has waned.
It's a far cry from the boom years of the late 1990s, when besotted investors made stocks a national pastime. It was a tryst made even more passionate by easy access to the financial markets due to the fast spread of on-line trading into investors' living rooms and offices.
Winning back disgruntled investors is considered key to a revival in flagging stock prices -- and government regulators are rushing to try to restore the confidence of people like Silver. But even if new regulation results from last year's collapse of Enron Corp. and other corporate scandals, it will take some time for Americans to regain their faith, investment experts say.
"Investors have a lot on their mind," said Franklin Morton, director of research at Ariel Capital Management in Chicago. "They remember their recent losses. The economy is sputtering along the bottom. ... (They're worried) about the war on terrorism, and prospects for heightened conflict in the Middle East and in India. And in addition, every day there's a new company in the headlines that's got accounting problems or some CEO that had his hand in the till."
Investor distrust has mushroomed amid a who's who of CEO scandal -- ranging from the indictment on tax evasion charges of former Tyco International Ltd. Chief Executive L. Dennis Kozlowski to scrutiny over personal loans that troubled telecom firm WorldCom Inc. made to former CEO Bernie Ebbers.
Even domestic doyenne Martha Stewart, head of Martha Stewart Living Omnimedia Inc. , is on the hot seat for selling shares in biotechnology company ImClone Systems Inc. shortly before regulators refused the drugmaker's application for an experimental cancer treatment.
It's all fostered a crisis of confidence that has helped push stocks to lows not seen since the aftermath of the Sept. 11 attacks. The Standard & Poor's 500 index <.SPX> is down about 12 percent year to date through Thursday, and is hovering near the psychologically important 1,000 mark.
Many battered investors have grown conservative, shunning young companies that don't post profits after losing a bundle on risky dot-com stocks when tech shares crashed. But now, even big companies with real earnings and revenue have come under the gun as regulators probe complex accounting and alleged boardroom misdeeds.
Small business consultant Paul Henry, of Newton, Massachusetts, has watched his stake in Tyco International plummet since he bought it earlier this year. The stock is down about 57 percent since the end of March alone. Henry says he bought the stock as it was declining, reasoning that accounting fears were overblown because Tyco already had been thoroughly investigated.
"I wasn't expecting the other shoe to drop because the SEC had done a very exhaustive investigation of their acquisition accounting," said Henry, 55. "This company has been subject to a great deal of scrutiny."
And regulators now are ratcheting up the scrutiny of Corporate America in an attempt to restore investor trust. Among the proposed reforms is a call from the U.S. Securities and Exchange Commission that CEOs should personally stand behind their companies' financial statements and face possible civil or criminal charges if they falsely certify them.
These and other reform proposals ultimately should help assuage investors, but confidence won't be restored overnight, said Marian Pardo, a small-company portfolio manager at J.P. Morgan.
"Yes, all of it's going to help, but you can't legislate honesty and you can't legislate confidence," she said. "It's going to take time. (When) the scandals dissipate, people will feel comfortable again."
Not only are many wary investors waiting on the sidelines, but some are considering getting out altogether. Financial planner Ray Ferrara got a worried call from a long-time client a few days ago during a steep market sell-off, asking whether it was time to sell everything.
Ferrara, president and chief executive of ProVise Management Group in Clearwater, Florida, says he had a hard time persuading his client to stay focused on the long term and not to cash out.
"A lot of folks are saying, 'How long are we going to grin and bear this?'" he said. "Financial planners right now are earning their keep by not letting their clients hurt themselves" by getting out of the stock market.
Silver, the Florida public relations firm president, is keeping some of her ailing tech shares, but she's not buying any new stocks. Her stock broker recently suggested she consider putting some money in pharmaceutical stocks -- generally considered a safe haven in tumultuous times -- but she said no thanks. Instead, she's keeping extra cash in a savings account.
"I'm not investing in anything right now," she said. "You know the Abba song, 'Take A Chance On Me'? Well not now -- I'm not taking any chances."
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Global Economy Shaken by Enron-like Concerns June 14, 2002
When America sneezes, so the old saying goes, the world catches pneumonia. Yesterday the world's financial doctor examined the patient-- and news isn't good. According to the International Monetary Fund, America's mushrooming accounting and business scandals have begun to infect global financial markets.
The growing list of wrongdoings, allegations of wrongdoings, and rumors of more to come are chilling global investment and consumer confidence. The IMF said that, in reaction to these fears, investors and consumers are beginning to stash money away in fixed rate investments rather than spending or investing them in companies.
"The Enron failure highlighted a number of weaknesses in accounting rules and their implementation, corporate governance and lax market discipline," the IMF said in its latest Global Financial Stability Report.
The IMF noted that in recent weeks company stocks throughout the world have been battered over fears that a review of their financial statements and accounting standards may uncover similar accounting irregularities or even fraud.
"This prompt reaction by markets is proving harsh discipline for corporations and an incentive to enhance the transparency of their financial accounts, strengthen their balance sheets and refrain from undue risk taking," the IMF report stated.
The spreading corporate governance scandal in the US is also going to make it more difficult for the Bush administration to sell its deregulated global markets message to developing nations.
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Confidence in Business Plummets - June 14, 2002
Over three quarters of Americans have little or no confidence in what companies report about their financial condition. The poll, conducted by CNN/Moneyline yesterday, showed that 77% of those responding said that they no longer trusted corporate reports.
The poll reflects growing suspicion and cynicism among rank and file investors in the wake of the Enron collapse last December. Since then dozens of other once respected public companies have been accused of manipulating their finances to hide losses and book phony revenue.
"Business is dirtier now than before," Marjorie Kelly, publisher of Business Ethics magazine told USA Today. "There's a nuttiness that we're seeing: Boost performance by any means. The temptation to cash in grabbed lots of people."
"There is always greed and misconduct in the business world. But in today's society, more people tend to believe they can get away with it," said Seth Taube, a former SEC enforcement chief.
Investors are voting with their feet. A record number of individual investors have pulled their money from stocks and are parking their funds in bonds or money market accounts.
"How can I make an intelligent decision to invest when I can't even trust audited financial statements?" one small investor complained. "I am not putting any money back into stocks until I am convinced that the SEC and FBI are on this problem and on it for the long run. And, I am not convinced."
Still Telling it Like it Isn't
When Enron began losing money but did not want investors to know it, they turned to the tried and tested "pro forma" report. You can think of pro forma reporting as a "mirror, mirror on the wall" form of reporting. By allowing companies to exclude just about any ugly fact it wants, a company's pro forma finances can always be made beautiful.
For example, when Enron was faced with the reality of $618 million in losses at reporting time, it turned to pro forma reporting and was able to convert that loss into a fictional $400 million net gain. Hot dog! With a tool like that, who needs to create real revenue?
One would think that after Enron's collapse and the dot-com meltdown highlighted the shortcomings of pro forma reporting most legit companies would avoid them like the plague. Not so, according to the Wall Street Journal. The Journal reports that such respected companies as Cisco Systems, Motorola and LSI Logic continue to issue pro forma reports.
It's no wonder investor confidence in public companies continues to wane. Maybe companies would be less likely to issue misleading pro forma figures if the SEC forced them to better reflect its real purpose. Maybe something like, the "Way Things Would Have Been Had We Not Made Some Mistakes Report." (The WTWHBHWNMSM Report, for short.) |
