Of particular concern is global investors who, to judge from the recent declines in the dollar, had already been pulling money from our fair shores. Ruffat, who works closely with Japanese clients, says that foreign confidence in U.S. assets has fallen to a new low.
money.cnn.com
The death of confidence
WorldCom's gigantic fraud may send investors to the exits for a long, long time.
June 26, 2002: 5:14 PM EDT
By Justin Lahart, CNN/Money Staff Writer
NEW YORK (CNN/Money) - Tuesday night,
the other shoe dropped.
Ever since Enron, investors have worried that
something big was lurking in the wings. A
steady stream of scandal -- Global Crossing,
Qwest (Q: Research, Estimates), Peregrine,
Adelphia -- kept the fear alive. And so it came:
WorldCom (WCOM: Research, Estimates), perpetrator of what looks
like one of the biggest accounting frauds in history. If trust in
Corporate America was already broken, now it's in shambles. With
that, many investors may decide to exit the U.S. stock market. And
not come back.
"I think you're going to have people withdraw
money for good," says Todd Clark, managing
director of listed trading at Wells Fargo
Securities. "People are going to say, 'I'd rather
bet on the New York Giants because I have a
better chance of guessing the result than of
know ing what some management team is up
to.'"
With the market whipping lower before a late-day recovery took it
back to the flatline, Clark's worry was echoing all over Wall Street.
"We're seeing basically complete distrust in financial accounting in
the Western Hemisphere," says Phil Ruffat of Mizuho Securities USA's
futures division. "People are going to pack it up and go."
Of particular concern is global investors who, to judge from the
recent declines in the dollar, had already been pulling money from
our fair shores. Ruffat, who works closely with Japanese clients, says
that foreign confidence in U.S. assets has fallen to a new low.
If that's what it's come to, one of the main drivers of the 1990s bull
market has been turned on its head. Stringent accounting standards
and active shareholder participation were supposed to make
companies here more transparent than they had been in the past.
This meant the risk of owning U.S. stocks was low both historically
and compared to places like Japan.
And so both here and abroad investors ploughed money into our
stock market. Paul Kasriel, chief U.S. economist at Northern Trust,
points out that by the end of 2000 foreigners owned financial assets
close to 25 percent of the U.S. capital stock, up from 11 percent in
1990. It is hard, he thinks, to imagine foreigners keeping up that
level of investment given what's going on.
"Even without the fraud," says Kasriel, "return on capital has been
plumbing the depths, the United States is at war, government
spending exploding to the upside and we're imposing tariffs on steel
and lumber. What's to like?"
And of course it's not just foreign investors who might be asking that
question. U.S. investors have been just as burned, and have just as
much reason for disgust at the shenanigans companies have played,
as their foreign counterparts. There are plenty of places to put
money besides stocks (bonds, money markets, gold, under the
mattress) and plenty of people may opt to do just that.
While many market watchers,
attuned to the big market
bouncebacks from 1987, 1997
and 1998 talk of "capitulation" --
a period of blind selling that
puts a firm bottom on stocks
and marks the new bull phase --
the WorldCom debacle could just as easily mark the beginning of a
long period of disinterest, where the stock market ends up being no
better than a mugs game.
"We're taking a lot of the people out of the market permanently,"
says Bollinger Capital head John Bollinger. "We're losing a whole
generation of investors."
What Bollinger expects is not the V-shaped rebound so many
investors hope for but something like the long grind the U.S. saw in
the 1970s and that Japan has been seeing for the past 13 years.
After topping out at 1,050 in 1973, the Dow Jones Industrial Average
wasn't able to pull clear of the 1,000 level until 1982. Tokyo's Nikkei
hit its high back in 1989 and has ground steadily lower ever since
then.
Maybe the prognosis for U.S. stocks isn't so dire as that but one
thing seems certain: investors who think WorldCom is the end of the
accounting imbroglio are in for disappointments. What's so
disappointing about WorldCom is that it proves the cockroach theory
-- where there was Enron, there was more.
"Telecom is where people thought the next Enron was going to be,
and they weren't disappointed," says David Hawkins, a Harvard
Business School professor who acts as an advisor to Merrill Lynch on
accounting issues. Hawkins suspects that the breed of fraud that
happened at WorldCom -- treating expenses as capital expenditures
-- probably happened elsewhere in the telecom arena.
With that kind of backdrop, some investors suspect that any rallies in
the weeks to come will be short-lived. "The feeling is that confidence
in corporate America has deteriorated so much that maybe you're
going to see the typical step up, followed by multiple steps down,"
said Seth Tobias of the New York-based hedge fund Circle T.
And as for those responsible for the WorldCom debacle?
"I hope these people go to jail," says Tobias. |
