SEC Asleep at the Wheeling and Dealing
By Bill Fleckenstein
Index Close Change
Dow 8043.63 -269.50
S&P 500 834.60 -29.64
Nasdaq Composite 1206.01 -41.91
Nasdaq 100 857.08 -35.43
Russell 2000 367.12 -9.33
Semiconductor Index (SOX) 283.91 -17.50
Bank Index 687.08 -29.73
Amex Gold Bugs Index 109.04 -4.04
Dow Transports 2132.27 -69.76
Dow Utilities 224.52 -1.55
NYSE advance-decline -1684 -199
Nikkei 225 9704.93 -4.73
10-year Treasury Bond 4.24% -0.023
Liberty Bell Peals 'Sell' : Overnight, the foreign markets were weaker, led by Taiwan, which was down almost 6% on the back of issues related to independence/China. Elsewhere in the region, Korea was down 3.5%, and Japan was basically unchanged. With the Nikkei continuing to lurk below the 10,000 level, its earlier rally this year is looking all the more like a head fake. In any case, the Asian markets have been rather weak lately, something that corroborates the weakness we have seen here.
Tech Bathes at Red Kettle Hole : To the west, Europe was modestly weaker as our casino readied for business, and at the open, selling kind of ensued right out of the gate. It was pretty orderly, however, such that a couple of hours into the day, the major indices were down about 0.5%. In the early going today, the bank stock index tied the SOX for leader to the downside. Technology was, for the most part, a sea of red, though the movements were not too gigantic. A dead fish lowered his opinion of Cisco CSCO , but I don't think that had much to do with the weakness in tech. Basically, there were more sellers than buyers.
Puree of 14-Carat Sticks : After the early-morning selloff, the market just basically slid all day long and closed on its low. As you can see from the box scores, everything came in for a pretty handy beating. The bank stock index was down about 4%. The SOX was down 5%, and the biotech index was roughed up about the same. In essence, there was no port in the storm, including the precious metals stocks, which after having been higher, flipped over to take a rather significant beating. Many of the gold stocks were down 5% or more.
Ye Gold Curiosity Shoppe : As to the cause, I'm not quite sure. Perhaps they are anticipating a further setback in the price of gold, or maybe there was some big liquidation somewhere. I did notice that it was an odd mixture today -- the euro down, gold up slightly, and gold stocks being hit hard. Many times, there's a lot of noise, and at others, these things mean something. We'll just have to try to ferret it out as we receive more data.
Nasdaq Issues Couple-Week Notes : In any case, it was simply a very ugly day. There's no other way to describe it. I suppose it's worth noting that the Nasdaq Composite is very close to the low of a couple weeks ago, though the Dow and the S&P held up somewhat better, obviously. We'll just have to see if that means anything over the course of the next few days.
Metals Secede from the Carbonation : Away from stocks, the metals were perking initially, but fizzled later. Silver was up $0.04, but gold was only up $0.60. The euro was 0.5% lower. Fixed income was up fractionally.
Insufferable Sufferin' Succotash : Turning to the papers, though, there's quite a good deal worth commenting on, and a rather stunning amount of disconnect. In the who-is-he-trying-to-kid? department, none other than Al Gore wrote an Op-Ed story in yesterday's New York Times called "Broken Promises and Political Deception." He argues logically from a false premise to a false conclusion, and here is just one example: "Uncommon power has combined with uncommon greed to create immense deceptions and losses. Millions of average Americans have been victimized. So have thousands of honest American corporations and the people who manage them, own stock in them, and depend upon them for a livelihood, for sending their children to college and for their retirement."
Take the Sanctimony and Don't Run Again : Mr. Gore is attempting to blame Mr. Bush for the troubles associated with the stock market. Now, that is the irony of all ironies, since these problems took root and festered while Mr. Gore was vice president. I am not suggesting they are directly related to Mr. Gore, because I feel that many of them are related to the Fed and human nature. But for him to blame Bush is the height of lunacy, and outright brazenness. I guess that's just politics as usual. These days, it seems, the brazen bird gets the worm, to mix my metaphors.
Scrutiny on the Bottom-Line Bounty : Moving to The Wall Street Journal , I'd like to talk about a very good article entitled "Meeting Expectations Used to Draw Favor, Now It Invites Scrutiny." The writer offers some worthwhile data about the percentage of companies that made the number by a penny, etc: "In the first quarter of 2001, at the market's peak, 21.4% of S&P 500 companies reported earnings as expected, 16.6% beat those expectations by a penny, and 11.8% beat by two pennies, according to Multex.com. By contrast, only 5.9% missed by a penny, and 3.7% missed by two." So, one can easily see that about 50% of the companies made or beat the number by a penny or two. Isn't it interesting to learn how pervasive the practice of earnings massage has been.
Your Siesta, Our Earnings Fiesta : But the breadth of these statistics is nothing compared to the shocking part about this story within a story. In the course of describing the earnings game, the writer quotes one Walter P. Schuetze, former chief accountant for the SEC's enforcement division from 1997 to early 2000: "I saw companies regularly making their earnings estimates by all kinds of earnings management." You heard that correctly, ladies and gentlemen -- the fellow in charge of enforcement acknowledged that he and the SEC knew about the ruse. So, why didn't the SEC bring any action against these companies? What were they doing, playing solitaire? I'm happy they knew, but I'm pretty distressed that the end result of awareness was inaction.
Schlock Market Revelation : The article also cited Charles Niemeier, the SEC's current chief accountant for enforcement, with the following quote: "'Most of the problems we see begin in the subtleties' . . . starting with small adjustments that may snowball into more serious situations." Mr. Niemeier has corroborated the point I made last week -- that it is important to deal with the little problems like tape-painting, because when allowed to start chipping away at the integrity of the markets, these "little" problems seem to grow and grow into an anything-goes atmosphere. In any case, I thought this was a very good article, both for the data it contained and for the larger, more powerful point it arrived at unintentionally.
Slop-Ed Page : Lastly, turning to the rife-with-denial department, I'd like to discuss an Op-Ed article called "What's a Bubble, Anyway?" that the Journal's former editor, Robert L. Bartley, wrote for his paper. In an exercise in stunning cluelessness, he takes up the cause of many historical revisionists, witness the following: "But the Great Depression was caused by policy errors: Mishandling of monetary policy both domestic and international, tariffs cutting off trade, and tax increases in the midst of a downturn."
Of Immunity & Impunity : Yes, those policy errors did exacerbate the Great Depression, as Japanese policy errors have worsened their problems. However, the reason the economic damage was so profound in the first place was due to the inept handling of monetary policy, which created the bubble. (It's a myth to think bubbles can be fixed. They cannot. They can only be prevented.) That was the case here, and that was the case in Tokyo. Bartley has a totally different view -- that in essence, markets are efficient, capitalism is great, and that basically, bubbles and related disturbances can't happen.
Drivel, in Lieu of Editorial Content : In fact, he goes so far as to maintain that people who use the word "bubble" or "crash" do so "in lieu of analysis." That is just patent nonsense. Indeed, given the public's growing awareness of the bubble and its insidious consequences, it is particularly stunning to see that this concept has eluded the onetime editor of The Wall Street Journal . Of course, from there, it's hardly surprising to hear him opine, "To some, indeed the word 'bubble' is almost synonymous with mistakes in monetary policy. This needs further debate and analysis on another day."
The Consequence of Forever Blowing off Bubbles : For the longest time, I have been trying to make the point that we had a bubble, the unwinding of which began in March 2000, and that its aftermath would be a lingering problem. But I also have pointed out that those people who understand the existence of the bubble in the first place can best position themselves to deal with the aftermath in its wake. Along those lines, I would suggest that the editorial essayist clear his calendar and commence the analysis on "another day" without further ado. |
