As has become the norm in recent years, this holiday-shortened week was anything but sleepy. That became readily apparent when trading resumed Tuesday morning amid a slew of corporate news, including
bankruptcy filing, and the
Major averages stumbled Tuesday in wake of the news deluge, accompanied by growing concerns the economic recovery won't be strong enough to support valuations. But such concerns faded as the week progressed and major averages were able to recoup the ground lost Tuesday. For the week, the
Dow Jones Industrial Average
rose 0.7%, the
gained 0.5% and the
Nasdaq Composite Index
That major averages advanced this week, however modestly, was impressive given the ongoing
saga, which took a tragic turn Friday with the apparent suicide of former Vice Chairman John Clifford Baxter. Earlier in the week, CEO Ken Lay resigned while Congress began multiple investigations on the scandal.
Reverberations from Enron's implosion included heightened concerns about firms with complex balance sheets, including Tyco and
. Additionally, shares of
J.P. Morgan Chase
fell 2.5% Friday after
The Wall Street Journal
reported the bank might have an additional $1 billion in exposure to Enron stemming from an offshore energy-trading venture.
"There's been a lot of press surrounding Enron and its accounting, and the fact no one seemed to be able to see through it, or kept quiet if they did," said Jeffrey Kleintop, chief investment strategist at PNC Advisors, which has $65 billion under management. "Many organizations set up to protect investors allowed this to occur. I don't know where that leads us
but it's certainly worrisome."
Either directly or through its Blackrock subsidiary, PNC did own shares of Enron, and maintains long positions in Tyco.
"We thought the breakup was a positive," Kleintop said, noting the Securities & Exchange Commission will have to "green light the accounting," for the breakup to occur.
The strategist believes Tyco shares will rise into the mid-50s. But even if Tyco executives had long considered the possibility of a breakup, he conceded the firm's decision was "clearly accelerated by the Enron situation."
Looking Beyond Enron
Major averages withstood various Enron-related shocks thanks to growing optimism about the economy and hopeful earnings reports from tech names such as
Renewed optimism about the economy was spurred by better-than-expected reports on leading economic indicators and jobless claims, plus comments by
Fed Chairman Alan Greenspan
in his appearance on Capitol Hill Thursday.
reported here, Greenspan gave a revised version of a speech delivered on Jan. 11. Due to a variety of factors, markets eagerly accepted a more optimistic interpretation of the Greenspeak. Bonds suffered in reaction as the fixed-income markets are now looking ahead to when the Fed will start tightening again; the bond market is now pricing in 50% odds the
will tighten at its May 7 meeting.
But the bond market's woe was a boon for equities, particularly economically sensitive names; the Morgan Stanley Cyclical Index rose 1.7% on Friday, ending the week up 3.7%.
In addition to optimism about the economy, names such as
rallied at week's end on rising hopes for some government relief on the asbestos front.
reported earnings slightly ahead of consensus expectations on Thursday. But what really got the stock moving was the company's attempt to quantify its asbestos liabilities for the next decade, for which it will take a $350 million ($221 million after-tax) charge in the fourth quarter.
The impact of asbestos has been "grossly overblown" and "absolutely absurd," CEO A.D. "Pete" Correll said in G-P's conference call. "There is no bad news here."
More accurately, it seemed the "bad news" was already priced into the shares. A precipitous decline in G-P shares since December culminated Tuesday with a 15.5% drop after the Weyerhaeuser-Willamette merger announcement.
In retrospect, Tuesday's big decline was a watershed event, in that it washed out "weak holders" who were hanging around solely for the possibility Willamette was going to buy G-P's building products division. With that deal out of the picture, remaining shareholders are focusing more on G-P's core business, which even our short-selling source said
Tuesday is "fairly valued" in the low 20s.
Buoyed by a Salomon Smith Barney upgrade, G-P shares rose 13.5% to $24.70 Friday.
The question now becomes how much upside is there for G-P, given a still- challenging economic backdrop. In a microcosm, the firm's challenges are the same ones facing the overall market, which appears destined to produce a saw-toothed pattern this year vs. a V-shaped recovery.
"We hope this year will be kinder to investors but I don't think it's going to be a gangbuster year," said PNC's Kleintop, who has a 1225 year-end target for the S&P 500. "Earnings-per-share growth is a matter of margin expansion, which is going to be difficult to achieve in this pricing environment."
As with many observers, Kleintop noted interest-rate sensitive areas such as housing and autos aren't likely to propel a sharp recovery this year. "They never went away, so they can't come back," he said. "It's not your typical year coming out of recession."
Fittingly, this week was anything but typical.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.