I simply can't believe my eyes and ears! The latest nonsense circulating in the financial press states that lancing the Enron ( ENRNQ) boil will be good for stock valuations. What a crock! Larry Kudlow first made this contention on CNBC's "America Now" program a few weeks ago. Kudlow is the quintessential financial-media Pollyanna. He finds the stock market's silver lining in every negative market event, every fundamental problem and every scandal. Next, a Jan. 30 article in The Wall Street Journal cited the same rubbish coming from Federal Reserve Chairman Alan Greenspan's mouth. In the same article, Sen. Jon Corzine (D., N.J.) contends that accounting concerns could lower stock valuations and raise the cost of capital for U.S. companies. According to the Journal, Greenspan "dismissed those worries at the same hearing," saying, "there are going to be people out there who are going to say, 'our accounts you can rely on.' And that will probably increase their price-earnings ratios." Since this piece was published, I have seen others make the same case on CNBC.
Do not kid yourself. This Enron crisis is huge. Not because of the wealth that Enron destroyed, but rather because of the repercussions it will have on the financial reporting system. Greenspan and Kudlow contend that stock valuations should improve because companies will be forced to report honest income statements. But here's the way I see it: All the "wink-wink" accounting tricks that most companies use to inflate reported profits will be gone: "big-bath" and acquisition charges fed back into income; pension profits; unrecognized option expense; inventory write-offs fed back into profits; special-purpose-entity profits; off balance sheet liabilities; recurring and nonrecurring charge-offs; bogus revenue recognition; and "pro-rata, pro forma, operating profits."