Most of the big thinkers on Wall Street, up to and including Fed Chairman Alan Greenspan, seem to think the lingering effects of the Enron implosion are overblown. Trouble is, somebody forgot to tell the market, which continues to be hounded by accounting and related woes. Today, stocks fell early and never recovered amid ongoing concerns about IBM ( IBM), which dropped 3.3% despite a Wall Street Journal report that the company would release more details on income that offsets expenses. Big Blue's blues suggest investors will punish companies for giving them the fuller disclosure they say they want. Elsewhere, Nvidia ( NVDA), which revealed a Securities and Exchange Commission inquiry into its accounting practices late last week, fell 3.8% today after having its debt ratings placed on Standard & Poor's CreditWatch for possible downgrade. J.P. Morgan ( JPM), which is being sued by shareholders over allegedly misleading statements about its Enron exposure, dropped another 3.4%. New and varied worries surfaced today about companies such as Circuit City ( CC), Protein Design Labs ( PDLI), AES ( AES) and (among others) Nextel Communications ( NXTL), which said its international unit will take pretax restructuring charges of $1 billion to $2 billion for 2001. The above fell between 16.3% and 32.1% today. Even presumably good news such as solid earnings by Wal-Mart ( WMT), which fell 1.2%, failed to inspire the individual names, much less the broader market. But as mentioned above and noted last week , those who are supposed to be market sages/long-term forecasters are looking beyond the accounting/accountability issue, and even searching for silver linings within it. Testifying before Congress last month, Greenspan said the "extraordinary response" to Enron's demise was "a very good sign," because it indicated the necessary reforms will occur to prevent future Enrons. Paul Rabbitt, president of Rabbitt Analytics in Hermosa Beach, Calif., expressed a similar view today. Investors may remain focused on accounting scandals in the short term, but "ultimately, these problems will result in accounting reform, which will increase investor confidence," he wrote. Tobias Levkovich, U.S. equity strategist at Salomon Smith Barney, said the potential for another Enron is one reason he's maintaining 5% cash in his recommended allocation, with 70% stocks and 20% bonds making up the remainder. Still, "I don't think Enron-style accounting irregularities are a systemic issue" or "representative of the broader economy," he said in an interview Tuesday afternoon. "I understand the concern but think it's being overblown." Because M2 money supply growth has slowed and the Fed has indicated it is done easing, the market has lost the "liquidity push" that helped propel fourth-quarter gains, and is susceptible to "accounting poison darts," the strategist conceded. But "I want to buy when the market is jittery" and is in a "disbelief state" about the "micro" improvements outlined in today's Midday Musings . In response to my point in that story about Levkovich's bullishness not being terribly unique, the strategist noted that many of his peers are pretty bearish these days. The permabulls aside, it's a fair point, as influential strategists such as Richard Bernstein at Merrill Lynch, Steve Galbraith and Barton Biggs at Morgan Stanley, Tom McManus at Bank of America Securities and the soon-to-be-departing Douglas Cliggott of J.P. Morgan aren't exactly wide-eyed optimists. Moreover, Levkovich noted most of the mutual fund managers he encounters are indecisive (at best) and that retail investors remain skittish, judging by mutual fund inflows. Retail mutual fund assets are now less than 60% in equities, he noted, down markedly from recent years and certainly below the average recommendation of most strategist types. "Who cares what strategists think; let's look where the money is," he said, with laudable candor. "I can give my opinion until I'm blue in the face but what matters is what people do, not what people say." Another good and fair point, as today's session proves: For as much as people like Levkovich say accounting concerns are overblown, investors are acting otherwise.
Another View on Accounting
Jeff Brotman, adjunct professor of accounting at University of Pennsylvania's law school, "respectfully disagrees" with those who suggest accounting worries have been overdone. "We have just begun the process of discovering that most of the investing public, and the so-called experts, do not truly understand the financial condition of a great many public companies," Brotman commented via email. "Enron is more than just an example, it is an extraordinary lesson." The fact the shady accounting of such widely followed, high-profile company went undetected for so long suggests analysts, auditors and regulators either knew about them but looked the other way or were duped, he commented. "Either way, who says it couldn't happen again?" There are many off balance sheet issues "that haven't even begun to be discussed as such," Brotman argued, noting the various forms of vendor financings used by telecom suppliers. "I think that the idea that an accounting approach that grew out of control over years will correct in weeks or months is as credible as the idea that the Nasdaq bubble would have corrected over weeks or months." For those who've lost track (or stopped counting), it's now almost two years since the Comp peaked and, as today's action demonstrated, we're still groping for a post-bubble resolution.