While not as bad as the disease of corporate malfeasance, the cure of forcing executives to sign off on financial statements is proving to be no panacea. In the weeks leading up to today's certification deadline, much of the talk was about how signing off on financials was a formality or a PR issue because it doesn't address the still-legal-but-aggressive accounting that became commonplace in the boom era. Some argued the "to the best of my knowledge" language in the certification documentation could be an out clause for executives if problems later emerge. Also, there's no formal penalty for executives who refuse to sign, and those guilty of book-cooking might sign off and continue their criminal activities. Finally, a large number of companies aren't beholden to the Aug. 14 deadline because of the timing of their fiscal years. (A list of companies' specific deadlines is available at the SEC's Web site .) Indeed, most market participants were downplaying the impact of the certification issue. " Yesterday , it was inevitable the market would sell off and I had felt the same about today but less so now," emailed Jeffrey Kleintop, chief investment strategist at PNC Advisors in Philadelphia, which has more than $60 billion under management. "Those companies forced to restate results today haven't taken the broader market down nor have they caused competitors that have yet to file to suffer disproportionately worse than the market. It is possible that investors are relieved that there are just a few minor restatements and no admission of substantial fraud." After trading as low as 8353.07 early on, the Dow Jones Industrial Average closed up 3.1% to 8743.31. Similarly, the S&P 500 gained 4% to 919.62 vs. its earlier low of 876.20 while the Nasdaq Composite, which demonstrated relative strength throughout the session, closed higher by 5.1% to 1334.30 after having traded briefly in negative territory early in the session. The Comp's relative (and absolute) strength was due to strength in mega-caps such as Microsoft ( MSFT) as well as smaller names which posted better-than-expected results Tuesday night, including Network Appliance ( NTAP) and CheckFree ( CKFR). Applied Materials ( AMAT), which posted better-than-expected fiscal third-quarter results but guided down its estimates for orders and revenues for its fourth quarter, finished up by 96 cents, or 7.13%, to clsoe at $14.42. Household International ( HI), another "restater," stormed back in support of the argument that today's deadline was a "nonevent." Household closed up 29 cents, or 0.77%, to $38.09 after trading as low as $32.90 earlier. The consumer finance firm said it will restate downward earnings going back to 1994 by $386 million, because of a change in the way it accounts for certain branded credit cards. Capital One Financial ( COF), which also restated and slipped earlier in the session, finished higher by $1.85, or 6.34%, to $31.05. Elsewhere, Nicor ( GAS), an energy holding company that earlier said it could not certify its financials and revised downward previously reported results for the first half of 2002, closed higher by 51 cents, or 1.95%, to $26.67. Tuesday evening, Interpublic Group ( IPG) revised downward its results going back to 1997 and reported weaker-than-expected second-quarter results. Interpublic finished up $1.28, or 8.11%, to $ 17.06. Similarly, DPL ( DPL) finished higher by $1.02, or 5.58%, to $ 19.29, after falling as low as $17.90. The owner of Dayton Power & Light said an accounting change will reduce its 2001 results by $19 million, or 16 cents per share, but that results for the first half of 2002 will be increased by $23 million, or 20 cents per share. Early on, the certification issue was also weighing on the dollar, which traded as low as 116.32 yen while the euro rose as high as $0.9893. "The move seemed to reflect disappointment at the Fed's inaction and perhaps, nervousness ahead of today's deadline for CEO sign-off to the SEC," commented Anne Mills of Brown Brothers Harriman. The Dollar Index, which measures the greenback's performance vs. a basket of other currencies, settled down 0.2 to 107.03 but well off its earlier low of 106.35.
The Other Side of the Fed
As Mills' comment indicates, the fallout from the Fed's announcement yesterday continues, as does the analysis of its implications, including some disagreement with my No-Win Situation analysis. The Fed's decision to leave rates unchanged but change their risk-assessment statement means the central bank "cannot be accused of panicking" and "gives them license to cut rates between meetings if the economy weakens," suggested Paul Rabbitt, president of Rabbitt Analytics in Hermosa Beach, Calif. "We believe this was the proper action as it also gives the Fed room to increase liquidity should any terrorist activity or Iraq war action create market chaos." Separately, Dave Hunter, chief market strategist a Kelley & Christensen, argued, "The Fed wasn't in a no-win situation. They had plenty of flexibility to cut rates aggressively." Hunter suggested the level of money supply rather than the absolute fed funds rate should be the determinant of Fed policy. "Targeting the funds rate rather than the money supply can lead to either an excessive and inflationary supply of money as was the case in the 1970s or an inadequate and deflationary supply of money as is the case now," he suggested. "The Fed needs to stop targeting the funds rate and let it fall to whatever level is necessary to create enough money to jumpstart this economy." For the three months ended June 29, M2 money supply was growing at a seasonally adjusted annual rate of 6% while M3 money supply was growing at a 5% pace, according to the NY Fed . Notably, that growth was slower than the 12-month pace of 7.6% for M2 and 7.2% for M3, meaning the money supply has more recently retracted. Obviously, this runs counter to the belief of many (bearish) observers that the Fed has caused some of these economic dislocations by printing too much money and that doing more won't solve the problems. Coincidentally (or not), both Rabbitt and Hunter were getting more optimistic about stocks at last check -- on April 15 and May 6 , respectively -- and both remain bullishly inclined at present. Perhaps that optimism influences their views that the Fed did the right thing or that aggressive cuts would help now. But I'm providing them an outlet here as food for thought and in the essence of fairness and balance.