On the Money: Analysts bob precariously in a sea of dodgy books

By Michael Coote

Friday 5th July 2002

America's sorry chapter of corporate scandals ranging from Enron to WorldCom will be cold comfort to investors in the US sharemarkets even if it makes for sensational reading in the press.

And this latest round of exposures is not the first and unlikely to be the last, since the dotcom and telecoms bubbles burst earlier.

The sheer scale on which US corporations can fudge their books and bilk their investors is rivalled only by Japanese companies, which is really saying something.

The Japanese can take some credit for being more subtle and devious than
WorldCom when it comes to faking profits and falsifying assets but the Yanks can still proudly claim to have continued their Wild West tradition of being bigger, bolder and badder than anybody else in the arts and wiles of daylight robbery.

In the old days horse thieves were hanged but in these enlightened times they are invited on to television talk shows.

It is hard to know if the change represents progress and we may yet see the return of the lynch mob as more investors end up holding worthless share certificates.

Nick Leeson should be doing a roaring trade in advising fallen corporate idols of yesteryear on how to forge a second career on the speaking circuit with such inspirational leadership themes as "How I burned billions and lived to tell the tale" concerning Houdini-like escapes from blood-lusting stockholders.

More sinister than the
collapse of whiz-bang new economy companies, however, is the refusal by Pimco, one of the leading bond fund managers, to buy any more corporate paper from General Electric, the "best company in the world" and a Old Economy stock.

The Pimco decision did not attract anything like the attention of the recent implosions of TMT companies but was a warning sign based on reservations about accounting practices.

If General Electric's paper has a question mark over it, what else should we be worrying about?

The fireworks of the WorldComs should not distract from the seismic rumblings emerging from old, established firms.

At least as a technical analyst I have gained some grim satisfaction from watching two phenomena come badly unstuck.

The first is fundamental analysis.

I can remember well some years back contacting a then newly setup sharebroking firm to offer assistance with technical analysis.

The boss replied that his company preferred to stick with the "bricks and mortar" of fundamentals.

These days, fundamentals bear a close resemblance to the remains of the World Trade Center in the aftermath of September 11.

Fundamental analysis presupposes accurate accounting if it is to be credible. And accurate accounting has been shot to hell post-Enron.

Fundamental analysts will now need a degree in forensic accountancy if they intend to be skilled in verifying the numbers that companies turn out.

From the point of view of traditional investment analysis, things have got much harder when it appears that dodgy books have become endemic in the world's premier sharemarket.

That sort of malady was not so long ago smugly attributed to many corrupt and nepotistic Asian countries and the gangster economy of Russia, places that failed to come up to exacting American standards.

Charting looks a whole lot better in the light of the early sell signals it gave for so many stocks that analysts and
sharebrokers, relying on fundamentals, optimistically continued to grade as buy, hold or accumulate.

The second phenomenon to take a knock is just this mercenary optimism on the part of those who never want to give a sell recommendation.

US investment bankers are coming under fire for urging stocks onto clients while secretly denouncing those same golden opportunities.

Lawsuits will fly but, of more importance, a principle is likely to emerge that will place greater onus on brokers and analysts to get their clients out of poor propositions in a timely manner.

Additionally, brokers may be forced to disclose to clients if their firm or a related party is the buyer or seller of securities on the other side of the deal, a practice which a disclaimer is often used to conceal.

Of course, risk cannot be legislated out of markets. Without risk no reward arises in them.

But the days of "all care, no responsibility" are likely to be over for those who give advice and recommendations to investing clients, particularly if those services fail to include a reasonable proportion of sells in relation to buys, holds or accumulates.

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