To paraphrase Ronald Reagan, here they go again.
The only thing that can make this bear market worse is politics. Politicians are mostly lawyers who know nothing about economics, accounting or business and are more concerned about getting re-elected than making hard choices.
In the best case, these misguided efforts are a formalization of what the markets have already done. In the worst case, they could increase the risk of a longer and deeper economic recession and bear market. Consider the following:
When trying to deal with the Great Depression in post-1929 America, politicians created the Smoot-Hawley tariffs that only made matters worse. This attempt at "protecting" U.S. businesses resulted in retaliation by other nations that exacerbated the Depression and made it a global event. It took a global war to shake that bear loose.
After the 1960’s boom, the press and congressional committees went after ÒcriminalÓ business practices and investigated CEOs and accountants. Sound familiar?
One would hope that our collective memory would help prevent a recurrence of these events, but that does not appear to be the case. Already the U.S. government has erected a trade barrier in steel and increased farm subsidies. As a result, some U.S. businesses now face a steel shortage, and the global community is mobilizing to retaliate.
The congressional panels that have been created to examine the Enron and WorldCom scandals are good examples of how Congress "deals" with economic issues. These are really nothing more than a stage for politicians to help them get re-elected and blame the other party. It is actually very funny to watch people who can’t balance their own checkbooks try and figure out complex financing deals.
Unfortunately, more effort is being made to assign blame for the accounting scandals and the bear market than on substantive efforts to enact measures that would fix the structural faults that created the situation. Democrats are blaming the Bush administration for being too pro-business and are pointing at his Harken transaction to undermine his credibility instead of trying to focus on the current issues.
It is important to remember that the seeds of this bear market and crisis of confidence were sown during Clinton’s administration! It was during Clinton’s watch that the dot-coms and telcos were fabricating sales and earnings. And didn’t both Bill and Hillary have investment "issues?" And don’t get me started on the lack of his ethics! Bottom line: Neither side is without guilt, and politicians should focus on resolutions, not recriminations.
But what can you expect from a government whose books are in worse shape than WorldCom or Enron? The U.S. government has the most creative bookkeeping in this country, if not the world. Just imagine the headlines if a corporation kept its books on a cash basis and didn’t record trillions of dollars of future liabilities on its books! After all, isn’t Social Security the "Godzilla" of all off balance sheet liabilities? And who evaluates the pay raises that Congress keeps giving itself?
I believe that a free market will react faster to the problems of today than any legislation. Business leaders know that a market cannot exist without the confidence of the participants and that a free market is dependent upon the free flow of information that can be trusted. It will be this invisible hand that will guide corporate initiative to regain investors’ confidence and distance themselves from the Enrons and WorldComs.
Many companies are already taking action to restore investor confidence without government mandate. Coca-Cola and the Washington Post were the first to announce that they would start to expense stock options, and they have been joined by a growing number of large companies. During the summer, we said that it would be very possible during the second quarter earnings season that companies will go out of their way to adopt Lady Godiva Accounting Principles (aka full frontal disclosure) in order to regain investors’ faith. And this is happening! There are some companies that have announced that they will start to report earnings in the Òcore earningsÓ format developed by Standard & Poors, which eliminates "one-time" charges and pension benefits, and includes option expenses.
The only "accomplishment" of the government has been to require that CEOs and CFOs declare that "to the best of their knowledge" their financial statements are correct. Duh! Isn’t that what they were doing by signing their 10Ks and 10Qs? The only thing that legislation accomplished was to provide a continued source of revenues for class action lawyers.
As August 15th approached (the deadline for complying with this rule), speculation mounted as to what would be the impact of non-compliance. The hype reminded me of the apprehension surrounding Y2K. The climax occurred as I watched in amazement how CNBC devoted expensive minutes during "Wake-Up Call" to show the signatures of the CEOs who were the first to file with the SEC. Wasn’t there something more important to talk about?
As election season approaches, politicians will undoubtedly increase their efforts to do anything to show that they are worth re-electing and that the other party is the cause of this bear market. What they say will undoubtedly increase investor uncertainty and market volatility. Meanwhile, corporations will continue their efforts to meet the demands of the market for full frontal disclosure in order to keep their shareholders’ confidence.
Let’s pray that the private sector can act faster than the government.
Richard J. Wayman, CFA, is a Chartered Financial Analyst and President of researchstock.com, an independent, fee-based, equity research firm that focuses on under-followed small cap stocks. For the last 10 years he has been a professional analyst with reports appearing in Barron’s, the Wall Street Journal, forbes.com, Investopedia.com and MultexInvestor.
