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The US market is really in a mess with all this stuff going on. Who do you believe today !!

January 30, 2002

Worries of More Enrons to Come Give Prices a Pounding

Concerns about the troubling practices that led to the failure of Enron (news/quote) slammed into the stock market yesterday.

Companies whose shares took the heaving beating were those with opaque or complex financial statements, those heavy with debt or those with even a whiff of off- balance-sheet obligations. The Dow Jones industrial average fell 247.51 points to 9,618.24, a loss of 2.5 percent. The Standard & Poor's 500 index, a broader market benchmark, lost 2.86 percent of its value, dropping to 1,100.64.

"It's the cockroach theory," said Anthony M. Maramarco, portfolio manager at the Babson Value Fund in Cambridge, Mass. "There's never going to be just one company that because of accounting practices or excessive debt levels will be a problem. As a result, we go out there and wholesale get rid of anything that might come close to being as tainted as what we have identified as the initial culprit."

<<Patron's comment: If these numbnuts had been doing their job, along with a reasonable amount of DD, this crap would never BE in their portfolios in the first place!>>

Shares of financial companies fell across the board. Stocks of companies with troubling news, including PNC Financial and Tyco International (news/quote), plunged even more than most.

"I think what Enron has raised is the question about all financial reporting," said Liz Miller, portfolio manager at Trevor Stewart Burton & Jacobsen, in New York. "The detail of the reporting, the clarity of the reporting, the simplicity of the reporting."

Ms. Miller said it was no coincidence that stocks took a pounding just ahead of President Bush's State of the Union address and on the first day of a two-day meeting by the Federal Reserve Board. "I think investors are looking for some very high-level responses to this condition," she said.

<<Patron's comment: You expect ANY politician to do anything material to improve oversight? I gotta stock, errr, BRIDGE to sell ya, Liz!>>

Selling was widespread yesterday for bank and financial services stocks, which have made billions in loans to companies now viewed as far riskier than they were when the nation's economy was healthy. Shares of J. P. Morgan Chase (news/quote) lost 6.6 percent of their value, Merrill Lynch (news/quote) fell 7.5 percent, and Citigroup (news/quote) shed 5.3 percent.

Telecommunications companies were hammered after Global Crossing, a giant concern, filed for bankruptcy. WorldCom (news/quote), the big long-distance carrier based in Clinton, Miss., plunged to $10.40, its lowest level since 1995. And the Williams Companies (news/quote), a natural gas pipeline company, fell 22 percent on disclosures that it might have $2.4 billion in unexpected costs associated with a communications business that was spun off last year.

Investors also pressured conglomerates with operations that are varied, far-flung and hard to fathom. Tyco, a company known for its complex financial statements, lost 20 percent of its value, falling to $33.65 a share. Contributing to investor skittishness was Tyco's disclosure that it had paid $20 million to an outside director and a charity he controls for help in arranging an acquisition last year.

Even shares of General Electric (news/quote), one of the nation's bluest chips, fell 4.4 percent, a reflection of investors' fears that the financial statements of companies in multiple lines of business may be too difficult to understand.

Investors are not the only ones bringing greater scrutiny to corporations' accounting practices. The Federal Reserve appears to be taking a closer look at banks' financial positions, too.

<<Patron's comment: BubbleBoy's on the case? Then rest assured these guys get a free pass to the coupon window for their bailout!>>

The PNC Financial Services Group (news/quote), Pennsylvania's largest bank, announced yesterday that it would reduce its 2001 net income by $155 million, or 53 cents a share, after Fed officials expressed concerns that the company was improperly accounting for some problem loans and venture capital holdings that it sold last year to three separate entities.

PNC said it had retained only a partial interest in the entities and had included that stake on its books, with the approval of its auditors, Ernst & Young. But the regulators instructed the bank-holding company to consolidate the entire value of the holdings on its balance sheet. Walter Gregg, a vice chairman of the bank, said PNC restated its figures to "avoid confusion going forward and in light of our desire to resolve the issue as quickly as possible."

Shares of Cendant (news/quote), a company with franchises of residential real estate operations and motels and the owner of the Avis rental car business, also fell sharply yesterday. The company has seven partnerships that it has used to move various operations from its books, said Jay Leupp, a stock analyst at Robertson Stephens.

The main purpose of these deals was not to hide debt but to avoid reporting losses, especially accounting charges for acquisitions and other items that do not affect the company's cash flow. Unlike Enron, Cendant disclosed details of each partnership to investors.

Mr. Leupp said the partnerships' debt of $1 billion to $1.5 billion was "not much in comparison to Cendant's $10 to $11 billion in total long- term debt." He estimated that shifting operations into the partnerships added 20 to 30 cents to Cendant's earnings in 2001. But investors may be nervous, he said, because once the company moved the units into the partnerships, key elements of their operations were no longer disclosed. "I wish I could see more of the drivers of their revenue and expenses," Mr. Leupp said.

Phone calls to Cendant were not returned late last night.

Even professional investors who know how to digest financial statements seem to be realizing that they may not truly know what they own.

"It has become much more difficult to make a standard comparison among companies in a world where derivatives and off-balance-sheet transactions are an increasingly significant part of a company's operations," said Jonathan Cohen, portfolio manager at JHC Capital in Greenwich, Conn., and former chief of software and Internet research at Merrill Lynch.

<<Patron's comment: As I recall, this is the guy who got canned by Merril (because he wasn't clownishly bullish enough) so they could replace him with Blodgett in '99. Good to see he's found a solid niche and has his head screwed on straight!>>

Confidence in the stock market rests on several basic beliefs: that corporate managers will be truthful, that auditors will be able to judge companies' financial positions and that stock analysts and bond rating agencies will be able to analyze how sound or promising companies are. The fall of Enron has shattered all these fundamental beliefs.

As a result, many investors perceive greater risk in almost every publicly traded stock.

"If I own a lot of stocks, now I have to wonder about whether much of the data on which I have based my judgments is accurate or phony," said Stan Jonas, managing director at Fimat USA, a broker dealer in New York. "If I don't know whether a company is honest or its accountants are honest, I have to act as though it is dishonest. That means I have to discount the price I will pay for it to adjust for that risk."

Mr. Maramarco, the Babson fund manager, said his company had had visits in recent days from two top accounting analysts at Wall Street firms. "Both these people, who clearly know balance sheets and income statements inside out, have thrown up their hands," he said. "They say there are so many ways for companies to obfuscate their financial statements and have their accountants sign off on it that they don't have a chance."

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