By: Ronald D. Struck
June 25, 2002
WHO’S GOING TO FIX THE MARKET?
Fed watching (closely monitoring what
Chairman Greenspan of the Federal Reserve says and does) has been a
sport in the capital markets for a long time, and it will continue to
be. In reality, Mr. Greenspan’s impact on the market is
primarily on the fringes. The
Fed can lower the discount rate banks pay for advances from the
Federal Reserve to make it easier for banks to make loans, but, the
discount rate is currently only 1.75% so how much is a reduction
really going to help. The
Federal Reserve can also buy Treasury securities in the capital
markets, which increases the money supply, which increases the supply
of investment capital, which keeps rates low.
However, there is plenty of money already in supply, and rates
are at historic lows, so the Feds impact there would also be minimal.
So, while the actions of Greenspan should be considered, he is
really not the key factor in driving market conditions, except to the
media.
The
media is always looking for the one and only answer why the market
changes, and this is especially true when the market is going down
(when it's going up, everyone is laughing all the way to the bank and
could care less about the causes).
BUT, when it goes down, the media immediately wants to know
what THE thing was that caused it, who was responsible, who is going
to do something about it, and WHEN will it be done.
If someone can come up with a 30 second answer to these
questions, suitable for a news-bite on the nightly news, they are
deemed to be gurus, even is their answers are total bull….
The
fact of the matter is that there is no ONE solution for financial
problems, and there is no one or two people who can solve them (Bush,
Greenspan, or anyone else). Investors went crazy in the 1990's and bid up the stock
market to stupid levels that had no financial substance.
Historical
norms for price/earnings ratios are between 5 and 20.
In the 1990's, a lot of stock was traded with 75 to 100 PE
ratios. Some dot-com companies had ratios of infinity because they
never had any earnings, in
fact, they were LOSING money and had virtually no prospects of ever
become profitable, but people were clamoring for their IPO offerings
anyhow. People rushed to
pay $100
for a share of stock that had just come to market at an IPO initial
offering of $10 per share. It
was a classic bubble. Bubble
can't last for long because there is no free ride. It's actually hard to make money, not a slam-dunk.
People are starting to see what that really means, but they
still need someone to blame for their losses - anyone
and everything except their own greed and carelessness.
And
then the media jumps on the bandwagon with their insightful reporting.
They have two easy scapegoats.
Heartless government leaders in Washington DC and corrupt
capitalists on Wall Street, and because both are easy targets that's
all you hear about. Obviously, the president, Greenspan, or someone in government
must have screwed up and caused the problems.
And now, the government is not doing what it should be doing to
solve the problems. This
terrible thing must be reported about over and over again.
After all, Washington DC is the site of that brilliant group of
people who should be solving all of America's problems.
(If the government is not VERY careful, they will make the
problems much worse than they would otherwise be if it did nothing. Fines levied by the government pale in insignificance
compared to the penalties companies are paying for their shady deals
in the form of lower stock prices).
How
about those corrupt Wall Street capitalists.
Wall Street is full of biased analysts who hype the stock of
companies their firms' are trying to sell. Anyone who didn't know that they should take with a grain
of salt the reports from analysts working for the firms selling the
stock, should not be in the stock market.
Come on; get real, common sense should tell you to be leery of
analysts' reports from selling firms.
It's like all those folks who get lung cancer from cigarette
smoking and then sue because no one told them about the risks.
And,
another seldom reported fact is that a vast majority of stock is owned
and traded by very large, rich institutional investors.
These investors have their own analysts.
Does anyone think their analysts don't reflect the impact of
the stock options that companies have outstanding when they make their
investment decisions? So,
stock couldn't be falling because investors didn't know about the
stock options impact of the companies in which they were investing.
How
about all the accounting scandals?
People who cooked their books, and those accounting firms that
aided and abetted them, should be dealt with in the harshest manner
possible, O.K., but let's look at the big picture.
Enron is no longer in business.
Arthur Andersen is almost out of business.
WorldCom is on the verge of bankruptcy.
So the market handed out some very harsh penalties to the
COMPANIES that cooked the books.
Yes, I want the individuals involved to also get what they
deserve, but individual punishment will have very little if any impact
on turning around the markets, as good as it may make everyone feel.
I
have a hard time following the logic of trying to make Greenspan a
scapegoat. He
didn't get the credit when the market was raking in the
profits, and rightly so, so now why is the media and government
wasting all their time looking for him to turn the market around. It's
not possible, even if he was the smartest person on earth.
The market will start improving only after there has been a lot
of blood on the street, which will cause NORMAL PEOPLE to put back on
their rational hats and start making their daily decisions with their
brains, not their guts. And,
they have to stop looking for the magic way to make lots of money
easily and fast, and try basic hard work again.
So, I'm
not looking for or following any guru, Greenspan included.
Nature just has to take its course.
We might be getting near the lows now but I'm not so sure. The next big impact
will be in August when, for the first time, the CEOs and CFOs have to
certify that their financials are true and correct, with 10-year
prison terms if they certify falsely.
There will be MANY restatements of previous earnings and
expense treatments. If
the public believes the restatements are primarily because of HONEST
differences in judgment calls, we might be near the lows now.
If other scandals like Enron or WorldCom are
uncovered, watch out, the market could plummet.
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