Earnings Deluge. Greenspan. Enron
By Brady Willett
Over 100 S&P 500 companies have reported earnings thus far, and results have surpassed expectations by over 3%. To put this in perspective, instead of earnings being down more than 22% this quarter, they could end up being down only 19% if current trends hold firm. Yes, such results would be 'better than expected' – does this make you want to run out and buy?
In the upcoming week 155 S&P 500 companies are scheduled to report earnings, along with nearly half of Dow components. Furthermore, Greenspan is set to deliver a speech to the Senate on Thursday which may provide clues on interest policy for the upcoming FOMC meeting on January 30. As it stands now economists are basically split as to whether or not the Fed will cut rates again.
With these things in mind, corporate earnings and Greenspan will be in the spotlight this week – or a repeat of last week.
The Enron Saga
The Enron debacle continues to grow larger in scope. Disclosure prior to December 2 now stands as follows: Citigroup's Rubin called his old pals at the Treasury and asked them to strong arm S&P, Cheney tried to salvage Enron's project in India, and Enron Chairman Lay pleaded with Greenspan, O'Neill, and Evans to have a chat with the ratings houses about pending debt cuts. Additionally, the NY Times reported last week that Enron paid no income tax in 4 out of the last 5 years, and a Texas judge ordered that Arthur Anderson stop shredding documents. AA replied to the judge by saying 'no problem, we finished shredding all incriminating documents a month ago'.
What has not yet been disclosed is whether or not there is any hard evidence that the S&P delayed downgrading Enron because of conversations, and/or promises from concerned parties (or non-material developments). However, it may come out in the months ahead that Dynegy was also on the other end of the phone when the PPT characters swung into action. As such, was Dynergy given incentives to make an offer in haste? Did these incentives lead to the 'fake buy-out offer' that ultimately gave S&P enough leeway not to immediately downgrade Enron? Yes, the saga continues. Perhaps all that can be assured is that an S&P downgrade back in early November would have bankrupted the company – and the arrival of this downgrade was delayed for some reason…
Enron Lesson
The Enron fiasco highlights all that is wrong with Wall Street, high finance, and the investing public: consistent debt warnings from seemingly 'professional' institutions do not outweigh fluffy analyst upgrades, a speech from a likable CEO conquers hemorrhaging financials, and a falling stock price always represents a bargain even if it is falling for a sound reason.
With this in mind, Enron has not only provided a lesson to ratings houses, but hopefully to investors as well: the reality of corporate worth is not seen in stock price, nor is it uncovered by looking at professionally audited GAAP financial results. Rather, the reality of worth can only be determined by intrinsic value – value that is ultimately determined by what a company is worth once it pays down all debts, and sells off all assets. Granted, the SEC needs to do a better job of enforcing how companies report assets/debts.
When considering that premiums to intrinsic value have recently escalated as the economic fundamentals have deteriorated a question deserves to be asked: what if Enron becomes merely the symptom of a much larger epidemic?
January 25, 2002
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