Tuesday, 17 July 2018

A decade can be a long time in markets – or not

  • Print
  • Share
  • Save

Anthony Peters, SwissInvest Strategist

The late British Prime Minister Harold Wilson, the one with the pipe and the Gannex raincoat, was the master of the one-liner – what is now referred to as a “soundbite” – and none was more famous than “A week is a long time in politics”. It is indeed.

In markets, even a minute can be a long time. However, occasionally 10 years seems like no time at all. Well, in this case it’s actually nine years and 11 months, because on November 29 it will be 10 years since the shares of Enron Corporation were suspended and on December 2 it will be 10 years since it filed for Chapter 11 bankruptcy protection.

Why am I writing about it now? Because I want to get in before the mob descends on the subject in a month’s time, that’s why.

For the under-35s, Enron is at best a business-school case study of what happens when greed meets fraud and both meet analysts who regurgitate what they’re told and who take guidance at face value.

The dotcom bubble had run its course by March 2000 when the Nasdaq peaked at 5,132.32 points in intraday trading. By September 2001 it had bottomed at 1,387.06 – this monstrous boom and bust partly explains the limited esteem in which I generally hold the people I referred to in those days as the spotty-nosed equity geeks.

Those who weren’t there will find it hard to understand the hubris that led to people diving on the stock of listed shell companies with no assets and no income, simply because the shell had been acquired by a guy with a degree in IT from Menlo Park Community College.

The blow-up of the dotcom market wiped out tens of thousands of day traders who thought “investing” in equities was like falling off a log and who banked on the idea that if they bought into 10 IPOs and one came good, they’d be quids in – and if two came good, they’d be rich as Croesus.

Those of us who turned our noses up at the tech sector punt were told that we didn’t understand and that earnings and cashflow had nothing to do with it – it was all about the new economic paradigm. Personally, I subscribed to the theory that “the new economic paradigm ain’t worth a pair of dimes”.

With the dotcoms blown away, everybody wanted stocks in real companies that did real things and had real earnings. Enron was just the ticket, as the world’s largest energy trader and a member of that elite group of America’s most admired companies.

This was the era of Jack Welch at GE, but Ken Lay’s Enron wasn’t far behind. Quarter after quarter it hit its earnings targets – which it had, of course, set itself – and analysts were cock-a-hoop.

Then, late in the summer of 2001, rumours started to circulate about “accounting irregularities” and between October 11 and November 30 the stock fell from US$36.79 to US$0.26.

Believe it or not, some firms still had buy recommendations on the stock based on its consistent earnings and strong cashflow. When it filed three days later, it became the largest corporate bankruptcy and fraud in US history and 22,000 employees were sent home with nothing other than what they had been able to grab from the office on their way out.

Many years later, a friend of mine – my commodity guru, in fact – related how, when he was working at Enron, one of his own clients had called him in and had warned him to be very careful.

Having understood the commodity business, the client had decided not to believe what he was being told by the analysts and had settled down to dissect the annual report for himself, only to find that it had more holes than a Swiss cheese. And yet, even though he warned people, it was hard for them to walk away from a company that was visibly profitable and paying its people handsomely.

Having seen Enron and Tyco and WorldCom, we thought we’d seen enough and seen it all. You couldn’t trust dotcoms and now you couldn’t even trust proper companies – but surely you could trust the banks … well, you could, couldn’t you?

So Enron went up in smoke and with it its accountant and consultant, the venerable Arthur Andersen. The consultancy business survived as Accenture, but the Big Five firms of the accountancy world found that they were all of a sudden only the Big Four.

Enron led to the promulgation of the Sarbanes-Oxley Act, which demanded more stringent accounting rules and, more significantly, led to senior executives becoming personally liable at law to the accounts they sign off on.

Enron was not alone though – there were WorldCom, Tyco, Adelphia and others – but it was the “biggie” that led the way. In the spring of 2001 the company had been worth US$60bn: in December it failed with a market cap of US$187m.

Having seen Enron and Tyco and WorldCom, we thought we’d seen enough and seen it all. You couldn’t trust dotcoms and now you couldn’t even trust proper companies – but surely you could trust the banks … well, you could, couldn’t you?

Now the under-35s can come back in and add their stories, for in 10 years’ time they will be looking back at the current period and it will feel just like yesterday to them too.

  • Print
  • Share
  • Save