investmenttool.com Cover Story

A Crisis of Confidence

There were two distinct trends in the market last week. One lead up and one led down. The upward pressure was due to the decision by the FOMC to stop cutting interest rates. The downward pressure was a new disease called Enronitis.

The FOMC, lead by Alan Greenspan stopped cutting rates for the time being. Though they believe the dangers to the economy far exceed the inflation risks, they liked the data they saw and want to give the economy rate stability for a time and see if it can sustain its growth.

In more surprise news, the GDP actually grew during the forth quarter of 2001. A miserly pace of .2% driven mostly by automobile sales, but on a purely technical level, the economy seems to have avoided the classic definition of a recession.

It would have been a great week except for the disease called Enronitis. This is a critically dangerous condition created by Enron Corporation. It is now obvious to investors that earnings reports can be legally manipulated by creative accounting.

Each company threatened by the SEC or other regulatory bodies to re-state earnings has dropped like a rock. Some of the firms lost a third of their market capitalization in a single day.

Many investors ask the same question when looking over their portfolios. Has my company played games with its earnings and balance sheet?

That crisis of confidence led to serious drops in the market in a week that should have given investors hope. If it continues there could be a massive change in the direction of the market. Options protection would seem to be the rule of the day.

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Shmuel Protter
investmenttool.com

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