Doomsday for Wall Street?
Dr. Martin Weiss suggests today’s rapidly accelerating crisis of investor confidence is about to explode in a flurry of NEW shocking revelations of brokerage scandals…earnings swindles…and surprise bankruptcies. In other words, you ain’t seen nothing yet.
As early as 1999 – with the greatest stock mania in history in full swing – subtle, but deeply disturbing, changes began to occur in corporate America and on Wall Street. The earnings reports issued by up to one-third of US companies just didn’t add up.
To me, it was plain as day that huge expenses were being buried…mock sales were being pawned off as real revenues…and earnings were being grossly exaggerated. Many companies reporting minor losses were really bleeding like so many stuck pigs…and some companies reporting big profits were actually drowning in red ink.
When I analyzed their balance sheets, I realized debt levels were off the scale. They were up to their eyeballs in debts they never had a prayer of paying, and merrily borrowing still more every day.
Wall Street ratings on these companies totally ignored these "minor details" and hyped the stocks as "quintessential investment opportunities." Analysts must have known what I knew – and yet they awarded many of the most egregious, most questionable companies the most highly touted "buy" ratings, with the greatest hoopla and fanfare.
I could only assume that the analysts must have an ulterior motive for recommending these dogs. Every single one of the brokerage firms hyping these rickety companies had collected massive investment banking and consulting fees from them; had loaned them millions of dollars; or were vying for their future business.
It was the most massive breach of trust I had ever seen in my three decades as an investment analyst. Unsuspecting investors were being betrayed, bilked, and bamboozled. They thought they were buying the stock of great companies with great earnings. They thought brokerage analysts genuinely believed these companies had great potential.
But investors were really getting something VERY different: Lousy, high-debt, low-earnings stocks that greedy and amoral brokerage firms needed to sell to pump up their own investment banking revenues.
That meant trillions of dollars – the life savings and retirement plans of millions of Americans – were in extreme danger. And with the high-profile scandals and bankruptcy now plaguing Wall Street’s most "reputable" firms, we’re only just beginning to see the damage that has been wrought.
But there is still time to save yourself… * With the startling revelations about investor swindles at Wall Street mainstays like Merrill Lynch, Morgan Stanley, Salomon, and others…
* With a never-ending flow of massive, newly discovered, accounting lies by the likes of WorldCom (a $4.0 billion profit overstatement), Merck ($14 billion revenue overstatement), Global Crossing (losses of $55 billion), and Tyco (probably around $30 billion)…
* And with the very real threat of a new wave of surprise bankruptcies like those at Williams, Kmart, and Adelphia, the trust millions of investors once had in our financial markets is rapidly vanishing. Investor confidence has plunged to 9/11 levels. Foreign investors are pulling out in droves. A wholesale, unbridled, uncontrollable panic is brewing.
This is not just a crash. It’s a threat to our entire future – as investors, as citizens.
Maybe, if the crooked companies and brokers who have been exposed thus far were the only ones, the shock and bewilderment in the market would eventually subside.
Or maybe, if the companies recently filing for Chapter 11 were among the last of the "bad apples," we could see a light at the end of the tunnel. But no.
* So far, authorities have only released damning evidence against ONE major broker – Merrill Lynch. But they are conducting new investigations of widespread ratings fraud at a dozen major Wall Street Brokerages. And I have data indicating that at least 47 firms may be guilty.
* So far, we’ve only heard about accounting regularities at a handful of major corporations. But our surveys indicate that thousands may have engaged in similar practices.
* So far this year, we’ve seen bankruptcies at 104 publicly traded companies, a new record. But according to my numbers, 1,359 are now at risk of failure.
It will take months for all the accounting crimes to be exposed and for the companies battling bankruptcy to finally throw in the towel.
In the meantime, day by day, every new disclosure and failure will deepen the crisis of confidence.
But there’s a limit to how much investors can take – an invisible psychological barrier that once violated, cannot be restored. This generation’s trust in Wall Street – and its willingness to play the stock market game – will have been destroyed forever.
Who’s going to help avert this dismal future?
I wish I could tell you that politicians in Washington are going to step in and stop the madness on Wall Street. But too many are afraid to be blamed for accelerating the coming crash or to lose their super- fat Wall Street campaign contributions.
I wish I could affirm that the major Wall Street firms will voluntarily mend themselves. Instead, even as they promise "never to do it again," they are deploying scores of high-powered lobbyists to squash any legislation that might force them to keep those promises. Case in point: Philip J. Purcell, CEO of Morgan Stanley Dean Witter, who has been lobbying feverishly to block attorney generals, like New York’s Elliott Spitzer, from exposing the dirt at companies like his, Merrill Lynch, or others.
I wish I could tell you that the SEC is likely to expose and punish the wrongdoers, or institute harsh new regulations that guarantee your safety and fair treatment.
The sorry truth is that the SEC knew about the conflicts of interest for many years and did next to nothing. Indeed, as far back as 1992, a front-page Wall Street Journal article presented a clear description of wrongdoing on Wall Street, especially highlighting the shenanigans at none other than Morgan Stanley – the very same firm that’s trying to squash anti-Wall Street actions today.
I wish I could tell you that even one, single, solitary brokerage firm would have the courage to step up to the plate and say, "You’re right. We lied, cheated, and stole billions of dollars from unsuspecting investors. We all did it. Now let’s throw the guilty behind bars."
But nobody’s talking – even when they’ve been caught red-handed. Merrill Lynch CEO David Komansky, for example, fresh out of his settlement with Elliot Spitzer, pooh-poohed the entire scandal by blaming it all on "a few bad apple analysts."
Throughout Washington and Wall Street, no one seems to care that, with each denial, each obfuscation, and each lobbying attempt to derail ongoing investigations, they’re convincing more and more investors that Wall Street is nothing more than a shell game.
Wall Street will never clean up its mess, the crisis of confidence will never end, and no one will ever be safe again until and unless investors like you take matters into your own hands and take action.
Here’s what I recommend: We’ve identified some of the worst offending brokerage firms… firms whose names may even surprise you: Prudential, for example, ranked worst in terms of number of legal actions against the firm, compared to 17 other large retail firms in 1997- 2001 and failed to downgrade 2 failing companies to "sell" in 2002. And Ameritrade ranked second worst in terms of number of legal actions and according to the Weiss ratings system rated a "C-" for safety. But there are many more…
In fact, we call it the Brokerage Hall of Shame.
If you have even one, lonely, solitary dollar invested with any of the brokerages, I believe you should run – not walk – to the nearest phone or computer and close your account NOW! That one act – multiplied a million- fold – will be their ultimate punishment.
By getting your money out of brokerages that have the worst record of investor abuse, your money will be safe if they are slammed with massive arbitration claims and settlements.
That’s important: More brokers go out of business because of judgments and settlements than for any other reason. And if you have an account with a failed broker, it may be frozen – and your money locked in losing positions – while the regulators and SIPC sort things out.
Plus, you’ll be sending these brokerages a clear message: Clean up your act or else!
Where should your money go? Move your accounts to one of the brokers listed in our BROKERAGE HALL OF FAME. Fidelity, for example, ranked best in terms of fewest legal actions; rated B+ for safety. They’ve got low commissions and did not recommend failing companies. Again, not all brokerages are bad…
By moving your money immediately, you’ll be rewarding firms that refused to trick you into junk stocks to earn investment banking fees – and you will help give them competitive power over dishonest firms.
Position yourself now to profit from the market’s inevitable decline. No action you or I can ever take will stop the stock market from falling. That’s already written in stone. Instead, make sure you have investments firmly in place that will help you profit from the decline. That way, when the market does hit rock bottom, you will join a powerful minority of investors with the wealth to buy up the best companies at the best time for the lowest prices.
Let me put this as bluntly as possible: The clock is ticking. Every day, more investors are becoming convinced – and rightly so – that Wall Street is a rigged game.
Unless faith is restored, this crisis of confidence will not only continue to spiral out of control, but it will doom the chances for an eventual market recovery. It’s probably too late to prevent the downward spiral. No one has that power. But if we don’t act immediately, it may also be too late to prevent a more permanent destruction of confidence.
Never forget: The biggest profit opportunity we will have is to buy good companies at the right time for a fraction of their peak value. But how can we do that safely if the entire market is still a cesspool of corruption and deception?
for The Daily Reckoning
July 9, 2002
P.S. And whatever you do: If you own even one stock listed in our CORPORATE HALL OF SHAME dump it now!
Each one of these companies warrants the same kind of warning I issued on Enron, WorldCom, Kmart, and Global Crossing long before they failed. Most of these companies are nothing short of time bombs in your portfolio. Holding them makes no sense at all. Cut your losses. Call your broker and sell them now, while you still can!
That one call will do more than you can ever imagine to put the fear of God into slick CEOs!
Editor’s note: Martin D. Weiss, PhD, the nation’s leading advocate for financial safety, has helped millions of Americans with his conflict-of-interest- free ratings of stocks, mutual funds, insurance companies, banks, brokerage firms and HMOs.
In 1994, he was among the very first to warn investors of Wall Street chicanery with his Safe Money issue headlined "Major Wall Street Firms Deliberately Deceive Investors with False Reports!" And back in 1999, he was among the leaders in documenting corporate shenanigans under the bold headline "28% of US Companies Are Telling Half Truths or Outright Lies About Their Earnings."
The New York Times says he was "the first to see the dangers and say so unambiguously." The Wall Street Journal says he runs a "feisty firm," and Esquire noted that his is "the only company…that provides financial grades free of any possible conflict of interest."
"This week should be interesting…" Dan Denning wrote me yesterday, "because second quarter 401(k) and mutual statements should arrive all across America. Imagine how most people feel opening them right now. The sense of dread they feel looking at a number that keeps getting smaller, even as they keep pumping more money in each month. Maybe proof in black and white of just how bad the market is will cause them to sell."
We don’t know what will be the proximate cause, but we suspect that the whole process will just take time.
America’s love affair with stocks lasted many years – from the furtive, sidelong glances and fumbling introductions in the early 80s, to the pullulating romance of the early ’90s to the hot-and-heavy, can’t- live-without-them madness of the late ’90s.
Now, investors hearts are breaking…the poor dumb schmucks. They’ve reached the "you left the cap off the toothpaste again" phase of the relationship…and they still can’t quite believe it…what went wrong, they are beginning to ask? Is it really over?
It can’t be!
Holidays are the worst. Because they sit around with time on their hands. After a while, they begin to feel lonely; it just doesn’t feel the same without those 20% per year profits. They know they shouldn’t do it, but they can’t help themselves. So, they pick up the phone and call their brokers. "Buy," they say tenderly, putting aside the bitterness of the last 2 and a half years.
But then, by Monday, they’re ready to shake off the languid melancholy of the long holiday weekend and get back to business.
Isn’t that what happened, Eric?
Eric Fry, our man in Manhattan:
– The bears returned from the long holiday weekend, refreshed and ready to sell stocks once again. The Dow dropped 105 points to 9,275, while the Nasdaq crumbled more than 3% to 1,406.
– Bit-by-bit, the market is drifting away from the archipelago of S&P 500 price targets issued by Wall Street strategists late last year. Most of the targets cluster around the 1,350 level – some 38% away from the current price of 977.
– In fact, the price targets may have already disappeared over the horizon…and the strategists can’t seem to "adjust" their price targets fast enough.
– The astonishing thing about Wall Street strategists is not that they are so often wrong, but that anyone still believes their "forecasts" to be any more reliable than "Puxatawnie Phil’s." (Then again, the strategists might be able to compile a much better record if – like the clairvoyant groundhog – they tried to predict the next six weeks rather than the next 12 months).
– Every winter the strategists issue their bullish forecasts for the upcoming year. (For some mysterious reason, few of these Wall Street employees ever offers a bearish forecast). If the market goes up during the year, the analysts’ forecasts are more or less correct. But when the market falls, as it did in 2000 and 2001, the analysts are pretty much dead wrong…But that’s no problem; they can always issue a new bullish forecast next year.
– At the beginning of 2002, did any of the errant strategists rethink their bullish stance? No way…not unless they were prepared to find a new job, like J. P. Morgan’s Douglass Cliggott. He was the only major strategist who dared to predict a third straight losing year for the S&P 500 in 2002. A few months after offering his forecast, Cliggott found himself working for an unknown Swedish investment firm. (Hey, it could have been worse).
– The bullish contingent of strategists remains gainfully employed on Wall Street. Eight out of ten strategists interviewed by Barron’s late last year rang in the New Year with bullish forecasts for the stock market. The financial weekly checked in with the group last week to see how their forecasts were progressing (or regressing) at the halfway point.
– To our complete astonishment, the strategists remain bullish…albeit slightly less so. Low-key bullishness is, after all, the latest fashion on Wall Street.
– "Like an earnest but unrealistic New Year’s resolution finally abandoned," Barron’s reports, "Wall Street’s top strategists have given up on the robust gains they once predicted for stocks this year."
– UBS Warburg strategist, Ed Kerschner, for example, who had predicted a year-end price target of 1,570 for the S&P 500 – or more than 60% above current levels – has ratcheted down his forecast to 1,360.
– Kerschner, like most of the other erroneously bullish seers, justified his lowered targets on "unforeseen" or "unanticipated" negatives like accounting scandals and feeble profits…It’s true, unforeseen events can put a big wrinkle in the prediction business.
– Like Kerschner, CSFB’s Thomas Galvin whines that "intangible issues" have made it very difficult to "quantify and create price-target adjustments."
– In fact, when Galvin appeared on CNBC yesterday, he seemed to throw in the towel completely on the entire forecasting charade. When pressed to update his earlier Dow price target of 11,400, Galvin replied, "I have absolutely no idea…I hope it will be 20% higher than it is right now."
– When a prominent Wall Street strategist throws up his hands in despair, we are getting closer to the end of the bear market. When they all do, we will have arrived.
– "Last year," says Barron’s, "most analysts shot the moon on their estimates – top strategists’ forecasts for the Standard & Poor’s 500-stock index ranged from 1225 to 1715 – and missed. The S&P 500’s year-end closing value was 1148.08. This year [is] starting to look like an embarrassing repeat, with projections for the S&P 500 as bullish as 1570, even while stocks continued to slide."
– The bearish strategists queried by Barron’s have become even more cautious. Richard Bernstein of Merrill Lynch, who expects the market to close lower for the third straight year, observes, "Most investors still appear concerned about capital appreciation and the prospect of missing the turn in the market when they probably should be more concerned about capital preservation."
– Bernstein points out that cash, as an investment, has performed better than the S&P 500 over the last 55 months.
– "We remain somewhat amazed that investors refuse to seriously consider cash as an investment," writes Mr. Bernstein. "After all, a measly 1.7% return from 3-month T-bills is still a better return than the negative returns stocks have been providing."
– Cash – like Shredded Wheat – causes neither excitement nor indigestion.
Back in Paris…
*** "The process of remediating the monstrous mess created by the bubble years is by no means over," writes Alan Abelson in Barron’s. "Pure and simple, it beggars belief and runs counter to common sense and logic that the biggest stock market bubble in history won’t engender an equally powerful bear market."
*** Of course, that is what we’ve been saying here in the Daily Reckoning for the last 3 years. So far, $6.5 trillion has been taken out of stock market valuations and returned to its rightful owners. How much more will have to be given back is anyone’s guess. But we suspect the Dow will drop down to 5,000 or so before it is all over.
*** But that is probably the least harmful part of the big financial picture. Markets go up…then they go down. The rich get richer…then not-so-rich after all. So what? What really hurts, by contrast, is the way bad times trickle down onto the heads of the lumpenproletariat – the poor patsies who bought stocks as they headed down, mortgaged up their homes when interest rates fell, and then ran up credit card debts that they’re having trouble paying off.
*** In May, we learned yesterday, consumers continued to borrow – and did so at the fastest pace since last November. Debt in America has grown to 280% of GDP – the biggest pile in history. Who’s going to pay it off? How? And what happens to the dollar and the economy? And what happens to a society that gets itself into such a jam? We know what happens when the society is in Argentina, Brazil or Turkey.
*** What happens when the country is the world’s only superpower, capable of dropping bombs on whomever it wants, whenever it wants? That is what we’re going to find out.
*** Imagine our relief on Monday when we saw the headline in the International Herald Tribune. President George Bush has outlined his plans for an attack on Iraq. Whew! With so much anti-French talk coming out of Washington we were afraid that Paris, rather than Baghdad, might be his next target in his campaign for re-election…oops, we mean his campaign against terrorism.
"I remember when I was growing up, Saddam Hussein was regarded as a great friend of France," Luc told me this morning. Of course, back then, he was also not exactly an enemy of America, either. Iraq may have been evil too, but it was Khomeini, not Hussein, who got the bad press.
Now, the French are getting bad press in America. Ed Koch, for example, the former mayor of New York, does a weekly radio show which he signs off with a latin expression, "Omni Gaul delenda est." The phrase is an amalgam of two famous quotations: "Gallis est omnis divisa in partes tres" (Gaul (modern France) is divided into three parts – the first line of Caesar’s Commentaries on Gallic Wars) and "Cartago delenda est" (Carthage must be destroyed – attributed to Cato.)
Making a long story short, American Jews are upset with France. Recent attacks against Jews and synagogues in France have encouraged them to believe that the French are anti-semites. It is all nonsense, of course. The French are no more anti-Jewish than Americans are. A good French Catholic is no racist; he simply despises all foreigners and non-believers equally. The attacks against Jewish targets in France have been carried out not by Frenchmen, but by Moslem immigrants to France who are often anti-Israeli, not necessarily anti-Jewish. Yet, if you were to believe the American press you’d think France was building gas chambers and handing out yellow stars.
Then, too, the French are famously uncooperative with American foreign policy. In 1986, the French refused to allow American bombers to fly over France in order to drop bombs on Libya. We can’t remember why dropping bombs on Libya was supposed to be a good idea. But we’re sure it was at least as good an idea as bombing Afghanistan and Iraq today.
But that’s precisely what worries us. If we were terrorists, we’d much rather take our lunches at the Paradis bar across the street from the office…than eat out of some dreadful can while holed up in a cave in the Hindu Kush. So it wouldn’t surprise us terribly much to discover that there were more than a few would-be, could-be, might kinda one day wanna be terrorists having lunch over at the George V…or having a cup of coffee at Le Dome.
But please keep it quiet. We don’t want the Bush administration getting wind of this…For every vote Bush would get from bombing Baghdad, he’d probably get two from dumping a load on the Elysee Palace.