Bill Sykes' Newsletter
from America.
(Summer Addendum #2 - 2002)
An ex-Brit gives his views-(without fear
or favor)---of the American Scene
Corporate greed and investor fear leads to a near
stock market meltdown.
In my opinion, the decline in world stock markets
started with corrupt Corporate Executives “fiddling/cooking”
the books in order to show that their particular company
was making more profits than they really were, and hiding
huge debt in many devious ways too difficult for the average
investor to comprehend and me to explain.
Believe me, these practices are not a new phenomenon, I
am given to understand that in the Enron case, a number
of financial institutions propped up the company’s
bottom line by upfront payments of extremely large sums
of money for services, such as electricity contracts, that
were never delivered.
I’m afraid that I really can’t understand the
complicated transactions that took place, so I’m unable
to provide details with any degree of accuracy. The end
results were that Enron was able to show profits in excess
of reality and hide their debit balances. As a reward to
Company Officers for their innovated and sometimes illegal
methods of improving Corporate profits, Corporate Officers
were rewarded by large stock options and year end bonuses
amounting in many cases to multi-million dollar benefit
packages, which sometimes had the added advantage of low,
or even zero percentage loans made to the Officers out of
corporate funds to enable them to purchase luxurious homes,
and all the so called good things in life.
Many of the names of Corporate Officers and the companies
involved have been published in most of the financial columns
of the large and not so large news media newssheets.
You know the names as well as I do, (of the executives and
the Companies they belonged to), so no purpose would be
served by me repeating those names until they have been
arraigned, tried and found guilty, or not guilty as the
case maybe, of fraudulent and deceptive practices which
have led to huge monetary losses by many investors, and
the loss of jobs by thousands of employees of the companies
concerned.
Who would admit to being involved in conditions that caused
the stock market downturn?
The current “bear” market in the United States,
leading to instability in other World markets, was exacerbated
by a number of other things in addition to Corporate greed
scandals.
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Mr. Alan Greenspan and his World Bank cohorts must
get a mention as I feel that their deliberate reduction
in interest rates on a monthly basis down to a ridiculous
2% has had a lot to do with the current monetary problems
of the United States.
The only entities to really benefit from the low interest
rates are the banks, big business and the large financial
institutions.
Mortgage rates are still in the 6.5/7.0% region and
interest rates on credit card debt is still in the 15%
plus region, so who are the beneficiaries???
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Big names, that I can mention because of current publicity,
which eventually will cause a great deal of political
fallout and may effect the upcoming November elections,
are of course our President Mr. George W. Bush’s
connection with Harken Industries and our Vice President
Mr. Dick Cheney’s dealings with the Halliburton
Company.
I would suggest that Mr. Bush and Mr. Cheney will have
to answer many embarrassing questions and accusations
from many sources, such as Senate sub-committees, about
their involvement in what has been described as possibly
fraudulent monetary and illegal dealings within the
aforementioned companies.
I would suggest that the two previous political scandals
involving past Presidents, the Watergate and the Whitewater
incidents, will pale in comparison to what may come
out of the current monetary accusations.
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The Secretary of the Army, Mr. Thomas White, has also
been testifying voluntarily before the Senate Commerce
Committee with respect to his involvement as a past
employee of the Enron Company.
Mr. White was subjected to questions from several Senators
of the committee which were centered around the California
electricity crisis and indications that subsidiaries
of Enron took advantage of the California power crisis
by using inflated estimates of how much customers needed,
in order to show congestion in the California electricity
grid system, thereby driving up the price of power supplied
by Enron’s wholesale power divisions.
Mr. White, who was employed by Enron for many years
in different capacities, before he left the Company
to work at the Pentagon, said that he was unaware of
any overstating of power load in the State of California.
One Senator said that a request would be placed with
Chairman Harvey Pitt of the SEC, (Securities and Exchange
Commission), to investigate Mr. White’s sale of
Enron stock after he became Secretary of the Army. Mr.
White stated that he sold the stock for around $12M
to satisfy an ethics agreement.
It was suggested that Mr. White earned roughly $50M
in salary and compensation during his eleven years with
Enron and was given a $14M payment, when he left to
join the Pentagon, whilst employees and shareholders
watched pension plans and investments become worthless.
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The White House has conceded that the year 2002, Federal
Budget Deficit will exceed $165B, which is a reversal
from last years, (2001), Federal Budget which had a
$127B surplus.
The economic policies of the current Government are
coming under close scrutiny due to the ever growing
deficit balance, and the Stock Market is judicially
selling off in preparation for one of the largest deficits
ever experienced by the American economy.
Of course we can’t saddle Mr. Bush and his administration
with all the blame, as Osama bin Laden certainly contributed
a great deal to our financial plight.
As the famous baseball player, coach and manager, Yogi
Berra would say “It’s déjà
vu all over again” and “It ain’t over
‘till it’s over”.
What goes up must come down. (General law of physics—or
is it Murphy’s law).
I would like to present some basic observations
on the current volatility in the United States Stock market.
A couple of year or so ago, (before the September 11th
2001 tragedy), I predicted, much to the amusement of my
son-in law who is a staunch Republican and great believer
in the Bush family, that the stock market was very much
overvalued and that a then current valuation for the DOW
industrials, based upon a number of factors, should be in
the 8,500, (+ or – 500 points), range and the NASDAQ
1,250, (+ or – 250 points), range. The Dow Jones average
closed the week at 8264 and the NASDAQ at 1262.
Well, was I right or was I right?
Not bad for an amateur stock forecaster!
The volatility of the market, (with violent swings), in
one particular instance the market was recently down 439
point during the trading session, and closed down 45 points.
For the uninitiated that swing was apparently caused by
“short selling”. Short selling is when an investor,
or trader, believing that the market is going to go down
“borrows” shares and sells them at the market
price.
If the trader is clever enough to predict when the market
is nearing bottom, he buys the shares at the lower price
so that he can indeed cover his shorts, in more ways that
one.
If he/she manages to do that then he/she makes a lot of
money, BUT, if the market turns around very quickly and
he hasn’t bought the number of shares that he requires
in time to cover the ones that he borrowed and sold, he/she
has to scramble to buy enough shares, at whatever price
is available, to cover his/her shorts, or he/she is in big
trouble and can lose a lot of money.
Within a day or so the market recovered somewhat with a
compete reversal of the downturn and finished up with a
gain of close to 500 points. This is not a market for the
investor with a weak stomach.
I’m afraid that I’ve given a simple explanation
of a very complex subject.
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