1998 begann die gefährlichste Krise seit 1929
Zwölf Feststellungen von Dr. Bruno Bandulet, Bad Kissingen
Was 1997 mit dem Zusammenbruch der südostasiatischen Währungen und Aktienmärkte begann und von den meisten Beobachtern als rein regionales Ereignis missverstanden wurde, hat 1998 in immer neuen und grösseren Wellen die ganze Welt erfasst.
Dies ist keine normale Korrektur der Aktienmärkte, wie die Neue Zürcher Zeitung glaubt, sondern der Einsturz eines Kartenhauses, das über viele Jahre hinweg in einer Orgie der Spekulation aufgetürmt wurde. Die zweite Oktoberhälfte brachte eine Atempause, aber ein Ende der Krise ist nicht in Sicht. Im Casino gehen die Lichter aus.
1
Das jüngste Kapitel der Crash-Serie betraf einen der 4'000 bis 5'000 Hedge-Fonds, die meist in Steueroasen domiziliert sind und keineswegs Absicherungsgeschäfte betreiben, wie die euphemistische Bezeichnung unterstellt, sondern mit grossem Hebel und entsprechendem Risiko an sämtlichen Finanz- und Rohstoffmärkten spekulieren. Solche Hedge-Fonds sind den kleinen Anlegern verschlossen, sie arbeiten mit dem Geld reicher Leute. Abgesehen von den schwarzen Schafen der Branche, konnten diese Fonds seit langem überdurchschnittliche Renditen erzielen. Denn dort werden die besten Köpfe der Finanzindustrie beschäftigt. Vieles, was sich in den vergangenen Jahren an den Märkten für Devisen, Aktien und Anleihen abgespielt hat, erklärt sich aus den Aktivitäten der Hedge-Fonds. Sie sorgten dafür, dass die Märkte einmal unter-, einmal überbewertet sind – denn nur nicht-effiziente Märkte mit «falschen» Preisen bieten ideale Gewinnchancen.
2
Da die Hedge-Fonds unreguliert sind und keiner Pflicht zur umfassenden Berichterstattung unterliegen, bleiben ihre Engagements und ihr Vorgehen undurchsichtig. Als der amerikanische Long Term Capital Management Fund (LTCM) im September am Rande des Abgrundes stand, erfuhr man zum ersten Mal, mit welch unglaublicher Hebelwirkung hier gearbeitet wird. Dass spekulative Fonds fünf- oder zehnmal soviel bewegen, wie sie Kapital haben, war schon immer üblich und kann als normal angesehen werden. Der LTCM aber kontrollierte im Sommer bei Eigenmitteln in Höhe von nur 2,2 Milliarden Dollar zeitweilig einen Wertpapierbestand von 125 Milliarden. Das war ein Hebel («leverage») von 56,8! Das ist ungefähr so, als ob Sie sich auf Ihr Haus im Wert von einer Million 56,8 Millionen leihen, um an die Börse zu gehen.
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Erste Reaktion des staunenden Beobachters: Das ist deren Problem, jeder möge so spekulieren, wie er Lust hat. Dann stellt sich aber sofort die Frage: Wer hat Fonds wie den LTCM eigentlich finanziert? Antwort: die Banken. Dieselben Banken, die einem mittelständischen Betrieb bei ungenügender Sicherheit eine halbe Million verweigern, machten Abermilliarden locker, damit im grossen Casino des Weltfinanzsystems die Kugel rollte. Nicht nur das: die Grossbanken, darunter auch die grösste in der Schweiz, beteiligten sich auch noch selbst am LTCM – und nicht nur sie, sondern auch Notenbanken wie die italienische!
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Seit der LTCM-Affäre ist das moralische Ansehen der Geschäftsbanken und der Notenbanken (jedenfalls eines Teils davon) lädiert. Die Kurse der Bankaktien sind meist um die Hälfte zusammengebrochen, teilweise bis auf ein Niveau, das zuletzt in den achtziger Jahren erreicht wurde. Tatsache ist: die Banken haben mit den Hedge-Fonds zusammengearbeitet, sie haben die Kredite vorgestreckt – niemand sonst. Während die Investitionen in die reale Wirtschaft vernachlässigt wurden (allein in den USA sind Tausende von Brücken baufällig), war immer genügend Geld da, um das grosse Rad zu drehen. Aber schliesslich haben die Trading Desks der Grossbanken, die seit Jahren in grossem Massstab auf eigene Rechnung spekulieren, im Prinzip nichts anderes getan als die Hedge-Fonds. Es war die Zeit einer grotesken Derivaten-Schwemme – künstlicher Finanzprodukte, die natürlich auch den kleinen Anlegern aufgeschwatzt wurden. Man werfe nur einen Blick in die Anzeigenseiten der Wirtschaftspresse.
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Das System ist korrumpiert. Es ist ein System der Finanzkapitalisten und Oligarchen, die sich gegenseitig in die Tasche wirtschaften. Die Gewinne fliessen auf das eigene Konto, die Verluste werden notfalls sozialisiert, mit Hilfe der Notenbanken abgefangen oder auch dem Steuerzahler aufgebürdet. An dieser offenen Verschwörung zu Lasten des Gemeinwohls waren viele beteiligt: One-World-Organisationen wie der Internationale Währungsfonds, der in Asien völlig versagt und immer nur die falschen Rezepte verschrieben hat – er gehört abgeschafft; die Banken, die den Entwicklungsländern überflüssige und fatale Kredite aufgedrängt haben; und die Zentralbanken, die dem Treiben nicht nur zusahen, sondern sich in den letzten Jahren sogar einbildeten, sie müssten nun auch ihre Profite maximieren anstatt ihre Währungsreserven sicher und seriös und mit Blick auf einen immer möglichen Ernstfall zu verwalten. Nur vor dem Hintergrund dieser perversen Philosophie war es denkbar, dass so viele Notenbanken ihr Gold zu Ausverkaufspreisen verschleuderten oder es ausliehen – ein verantwortungsloses Verhalten. Als der LTCM dann am 23. September von einem Konsortium amerikanischer und europäischer Banken gerettet wurde, stand der amerikanische Notenbankchef Allan Greenspan Pate. Da fragt man sich, wessen Interessen er und seine Bank eigentlich vertreten.
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Möglich wurde der wahnsinnige Aufbau dieser internationalen Kreditpyramide nur durch die Lösung vom Gold im Sommer 1971, als Präsident Nixon das sogenannte Goldfenster schloss. Bis dahin waren die Devisenreserven der Notenbanken jederzeit in Gold einlösbar. Die Notenbanken konnten Dollars präsentieren und dafür Gold verlangen. Seit 1971 hat das Papiergeld seinen Bezug zu einem realen Wert verloren. Es wurde beliebig vermehrbar. Die Spieler konnten sich reich rechnen. Die Finanzblase wurde grösser und grösser, jetzt wird sie kleiner und kleiner. Was in den letzten Wochen und Monaten passierte, war genaugenommen noch keine «Flucht in die Qualität», sondern eine beginnende, kopflose Absetzbewegung aus allen möglichen Finanzanlagen. Wer in diesem Sommer aus den Aktien in Anleihen wechselte, floh nicht in «Qualität», sondern in Papiere, die nur auf kurze oder mittlere Sicht dafür gut sind, Geld zu parken, deren Wert jedoch im Zuge der unvermeidlich kommenden Reflationierung zerstört werden wird. Eine Flucht ins Gold, das wäre eine Flucht in die Qualität gewesen. Aber dazu kam es noch nicht, durfte es nicht kommen.
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Was wir derzeit erleben, ist eine Kreditkontraktion, eine Flucht in das Bargeld. Das hat konkret zur Folge, dass auch gute Firmen in Japan und anderswo von ihrer Bank keine Kredite mehr bekommen und deswegen nicht investieren können. Dieser Effekt – er hat Europa noch kaum erreicht – ist dabei, sich auf die gesamte Weltwirtschaft auszubreiten. Greenspan versuchte, mit der jüngsten Diskontsatzsenkung gegenzusteuern. Das Problem ist nur: um das Zusammenfallen der Finanzblase aufzuhalten, sind im Notfall immer grössere Gelder notwendig. Wenn beispielsweise auf der Basis einer Geldmenge von tausend Milliarden zehnmal soviel an Krediten mobilisiert wurde und wenn dieser Hebel von zehn auf fünf reduziert wird, kann eine Notenbank eine solche Kreditkontraktion kaum ausgleichen. Sie müsste dafür Tag und Nacht Geld drucken. Auch Zinssenkungen als solche können dann nicht verhindern, dass das Soufflé in sich zusammenfällt.
Dass steigende Zinsen immer schlecht für die Börse sind und fallende immer gut, ist eine Legende. Auch der Jahrhundertcrash, der im Herbst 1929 begann, wurde von der amerikanischen Federal Reserve mit ständigen Zinssenkungen begleitet. Die Fed machte das Geld billiger, um das Schlimmste zu verhindern. Es war vergeblich. Innerhalb von zwei Jahren sank der US-Diskontsatz von 6% auf 1,5% – aber die Aktien fielen und fielen. Nicht anders war es in den vergangenen Jahren in Japan. Umgekehrt war die Börsenhausse 1924 bis 1929 an der Wall Street von einer Verdoppelung des Diskontsatzes begleitet.
Wie gross die notwendige Dosis an Geldspritzen am Ende werden kann, zeigt der Fall Japan: Im Oktober beschloss das Unterhaus, 60 Billionen Yen (620 Milliarden Franken) in das marode Bankensystem zu pumpen. Japan belastet sich mit einer drückenden Staatsverschuldung, die nach menschlichem Ermessen nur durch eine spätere Inflation erträglich zu machen ist. Besonders wichtig: auch am Beginn der katastrophalen Entwicklung in Japan stand keineswegs ein Versagen der realen Wirtschaft, sondern die Überspekulation am Aktien- und Immobilienmarkt. Überall und immer wieder wackelt der Schwanz (= Finanzkapitalismus) mit dem Hund (= reale Wirtschaft).
8
Das Tragische an dieser Entwicklung: sie war unnötig. Selbst der Kollaps in Südostasien, der viele Millionen Menschen in bitterste Armut gestürzt hat, war überflüssig. Wie die Financial Times am 21. September berichtete, beliefen sich in den neunziger Jahren die Kapitalzuflüsse in die Entwicklungsländer auf nicht mehr als 10% der inländischen Investitionen. Und davon ging die Hälfte in die offiziellen Währungsreserven. Mit anderen Worten: Diese Nationen haben sich ruiniert, weil sie Kredite in Fremdwährungen aufnahmen, die sie im Grunde nicht brauchten und die sie wegen des Kollapses ihrer eigenen Währung 1997/98 nicht mehr bedienen konnten – und das alles wegen 5% ihrer Gesamtinvestitionen und einer zusätzlichen Beschleunigung des Wirtschaftswachstums, für die jetzt ein zu hoher Preis errichtet werden muss. Richtiger wäre es gewesen, sich langsamer, solider und aus eigener Kraft zu entwickeln. Aber dann wäre der Finanzindustrie ein blendendes Geschäft entgangen.
9
Die Entwicklungsländer (gemeint sind die sogenannten Emerging Markets) fanden sich plötzlich in der Situation von Banken, von denen alle ihr Geld abheben wollen. Der Fluch des Systems ist Kurzfristigkeit und Kreditexzess. Nicht die Globalisierung als solche! Auch im 19. Jahrhundert – zur Zeit des Goldstandards – war die Welt in dem Sinne globalisiert, dass das Kapital frei über die Grenze fliessen konnte. Nur vollzog sich dies damals langfristig und ohne die – am Beispiel von LTCM erklärte – fatale Hebelwirkung.
Wie Wirtschaftshistoriker herausfanden, waren es nicht mehr als 5‘000 britische und 20‘000 wohlhabende kontinentaleuropäische Familien, die ihr Geld auf lange Sicht in Aktien und Anleihen der Entwicklungsländer steckten und damit beispielsweise Eisenbahnen in Amerika und Goldminen in Südafrika finanzierten. Ab und zu ging eine Mine oder ein Schuldner pleite, aber nie auf Kosten der Steuerzahler! Das damalige System hatte auch seine Krisen und Crashs, aber sie waren kurz, das System korrigierte sich von alleine. Und der Goldstandard garantierte, dass Geld und Kredit nicht beliebig vermehrt werden konnten. Auch in unserer Zeit müsste es profitabel sein, in Südamerika und Südostasien zu investieren – wenn der moderne Finanzkapitalismus, der im Grunde mit der Marktwirtschaft gebrochen hat, das System nicht missbraucht und denatuiert hätte.
10
Die Krise ist nicht ausgestanden, sie wird wieder und wieder an anderen Stellen ausbrechen. Brasilien erlebt seit Wochen hohe Kapitalabflüsse. Und selbst Argentinien, dessen Währung fest an den Dollar gekoppelt ist, wird sich wohl nicht halten lassen. Auf der Tagung von Weltbank und IWF im Oktober konnten sich die Argentinier zwar neue Kredite in Höhe von 5,7 Milliarden Dollar sichern. Aber diese reichen gerade aus, um den Schuldendienst bis zum ersten Quartal 1999 leisten zu können. Und was passiert dann? Dass Argentinien inzwischen den Rest seiner Goldreserven verschleudert hat, war entweder ein Akt der Dummheit oder der Verzweiflung. Es wäre besser gewesen, die Südamerikaner und die Asiaten hätten sich nie in die Abhängigkeit der internationalen Banken und Finanzorganisationen begeben und hätten sich – wie im 19. Jahrhundert – statt dessen langfristiges privates Kapital für rentable und vernünftige Projekte gesichert.
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In den Stürmen, die 1998 durch das Weltfinanzsystem fegten, stand Europa wie eine Festung – abgesehen von den Aktienmärkten, die hierzulande sogar schneller als in New York fielen, weil die Akteure Bargeld brauchten. (In einer Liquiditätskrise wird eben alles verkauft, ungeachtet der Qualität. Sie hätten auch Gold verkauft, wenn sie welches gehabt hätten.) Die Politiker reden sich nun ein, die relative Ruhe in Europa sei dem wunderbaren Projekt Euro zu verdanken. Man hat offenbar bereits vergessen, dass die Bundesbank in ihrem berühmten Konvergenz-Bericht klipp und klar feststellte, dass die meisten Euro-Teilnehmer die Voraussetzungen für das Währungsexperiment nicht erfüllen konnten. Wenn es schiefgeht, kann die Bundesbank nachher mit Recht darauf verweisen, dass sie gewarnt und nie ihr Placet gegeben hat. Sie hat sich lediglich der politischen Entscheidung gebeugt. Wahr ist nach wie vor, dass der Maastrichter Vertrag schwerste Mängel aufweist, dass der Euro noch völlig unerprobt ist und dass Europa nur deswegen bisher von der Krise halbwegs verschont blieb, weil die Verantwortung für die Stabilität des Finanzsystems in den bewährten Händen der Deutschen Bundesbank lag, an der sich die Nachbarn orientierten. Im Januar 1999 muss diese Bundesbank die Verantwortung abgeben. Aber niemand weiss bisher, an wen. Die Aufgabenteilung zwischen Europäischer Zentralbank und nationalen Notenbanken ist keineswegs eindeutig geklärt: Aufgrund der dubiosen Konstruktion des Maastrichter Vertrages kann die EZB in Krisenzeiten nur schwer als «lender of last resort» tätig werden, und dazu wird die unqualifizierte Einflussnahme sozialistischer Politiker in Bonn und Paris kommen. Die Zinskonvergenz in der EU, durch die italienische Staatsanleihen wunderbarerweise fast auf den Wert deutscher Bundesanleihen angehoben wurden, war pikanterweise den Spekulationsgeschäften der Hedge-Fonds zu verdanken, die damit der Politik einen Gefallen taten. So liess sich die heile Euro-Welt vorgaukeln. Den Verantwortlichen ist nur zu raten, spätestens im Dezember die Lira und einige andere südeuropäische Währungen ein weiteres Mal abzuwerten.
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Stellen Sie sich darauf ein, dass das Währungschaos noch einige Jahre andauert, dass auch der Euro unter Beschuss gerät, dass der Dollar dann wieder gefragt sein könnte, dass sich die Aktienbaisse nach dem Ende der derzeitigen Atempause fortsetzt, dass der globale Finanzkapitalismus 1998 den Zenit seiner Macht überschritten hat, dass die Devisen- und Kapitalmärkte wieder mehr kontrolliert und reguliert werden, dass auch in den Büchern der europäischen Banken weitere faule Kredite versteckt sind, dass sich die russische Krise verschärft und ihre Schatten auf ganz Europa wirft, dass im schlimmsten Fall die Banken für ein paar Tage zumachen müssen – und dass sich am Ende der Krise neue langfristige Anlagemöglichkeiten bieten, nicht zuletzt in Japan und den Entwicklungsländern.
Vergessen Sie alles, was in den Zeitungen steht, auch über Gold. Das Problem des Goldes ist weniger ein Überangebot, sondern eine manipulativ zurückgestaute Nachfrage. Es wird immer auf die offiziellen Goldreserven verwiesen, aber diese sind winzig im Vergleich zum internationalen Finanzmarkt. Allein ein einziger Hedge-Fonds wie LTCM hätte die gesamten europäischen Goldreserven übernehmen können! Statt dessen haben die Fonds und die Grossbanken (im stillschweigenden Einvernehmen mit den Notenbanken!) Gold gedrückt, indem sie wie im Yen eine gigantische Short-Position aufbauten. Die Verantwortlichen fürchten, dass Gold steigen könnte, denn erst eine Goldhausse wäre das offensichtliche Indiz dafür, dass das Papiergeldsystem gescheitert ist. Gold stellt keine Zahlungsverpflichtung dar, steht für kein Kreditverhältnis. Es geht nie pleite, trägt kein Länderrisiko. Jetzt, 1998, schlüge die Stunde des Goldes – würde der Zeiger nicht angehalten.
Dr. Bruno Bandulet
Spekulanten-Dämmerung
Moderator: oegeat
-
Turon
Major Nasdaq companies
suspected of gimmicks,
tricks and lies!
In the following scene, although the dialog is fictional, the facts are real. The time is a few weeks from today; the place, the conference room aboard Air Force One, returning with the First Family and advisors after a brief excursion abroad.
The President stares blankly out at the clouds far below. Two economic advisors chat solemnly on a leather sofa directly to his front and left. The first, a CPA and formerly the head of a major accounting firm, has just been appointed to a second-tier position at the Treasury Department. The other, although not assigned an official government post, is a trusted friend from Texas.
The two debate quietly between themselves. But as their voices become more animated, Mr. Bush turns his head in their direction, reluctantly allowing himself to be drawn into the conversation. The CPA does most of the talking ...
Advisor 1: Remember when we moved in? Remember the mess the Clinton staffers left behind?
President: You mean the W's missing from the computer keyboards, and taped to the walls, the scrawly messages and other pranks.
Is that what's bothering you boys? Geez. I thought I told you we're not going to go there, we're not going to make a mountain out of a —
Advisor 1: Heck no. Who cares about that mess? That was just a subtle metaphor for the garbage that we're beginning to turn up in the economy.
The President, although barely into the dialog, already shows signs of impatience.
President: Look, fellas. You wanna gripe and groan about Clinton left-overs, hang-overs and work-overs, go ahead. But my stomach has no more room for this bellyaching than the average guy out there.
Advisor 1: No, no, no. This is different. It's not about scandal — it's about conspiracy. It's not about Washington — it's about Wall Street.
Advisor 2: Yeah. I agree.
President: What in tarnation are you talking about?
Advisor 1: Stocks, the stock market! It could make mincemeat out of our 2001 plans and sabotage every last great thing we're doing for the people who voted for us — or didn't vote for us. We're sitting here trying to figure out what the heck is going on, why the economy is turning down so fast ... why earnings are —
President: What's causing it?
Advisor 1: Earnings. They're not just getting banged up a bit ... they're shattered. Instantly. Like a windshield in a five-car wreck. Imagine little bits of glass spilling onto the asphalt.
President: OK. So Clinton has left us another little gift. So what else is new?
Advisor 1: I know what you're referring to. You're referring to the spiel Greenspan, Treasury and Commerce gave us in that ho-hum meeting last week in your office. All that stuff about "irrational expectations," "irrational p/e's" and other bits and pieces recycled from Greenspan's old "irrational exuberance" speech.
But that's not what we're talking about now. What we're talking about is new stuff. Mind-boggling, absolutely mind-boggling!
Advisor 2: That's what I say. Remember that discussion we had about how companies manipulate their earnings reports? We talked about it during the campaign once. But we all decided it was too dull and boring for the American public, that they wouldn't understand it. Or even if they did, they wouldn't give a damn. Now here we are ... and here it is — kicking everyone in the rear end, us included.
President: Oh yeah, right. I remember. The bogus profits. The accounting gimmicks, tricks, lies. OK. Gimme an update.
Advisor 1: The FASB, the Federal Accounting Standards Board, is finally shifting its stance, cracking down. And that's good. But what's not good is that, NOW, on our watch, it's hitting the fan. The shift is hitting the fan. The crackdown — and, more importantly, the crash in the tech stocks — is flushing the garbage out into public view.
President: Can you be more specific?
Advisor 1: Number one. Many larger companies bought up shares in young start-ups. Then they made a killing and played up their big stock profits in their earnings reports.
President: And all this was hidden?
Advisor 1: Quite the contrary. CEOs and their PR flacks always made a big point of bragging about how well they were doing. Intel and Yahoo did it. So did some big banks, like Morgan (now Morgan-Chase).
They did it in investor conference calls. They did it in their press releases on the Business Wire, to Bloomberg, CNBC, Reuters. But did they talk about their portfolio profits up front, in the headlines? No. Did they put it in the body copy? No. In the text anywhere? No. Where did they put it? Buried in the financials, in 8-point footnote text.
So the investor came away thinking that the companies' core operations were driving earnings skyward ... when it was really their stock market profits, which had nothing to do with their core operations.
President: They say we're good at spin. Hah! Sounds like we're amateurs compared to those guys.
Advisor 1: No kidding! Their spin completely mesmerized — hypnotized — investors, even sophisticated investors.
President: You don't really believe they fooled the Wall Street pros, do you?
Advisor 1: You're right. Lots of Wall Street analysts were part of the conspiracy. They played along. They trumpeted the per share earnings reports as nirvana.
They put out the spin that Clinton and Greenspan had created a miracle in the U.S. economy, that the manna from heaven would never end. Then the market tanked, and now this accounting thing is blowing up.
Here. I jotted down some notes on this: Yahoo, fourth quarter '99 report: Proudly announces revenues of $201 million.
Yahoo fourth quarter 2000: Operating revenues up 53% to $311 million. Good, right? But now Yahoo suddenly is disclosing a $163 million write-down on its stock portfolio!
President: But ...
Advisor 1: Wait, wait. There's more. Here's HP, Hewlett-Packard, forced to take a $48 million charge against earnings due to investments gone sour .... Amazon.com, forced to write down its $57.8 million investment in Pets.com when the online pet store closed its doors ... Microsoft, stuck with $5 billion of AT&T stock. Paid $50 a share for it in 1999, now worth $24 a share!
Heck, no wonder Bill Gates filed to sell more shares just the other day! Plus —
President: OK. I get the picture.
Advisor 1: What's important is that the CEOs are still trying to spin it — but the other way. Now they're saying: "It's fine. Core business is fine. These are merely freak events due to the market correction. Nothing to worry about."
But investors aren't buying it. They're telling 'em the same thing I'd be telling 'em:
"What's with you guys? When the total profit picture is good, you play up the total profits and hide the fact that they're really from your stock portfolio. But when the total profit picture turns sour, you pooh-pooh the results with the excuse that it's 'just' the stock portfolio. Sorry, buster, but you can't have it both ways."
President: Number two?
Advisor 1: The second accounting gimmick that's backfiring is trumped-up sales — sales that weren't really sales to begin with, that are now going up in smoke.
Barter was the primary device. For example, Internet companies bartered ad space on their sites for ad space on other sites. Granted, this was a slick strategy to gain exposure on the Web. They didn't have to pony up millions of dollars for ads — all they had to do was offer space on their own website.
But now get this: Even though it was strictly barter, many companies still booked it as "revenue." So, to the investor, it looked like they were racking up big bucks for all that ad space they "sold."
President: Unbelievable.
Advisor 1: But it's fact. Meanwhile, Amazon.com was counting on bartering ad revenues from affiliates like Furniture.com and Living.com.
But now that these two dot-coms have gone belly-up, Amazon has been forced to reverse $145 million in revenue it booked from future barter deals. And it's not alone.
President: Who else?
Advisor 1: A guy I'm talking to is looking into NBC Internet, an NBC offspring. He says more than 36% of its revenue in the latest quarter was pure fiction 'cause of this bartering gimmick.
These bozos bartered for advertising with other companies, even got some stock in the other companies in the bargain. Then they tried to pass it all off as real revenue. They thought they were smart. But none of this bogus revenue can possibly flow to the bottom line.
President: And now?
Advisor 1: Now NBCI's barter "revenue" has hit the ground like dead turkey. Investors finally got wise and punished the stock mercilessly, down all the way from $106 per share a year ago to $3 and change right now. Can you believe that? $106 to $3?!
President: Look. I know some of you guys like to play these stocks on the sly, and I know you're hurting. But I'm out of that business, have been for a long time. I don't care if some of these stocks go to zero. I want to know what this means to us.
While Air Force One approaches the North American Continent, the two advisors remind the President of the impact these stock market disasters can have on the economy.
Advisor 1: We've talked before about the "reverse wealth effect." But it's worse than we thought.
Consumer sentiment has just taken the worst plunge in a decade. Americans are obviously shell-shocked by the sudden fall in their stocks, by the gaping hole in their mutual fund statements, by the sudden rash of layoffs.
So they're recoiling from big expenditures, which is gonna drive earnings and stocks into another tailspin ... and cause an even deeper plunge in consumer sentiment.
This is a vicious, vicious cycle. It's going to have a dramatic impact on your popularity ratings.
The President fidgets and his body language belies deep concern. The advisors can almost read his mind. They know one of his fears is becoming another one-term president, just like his father. The former accounting firm CEO decides to quickly change the subject by moving on to the next item on his list.
Advisor 1: Deception number three. Lots of company insiders had huge personal stakes in their companies' shares. These guys knew that to get rich personally, they had to convince Wall Street to hype their shares; and to hype the shares, the Wall Street gurus needed strong sales figures. No ... I take that back. Not just "strong" sales. They needed rapidly accelerating sales.
So they told their salespeople to go to their customers and say: "Don't give us any cash. Don't even give us any promissory notes. Just give us some shares in your company. The equipment is free for now."
Then they're suddenly booking big sales again, Wall Street has the ammunition to hype up their stock ,and everyone's in pig heaven.
President: How common was this?
Advisor 1: Rampant, absolutely rampant.
Take Lucent, for example. It lost hundreds of millions of dollars in so-called "sales" to companies that later went bankrupt.
Take Qualcomm. It lent $4.5 billion to Globalstar through vendor financing, and now Globalstar has suspended payments on its debt. Qualcomm says this will only have a "slight negative impact" on operating earnings. But $4.5 billion? Come on now!
Scores of other companies are in the same boat.
President: Go on.
Advisor 1: Number four. Stock options. These were used as a carrot — I mean a gi-gan-tic carrot — to entice talent. I told you how CEOs and other insiders with a piece of the action will do almost anything to goose up sales and earnings. Well, it's mostly because of these options.
Everyone knew options were part and parcel of the compensation packages, that they are really a kind of salary expense. But did the companies report them as an expense? No way. Again, earnings were exaggerated and shareholders got the raw end of the deal.
Yahoo again: The company relied heavily on stock options to pay staffers, but wouldn't book them as an expense. Would it have made a big difference? You're darn tootin' it would have!
In 1999, Yahoo's reported net income was $61 million. Factor in all those stock options as a cash expense, and Yahoo would have lost $256 million. The stock has since plummeted more than 80%.
President: Are you done?
Advisor 1: No. I still haven't told you about the main one — the flaky, "intangible assets" that were used to bloat balance sheets. This is also backfiring smack in their faces — and ours.
President: For example?
Advisor 1: "Intellectual capital" is one gimmick. It's supposed to be tied to all those smart people a company has working for it — the same ones who are now leaving. So it's backfiring. As soon as these employees start to realize their options aren't worth the paper they're printed on, they walk.
Or they get canned because now, suddenly, they're not "capital" any more — they're just "overhead." Poof! Intellectual capital is history.
"Goodwill" is an even bigger gimmick. You probably remember it from the old days in Texas when oil money ran dry and all those Texas S&Ls had to be bailed out. The S&Ls weren't worth a dime — they had more debts than assets — but they were bailed out with big money. So on the balance sheet, those big bucks were recorded as "goodwill." Remember that?
President: Well ... uhm ... yes, sure.
Advisor 1: OK. Good. 'Cause then you'll understand better what's going on now — they've done essentially the same thing in this new, high-tech merger mania.
Some goodwill on the books is justifiable. But today's accountants are stuffing goodwill into the asset side of their ledgers with the sole purpose of trying to justify the outrageous prices paid to acquire other companies.
I'm not talking just little techie companies. I'm talking about almost all of the big merger-maniac firms. Those CFOs were tripping all over one another to bid outrageous prices, far more than any serious bean counter could justify. But they came up with a simple formula: Purchase price = real value + goodwill.
The President is a bit confused and raises his eyebrows toward his old friend from Texas.
Advisor 2: Goodwill is the fudge-factor. Whatever the difference was between what they paid for an acquisition and what it was really worth — that was mostly recorded as "goodwill."
President: Give me a real example.
Advisor 1: Look at this supposedly hot Internet company. Just a year ago, how much goodwill do you think it had on its books? I'll tell you. Zero! Then it acquired a company and ... presto ... suddenly it's bloated up to the gizzards with $18.9 billion of goodwill, according to its September 2000 balance sheet. $18.9 billion! Wanna know how much they got in equity, in net worth? Only $19.7 billion!
Think about that. Less than $20 billion net worth; of which almost $19 billion is intangible goodwill. Take away the goodwill, and you're left with less than $1 billion in net worth.
Mr. Bush glances back out the window. The clouds below seem nearer now.
President: We're going to be landing soon. And you know something? We're not going to be landing on Wall Street. We're going to be landing in DC. So give me the big picture about how this affects us in Washington, inside the Beltway.
Advisor 2: Sorry, sir. But remember how Clinton talked about all the wealth he created for the American people? Remember how we had such a tough time fighting that campaign theme on the Gore side? Well, this is it.
President: This is what?
Advisor 2: The wealth, sir. These accounting gimmicks — these bogus assets and bogus earnings and bogus sales and bogus equity of the shareholders — these are big chunks of the so-called "wealth" Clinton supposedly created.
You go to these companies, including some big old-economy banks, telecom giants, industrial monoliths — you name it — and they show you all these impressive numbers on their balance sheets ... but then, when you do on-site walk-throughs, you can't find any of the stuff. It's intangible, invisible, mostly fluff.
President: So what's happening now?
Advisor 1: Now, the fat lady is singing on Wall Street. And as she sings, guess who enters stage left — here in Washington? You. You walk onto the stage, and you ask ...
"Where the heck is all that wealth?"
"'Twas never there to begin with," sings the fat lady from afar.
But we can't hear her any more, 'cause now the audience is shouting. The audience — our public — is yelling out: "The emperor has no clothes! The emperor has no clothes!"
That's you, Mr. President — you're the emperor in this scene. But it's not your fault, sir. What's really happening is that the goodwill is turning into ill will.
Investors are no longer enamored with the promise; they don't want any more "intangible assets." Instead, they're starting to focus on old, supposedly outdated concepts, like "book value" on fixed assets like real estate, machinery, equipment.
Suddenly, they realize that even after they add up all the tangible assets, their once-favorite companies have little more than a tiny fraction of their share values in real, live assets.
President: Then what?
Advisor 1: Then investors realize that this wasn't pig heaven after all.
President: What was it?
Advisor 1: A pig in a poke.
President: I see your point. But what percentage of voters are investors?
Advisor 1: Are you kidding? Gimme a break ... uhm ... sorry, sir ... I mean, give me some time to look into that, and I'll get the exact stats for you ... but for now, I think you can assume that the overwhelming majority of the population — certainly most of our people out there — are investors.
President: Look fellas. I see your point. But I think all of this has a simple solution: Tax cuts and rate cuts. We cut both. We pump money into the economy from both sides. That will overcome all of this. So don't you worry. Give us a few months — six at the outside — and we'll be sailing along beautifully with hardly a cloud in the sky.
The Fed did cut interest rates. And Congress did pass Mr. Bush's tax cut. But neither action had much impact. The dramatic plunge consumer sentiment, first reported at the end of January, soon turned into an all-out consumer buyer's strike.
With the stock market in shambles and the economy in a recession, the two advisors are back on Air Force One, near the cockpit. One buries his head in his hands, shaking it rhythmically from side to side, bemoaning the fact that he has been able to do so little to help the President rescue the nation from economic disaster.
Advisor 3: I can't hack it any more. The more drastic the government measures, the more intense the consumer fears. They say: "If the government is trying so hard to end the crisis, the crisis must be a lot worse than we thought." There's no way we can convince them otherwise. I'm desperate, totally desperate.
Give me a $100 bill! I want to throw it out the window ... so that at least ONE American investor can find it and be happy today.
Advisor 4: No. Here's two $50 bills. Throw these out the window and let TWO Americans be happy!
Copilot, poking his head back into the cabin: Shut up or we'll throw both you clowns out the window and make 200 MILLION Americans happy.
Back To The Present ...
The scene fades; and we're back to the present. Our next task: Figure out the consequences and what to do about it.
Consequence #1. Stock market sinkhole. When bogus earnings disappear, stock prices don't just fall in price — most get sucked down a vortex, never to return to previous highs. Example: Sunbeam has gone from $53 a share to under 53 cents, never recovering from SEC charges and stockholder lawsuits.
Consequence #2. Shattered investor confidence. Right now, the main factors holding stocks at current levels are trust and faith. Once the truths revealed here come out, that faith is going to turn to fear —even lust for revenge.
Even if you assumed, hypothetically, that all earnings are solid and valid, you'd still have to confront this inescapable fact:
The Nasdaq-100 is now trading for 164 times earnings. Just five years ago, it was selling for just 23 times earnings. To get back to those levels, it would have to fall close to 85%.
Crazy, isn't it? But true.
And don't be lured into the blue-chip Dow stocks as a safe haven. The Dow is also overpriced. Its historical norm is 13 times earnings. To return to that level, the Dow would have to lose nearly half its value, cratering to about 5400.
Consequence #3: Collapsing consumer confidence. Bamboozled by corporate tricks and devastating losses in the market, consumer confidence is sure to get whacked over the head. Indeed, it's already plunging — as evidenced by retail chain store sales at their lowest level in 30 years ... auto sales falling a record 8% in December ... and factory orders plunging to a level not seen since the 1991 recession.
That's why Sears is closing 89 stores ... Office Depot is shutting down 70 outlets and giving pink slips to 10% of its sales force ... and Montgomery Ward has closed its doors completely.
But this is just the beginning. I've told you in recent issues how the stock market declines over the last year wiped $4 trillion out of investors' accounts. That was a hard pill to swallow. Indeed, the net worth of households fell $875 billion in the last quarter alone — an average of $8,750 per family.
You don't need an economics degree to figure out that these losses are going to dramatically cut into consumers' spending habits.
Consequence #4. Soaring corporate bankruptcies. Corporate debt in America has reached an astounding $4.6 trillion, up from $2.5 trillion just a decade ago. Many companies are drowning in a sea of red ink, and we could soon see one huge company after another seek protection from its creditors by declaring bankruptcy.
In December, I told you about 168 publicly-owned companies that have more debt than assets — and another 668 companies so deep in the red, they may not last beyond the next year.
When these companies go belly-up, bondholders will get pennies on the dollar from their investments. Shareholders will end up with nothing. Another huge chunk of the wealth will disappear.
Here's what to do in this stage
of the crisis ...
On the surface, the markets appear to have stabilized. And Wall Street's stock promoters will continue to trumpet the Fed rate cuts to get you back into stocks. Don't listen to them.
Unless you're a trader, stay out. All those corporate accounting tricks are just beginning to backfire, and another round of steep losses lies dead ahead — in the Nasdaq, the Dow and the S&P.
Among the worst hit will be companies that are still playing games with their earnings. Just over a year ago, in the heat of the wildest, craziest bull market in history, we ripped the lid off these corporate earnings deceptions and exposed them as one of the worst and biggest con games in the country. Now, as I illustrated above, those chickens have come home to roost.
As you may recall, we listed 100 large companies that we suspected of some of the worst shenanigans (issue #305, September 1999).
Well, many have already suffered plunging earnings, and still more are about to meet the same fate.
Ditto for their shares. Just a few months after we issued that list, they began to plunge and have been getting clobbered ever since — some down 68%, 72%, even 84%.
Now, in this issue, we've included a fresh, new list. These are the 100 largest companies with the largest gaps between their reported earnings and their operating cash flow.
No, we can't accuse them of wrongdoing. Nor do we have specific evidence of accounting gimmickry — yet.
But months from now, you'll probably find that a large proportion have been manipulating their earnings. As an investor, you can't wait until then. You have to act now to get rid of these shares. Plus, if you have speculative funds, buy investments designed to profit from their demise.
Larry Edelson
suspected of gimmicks,
tricks and lies!
In the following scene, although the dialog is fictional, the facts are real. The time is a few weeks from today; the place, the conference room aboard Air Force One, returning with the First Family and advisors after a brief excursion abroad.
The President stares blankly out at the clouds far below. Two economic advisors chat solemnly on a leather sofa directly to his front and left. The first, a CPA and formerly the head of a major accounting firm, has just been appointed to a second-tier position at the Treasury Department. The other, although not assigned an official government post, is a trusted friend from Texas.
The two debate quietly between themselves. But as their voices become more animated, Mr. Bush turns his head in their direction, reluctantly allowing himself to be drawn into the conversation. The CPA does most of the talking ...
Advisor 1: Remember when we moved in? Remember the mess the Clinton staffers left behind?
President: You mean the W's missing from the computer keyboards, and taped to the walls, the scrawly messages and other pranks.
Is that what's bothering you boys? Geez. I thought I told you we're not going to go there, we're not going to make a mountain out of a —
Advisor 1: Heck no. Who cares about that mess? That was just a subtle metaphor for the garbage that we're beginning to turn up in the economy.
The President, although barely into the dialog, already shows signs of impatience.
President: Look, fellas. You wanna gripe and groan about Clinton left-overs, hang-overs and work-overs, go ahead. But my stomach has no more room for this bellyaching than the average guy out there.
Advisor 1: No, no, no. This is different. It's not about scandal — it's about conspiracy. It's not about Washington — it's about Wall Street.
Advisor 2: Yeah. I agree.
President: What in tarnation are you talking about?
Advisor 1: Stocks, the stock market! It could make mincemeat out of our 2001 plans and sabotage every last great thing we're doing for the people who voted for us — or didn't vote for us. We're sitting here trying to figure out what the heck is going on, why the economy is turning down so fast ... why earnings are —
President: What's causing it?
Advisor 1: Earnings. They're not just getting banged up a bit ... they're shattered. Instantly. Like a windshield in a five-car wreck. Imagine little bits of glass spilling onto the asphalt.
President: OK. So Clinton has left us another little gift. So what else is new?
Advisor 1: I know what you're referring to. You're referring to the spiel Greenspan, Treasury and Commerce gave us in that ho-hum meeting last week in your office. All that stuff about "irrational expectations," "irrational p/e's" and other bits and pieces recycled from Greenspan's old "irrational exuberance" speech.
But that's not what we're talking about now. What we're talking about is new stuff. Mind-boggling, absolutely mind-boggling!
Advisor 2: That's what I say. Remember that discussion we had about how companies manipulate their earnings reports? We talked about it during the campaign once. But we all decided it was too dull and boring for the American public, that they wouldn't understand it. Or even if they did, they wouldn't give a damn. Now here we are ... and here it is — kicking everyone in the rear end, us included.
President: Oh yeah, right. I remember. The bogus profits. The accounting gimmicks, tricks, lies. OK. Gimme an update.
Advisor 1: The FASB, the Federal Accounting Standards Board, is finally shifting its stance, cracking down. And that's good. But what's not good is that, NOW, on our watch, it's hitting the fan. The shift is hitting the fan. The crackdown — and, more importantly, the crash in the tech stocks — is flushing the garbage out into public view.
President: Can you be more specific?
Advisor 1: Number one. Many larger companies bought up shares in young start-ups. Then they made a killing and played up their big stock profits in their earnings reports.
President: And all this was hidden?
Advisor 1: Quite the contrary. CEOs and their PR flacks always made a big point of bragging about how well they were doing. Intel and Yahoo did it. So did some big banks, like Morgan (now Morgan-Chase).
They did it in investor conference calls. They did it in their press releases on the Business Wire, to Bloomberg, CNBC, Reuters. But did they talk about their portfolio profits up front, in the headlines? No. Did they put it in the body copy? No. In the text anywhere? No. Where did they put it? Buried in the financials, in 8-point footnote text.
So the investor came away thinking that the companies' core operations were driving earnings skyward ... when it was really their stock market profits, which had nothing to do with their core operations.
President: They say we're good at spin. Hah! Sounds like we're amateurs compared to those guys.
Advisor 1: No kidding! Their spin completely mesmerized — hypnotized — investors, even sophisticated investors.
President: You don't really believe they fooled the Wall Street pros, do you?
Advisor 1: You're right. Lots of Wall Street analysts were part of the conspiracy. They played along. They trumpeted the per share earnings reports as nirvana.
They put out the spin that Clinton and Greenspan had created a miracle in the U.S. economy, that the manna from heaven would never end. Then the market tanked, and now this accounting thing is blowing up.
Here. I jotted down some notes on this: Yahoo, fourth quarter '99 report: Proudly announces revenues of $201 million.
Yahoo fourth quarter 2000: Operating revenues up 53% to $311 million. Good, right? But now Yahoo suddenly is disclosing a $163 million write-down on its stock portfolio!
President: But ...
Advisor 1: Wait, wait. There's more. Here's HP, Hewlett-Packard, forced to take a $48 million charge against earnings due to investments gone sour .... Amazon.com, forced to write down its $57.8 million investment in Pets.com when the online pet store closed its doors ... Microsoft, stuck with $5 billion of AT&T stock. Paid $50 a share for it in 1999, now worth $24 a share!
Heck, no wonder Bill Gates filed to sell more shares just the other day! Plus —
President: OK. I get the picture.
Advisor 1: What's important is that the CEOs are still trying to spin it — but the other way. Now they're saying: "It's fine. Core business is fine. These are merely freak events due to the market correction. Nothing to worry about."
But investors aren't buying it. They're telling 'em the same thing I'd be telling 'em:
"What's with you guys? When the total profit picture is good, you play up the total profits and hide the fact that they're really from your stock portfolio. But when the total profit picture turns sour, you pooh-pooh the results with the excuse that it's 'just' the stock portfolio. Sorry, buster, but you can't have it both ways."
President: Number two?
Advisor 1: The second accounting gimmick that's backfiring is trumped-up sales — sales that weren't really sales to begin with, that are now going up in smoke.
Barter was the primary device. For example, Internet companies bartered ad space on their sites for ad space on other sites. Granted, this was a slick strategy to gain exposure on the Web. They didn't have to pony up millions of dollars for ads — all they had to do was offer space on their own website.
But now get this: Even though it was strictly barter, many companies still booked it as "revenue." So, to the investor, it looked like they were racking up big bucks for all that ad space they "sold."
President: Unbelievable.
Advisor 1: But it's fact. Meanwhile, Amazon.com was counting on bartering ad revenues from affiliates like Furniture.com and Living.com.
But now that these two dot-coms have gone belly-up, Amazon has been forced to reverse $145 million in revenue it booked from future barter deals. And it's not alone.
President: Who else?
Advisor 1: A guy I'm talking to is looking into NBC Internet, an NBC offspring. He says more than 36% of its revenue in the latest quarter was pure fiction 'cause of this bartering gimmick.
These bozos bartered for advertising with other companies, even got some stock in the other companies in the bargain. Then they tried to pass it all off as real revenue. They thought they were smart. But none of this bogus revenue can possibly flow to the bottom line.
President: And now?
Advisor 1: Now NBCI's barter "revenue" has hit the ground like dead turkey. Investors finally got wise and punished the stock mercilessly, down all the way from $106 per share a year ago to $3 and change right now. Can you believe that? $106 to $3?!
President: Look. I know some of you guys like to play these stocks on the sly, and I know you're hurting. But I'm out of that business, have been for a long time. I don't care if some of these stocks go to zero. I want to know what this means to us.
While Air Force One approaches the North American Continent, the two advisors remind the President of the impact these stock market disasters can have on the economy.
Advisor 1: We've talked before about the "reverse wealth effect." But it's worse than we thought.
Consumer sentiment has just taken the worst plunge in a decade. Americans are obviously shell-shocked by the sudden fall in their stocks, by the gaping hole in their mutual fund statements, by the sudden rash of layoffs.
So they're recoiling from big expenditures, which is gonna drive earnings and stocks into another tailspin ... and cause an even deeper plunge in consumer sentiment.
This is a vicious, vicious cycle. It's going to have a dramatic impact on your popularity ratings.
The President fidgets and his body language belies deep concern. The advisors can almost read his mind. They know one of his fears is becoming another one-term president, just like his father. The former accounting firm CEO decides to quickly change the subject by moving on to the next item on his list.
Advisor 1: Deception number three. Lots of company insiders had huge personal stakes in their companies' shares. These guys knew that to get rich personally, they had to convince Wall Street to hype their shares; and to hype the shares, the Wall Street gurus needed strong sales figures. No ... I take that back. Not just "strong" sales. They needed rapidly accelerating sales.
So they told their salespeople to go to their customers and say: "Don't give us any cash. Don't even give us any promissory notes. Just give us some shares in your company. The equipment is free for now."
Then they're suddenly booking big sales again, Wall Street has the ammunition to hype up their stock ,and everyone's in pig heaven.
President: How common was this?
Advisor 1: Rampant, absolutely rampant.
Take Lucent, for example. It lost hundreds of millions of dollars in so-called "sales" to companies that later went bankrupt.
Take Qualcomm. It lent $4.5 billion to Globalstar through vendor financing, and now Globalstar has suspended payments on its debt. Qualcomm says this will only have a "slight negative impact" on operating earnings. But $4.5 billion? Come on now!
Scores of other companies are in the same boat.
President: Go on.
Advisor 1: Number four. Stock options. These were used as a carrot — I mean a gi-gan-tic carrot — to entice talent. I told you how CEOs and other insiders with a piece of the action will do almost anything to goose up sales and earnings. Well, it's mostly because of these options.
Everyone knew options were part and parcel of the compensation packages, that they are really a kind of salary expense. But did the companies report them as an expense? No way. Again, earnings were exaggerated and shareholders got the raw end of the deal.
Yahoo again: The company relied heavily on stock options to pay staffers, but wouldn't book them as an expense. Would it have made a big difference? You're darn tootin' it would have!
In 1999, Yahoo's reported net income was $61 million. Factor in all those stock options as a cash expense, and Yahoo would have lost $256 million. The stock has since plummeted more than 80%.
President: Are you done?
Advisor 1: No. I still haven't told you about the main one — the flaky, "intangible assets" that were used to bloat balance sheets. This is also backfiring smack in their faces — and ours.
President: For example?
Advisor 1: "Intellectual capital" is one gimmick. It's supposed to be tied to all those smart people a company has working for it — the same ones who are now leaving. So it's backfiring. As soon as these employees start to realize their options aren't worth the paper they're printed on, they walk.
Or they get canned because now, suddenly, they're not "capital" any more — they're just "overhead." Poof! Intellectual capital is history.
"Goodwill" is an even bigger gimmick. You probably remember it from the old days in Texas when oil money ran dry and all those Texas S&Ls had to be bailed out. The S&Ls weren't worth a dime — they had more debts than assets — but they were bailed out with big money. So on the balance sheet, those big bucks were recorded as "goodwill." Remember that?
President: Well ... uhm ... yes, sure.
Advisor 1: OK. Good. 'Cause then you'll understand better what's going on now — they've done essentially the same thing in this new, high-tech merger mania.
Some goodwill on the books is justifiable. But today's accountants are stuffing goodwill into the asset side of their ledgers with the sole purpose of trying to justify the outrageous prices paid to acquire other companies.
I'm not talking just little techie companies. I'm talking about almost all of the big merger-maniac firms. Those CFOs were tripping all over one another to bid outrageous prices, far more than any serious bean counter could justify. But they came up with a simple formula: Purchase price = real value + goodwill.
The President is a bit confused and raises his eyebrows toward his old friend from Texas.
Advisor 2: Goodwill is the fudge-factor. Whatever the difference was between what they paid for an acquisition and what it was really worth — that was mostly recorded as "goodwill."
President: Give me a real example.
Advisor 1: Look at this supposedly hot Internet company. Just a year ago, how much goodwill do you think it had on its books? I'll tell you. Zero! Then it acquired a company and ... presto ... suddenly it's bloated up to the gizzards with $18.9 billion of goodwill, according to its September 2000 balance sheet. $18.9 billion! Wanna know how much they got in equity, in net worth? Only $19.7 billion!
Think about that. Less than $20 billion net worth; of which almost $19 billion is intangible goodwill. Take away the goodwill, and you're left with less than $1 billion in net worth.
Mr. Bush glances back out the window. The clouds below seem nearer now.
President: We're going to be landing soon. And you know something? We're not going to be landing on Wall Street. We're going to be landing in DC. So give me the big picture about how this affects us in Washington, inside the Beltway.
Advisor 2: Sorry, sir. But remember how Clinton talked about all the wealth he created for the American people? Remember how we had such a tough time fighting that campaign theme on the Gore side? Well, this is it.
President: This is what?
Advisor 2: The wealth, sir. These accounting gimmicks — these bogus assets and bogus earnings and bogus sales and bogus equity of the shareholders — these are big chunks of the so-called "wealth" Clinton supposedly created.
You go to these companies, including some big old-economy banks, telecom giants, industrial monoliths — you name it — and they show you all these impressive numbers on their balance sheets ... but then, when you do on-site walk-throughs, you can't find any of the stuff. It's intangible, invisible, mostly fluff.
President: So what's happening now?
Advisor 1: Now, the fat lady is singing on Wall Street. And as she sings, guess who enters stage left — here in Washington? You. You walk onto the stage, and you ask ...
"Where the heck is all that wealth?"
"'Twas never there to begin with," sings the fat lady from afar.
But we can't hear her any more, 'cause now the audience is shouting. The audience — our public — is yelling out: "The emperor has no clothes! The emperor has no clothes!"
That's you, Mr. President — you're the emperor in this scene. But it's not your fault, sir. What's really happening is that the goodwill is turning into ill will.
Investors are no longer enamored with the promise; they don't want any more "intangible assets." Instead, they're starting to focus on old, supposedly outdated concepts, like "book value" on fixed assets like real estate, machinery, equipment.
Suddenly, they realize that even after they add up all the tangible assets, their once-favorite companies have little more than a tiny fraction of their share values in real, live assets.
President: Then what?
Advisor 1: Then investors realize that this wasn't pig heaven after all.
President: What was it?
Advisor 1: A pig in a poke.
President: I see your point. But what percentage of voters are investors?
Advisor 1: Are you kidding? Gimme a break ... uhm ... sorry, sir ... I mean, give me some time to look into that, and I'll get the exact stats for you ... but for now, I think you can assume that the overwhelming majority of the population — certainly most of our people out there — are investors.
President: Look fellas. I see your point. But I think all of this has a simple solution: Tax cuts and rate cuts. We cut both. We pump money into the economy from both sides. That will overcome all of this. So don't you worry. Give us a few months — six at the outside — and we'll be sailing along beautifully with hardly a cloud in the sky.
The Fed did cut interest rates. And Congress did pass Mr. Bush's tax cut. But neither action had much impact. The dramatic plunge consumer sentiment, first reported at the end of January, soon turned into an all-out consumer buyer's strike.
With the stock market in shambles and the economy in a recession, the two advisors are back on Air Force One, near the cockpit. One buries his head in his hands, shaking it rhythmically from side to side, bemoaning the fact that he has been able to do so little to help the President rescue the nation from economic disaster.
Advisor 3: I can't hack it any more. The more drastic the government measures, the more intense the consumer fears. They say: "If the government is trying so hard to end the crisis, the crisis must be a lot worse than we thought." There's no way we can convince them otherwise. I'm desperate, totally desperate.
Give me a $100 bill! I want to throw it out the window ... so that at least ONE American investor can find it and be happy today.
Advisor 4: No. Here's two $50 bills. Throw these out the window and let TWO Americans be happy!
Copilot, poking his head back into the cabin: Shut up or we'll throw both you clowns out the window and make 200 MILLION Americans happy.
Back To The Present ...
The scene fades; and we're back to the present. Our next task: Figure out the consequences and what to do about it.
Consequence #1. Stock market sinkhole. When bogus earnings disappear, stock prices don't just fall in price — most get sucked down a vortex, never to return to previous highs. Example: Sunbeam has gone from $53 a share to under 53 cents, never recovering from SEC charges and stockholder lawsuits.
Consequence #2. Shattered investor confidence. Right now, the main factors holding stocks at current levels are trust and faith. Once the truths revealed here come out, that faith is going to turn to fear —even lust for revenge.
Even if you assumed, hypothetically, that all earnings are solid and valid, you'd still have to confront this inescapable fact:
The Nasdaq-100 is now trading for 164 times earnings. Just five years ago, it was selling for just 23 times earnings. To get back to those levels, it would have to fall close to 85%.
Crazy, isn't it? But true.
And don't be lured into the blue-chip Dow stocks as a safe haven. The Dow is also overpriced. Its historical norm is 13 times earnings. To return to that level, the Dow would have to lose nearly half its value, cratering to about 5400.
Consequence #3: Collapsing consumer confidence. Bamboozled by corporate tricks and devastating losses in the market, consumer confidence is sure to get whacked over the head. Indeed, it's already plunging — as evidenced by retail chain store sales at their lowest level in 30 years ... auto sales falling a record 8% in December ... and factory orders plunging to a level not seen since the 1991 recession.
That's why Sears is closing 89 stores ... Office Depot is shutting down 70 outlets and giving pink slips to 10% of its sales force ... and Montgomery Ward has closed its doors completely.
But this is just the beginning. I've told you in recent issues how the stock market declines over the last year wiped $4 trillion out of investors' accounts. That was a hard pill to swallow. Indeed, the net worth of households fell $875 billion in the last quarter alone — an average of $8,750 per family.
You don't need an economics degree to figure out that these losses are going to dramatically cut into consumers' spending habits.
Consequence #4. Soaring corporate bankruptcies. Corporate debt in America has reached an astounding $4.6 trillion, up from $2.5 trillion just a decade ago. Many companies are drowning in a sea of red ink, and we could soon see one huge company after another seek protection from its creditors by declaring bankruptcy.
In December, I told you about 168 publicly-owned companies that have more debt than assets — and another 668 companies so deep in the red, they may not last beyond the next year.
When these companies go belly-up, bondholders will get pennies on the dollar from their investments. Shareholders will end up with nothing. Another huge chunk of the wealth will disappear.
Here's what to do in this stage
of the crisis ...
On the surface, the markets appear to have stabilized. And Wall Street's stock promoters will continue to trumpet the Fed rate cuts to get you back into stocks. Don't listen to them.
Unless you're a trader, stay out. All those corporate accounting tricks are just beginning to backfire, and another round of steep losses lies dead ahead — in the Nasdaq, the Dow and the S&P.
Among the worst hit will be companies that are still playing games with their earnings. Just over a year ago, in the heat of the wildest, craziest bull market in history, we ripped the lid off these corporate earnings deceptions and exposed them as one of the worst and biggest con games in the country. Now, as I illustrated above, those chickens have come home to roost.
As you may recall, we listed 100 large companies that we suspected of some of the worst shenanigans (issue #305, September 1999).
Well, many have already suffered plunging earnings, and still more are about to meet the same fate.
Ditto for their shares. Just a few months after we issued that list, they began to plunge and have been getting clobbered ever since — some down 68%, 72%, even 84%.
Now, in this issue, we've included a fresh, new list. These are the 100 largest companies with the largest gaps between their reported earnings and their operating cash flow.
No, we can't accuse them of wrongdoing. Nor do we have specific evidence of accounting gimmickry — yet.
But months from now, you'll probably find that a large proportion have been manipulating their earnings. As an investor, you can't wait until then. You have to act now to get rid of these shares. Plus, if you have speculative funds, buy investments designed to profit from their demise.
Larry Edelson
