- The recent weakness in the stock market has wrought havoc
on investors. Mounting losses have been accompanied by increasing concern
on the part of Americans who are watching their dreams of financial security
waste away. Yet, as prices decline, Wall Street and the corporate media
are trying to persuade investors to buy and hold even more shares of stock.
- The public has been advised that this is just one more
temporarily painful correction in a long term bull market. It isn't. It
is a grueling prelude to annihilation. Four hundred years of market history
indicate that investors who heed the advice of Wall Street to buy and hold
for the long term are allowing themselves to be led to a stock market slaughterhouse.
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- On February 3, 2002, in an article titled, "Missing
The Overall", I alerted readers to the fact that the mainstream media
was misrepresenting the Enron scandal as an aberration of corporate corruption.
As I reported at the time, the Enron debacle was just a symptom of a corporate
epidemic:
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- "Many corporate empires have been built on such
accounting legerdemain, including General Electric (NBC), Viacom (CBS),
Disney (ABC), AOL/Time Warner (CNN, Time Magazine), News Corporation (Fox),
The Washington Post Company (Washington Post, Newsweek), the Tribune Corporation
(Chicago Tribune, Los Angeles Times), and the New York Times Company (New
York Times, Boston Globe).
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- Enron is the tip of an iceberg on which sits the entire
mainstream media.
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- A national association of accounting firms has called
on the Securities and Exchange Commission to require all publicly held
corporations to report real GAAP earnings. The return to ethical accounting
standards would mean that, in order to reflect the current valuation of
the Dow Industrials, the average would fall to 5825. In order to reach
the historical norm based on GAAP, the Dow would decline to 3300."
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- Since then, accounting scandals have rocked WorldCom,
Tyco, Qwest, Xerox, Adelphia, and many others. More corporate dominoes
are now on the verge of toppling.
-
- In February, the factual news as opposed to the
fiction that was reported on television and in the Wall Street Journal
was very bad. The accounting scam was beginning to unravel, and the
insanely overvalued market was vulnerable to a major decline. As trillions
of dollars were about to evaporate, Corporate America was reassuring investors
that the future was bright.
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- On July 17th, stocks temporarily rallied. After the close,
brokerage analysts continued to tell the public that the market is ready
to move much higher. I maintain that, as the economy has slowed, corporations
have further exaggerated their earnings in order to support their stock
prices. As a result, the gap between real corporate earnings and the phony
kind is larger than ever. Despite the carnage that has already occurred,
the long term future for investors is actually bleaker than it was in February.
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- My perception stands in stark contrast to the propaganda
that is being generated by Wall Street and the corporate media. They continue
to spoon-feed happy talk to investors who are desperate to hear that things
will improve. The professionals on the New York Stock Exchange are still
aggressively selling short while their employees exhort the public to aggressively
buy. Each rally is accompanied by brokerage firm proclamations of a new
bull market. The public is again being seduced with the promise of the
nonexistent economic recovery that is always just around the corner. Investors
are being told the pessimism is now so great that everyone who wanted to
sell must have already sold - meaning that the next major move will be
to the upside.
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- It is the same pitch that Wall Street and the corporate
media broadcast in 2000 and 2001. Their rhetoric was deceitful then, and
it still is. This is an ongoing swindle of the American people. Hard-earned
retirement accounts and pension funds are being obliterated. The faith
of average citizens in Big Business is being rewarded with poverty.
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- And it is going to get much, much worse.
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- The speculative mania began in 1994, shortly after Congress
overrode President Clinton's veto of legislation that protected corporate
executives from being sued by shareholders for lying about earnings. Freed
from civil liability, and faced with the prospect of making incredible
fortunes on their stock options, the leaders of America's public corporations
invented fairy tales in order to con the public into buying equities. The
result was "irrational exuberance" that ended in the first quarter
of 2000 with stocks more overvalued than at any time in history.
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- Every speculative mania of the last four hundred years
has made the round trip to its point of origin. Whether it was the Tulip
mania, or the South Sea bubble, or the stock market of the Roaring Twenties,
every mania has ended with a panic that dropped prices below where they
were before the speculation started. In the case of the Crash of 1929,
it took investors twenty-five years to get even. Unless this time is unique,
the market will return to the scene of the crime. It will drop to
at least the level where it was trading before the congressionally
endorsed corporate lying for dollars began in 1994. That means the major
averages will fall at least another fifty percent from here.
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- It will not be a straight-line drop. There were big bear
market rallies beginning in April and September of 2001. In the current
emotional environment, there can be a violent countertrend up move at any
time. When rallies do occur, they will doubtlessly be accompanied by orgasmic
screams of ecstasy from Wall Street. The shills for the financial establishment
will once again lure naïve investors into the market so the big boys
can sell equities short at higher, more profitable levels.
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- The reasons that are being given for buying stocks as
long term investments are false. The extremely high prices that Corporate
America has paid for buyouts and takeovers have created massive debt that
will take years to reduce. An enduring economic recovery will not occur
until the elimination of the tremendous corporate inventory overcapacity
that was built up during the acquisition frenzy.
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- While the market may look undervalued by comparison to
where it was a couple of years ago, the bargains are illusory. Stocks are
still extremely overvalued on an historical basis. On July 10, Merrill
Lynch recommended that investors buy Cisco Systems for the long term at
$13.51. This is the same Merrill Lynch that in 2000 told the public Cisco
was a winning investment for the long term at $82. Yet even now, gullible
investors have again charged in to buy Cisco shares based on Merrill's
recommendation.
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- The stock of Cisco Systems currently is selling at more
than five times above the historical norm for companies with a similar
growth rate. The firm's reported earnings do not include the cost of employee
stock options. If Cisco had acknowledged the expense of the options, its
reported earnings would have dropped by two thirds. The saving grace here
is that Merrill Lynch does not recommend stocks that are below three dollars
a share, so its days of conning the public into investing for the long
term in Cisco Systems are numbered.
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- The myth that investors are overly pessimistic was debunked
by Comstock Partners on July 12:
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- At the 1974 bottom cash at equity mutual funds was 11.7%
of assets, the percentage of bearish investment advisors was 67%, only
4% of stocks were above their own 200-day average and stocks on average
sold at 8 times earnings. We are nowhere near these numbers today. Currently,
cash is 5.3% of equity mutual funds assets, the percentage of bearish advisors
is 37%, stocks above their 200-day average are at 37% and the S&P 500
is at 40 times trailing reported earnings and 25 times consensus 2002 estimated
earnings.
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- Translated into English, Comstock's analysis demonstrates
that market sentiment is nowhere near the emotionally depressed level that
accompanies the end of a major decline.
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- A recent New York Times poll revealed that the average
expectation by investors is for double-digit returns on stock investments
over the next five years. That is not pessimistic. It is optimistic.
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- Last week, AOL conducted a poll posing the following
question: "What are you doing with your stocks?" Over sixty percent
of the respondents chose, "I'm leaving them alone. The market will
come back." That is not pessimistic. It is masochistic.
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- The Dow Industrials have begun to fall hard because foreign
investors who generally prefer to buy the stocks of household names
have begun taking their money out of America. According to a report
by the Federal Reserve, foreigners are now withdrawing their funds from
this country at a greatly accelerating pace. The reason is simple
they do not share the parochial view that George W. Bush is doing a great
job. Foreign money managers invested large amounts in America during the
mid to late 1990s, when they had confidence in the intelligence and skill
of a capable president. After almost two years of watching Bush in action,
they are now voting with their cash. These are votes that Antonin Scalia
is helpless to void. As a result, the blue chips and the American dollar
are getting pummeled.
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- There is reason to believe that a fresh spate of corporate
accounting scandals will soon arrive. The new "exaggerations"
will be even larger than most of those that occurred during better economic
times. Faced with the unpleasant task of reporting smaller profits, many
corporations have compensated by telling bigger lies. Standard and Poors
estimates that Raytheon may be reporting profits that are nearly 9,000
percent better than its "core" real numbers; Perkin-Elmer is
overstating earnings by 7,274 percent; The Gap by 1,047 percent; Apple
Computer by 1,003 percent; and Yahoo! by 956 percent.
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- According to the Associated Press, several Apple executives
sold company stock worth almost $50 million in the weeks before an earnings
warning caused Apple's shares to plunge. Chief Financial Officer Fred Anderson
was one of those who sold his stock just before the bad news was released
to the public. He claims that there is "nothing wrong" with what
he did.
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- This attitude toward cheating the shareholders has been
noticed overseas. Guido Rossi, a former chairman of Telecom Italia, said,
"What is lacking in the U.S. is a culture of shame. No business leader
in the U.S. is considered a thief if he does something wrong. It is a kind
of moral cancer."
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- Thus far, the favorite companies of American investors
have been largely spared. They will not be able to hide their lies much
longer. IBM is going to get nailed for accounting fraud, as will Intel
and Cisco and General Electric. The GE Capital division, which is the big
deal-making profit generator for the conglomerate, is a cesspool of accounting
corruption. General Electric, which owns NBC and is the most widely respected
company in America, is going to take a hard fall.
-
- So will the media conglomerates. They are still lying
about their earnings, too.
-
- When the bluest of the blue chips along with the
ostensible guardians of the truth - are caught cheating their shareholders,
the current crisis of confidence will turn into panic. Investors will not
trust business to be honest with them, nor will they trust the media to
honestly report what is going on. The result will be a terrifying freefall
in stock prices.
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- The Federal Reserve will do everything it can to stem
the tide, and huge short-term rallies will result. Massive Fed intervention
worked to end the crash in October 1987, but that frightening drop had
occurred within the context of the greatest bull market ever. The Fed tried
the same thing in September 2001, with only temporary success. The S&P
500 and the NASDAQ are now under the September low, because the most recent
intervention occurred within the context of what will be the greatest bear
market ever. The constant lowering of interest rates by Alan Greenspan
has not worked to stop the continuing deflation of the biggest speculative
bubble in human history. His intervention to stop a crash won't work this
time, either. Not for long.
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- What is going to happen to the market will devastate
most people. During the crash in 1929, one out of eighty Americans owned
stocks. Today, more than half do. The lives of trusting individuals who
bought the dream are going to be permanently damaged. The irreplaceable
money in the pension funds and 401(k) plans of millions of Americans will
vanish. This will mean a long term decline in the standard of living for
the majority of people in this country.
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- The aftermath of the stock market mania is going to be
heartbreaking. Innocent people will be crushed.
-
- Meanwhile, the guilty corporate aristocracy is crying
all the way to the Swiss bank. Relatively few of them will ever be made
to suffer for their banditry. The vast majority of corporate brigands will
ride off into the sunset with their ill-gotten loot. Like Al Dunlap of
Sunbeam and Gary Winnick of Global Crossing, their penalty for lying and
cheating and stealing from their shareholders will be a life sentence of
living in luxury.
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- What has been done cannot be dismissed as white collar
crime. Given the countless lives of employees and investors that have been
ruined by the corporate miscreants, they are guilty of crimes against humanity.
Yet their atrocities are excused by the mindless chorus of conservative
lemmings who continue to insist that there is absolutely nothing wrong
with American Big Business - except for the slanders manufactured against
it by wild-eyed communist critics.
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- Human nature never changes. There was mass euphoria at
the top in 2000, with the boom in technology ensuring permanent prosperity
and budget surpluses for as far as the eye could see. At the bottom, there
will be overwhelming despair that this country has not experienced since
the last stock mania bear market ended in 1932. There is nothing we can
now do to prevent it from happening; this is the inevitable day of reckoning
that follows the unraveling of the most audacious Ponzi scheme ever perpetrated.
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- Unfortunately, the impending disaster will be even worse
than it has to be. The remedies that have been proposed by George W. Bush
are transparently farcical, which guarantees a further worsening of what
is already a horrible situation. Bush appears to be totally out of his
depth - another Herbert Hoover - and the very real possibility exists that
he could produce similar results.
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- As was the case in the spring, Corporate America and
its mainstream media are saying that there is no reason to worry. The party
line is still that investors should be buying and holding stocks for the
long term. According to the current Wall Street marketing campaign, a falling
market is actually a good thing, because lower stock prices create bargains.
But there are no bargains during the collapse of a speculative mania. It
is vital to remember that, during a financial panic, just preserving what
you already have is a wonderful investment.
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- Thus far, believing the Wall Street hucksters has been
a painful mistake. If history proves to be an accurate guide, then continuing
to follow the self-serving advice of the financial establishment is going
to result in a nightmarish catastrophe for the average American.
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- http://www.buzzflash.com/contributors/2002/07/19_Slaughterhouse.html
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