[A-List] US: Investor confidence

[Sabri Oncu <soncu@xxxxxxxxxxx>]

The other day Michael Perelman posted this to PEN-L. It is by
Keynes, and according to Ian Murray, from "A Tract on Monetary
Reform":

> To convert the businessman into the profiteer
> is to strike a blow at capitalism, because it
> destroys the psychological equilibrium which
> permits the perpetuance of unequal rewards.
> The economic doctrine of normal profits, vaguely
> apprehended by everyone, is a necessary condition
> for the justification of capitalism.

Today there is this article in New York Times.

Sabri

++++++++++++++++++++


New York Times
June 2, 2002
What If Investors Won't Join the Party?
By GRETCHEN MORGENSON


By many measures, the United States economy is rebounding smartly
from its desultory performance in late 2001. But even as economic
output surges and corporate profits appear once more to be
rising, one closely watched indicator of economic oomph remains
depressed: the broad stock market indexes. All of the big-company
indexes, the ones that reflect what investors are most likely to
own through mutual funds, are still down for the year.

Because stocks normally begin to rise well before evidence of an
economic recovery drives up to the door, many investors are
baffled by the fact that the market is in reverse. And they are
angry, after already enduring two years of losses in the major
indexes.

Stocks may bounce back during the summer, of course, as investors
gain their footing in unstable times. Indeed, on Friday, stocks
rose slightly after the University of Michigan monthly consumer
confidence report showed confidence rising in May to its highest
level since December 2000.

But if stocks remain stuck in their underlying slump, consumers
may rein in their spending, which would damage a fragile economic
recovery. Even more ominous, if investors shun stocks for a
prolonged period, companies will find it much more difficult and
costly to raise the capital they need to expand their operations
and increase revenue and profits. That possibility is worrying
leaders of corporate America.

"The fundamental issue we're dealing with is uncertainty," said
Samuel J. Palmisano, president and chief executive of I.B.M. "It
is both geopolitical uncertainty in the aftermath of Sept. 11 and
the war on terrorism, and market uncertainty in reaction to the
flame-out of the dot-coms and Enron."

That instability is depressing business investment and weighing
down the stock market, Mr. Palmisano said. Investors are not only
focusing on fundamentals like a company's ability to generate
cash, he explained, but they are also demanding sound strategy,
skilled management and by-the-book accounting from companies. "It
is incumbent on business leadership to demonstrate that," Mr.
Palmisano said, "so our credibility will not be questioned."

Terrorist threats and fears about the possibility of nuclear war
between Pakistan and India have definitely added to market
jitters. A decline in the value of the dollar may be hurting
stock prices because it encourages foreign investors to
repatriate some funds they have held in dollar-denominated assets
like stocks. And what looked like a recovering economy early in
the year may falter over the summer or fall, causing what
economists call a recessionary double dip.

But another factor weighing on stock prices may not be as evident
as tensions in South Asia and the Middle East yet is every bit as
menacing to investors. This is investors' growing sense of
mistrust in the nation's capital markets and the role they play
in helping to generate growth and prosperity.

The steady stream of accounting scandals, corporate chicanery and
questionable practices at Wall Street firms is taking a toll on
investor confidence ? and that has major implications for the
stock market as a whole.

Felix G. Rohatyn, the financier and former American ambassador to
France, says investors' belief in the integrity of the financial
markets has been severely damaged in the last year.

"Our system of market capitalism requires a high level of
Protestant ethic," he said. "You need a regulatory system on one
hand and a very strong ethic on the other, and within those
guideposts you can let the market hopefully promote growth and
wealth creation. But if either the regulatory or ethical base
begins to erode, then you've got some real problems. And I think
that is where we are right now."


Not all stocks are down, by any means. Shares of medium-sized
companies have been strengthening, perhaps reflecting a belief
among investors that because these companies were more obscure,
their managements did not feel the need to resort to aggressive
accounting to meet or beat their financial forecasts and prop up
their stocks. The Standard & Poor's midcap index of 400 companies
is up 4 percent since the beginning of the year.

But larger stocks ? and the investors who own them ? have
definitely felt the pain. The S.& P. 500 has lost 7 percent of
its value this year while the Dow Jones industrial average is
flat. The Nasdaq composite, where many investors have been hit
hardest, has lost 17.2 percent of its value and is trading 68
percent below its 2000 peak.

With returns like these, it is perhaps not surprising that the
number of investors who say that now is a good time to invest has
dropped to levels not recorded since September 2001, according to
the investor optimism poll conducted monthly by UBS and Gallup.

The results of the May poll also indicate where investors think
the market is most vulnerable. Their largest concern is dubious
accounting practices: 84 percent feel that this issue is
punishing stock prices, ranking it ahead of conflict in the
Middle East and terrorism. Almost two-thirds of those polled say
conflicts of interest between brokerage firms' research
departments and investment banking activities are hurting the
investment climate.

The poll results also show how much damage the Enron eruption has
done to investor confidence. Nearly three-quarters of investors
surveyed ? 71 percent ? said they believe questionable accounting
practices are widespread in business, up from 62 percent in
February.

As a result, 40 percent of the 1,002 investors responding to the
poll say they are less likely to invest in stocks or mutual
funds. That figure was 34 percent in February.

It appears unlikely that investor confidence will jump anytime
soon. Jason Trennert, managing director and investment strategist
at the I.S.I. Group, a brokerage firm in New York, said
regulatory investigations into the business practices of
brokerage firms were a cloud over the industry that was not going
away.

"You're going to continue to see things coming out every day that
question how Wall Street does business, and that is not helpful
for investor confidence," he said. "Longer term, reforms will be
positive to the extent that it will make investors more
confident, but the investigations will be a heavy headwind for
investor confidence."

Judging from the e-mail messages he has received recently from
investors, David M. Blitzer, chief investment strategist at
Standard & Poor's, said investors appeared deeply frustrated
today.

"In the scandals of the last year, a few people have gotten rich
and most investors have gotten poorer," Mr. Blitzer said. "I
think they want a sense that it is a fair game and that everybody
has an equal chance to win or lose. People seem to feel that for
the matter to be settled, somebody is going to have to go to
jail."

Mr. Blitzer said he is amazed at the number of investors who have
stayed in the market throughout the crashing fall of the Internet
and telecommunications stocks and, now, almost daily reports of
fresh accounting fiascos at big public companies. He fears that
if significant changes are not made to restore investor
confidence, many will drift away from stocks.

Volume figures show that this drift has begun, at least among
individual investors. While trading volume is still high on the
New York Stock Exchange, average daily trades at Charles Schwab
in April came in at 192,900, down from 235,000 a year earlier. In
March 2000, when the market peaked, Schwab clients conducted
420,100 trades daily.

Mitchell H. Caplan, president of the E*Trade Group, characterized
many of his firm's customers ? particularly those with more than
$100,000 in investable assets ? as frozen. "People are trying to
figure out what to do and more often than not they are going to
cash," he said.

James B. Stack, president of InvesTech Research in Whitefish,
Mont., recently returned from the Las Vegas Money Show, a
four-day conference where purveyors of investment information
make presentations to individual investors. Mr. Stack met
hundreds of investors at the show and has concluded that most of
them are only now beginning to realize that the $5 trillion they
have lost in stocks is not coming back anytime soon, if ever.

"What was lost in paper wealth was real money," Mr. Stack said.
"It may not have been booked profits in investor portfolios, but
it was perceived as retirement funds. The pain of today is going
to evolve into anger; unfortunately, along the way comes
mistrust. They're asking: "Who's telling us the truth? Who's
giving us the real numbers?' "

One measure of wealth noted by Moody's Investors Service shows
how much poorer consumers are today than they were just two years
ago. In the first quarter of this year, real liquid financial
assets per worker were down an estimated 24 percent from the high
of early 2000. Americans are still 36 percent wealthier than they
were from 1991 through 1995, but the recent decline is troubling
nonetheless.

"Real wealth might seem ample compared to its historical trend,"
said John Lonski, chief economist at Moody's. "But an extended
slide by equity prices could be damaging. Consumer confidence
would suffer, and businesses would be less inclined to pursue
expansion amid slumping equities. Declining share prices would
curb both capital spending and hiring activity."


Perhaps reflecting their fears about investment prospects,
consumers are less confident about the possibilities for income
growth than they have been in recent years. In a recent
confidence report cited by Moody's, tracking the first five
months of 2002, only 21 percent of respondents expect higher
incomes in six months. That is below the 25.7 percent average
from 1996 to 2000 and below the 23.9 percent of a year ago.

The trouble with the current market malaise may come down to
this: While nobody wants a frightened investor class, few think
that its suspicions or frustrations are irrational. "As the
average investor learns more about the shenanigans that went on,
he is going to get mad and he has every right to be mad," Mr.
Stack said. "You hate to see it because the small investor is
paying the steepest price, not because they lost the most but
because they lost the greatest amount of what they could not
afford to lose."

Full at:
http://www.nytimes.com/2002/06/02/business/yourmoney/02CONF.html