WHY THE BULLS ARE EXCITED - Eric Fry, DR
Apr 29, 2003
A spectacular spring day arrived in Manhattan,
and the trading posts on the New York Stock Exchange
sprouted buy orders like peach blossoms. Does the recent
advance on Wall Street herald the springtime of a new
bull market?
Almost anything is possible, of course - this year's winter in Manhattan lasted about 15 months - but we suspect that today's buyers of Dow 8,482 will fare little better than the buyers of Dow 10,060 one year ago.
No matter how balmy the conditions on Wall Street may appear, we at the Daily Reckoning still consider it a bad idea to pay 30 times earnings for stocks in a slow-growing economy.
However, it easy to see why the bulls are so excited: the war is finally over. We are referring, of course, to the war between Wall Street's research department and the Securities and Exchange Commission (flanked by New York Attorney General Elliot Spitzer).
In an "historic" agreement yesterday with the SEC, Merrill Lynch, Credit Suisse First Boston, Citigroup's Salomon Smith Barney and seven other Wall Street firms agreed to pony up $1.4 billion in fines as recompense for issuing fraudulent research reports. The 10 firms neither admitted nor denied wrongdoing, but paid the $1.4 billion anyway. We would observe that innocent parties - much less 10 innocent parties with gaggles of lawyers on their payrolls - rarely agree to pay $1.4 billion in fines...But let's not jump to any conclusions.
"I am profoundly saddened - and angry - about the conduct that's alleged in our complaints," said SEC Chairman William Donaldson. "There is absolutely no place for it in our markets and it cannot be tolerated."
We too are saddened. But we are also amused...As King Solomon once observed, "There is nothing new under the sun." And certainly, there is nothing new on Wall Street...the rules may change a bit from year to year, but the game never changes. Yesterday's settlement merely signals a rule change, which means that Wall Street will need to devise creative new ways to fleece its clients...Don't underestimate Wall Street's ingenuity.
In order to continue playing the game, Wall Street firms understand that they must offer up sacrificial lambs from time to time. Enter Internet analysts Henry Blodget and Jack Grubman. By epitomizing bubble-era excess, these two über-analysts were made-to-order sacrificial lambs. As such, they have also come to personify post-bubble recrimination. Their former employers tried to distance themselves from their celebrity analysts, at the same time that individual investors sought retribution.
Yesterday, the SEC announced that the two former analysts have agreed to pay $19 million in penalties and have accepted a lifetime ban from the securities industry. (Do I hear $20-million book deal with movie rights?)
Interestingly, Mary Meeker, the star analyst of Morgan Stanley, escaped any charges or penalties in Monday's settlement. Who says chivalry is dead?
So now the financial markets are safe once again for widows and orphans, right? Not so fast. Reported earnings might be more honest now, but they are honestly meager. What's more, the "era of honesty" on Wall Street is unlikely to last long...The capital markets are a phoenix of duplicity.
