Monday's Stock Market Round-Up

By James J Puplava CFP, February 11, 2002

WARNING: THE FOLLOWING FINANCIAL REPORT COULD BE HAZARDOUS TO YOUR FINANCIAL HEALTH.

The SEC should start requiring that Wall Street firms publish a warning label that accompanies any statement made by firms making stock recommendations. Over the last few years, firms have advised investors to stay fully invested in stocks while the market, and especially technology stocks, wiped out over $1 trillion of investor wealth. The fact that the conflicts of interest run throughout the industry should get more attention from regulators, especially when there are banking relationships and long and short positions involved. In the case of Enron, many of the firms that had strong buy recommendations on the stock right up to the point of its bankruptcy had investment banking relationships with the bankrupt firm.

Today was a good example of this kind of bias. A major firm came out with a recommendation on Cisco. They said the business was doing great and that they felt there were no accounting problems involved with Cisco's books. The reporter did ask the customary question about banking relationships. The recommending firm not only held a position in the stock, but also had strong investment banking relationships. There was no mention that Cisco's sales and profits have slid considerably. No mention that profit margins have shrunk or that the tech giant has a fair amount of goodwill on its balance sheet that may be impaired. Nor did the analyst mention that Cisco had been receiving a greater portion of its income from interest income. Cisco actually lost over a $1 billion last year. In its latest quarterly report, the company said its sales fell 29%, while profits fell 24%. The company's revenue growth has been anemic and new orders haven't been coming in as fast. Cisco is starting to receive tough competition from the user equipment market. The company is forecasting that next quarter's sales could be unchanged or rise only slightly. All of this from a company that is now selling at 97 times earnings. I wonder why none of this kind of information was mentioned in the firm's strong buy recommendation. Could it be that investment banking relationships, and the fact that the firm held shares of Cisco prevented them from saying or reporting this kind of information?

In an equally ridiculous call this morning, another Wall Street firm downgraded shares of soon-to-be gold mining giant Newmont Mining. The target price was cut from $21 a share to $10 a share. The analyst sited concerns over some of Newmont's reserves declining at some of its mines and concern that higher gold prices may impact jewelry demand. Apparently the analyst was oblivious to Newmont's successful bid for Normandy and its pending merger with Franco Nevada. This combination not only increases Newmont's reserves, but also strengthens the firm's balance sheet with Franco's $1 billion cash hoard and improves income with the Franco royalty stream. Newmont will now become the world's largest gold mining company with close to 93 million in proven and probable reserves, and an annual production of close to 8 million ounces of gold. On a market cap to proven reserve basis, Newmont is probably one of the cheaper majors around. Newmont will also become the world's largest unhedged gold mining company, making it a favorite of institutional investors.

The fact that Franco's Pierre Lassonde and Seymour Schulich will personally control 32% of the world's largest company is not mentioned. These two, while managing Franco Nevada, produced an annual return of 38% a year to shareholders in one of the worst gold bear markets of the century. Imagine what they could do in a rising gold market, which is what the two believe is ahead for gold. Their belief is so strong on this view that they are willing to stake $235 million of their own money by tendering their 9% interest in Franco for shares of Newmont.

If I had to bet on this one, I would bet against Wall Street. It is more likely, but not probable that Newmont's shares are going to head higher this year rather than lower. The analyst failed to mention monetary demand, and a flight to quality is what is driving the demand for gold shares at the moment -- not jewelry demand. Gold has been running an annual supply deficit for close to a decade. It has only been official central bank gold sales and gold leasing that has kept the price down. Gold Fields Minerals reported that central bank sales were 468 tons last year. Other reports put that number much higher. The fact remains that fabrication demand alone of 3,483 tons far outstrips gold production of only 2,595 tons.

If you want to get the real facts on what is happening to the precious metals markets, I recommend finding a good Canadian brokerage firm, or a newsletter that doesn't get its compensation from stock options, payments for articles/coverage, or retainer fees to get an unbiased opinion on what is happening in the new bull market in precious metals. Wall Street analysts don't have a clue as to what is happening. You would be better off getting your advice from comic books.

Hype and Pitch

Elsewhere in the news, stock prices rose today as Wall Street pitchmen made the case that investor accounting concerns were overdone. Firms told investors today there isn't likely to be another Enron, and that accounting irregularities won't be widespread. There was no mention of the fact that earnings are now being reported on an operating income basis instead of net income was part of the discussion. You're going to need a shovel to dig through the hype and hyperbole that is spewed out as analysis in this market. Analysts are now telling investors that profits will be up this year by 17.6%t. You will need to interpret exactly what is meant by the word "profit."

Qwest Communications and Global Crossing, Swapping Horror Stories

In the "No New Enron" mantra so widely spoken today, Qwest Communications was ordered to surrender documents to regulators who are now pursuing an investigation into the bankrupt company. Qwest and Global Crossing last year swapped at least $100 million in space on their networks from each other. Global Crossing recorded these swaps as sales even though no cash changed hands. These swaps had the effect of inflating revenue. It made fundamentals at the companies look much better than they really were. In the case of Global Crossing, the company filed for Chapter 11 bankruptcy, while the shares of Qwest have lost 70% of their value over the last year. As was the case with Enron, Qwest and Global Crossing's auditor was Arthur Andersen. The giant accounting firm allowed these swaps to be booked as revenue. The accountants should have known better. Roy Olofson, vice president of finance at Global Crossing, was fired last November after the VP said the company was cooking its books. The FBI is also examining Global Crossing's accounting. Like Enron's top officials, top management, including DNC Chairman Terry McCauliff who turned an inside investment of $100,000 into $18,000,000, sold off their shares well in advance. According to the Wall Street Journal, company directors and executives unloaded $1.3 billion in stock between from the end of 1999 to 2001, far exceeding the amount Enron officials made during the same period.

More Coming Out of The Closet

In yet another possible accounting scandal, The Wall Street Journal recently did a story about computer data storage maker EMC. The WSJ story said the company fired two workers at its Chicago office after an internal investigation found accounting irregularities in booking customer orders. The allegations, according to people close to the matter, involve certain employees that were meeting their sales quotas by falsifying customer signatures on storage orders. In another story of wrongdoing, Michael Cowpland, who quit as chief executive of Corel Corp., pleaded guilty to insider trading of the software maker's stock and will be fined $1 million. The executive sold shares through a holding company ahead of the company missing a sales and profit forecast.

Wall Street seems to be taking an Alfred E. Newman approach to all of these scandals by essentially saying, "What, me worried?" However, there is mounting pressure in Congress and the SEC to look into these matters because they are starting to surface too frequently. What is different now compared to a few years ago is that people are starting to pay attention. When we were in a bull market and the price of most stocks were going up, nobody seemed to care. Now that we are in a bear market, the fact that the books were cooked is now getting attention. When everybody was making money, the slight of hand was overlooked. When investors start losing money, they start caring.

Markets Jittery - Tensions Higher

Inside market trading today, industrial, airline, defense, oil service, retail and natural gas stocks rose while shares of gold stocks declined on downgrades. Shares of oil and oil service along with natural gas companies rose as the price of crude oil and natural gas rose on the NYMEX. Tensions in the Middle East with Israel launching an air strike and Hamas launching rockets into Southern Israel have both parties on the edge of war. In a separate report, Iran and Iraq have pledged to join forces if attacked by the US. The price of oil may begin to move on its political fulcrum as well as economic fundamentals.

Volume was lower on Monday with only 1.14 billion shares trading on the New York Exchange and 1.56 billion on the Nasdaq. Market breadth turned positive by 21-10 on the big board and by 20-15 on the Nasdaq.

Overseas Market

European stocks advanced after Group of Seven finance ministers said the outlook for a global economic recovery has improved. Finance ministers and central bankers from Canada, France, Germany, Italy, Japan, the U.K. and the U.S. said this weekend the outlook for a global economic recovery has improved. The U.S. recession that began last March is probably over, according to the latest Blue Chip Economic Indicators survey.

The Dow Jones Stoxx 50 Index gained 36.82 points, or 1% to 3522.38, trimming last week's 3.3% drop. A total of 110 billion euros ($96.4 billion) of market value was wiped off the Stoxx 50 last week amid concern falling profits would impair companies' ability to repay debt and jitters about corporate accounting after Enron Corp.'s bankruptcy. Benchmark indexes rose in six of Europe's eight biggest share markets.

Markets also rallied in Asia on hopes of a recovery. The Nikkei rose 1.07% and the Hang Seng gained 3%. Both indexes remain down for the year.

Treasury Market

Treasury issues closed down on Monday with losses in the long end of the yield curve. The 10-year Treasury note was off 5/32 to yield 4.915%, while the 30-year government bond erased 12/32 to yield 5.405%. There were no economic releases on Monday. The week's marquee event will be on Wednesday with the retail sales report. Other reports dotting this week's activity: January industrial production and capacity utilization, the Michigan consumer sentiment index for February and the January producer price index.

James Puplava

Contact Information

James J. Puplava CFP
PFS Group
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