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WALL STREET TREACHERY
Part Two:
By
David Podvin
The impressive recovery in the stock
market since the September low has been attributed to the easing of interest
rates by the Federal Reserve, and the stimulation of the economy brought about
by increased government spending. In fact, stock prices have risen largely
because of a con job perpetrated on investors by Corporate America and its
wholly owned subsidiary, the Bush administration:
As
the chart above documents, during the first three quarters of 2001, the hundred
largest NASDAQ companies reported to shareholders over $19 billion in
profits using the pro forma method of creative
accounting. During the same period, using classic Generally Accepted Accounting
Principles, these companies reported to the Securities and Exchange Commission losses
of over $82 billion. An
unprecedented explosion of artificially high third quarter earnings that
were reported during the latter part of 2001 coincided with the strong rally in
NASDAQ stocks:
This fraud
has been made possible by the presence of Wall Street lobbyist Harvey Pitt as
Chairman of the Securities and Exchange Commission. Pitt, who was appointed by
George W. Bush last year, told the New York Times, "I
am very much in favor of a vigorous enforcement program, but I am not in favor
of having investors barraged by conflicting statements and restatements."
There have been reports from dissidents within the SEC that Pitt is much softer
on corporations that lie about earnings than was his predecessor, Clinton
appointee Arthur Levitt.
Congressman
Edward Markey (D-MA) is currently investigating whether Pitt transferred chief
accountant Robert Bayless out of the SEC’s corporation finance division when
Bayless demanded that a company tell investors the truth about its earnings. The
SEC refuses to comment on the matter, but CFO.com reports that sources within
the agency have confirmed that Pitt’s message to go easy on corporate brigands
has definitely registered with his underlings who are responsible for enforcing
the law.
Taking
full advantage of Pitt’s permissive attitude, companies are aggressively
deceiving the public. The profits that semiconductor leader Intel reported to
shareholders were two hundred percent higher than the profits that the company
reported to the SEC. Networking giant Cisco Systems has been even more
outrageous in pushing the envelope of deceit. It triumphantly announced a profit
of $700 million to shareholders, while discreetly reporting to the SEC a loss of
$3 billion:
As
a result of the widespread use of the pro forma deception, the NASDAQ
Composite index currently has a higher price to earnings ratio based on GAAP
than at any time in history. Amazingly, this is true despite the fact that the
index is 64 percent below its all time high that was set in March 2000.
Major
brokerage firms like Merrill Lynch have access to all of these numbers and are
well aware that they signify a spectacularly overvalued market. However, such
disturbing facts are inconsistent with the firm’s stated objective to be
“Bullish On America”. Merrill Lynch will make more money in retail
commissions and investment banking if an outrageously overpriced market can be
pushed higher, regardless of the ultimate peril to Merrill investors who are
being lured into a pyramid scheme.
While
Wall Street brokerage firms are encouraging their clients to put three quarters
of their liquid assets into equities, corporate insiders are hurriedly fleeing
the scene of the pro forma crimes:
Source:
Crosscurrents.com
As
shown above, corporate insiders are urgently selling the blue chips. They are
apparently unconvinced by the investment industry’s proclamation that the bear
market is over.
We
have previously alleged that the pro forma scandal is endemic throughout
Corporate America. Now, at least one major Wall Street player is publicly
expressing concern about the scam. William
Gross, Managing Director of America’s largest bond trading company PIMCO,
recently alleged that corporate superpower General Electric is playing cynical
games with its financial statements. Gross said that GE’s impressive record of
earnings growth is a mirage based on the clever manipulation of numbers. As a
result, PIMCO will no longer be buying GE bonds because of the risk of severe
losses when the House Of Cards That Jack Welch Built finally comes tumbling
down.
Even IBM has been doctoring the numbers. The Wall Street Journal has revealed
that, since 1999, the earnings gains reported by the company have actually just
been the appreciation of assets in IBM’s pension fund.
Old Economy. New Economy. NASDAQ. Dow. Penny stocks. Bluest of the blue
chips.
It doesn’t matter. America’s companies are lying about earnings to their
shareholders.
The natural reaction to learning about the pro forma scam is to ask how such
blatant corruption on such a mind-boggling scale could possibly exist. How is it
that so many sophisticated investors respond to this amazing display of overt
fraud with seeming indifference? Certainly everything must really be okay, or
knowledgeable investors would be panicking for the exits.
In 1841, Charles MacKay wrote a seminal book on mass psychology, Extraordinary
Popular Delusions And The Madness Of Crowds:
“In reading the history of nations, we find that, like individuals, they
have their whims and their peculiarities; their seasons of excitement and
recklessness, when they care not what they do. We find that whole communities
suddenly fix their minds upon one object, and go mad in its pursuit; that
millions of people become simultaneously impressed with one delusion, and run
after it, till their attention is caught by some new folly more captivating than
the first. We see one nation suddenly seized, from its highest to its lowest
members, with a fierce desire of military glory; another as suddenly becoming
crazed upon a religious scruple, and neither of them recovering its senses until
it has shed rivers of blood and sowed a harvest of groans and tears, to be
reaped by its posterity. At an early age in the annals of Europe its population
lost their wits about the Sepulchre of Jesus, and crowded in frenzied multitudes
to the Holy Land: another age went mad for fear of the Devil, and offered up
hundreds of thousands of victims to the delusion of witchcraft. At another time,
the many became crazed on the subject of the Philosopher's Stone, and committed
follies till then unheard of in the pursuit. It was once thought a venial
offence in very many countries of Europe to destroy an enemy by slow poison.
Persons who would have revolted at the idea of stabbing a man to the heart,
drugged his pottage without scruple. Ladies of gentle birth and manners caught
the contagion of murder, until poisoning, under their auspices, became quite
fashionable. Some delusions, though notorious to all the world, have subsisted
for ages, flourishing as widely among civilized and polished nations as among
the early barbarians with whom they originated, -- that of duelling, for
instance, and the belief in omens and divination of the future, which seem to
defy the progress of knowledge to eradicate entirely from the popular mind.
Money, again, has often been a cause of the delusion of multitudes. Sober
nations have all at once become desperate gamblers, and risked almost their
existence upon the turn of a piece of paper. To trace the history of the most
prominent of these delusions is the object of the present pages. Men, it has
been well said, think in herds; it will be seen that they go mad in herds, while
they only recover their senses slowly, and one by one.”
MacKay’s analysis of the madness of crowds allowed for prolonged insanity,
but he contended that reality ultimately returns. The normal historical GAAP
valuation of the Standard and Poors 500 index is a price earnings ratio of
fifteen. As a result of the dishonest accounting games that have been played by
captains of industry, the current GAAP price earnings ratio on the S&P 500
is 44. By this traditional gauge of valuation, the S&P 500 is now overpriced
by more than 65 percent.
When reality finally returns to the stock market, look out below.
The truth will not be allowed to
resurface without a fight. Maintaining the status quo is essential to the
survival of politically well-connected multinational corporate executives who
desperately need counterfeit earnings to substitute for their inability to
generate the real thing. Everything that George W. Bush has done since taking
office has been designed to reward his Fortune 500 benefactors at the expense of
the average citizen. The appointment of Harvey Pitt to head the SEC is just one
more example of how big contributors are getting repaid many times over as
reward for subsidizing the Bush campaign in 2000. The result is that the
American people are being lured into treacherous investments with false
information while the Bush regime defaults on its legal responsibility to
insure the integrity of the stock market.
The corporate deceit that Pitt is enabling
will continue to worsen until someone forces companies to tell the truth. No one
in a position of authority wants to risk having the stock market collapse
because America’s leading corporations are coerced to engage in a collective
mea culpa, so the Ponzi scheme continues. It remains to be seen how long can
this swindle can be kept going, and against whom the American people will lash
out in rage when they are inevitably left holding the multi-trillion dollar bag.
SmartStockInvestor.com
Commentary And Charts
CFO.com
Lawmaker Looking Into SEC Shakeup
Managing
Director Of PIMCO Discusses General Electric
Wall
Street Journal On IBM Earnings
(middle of page)
Standard and Poors 500 GAAP Price Earnings Ratio
