Investors wary amid turmoil

Confidence: Problems at Enron, Allfirst and elsewhere are heightening the fears of those already uneasy about the economy.

February 10, 2002|By Robert Little, Eric Siegel and John Woestendiek | Robert Little, Eric Siegel and John Woestendiek,SUN STAFF

There's a thin line between alarm and panic, and 69-year-old Sarah Crooke was standing on it.

The question she asked her financial adviser was simple on the surface, but he could hear the emotions bubbling beneath. Where, she wanted to know, might the money she and her retired husband planned to live on the rest of their lives - most of it invested in the stock market - be safe?

In a week that included more empty testimony in the Enron case and the revelation that a Baltimore bank, Allfirst Financial Inc., had hemorrhaged an apparent $750 million before anyone noticed, Crooke's questions were valid ones.

"These things are causing the average American investor to lose confidence in the market," she said. "Our economy is based on the stock market. It's based on trust. It's based on having legitimate auditors. It's based on checks and balances. If we can't trust these corporations, what happens to our economy?"

Those questions increasingly hit home as more and more Americans become investors. Newsday reported this month that half of U.S. households owned stock in 1999, up from 34 percent in 1990, according to analysts with the Federal Reserve Bank of New York's Research and Market Analysis Group.

Analysts and investors agree: The recession was bad enough, and the terrorist attacks of Sept. 11 even worse, but confidence in corporate America could be sinking to new lows - and caution to new highs - thanks to a string of spectacular bottom-line blows.

Whether it be from reports of fuzzy accounting or bad forecasting - or, in Allfirst's case, an alleged "rogue trader" racking up losses - investors are becoming increasingly skeptical, market watchers say.

"Allfirst is just another big surprise - another announcement that shakes your confidence that you know the complete story," said Hugh A. Johnson, chief investment officer for First Albany Asset Management.

The announcement Wednesday by Allied Irish Banks PLC, parent of Allfirst, that it lost $750 million because of fraudulent currency trades was a bombshell. But it fell into a deeply pocked investment landscape. Companies such as Cendant Corp., Williams Cos. Inc., Global Crossing Ltd. and Elan Corp. have watched their stocks plummet in recent weeks as investors have begun questioning their complicated accounting.

Most analysts consider the collapse of Enron Corp. to be the catalyst - some term the market's nervousness "Enronitis." But in many cases, such as the sudden plunge of Tyco International Ltd., no impropriety or instability was alleged, just complex accounting that made investors nervous. Stock in Allied Irish plunged nearly 17 percent after the losses at Allfirst were announced.

"These things have done some serious damage to investor confidence," Johnson said. "People used to ask me how they could defend against the bear market. Now they want to know how to protect themselves from scandals, swindles and fraud."

`Great buys out there'

Barry Hebbel, 46, still looks at the stock market and sees money to be made.

A father of two who works as a software salesman for Mercury Interactive in Baltimore - "I'm Al Bundy with a laptop," he said - he keeps a relatively risky 80 percent of his investments in stocks and mutual funds. But, these days, before he buys anything, he's getting advice and trying to make certain he's not latching on to a lemon.

"You've got to look much more closely today at what you invest in and make sure that, once you pull up the hood, there's really an underlying business there that you can make sense of," he said.

He's looking for companies with a strong foundation and a clear mission - ones where it's not clear just that they are making money, but why. In the past, that hasn't always been clear, especially during the dot-com boom, which, at the advice of his financial planner, he avoided investing in.

"In the last 10 years, business was going so great in so many areas, and a lot of people were coming out of school and getting in high-level positions no matter what their experience was. Some of them were playing above the rim, and some of them were probably playing a little loose, and some of them tried to keep the numbers fluffed up when the economy got tough," Hebbel said. "Analysts didn't have any way of justifying the prices. It was kind of like everybody was fooling themselves. And now we're seeing what the fallout of that is."

Despite his concerns, he's not giving up on the market: "Considering my age and income, I'm more inclined to take risks at this particular point in my life. Besides, there are still a lot of great buys out there."

Skepticism before scares

With the economy in recession and many stocks battered from their dot-com boom highs, advisers say the public was skeptical of the stock market before the recent scares. But Charles B. Carlson, vice president and portfolio manager of Horizon Investment Services in Hammond, Ind., said the investor malaise has the potential to be far more damaging.

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