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Is Doomsday now?

The current doomsday scenario, spoken of by short sellers and long-term investors alike goes something like this; The continued fall of the stock market sparks fear among foreign investors, who pull out their money. A vicious cycle is created in which capital flight from the United States becomes a panic. The dollar crashes, and the U.S. economy begins to implode, since it is very dependent on foreign investment. Can his happen? Yes. Is it happening as we speak? Probably not.

Though long and painful for investors, here and abroad the current stock market fall, which began over two years ago in 2000 has been orderly. Trillions of dollars have come out of the stock markets and found their way into bonds and U.S. government bonds.

In spite of the nearly 70% decline in the NASDAQ composite, net investment into the United States, was well over $100 Billion during the last three months. This was much lower than prior quarters but still shows no signs of money flowing out of the country.

Even the dollar's fall has had some benefit to the economy. The dollar has slowly drifted down against foreign currencies over the past few months. Once again, the decline has been orderly and represents the feeling that the U.S. economy has a few problems to work out. The largest of these problems, which the U.S. Congress seems ready to make worse with ill-conceived legislation, is corporate corruption.

Through it all, come Enron, WorldCom, Qwest and the next one, the world is seeing something surprising happen. The markets are working faster than any government regulator can get a committee meeting together.

Though there may have been lax enforcement from the Securities and Exchange Commission and the Financial Accounting Standards Board, the government has done little other than hold hearings to solve the problem. President Bush made it clear that the Justice department would take harsh action against the leaders of companies that cooked their books, thus ripping off investors.

The markets already have handled this, though not perfectly. The stock market value of the firms that played games with their books has plummeted. This has hurt small investors, and the large shareholders who ran the firms. The only tweaks I can see as useful is increasing the jail time for such malfeasance and perhaps seizing the proceeds of directors and CEO's who sold stock, knowing that they'd cooked the books.

The system, without much help from the government at all has punished the companies that broke the rules. Some of the money that's rushed out of the above-mentioned firms has gone into government bonds. Some of that money however has gone into the stocks of quality firms that have not played games with their books.

Take a look at which companies have not fallen as hard as the NASDAQ over the past three to six months to find some clues. There are a lot of companies, large and small that are doing 30% better than the NASDAQ this year. That means they held their own. But that's pretty good in today's environment.

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Shmuel Protter
investmenttool.com

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