Spotlight: January 25, 2002
For Investors, X Marks The Spot, Whether They Choose To See It Or Not
By Brady Willett & Todd Alway

Investors have learned to cope with horrible economic data, poor earnings results, and dismal forecasts; they simply ignore them altogether.  Quoth the ostrich "you may get a little grit in your eye by sticking your head in the sand, but the view down here is always reassuringly the same, and the changes reality brings are often less than comforting."  Nevertheless, there are two market changes, or X factors, that are likely to come into focus in 2002, regardless of investors' desire to hide from the uncomfortable truth.

To begin with, following the Enron disgrace the SEC is launching a series of surgical strikes in a belated attempt to restore credibility.  Trump's DLP was the first to be struck on January 16 when the SEC said the company's pro forma ramblings rambled just a little bit too far off of the honest path.  Unlike Levitt who often mused about the problems inherent to pro forma reporting but did nothing to rectify its excesses, it appears that Chairman Pitt is at least trying to give the issue some serious thought and discussion.  Judging from the menacing rhetoric coming out of Pitt's corner, it looks like the resulting statements are about to become a paragraph, a short story, then a novel…
 
Those of you encouraged by the SEC backed campaign to ensure clarity in financial reporting, think again.   Yes, investors will be better off a few years from now if pro forma reporting doesn't exist, if channel's stop being stuffed, and if big baths turn into brief showers (to indulge in the accounting jargon for misleading numbers).  However, remember that in the near term the new rules will not help the markets but only hurt them.  Do investors focused on buying stocks for the upcoming 'rebound' really want to raise their eyes to audited results that are clearly presented under the GAAP umbrella?  Or would they rather rest content with the comforting obfuscation that the "creatively" managed reports have given them thus far?  After all, if we can just agree to pretend that everything is fine with the state of the markets, we can all feel better about our mounting debt, lack of savings, and the precarious nature of our jobs in what is looking to become an entrenched economic downturn.  The truth may set you free, but that freedom is not without cost!  After all, the truth turned what was once the seventh largest company in America into a pile of shredded paper…

The other coming reality is the inevitable end of Alan Greenspan's Fed Chairmanship.  Greenspan will turn 75 on March 6, 2002, and despite his playful rhetoric and boyish smile, there can be little doubt that he will soon leave his Fedship behind.

When Greenspan leaves, be it this year or a couple of years from now, investors perceptions will change: perhaps for the better, or worse – but change they will. On the day of FOMC meetings, stock market speculators will not be looking at the size of Greenspan's briefcase and wearing 'fed red' to commemorate the event.  They will simply be hoping that the new Fed boss follows what is popular, what is known, and what is thought to be most beneficial to the economy and stock markets.  When Greenspan leaves there will most certainly be a new agenda for the Fed – one that the inflation fighting Greenspan has not yet tackled.   That new agenda is, in fact, how to fill the void of Greenspan.
Granted, his instincts often made no sense, and he typically spoke in a language that no one understood.  But perhaps this was the goal from the very beginning?  Keep them guessing; mention the phrase 'new economy' and 'market mania' back to back and let perceptions clash.  Ironically, perceptions didn't clash for much of Greenspan's tenure, people were usually extra optimistic: consumer debt levels rose past any previously recorded level, the stock markets traded at record valuation levels, and the longest economic expansion ever unfolded. 

When the new Fed boss takes office it won't be long before he says something that rocks the markets, hits the dollar, or leaves investors in a state of bewilderment that is not a welcomed Greenspan-like state of bewilderment, but just bewilderment…  Change for the markets, it seems, is therefore inescapable.

These are the two of the not often mentioned upcoming alterations to the investment landscape that investors must consider: the SEC, and Greenspan. These factors alone, beyond earnings, economic readings, and mutual fund developments, promise to make market movements tumultuous in the coming months and years.  Regardless of investors' propensity to hide from reality and to shy away from change when it means that painful economic adjustments will have to be made, when these X factors make their appearance, investors will be unable to disregard them.