LOM Weekly Perspectives

Credibility concerns spook equity markets

There have been a number of upbeat data releases in the U.S., including one on manufacturing activity and another on consumer confidence. So, why is it that equity investors are so gloomy? It could be that the Enron debacle and a slew of revelations from other corporations is making them a bit nervous. For the first time, in a long while, they may be reflecting on the difference between image and reality. Now, any half-decent psychologist will tell you that understanding reality is not just a straightforward process of evident facts determining correct perception, but of perception selecting facts which in turn affect perception. How we perceive reality is filtered through a whole system of received ideas, ideologies and media presentation of events. Rational, cool heads are few and far in-between. The concerted efforts of those in media, marketing and public relations are aimed at truncating critical thought and promoting a particular presentation of reality.

Illusion and reality

The reality is that the quality of financial reporting has been deteriorating for years - and that's no secret. Wall Street investment banks, corporate management, accounting firms, lawyers, and notably investors went along with the accounting manipulations until the earnings-growth machine finally sputtered. It is rather disingenuous for investors to suddenly claim that they have been conned by unscrupulous managers and accountants. The latter were only some of the players in a show that ran successfully for a number of years and received repeated applause and accolades from some of the folk who are now complaining loudly. However, despite these truths, and because of the current screams of pain, it is clear that for political reasons the show will not be allowed to go on exactly as before. At the same time, there are so many vested interests involved that it is unlikely we will get an entirely new production. There is going to be a political struggle over just what sorts of regulations are going to be implemented. Wall Street is definitely interested in presenting a cleaner image, because bread and butter issues are at stake. But don't expect a sea change in how managers, accountants and analysts behave.

Currently, if we side-step the phoney numbers game, we can still say that the state of finances in corporate America, though rickety in some cases, is nevertheless broadly sound. Certainly, there are going to be some...

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