True, WorldCom will die in time. It may have customers, revenues, and assets but it is mortally wounded. It will, in due course, be set upon by cannibals, dismembered and sold in pieces.
I hope it will happen as ignominiously as possible, with howls of execration.
What died yesterday was Trust. WorldCom plunged the last knife.
What died was Trust in corporate leadership, corporate governance, corporate accounting, corporate auditing, and corporate regulation. The word "corporate" has gone from being a symbol of innovation, power, and organization to being an insult. Today it is a bright red badge signaling dishonesty, misuse of power, corruption, and arrogance.
Only a few months ago a reasonable person could argue that Enron wasn't typical of Corporate America. It was possible to argue that Enron made a mess, that redress would be pursued, and that we should concentrate on all the companies that aren't Enron. There are thousands of those companies. I still believe that honest and capable individuals manage most of them.
Today that doesn't matter.
Today, after Tyco, Global Crossing, Qwest, Adelphia, and Merrill Lynch, the display of corporate wretchedness is so wide and compelling that the burden of proof has shifted. In the Post-WorldCom world, defenders of corporate America have to prove, upfront, that they aren't self-serving, megalomaniac crooks.
I have no idea how they will do it.
All of us will pay a heavy price for the death of trust. Millions of workers have a stake in corporate America. At the end of May, 25 months into the current bear market, the Hewitt 401(k) Index still shows that 28.1 percent of 401(k) holdings are in company stock, 22.8 percent are in large capitalization stocks, and another 5.2 percent are in mid and small cap stocks. That means some 56.1 percent of 401(k) assets are still hostage to the market for corporate equity. (Hewitt would point out that their index does not reflect the entire 401(k) world. It reflects plans offered by large employers with daily trading and daily valuation.)
Investment lambs, we are slow to change. We are still slower to act.
At the end of April 2000--- the arguable peak of the bull market--- the same index showed that 62.87 percent of 401(k) assets were in equities. Do the math and you can see that we've only decreased our equity commitment by 7 percent. The change can be accounted for by sinking stock prices, not by selling.
As investors we kept the faith.
But the flow of money is changing.
In the month before WorldCom my reader e-mail started to fill with new messages.
"Is it time to sell our stocks?"
"Would this be a good time to stand aside and move to cash?"
These are not questions of asset allocation. These are requests for directions to a lifeboat.
The Hewitt Index shows some signs of this change. In May, 401(k) account holders moved money out of large U.S. equities. They also moved money out of company stock.
Where did the money go? It went into GICs (Guaranteed Investment Contracts), bonds, and cash.
Another Hewitt measure, one that shows the direction of 401(k) money movement on a daily basis, indicates account holders have moved toward fixed income in 13 of the 16 trading days through June 24th.
Expect this to continue.
In a reasonable and measured world, this shift from equity to fixed income would be brief. Eventually, people would ask about growth, earnings, and the price to earnings multiples. Thousands of stocks are already selling at normal valuation levels. In a reasonable world, we would be tempted to buy.
Unfortunately, we no longer live in a reasonable world.
We can no longer trust the numbers we are offered. In that context, why would anyone dare pay the 5 times the purported book value of S&P 500 Index stocks? Why would anyone pay 30 times trailing purported earnings or 20 times estimated purported earnings for this year?
You wouldn't. Not under current management, thank you.
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