The Enron Effect

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Federal Reserve Chairman Alan Greenspan smiles before business leaders

Alan Greenspan gave stocks a nice little boost Thursday morning, telling the Senate Budget Committee in prepared remarks that recessionary forces are "starting to diminish" and "activity is beginning to firm," and thus giving the recovery, however nascent it may be, the imprimatur of the Federal Reserve. Techs like chips and cell phones are percolating again. And with, one of the first (and one of the last) of the great dot-coms, finally notching a quarterly profit Tuesday the old-fashioned way — dollar by hardscrabble dollar — and the New Economy may have a second spiritual wind and a resurrected flag to fly in it.

But if Greenspan's suggestion that the worst is over made for the happy news of the day, for investors his caveat about the best being a long way off may be the more salient prediction. Because despite the recent percolations in techs from semiconductors to data storage to cell phones, there's a bit of a chill blowing across Wall Street these days. And it's already being dubbed "the Enron effect."

First case in point: Thursday. In the morning Greenspan, along with encouraging corporate words from Nokia and Siebel, put the Dow on a 100-point rally that was spreading nicely across the indexes. But by afternoon the nibblers had done their work and the Dow and NASDAQ had given back half the day's gains; another run-up had run out of steam.

Second case in point: the month of January. The brave new year started out gangbusters, with the Dow opening Jan. 2 at 10021 and the NASDAQ at 1979 and closing the holiday-shortened week three days later at 10259 for the industrials and 2059 for the techs, respectively. Those were gains in the 10-20 percent range, gains that had the pundits gleefully talking about "the January effect" and noting how good starts, historically, make for good years.

Then came the first full trading week of the year — and one in which the Justice Department announced that it would be conducting a criminal investigation into the Enron implosion. It was the week in which the daily swirl of revelations — from whistleblowings and shreddings to political connections and ominous-sounding congressional investigations — really got underway. It was also the week in which Wall Street finally started to acknowledge how unreliable corporate accounting, not to mention corporate analysis, had become. Suddenly everybody had stopped talking about the recovery — and began scouring the ticker for the next Enron-in-waiting, so they could sound the alarms and get out now.

The Dow opened that week at 10261 and closed it at 9987 — goodbye, 20 percent — and the NASDAQ, after opening at 2037, puttered along until it was lucky to close at 2022. Two weeks later, the Dow is now twitching ineffectually in the 9700 range, the NASDAQ's idling in the 1900 range, and while sporadic big selloffs like Tuesday's 200-pointer aren't snowballing yet, there never seem to be as many buyers on the way back up as there were sellers on the way down.

The problem is shaken investor confidence — in companies' revenues and whether they're real or a product of the same kind of financial adventuring that Enron apparently relied on all those years. Investors are taking hard second looks at earnings statements — or at least promising to — and manipulation-prone numbers like EBIDTA are being stacked up against more implacable measures of corporate health like cash flow. The result is harder questions and more skepticism — can, say, Ford and GM really make money selling cars, or are they relying too heavily on their financing operations? — and it's all coming at a time when the recovery, on the business side, will be built on earning statements.

In the long run, a thorough reckoning is a healthy thing. Investor scrutiny of things once taken for granted — and an increased awareness of risk — is part and parcel of the aftermath of a burst bubble, and the lessons taught by Enron, if they're learned, make for a more rational investing climate and a better-built expansion, when it does come. Likewise, the political scrutiny now being visited upon Enron and Andersen, if it results in any good legislation, can eventually help bring leery small investors back into the equities fold.

But this spring is when Wall Street — and the economy it alternatively drives and reacts to — will need all the gamblers it can get. Investors betting on companies means companies having more purchasing power for capital investments; it means consumers feeling good about their portfolios and retirements and thus spending more; it means the economic recovery can proceed apace. Enron, meanwhile, means a second guess — is this company truly good, or is it too good to be true? — and second-guessing is not the kind of attitude of which sustained bull markets are made. The Dow and NASDAQ's January chart lines are jagged, but the trend is clearly downward since Probe Day, January 9, and for every buyer whose glass is half full there seems to be two who'd rather wait before they take a drink.

In the marketplace, Enron's implosion hasn't made many waves; energy trading goes on as before. But in the markets, the fallout is more fundamental — it attacks the very set of assumptions by which investors place their bets, and a lot of those bets are now being pulled off the table. This too shall pass — and Congress and the SEC willing, it might even provide the impetus for some much-needed regulatory renovation. But while Enron is in the news every day — and as Democrats spend the spring making absolutely sure of that — the rise, fall, and posthumous flogging of Enron could be one more thing keeping the much-anticipated economic recovery on a slow track.