Enron, Enron on the wall
rutledge, john
"Enron, Enron on the wall" market with Valley Girl ("Mat-ever") stock selection, is over. For 20 years interest rates went down and stock prices went up. During that extraordinary period caution was not rewarded....
...Apparently Abe Lincoln was wrong—you can fool all the people for a long time...
...Marius and Sulfa...
...How will it affect risk taking...
...The Rise of Christianity...The Restoration of Order...
...Regal Society...
...Former ChrisDon't get me wrong, I'm not casting aspersions on the list of Enron luminaries—far from it...
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...Public Entertainment II—Gladiatorial Games...
...Payment in US...
...Either way it encourages people to place big uninformed bets and keep their winnings in the game...
...For those who do their homework and make their own valuation judgments and risk assessments, this is a great time to place your bets...
...it's what it reveals about us, the way we process information, and the way we make investment decisions...
...This means, ironically, that although the Enron disease started in the utility sector, its worst damage will be felt by small-growth companies...
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...Roman Expansion in Italy...
...So it is for economics and financial markets, too...
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...Octavian Emerges Supreme...The New Order of Augustus...The Imperial Succession...
...The Domination of Caesar...
...The Third-Century Crisis PART IV (Lectures 37-48) The Shape of Roman Society...
...That's what the airlines were doing when they announced they were forming a new insurance cooperative, selecting self-insurance over backward-looking market premiums...
...How did the Romans build an empire that ran from Syria to Scotland and lasted for nearly a millennium...
...Stephen Moore is president of The Club for Growth...
...A second way to profit from the market's abnormal risk aversion is to become an insurer yourself...
...They react to slight disturbances with chaotic swings...
...Public Entertainment I—The Roman Baths and Chariot Racing...
...The Gracchi Brothers...
...It was further eroded when we learned we could not trust public-company financial statements, or the people who audit their books...
...Public company managers—whether out of disdain for public shareholders or fear of running afoul of the SEC's complex rules regarding dissemination of material information—keep their cards close to their vests.They hire investor relations staff to keep investors and analysts at arm's length, and conduct discussions only in tightly con-trolled venues.They produce consolidated, i.e., unintelligible, financial statements...
...Equities necessarily have huge durations relative to bonds...
...You will also learn how you can get more teaching that engages the mind from our full line-up of more than 90 Great Courses...
...You'll gain a superior understanding of one of the greatest civilizations that ever existed, under the guidance of a distinguished scholar and accomplished lecturer...
...Not good...
...our own role in the disaster...
...Women in Roman Society...
...The California energy crunch gave them a scare...
...Roman Slavery...
...How (lid a tiny group of hamlets on the Tiber become a colossus that bestrode the known world and left such a deep impress on history...
...Social and Cultural Life in the Late Republic...
...necessary...
...Until we find a way to make them put their own money at risk, we shouldn't be surprised at the shabby way shareholders get treated...
...Both phenomena are clearly present in the markets today...
...The Sources...
...GARRETT G. FAGAN (Ph.D., McMaster University, 19931 is associate professor of history at the Pennsylvania State University in State College...
...Let's hope our cocoon heals quickly...
...ENRON AND ME BY STEPHEN MOORE These days, the ultimate status symbol in Washington is to have been on Enron's payroll...
...20 THE AMERICAN SPECTATOR • MARCH/APRIL 2002...
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...We need to know how you and I stepped on the biggest banana peel in history, proving for all time that God does have a sense of humor...
...The result is the increasingly chaotic price movements we have 18 THE AMERICAN SPECTATOR • MARCH/APRIL 2002 The History of Ancient Rome...
...These prices then feed back through credit markets, collateral values, and analyst and rating agency announcements to further influence asset prices...
...More than three-quarters of analysts lost their jobs during the bear market from 1968 to 1981...
...Many of them are organized as hedge funds, where the principals have their own money in the game and a piece of the profits...
...It includes Robert Rubin, Karl Rove, Larry Lindsey, Frank Luntz, Bill Kristol, Robert Zoellick, Peggy Noonan and, of course, three-quarters of the members of Congress...
...Duration is a concept many investors know from fixed-income analysis—the measure of how long you have to wait to get paid back...
...Exploring their lives and achievements with this superb taped course is a wonder and a joy...
...which they use to discount public companies' expected future cash flows.As a result, since November the stock market has followed the Enron story down like synchronized pair skaters...
...Fortunately, the dwindling number of value investors willing to bet on their own intrinsic value judgments also implies higher returns for the few who continue to play this important role...
...Size: 3"W x 5"H x 1 4)"D GRUnDIG Keep...
...Stock market investors have built a liar's premium into the cost of capital...
...Explaining the Rise of the Roman Empire...
...code from this ad (e.g...
...Mathematicians know that systems with both delayed feedback mechanisms (reliance on outsiders for information) and nonlinearities (triggers) are unstable...
...Finally, Wall Street analysts are just too young...
...tian Coalition director Ralph Reed's $300,000 in Enron consulting payments got him on the Washington Post's front-page...
...Why did we discover Enron—its problems—when we did...
...Every course comes with helpful printed course guides that give you lecture outlines, reading lists, glossaries, and more...
...I'm not actually going to write about Enron...
...Statisticians call such an improbably long run of luck—flipping a coin and getting twenty heads in a row—a race...
...In all, over the past decade, Enron tossed around tens of millions of dollars from its political piggy bank...
...The Royal Rule of Sulla...
...September 11 sealed the deal...
...r \1 adssr ADO, rs u1~-----------FREE CATALOG...
...As a further irony, the bigger the company, the harder it is for an investor to find out what is really going on...
...With its superior dual conversion circuitry for optimal sensitivity and selectivity, all-band shortwave coverage, AM, and FM-stereo...
...And you'll also explore daily life, including such fabled Roman customs as gladiatorial combat, public bathing, and chariot racing...
...Roman Paganism...
...Before joining the faculty at Penn State, he held teaching posts at McMaster University and York University in Canada, and at the University of North Carolina—Chapel Hill and Davidson College...
...The Teaching Company scours America from coast to coast searching for the best college lecturers, who can be identified most surely by teaching awards and consistently outstanding marks on independent student evaluations...
...Yes, we are having witch trials...
...Here's the principal reason:The incredible 1981-2001 stock market rise, during which you could make money in the stock The CTRAVELLER VII is the perfect travel radio and everyday companion, this palm-sized radio is your headquarters to information at your command...
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...Taught to you memorably and effectively in 48 information-packed lectures from The Great Courses Like almost no one before or since, the Romans thought big and built to last...
...Growth companies, technology companies with back-loaded cash flow forecasts, and nondividend paying companies will be negatively affected relative to companies with steady free cash flow, simple technologies and steady dividends...
...As you'll learn from these 48 enthralling, easy-to-use lectures on The History of Ancient Rome by Professor Garrett Fagan, the Romans' magnificent cultural legacy is all around us still, in our art, architecture, language, literature, engineering, law, government, and religion...
...But its real value is as a tool or proxy for investment analysts, because a 100-basis-point increase in the cost of capital reduces the prices of securities by a percentage roughly equal to their duration...
...The Second Triumvirate...
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...THE COURSE CURRICULUM PART I (Lectures 1-12) Introduction...
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...Risk aversion undermines capital investment, innovation, new business formation and growth...
...To them the observer is an integral part of the system being observed—the essence of Niels Bohr's Copenhagen Interpretation of quantum mechanics.According to Bohr, the answer to the famous question about a tree falling in the forest is simple: If nobody is there to see it, the tree doesn't even exist...
...Why didn't we know what was going on...
...It is eminently worth knowing, which is why The Teaching Cornpany is so proud to offer this course to all who desire to understand Order today...
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...In recent years, investors have developed an unhealthy and excessive reliance on the work of rating agencies and sell-side securities analysts when making valuation judgments...
...Look for a lot more self-insurance schemes and co-op financing arrangements to develop...
...How can we make money out of this...
...The Captured Conqueror"—Rome and Hellenism...
...In economics the observer—i.e., the investor—determines asset prices by setting both the risk-adjusted cost of capital and the expectations for future cash flows...
...Rome in the Eastern Mediterranean...
...History gives us many examples of frightened people behaving badly...
...The Beginnings of the Republic...
...For equity investors, that means a time-weighted average of the present value of a company's projected future cash flows...
...And you won't have to pay thousands in tuition, take exams, or disrupt your schedule by even a minute...
...By comparison, at today's rates the duration of the 30-year Treasury bond is only about 15...
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...Investors who are willing to take positions based upon independent judgments about intrinsic value play an important stabilizing market-maker role...
...Dublin, and was a Killam Postdoctoral Fellow at the University of British Columbia...
...Wall Street calls it a bull market...
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...They will not be satisfied until our illusion of order has been fully restored...
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...they live mostly in the dark...
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...Cognitive science researchers such as MIRROR, MIRROR ON THE WALL WHAT DOES THE ENRON SAGA SAY ABOUT US...
...The International Scene on the Eve of Roman Expansion...
...A native of Dublin...
...Mathematicians call these Complex Adaptive Systems...
...The beneficiaries list reads like a Who's Ll4'ho of the Washington power structure...
...In America today we use politicians to conduct our exorcisms...
...The informative liquid crystal display (LCD) shows you everything...
...Why do we watch the C-SPAN witch trials...
...Essentially, the market is deprived of the normalizing benefits of the Central Limit Theorem, which says that the average behavior of a large number of independent events becomes more predictable as the number of events grows larger...
...Unfortunately, the world is a disorderly place and getting more so, guaranteed by the monotonically increasing entropy dictated by the Second Law ofThermodynamics.We bridge this uncomfortable gap by wrapping our-selves in a cocoon of illusion that the world—our world, at least—is safe...
...How will Enron affect risk taking...
...It is no coincidence that Enron vaporized in the weeks just after 9/11, when investors' appetites for risk collapsed with the World Trade Center...
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...We will do almost anything to restore our illusion of order so we can go about our business in comfort again.Throughout history, the standard way to accomplish this is to burn someone at the stake...
...N3>,e !rarer rs...
...It gave us the Inquisition, the Ku Klux Klan and Joe McCarthy...
...stocks, estimate the duration of the S&P 400 Indus-trials today at just over 26, based on consensus growth and profitability assumptions for the individual companies in the index...
...Man is an order-seeking creature...
...This is a harsh environment for investors who don't do their own homework, and belies a serious structural problem in the market...
...BY JOHN RUTLEDGE Put the corner of this page down and back away slowly...
...Unfortunately, they are either the hired managers with salaries and one-way stockoptions, or investment bankers, lawyers and other hired guns working for fees...
...Ireland, he eared his bachelor's and master's degrees at Trinity College...
...This sense of order was shattered when we watched hijacked airliners crash into the World Trade Center...
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...The History of Ancient Rome tells a complex story that is sometimes horrifying, sometimes glorious, and never less than hugely intriguing...
...The mob is out for blood today, looking for bad guys under every balance sheet...
...Pompey and Crassus PART III (Lectures 25-30 The First Triumvirate...
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...The Pressures of Empire...
...Contrast this with companies owned by private-equity investors, who have access to every document and person in a company, who can ask any employee any question at any time, who take part in planning the company's future, and who can intervene when necessary...
...The Struggle of the Orders...
...This has big implications...
...If you want to dial in a station, it is clearly shown with perfect digital accuracy...
...When all this goes wrong, as it did with Enron, apparent value can evaporate overnight...
...There are people who know what's going on in public companies, of course...
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...In the morning, the alarm feature wakes you up to your favorite station...
...At least you can in the public markets...
...The Enron saga has also made stock prices extremely volatile and made the shares of even established companies with huge market capitalizations react violently to every bit of new information...
...Never again will you have to guess which specific frequency you are tuned to...
...This article is motivated by jealousy, not rage...
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...After Enron and Arthur Andersen, the spotlight shifted to Tyco,Vivendi, Global Crossing and many others...
...Students at every institution consistently offered high praise for his courses in ancient history...
...Our willingness to take risks has always been one of the great strengths of American companies and the American economy...
...Growth stocks have longer durations than value stocks for the same reason...
...Visit our website: www.grundigradio.com MARCH/APRIL 2002 • THE AMERICAN SPECTATOR 17 William Calvin, author of The Cerebral Code, argue that our brains process information by extracting patterns from the observed world and projecting them into the future.Twenty heads in a row is a pattern few stock market investors were willing to bet against...
...plus $20 shipping, handling, and guarantee...
...Conventionally, duration is defined as the time it takes for you to receive half the present value of the future payments dividends, interest or reinvested free cash—that make up the value of the security...
...The owner of a corner drug store knows more about what's going on inside his business than public investors or stock market analysts will ever know about companies like Enron...
...Even at the remove of many centuries, its epoch-making significance leaps from the annals of our common history and shines through many of the finest achievements of our civilization...
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...Deborah Allen and Paul Davis of Rutledge Research, an independent research firm based at the College of William & Mary that makes intrinsic value estimates for U.S...
...Why didn't we know what was going on...
...The upshot: a confidence event—another Enron or a terrorist attack that increases the cost of capital by 100 basis points will push stock prices down by 26 percent, nearly twice the effect (15 percent) on the long bond...
...The Kings of Rome...
...Investors willing to look in the mirror and understand our own weaknesses are better equipped to take advantage of times like these...
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...Ironically, the insider trading rules that are designed to protect outside investors have built barriers of silence around public companies...
...In a similar way, lenders, vendors and stock market investors have all developed an unhealthy dependence on the work of rating agencies.Automatic triggers have increasingly been built into contracts, which change input prices, interest rates, credit availability and other important business parameters...
...Sulfa's Reforms Undone...
...To answer these and other fascinating questions, Professor Fagan draws on a wealth of sources, including recent archaeological findings...
...Unlike economists, physicists are used to looking in the mirror...
...How will it affect the stock market...
...Antony and Octavian...
...The higher risk premium investors are charging today does not affect all stocks equally As the cost of capital increases, significant duration differentials among different industries and companies will lead to changes in their relative valuations...
...There are other implications, too...
...Pompey and Caesar...
...The people who do this are essentially gleaners, earning above-market returns by doing the work of collecting and processing information that has been over-looked by the great herd of investors...
...Offer Good Through June 7. 2092 e copy of your MARCH/APRIL 2002 - THE AMERICAN SPECTATOR 19 seen Enron's own cliff dive most prominently...
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...Stock market investors have voted with their feet, moving into bonds and hedge funds, with the hope of less volatile but still positive—returns...
...Why do we watch the C-SPAN witch trials when we know the inquisitors were on the payroll, too...
...Here are some questions that highlight John Rutledge is chairman c ?f Capital, a private equity and hedge fiend management firm based in New Canaan, Connecticut...
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...Insurance companies are backing away from liability coverage...
...As their numbers dwindle, whether due to indexing or increased reliance on a small group of third-party advisors, stock prices become more volatile...
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...Why are we so outraged...
...According to CAS theory, if you put several agents together—think of an agent as a person—even though you think you understand how each agent behaves separately, the resulting system is very likely to behave in a surprising, complex or chaotic manner...
...We found Professor Fagan through these exacting processes, and we promise that he will not disappoint...
...It forms the basis for Shakespeare's Othello, for Voltaire's Candide, for Dickens's Tale of Tivo Cities, for Charles MacKay's Popular Delusions and the Madness of Crowds, and for Freud's treatise on mob psychology in Hitler's Germany...
...These triggers depend on the decisions ofjust a few people at only three rating agencies, rather than the average behavior of a large number of investors...
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...Carthage and the First Punic War PART II (Lectures 13-24) The Second Punic (or Hannibalic) War...
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...Everyone working on Wall Street today still has hair.They have not yet lived through a bear market...
...How will it affect the stock market...
...Imagine, at home or when traveling, not only tuning in local AM and FM stations, but international shortwave broadcasts as well...
...This is especially true of the professionals, the banks and insurance companies, who takerisk for a living...
Vol. 35 • March 2002 • No. 2
