Investors wary amid turmoil

THE BALTIMORE SUN

There's a thin line between alarm and panic, and 69-year-old Sarah Crooke was standing on it.

The question she asked her financial adviser was simple on the surface, but he could hear the emotions bubbling beneath. Where, she wanted to know, might the money she and her retired husband planned to live on the rest of their lives - most of it invested in the stock market - be safe?

In a week that included more empty testimony in the Enron case and the revelation that a Baltimore bank, Allfirst Financial Inc., had hemorrhaged an apparent $750 million before anyone noticed, Crooke's questions were valid ones.

"These things are causing the average American investor to lose confidence in the market," she said. "Our economy is based on the stock market. It's based on trust. It's based on having legitimate auditors. It's based on checks and balances. If we can't trust these corporations, what happens to our economy?"

Those questions increasingly hit home as more and more Americans become investors. Newsday reported this month that half of U.S. households owned stock in 1999, up from 34 percent in 1990, according to analysts with the Federal Reserve Bank of New York's Research and Market Analysis Group.

Analysts and investors agree: The recession was bad enough, and the terrorist attacks of Sept. 11 even worse, but confidence in corporate America could be sinking to new lows - and caution to new highs - thanks to a string of spectacular bottom-line blows.

Whether it be from reports of fuzzy accounting or bad forecasting - or, in Allfirst's case, an alleged "rogue trader" racking up losses - investors are becoming increasingly skeptical, market watchers say.

"Allfirst is just another big surprise - another announcement that shakes your confidence that you know the complete story," said Hugh A. Johnson, chief investment officer for First Albany Asset Management.

The announcement Wednesday by Allied Irish Banks PLC, parent of Allfirst, that it lost $750 million because of fraudulent currency trades was a bombshell. But it fell into a deeply pocked investment landscape. Companies such as Cendant Corp., Williams Cos. Inc., Global Crossing Ltd. and Elan Corp. have watched their stocks plummet in recent weeks as investors have begun questioning their complicated accounting.

Most analysts consider the collapse of Enron Corp. to be the catalyst - some term the market's nervousness "Enronitis." But in many cases, such as the sudden plunge of Tyco International Ltd., no impropriety or instability was alleged, just complex accounting that made investors nervous. Stock in Allied Irish plunged nearly 17 percent after the losses at Allfirst were announced.

"These things have done some serious damage to investor confidence," Johnson said. "People used to ask me how they could defend against the bear market. Now they want to know how to protect themselves from scandals, swindles and fraud."

'Great buys out there'

Barry Hebbel, 46, still looks at the stock market and sees money to be made.

A father of two who works as a software salesman for Mercury Interactive in Baltimore - "I'm Al Bundy with a laptop," he said - he keeps a relatively risky 80 percent of his investments in stocks and mutual funds. But, these days, before he buys anything, he's getting advice and trying to make certain he's not latching on to a lemon.

"You've got to look much more closely today at what you invest in and make sure that, once you pull up the hood, there's really an underlying business there that you can make sense of," he said.

He's looking for companies with a strong foundation and a clear mission - ones where it's not clear just that they are making money, but why. In the past, that hasn't always been clear, especially during the dot-com boom, which, at the advice of his financial planner, he avoided investing in.

"In the last 10 years, business was going so great in so many areas, and a lot of people were coming out of school and getting in high-level positions no matter what their experience was. Some of them were playing above the rim, and some of them were probably playing a little loose, and some of them tried to keep the numbers fluffed up when the economy got tough," Hebbel said. "Analysts didn't have any way of justifying the prices. It was kind of like everybody was fooling themselves. And now we're seeing what the fallout of that is."

Despite his concerns, he's not giving up on the market: "Considering my age and income, I'm more inclined to take risks at this particular point in my life. Besides, there are still a lot of great buys out there."

Skepticism before scares

With the economy in recession and many stocks battered from their dot-com boom highs, advisers say the public was skeptical of the stock market before the recent scares. But Charles B. Carlson, vice president and portfolio manager of Horizon Investment Services in Hammond, Ind., said the investor malaise has the potential to be far more damaging.

Although betting on inflated Internet or technology stocks three years ago was risky, at least investors could navigate through financial statements, Carlson said. Today they're losing confidence in even the most fundamental pieces of information available to them.

"Everybody kind of knew that the dot-coms were a bit of a funny money thing," he said. "But now you have company after company after company doing things that you weren't even aware of, sometimes illegally. If people start thinking that everything reported by corporate America is bogus and everyone is deceiving them, it will be hard for the market to recover."

At the L and M Investment Club in Baltimore, a quarter of the club's dozen members have decided recently to put less cash into their stocks - though they're willing to pony up the $100 a month for the club's investments.

The club's president, Thomas Kingston, is not one of those backing off from stocks.

"I'm cautious in the short term, and I'm optimistic in the longer term," said Kingston, chief operating officer of a Cockeysville health and lifestyle promotion company.

"To retire, you need to have a pile of cash," said Kingston, 39, who lives in Monkton with his wife and their two children. "The best way to accumulate that cash is to keep in stocks."

Kingston acknowledges that the club has taken its lumps recently. Last month, members bought shares of Elan, the Irish drug manufacturer - just before the stock swooned after questions about its accounting procedures, news of a Securities and Exchange Commission investigation and problems with its trials for a drug to treat Alzheimer's disease.

"Where do you go with Elan?" he asked. "What you do is, you sit on it. It's a solid company."

Joan Taavon, another member of the investment club, said she has "lost a little" from her retirement accounts but has confidence the market will rebound. "What goes down will come up," the 67-year-old retired social worker asserted.

Still, Taavon, a Lutherville resident, is hedging her bets in subtle ways. She said she's being more cautious about how she spends money. She's also keeping her social work skills up through volunteering - and keeping her license current: "If you have to go back to work, you can. You never know."

Harder to see pitfalls

The game is getting harder to play.

"I think anyone who really looks deep probably would see that there are some bad apples, but they're in a barrel that's otherwise full of good ones," said Steve Cochrane, a senior economist for Economy.com.

"But it's hard to see that. It's easy for many investors to look at the market and think that these kinds of irregularities are becoming more common. The stock market is very much a game of measuring risk. But you have to be able to understand the companies and have confidence in their reports in order to gauge those risks.

"Right now, there's this perception out there that people can't trust their information enough to make decisions. And they're saying, 'I'm going to sit this one out.'"

Diversifying his portfolio

Lawrence Cooper, a 40-year-old power systems operator at Bethlehem Steel, made a subtle but important change in his investments when the stock market tanked after the terrorist attacks.

Cooper, who began investing in a 401(k) retirement plan four years ago, upped his allocation to a bond fund from 35 percent to 55 percent and pared his allocation to two stock funds from 65 percent to 45 percent.

"I saw the market going down," said Cooper, a divorced father of a teen-age son. He puts 12 percent of his $51,000-a-year salary into his retirement funds. "I felt it would be a while before it came back up."

The change in allocation was a departure for him. "I don't follow my investments as closely as most people," he said. "I don't do a lot of switching and trading off."

Cooper said he'll buy more stocks when he sees the market start to go up. Even though his 401(k) is about 20 percent below where he had figured it would be at this time, he's philosophical: "That's part of investing. You can lose or you can gain.

"At my age, I'm probably going to be working for another 20 years," said Cooper, who is pursuing an electrical engineering degree at Morgan State University. "If I was 55, I'd be more worried."

Professional advice urged

Carlson, the financial adviser, said the market's recent turmoil shows why investors need professional advice: "A lot of people are scared by this because they're seeing that they actually have to do some work to be an investor."

But even professionals offer no guaranteed insulation from nasty surprises. They're victims of fudged accounting like everyone else. And Timothy J. Mulholland, executive director of the Chicago derivatives and futures consulting firm Melamed & Associates, said they often lack incentive to make good predictions.

Wall Street investment houses, which most investors rely on for advice, have failed to spot recent troubles and sometimes profit from them through investment banking revenues, Mulholland said. He has warned for more than a year that many companies' earnings were being artificially inflated to keep stock prices high.

And many times, corporate executives reap the benefits, Mulholland said, by cashing in their stocks before the prices fall from those artificially high levels.

"The public has a reason to lack confidence when they see that the companies didn't tell them about this, the analysts didn't, the mutual fund managers didn't - people they trust," Mulholland said.

"Then they see that everybody's making money but them. I've always said, 'Wait until the public figures this out.' And now they're figuring it out, and look what's happening."

A frantic call to a broker

Sarah Crooke keeps a close eye on the investments she and her husband have made in the stock market. Recently, what she has seen has alarmed her.

"She called me last week, expressing extreme concern about the market and wondering if she should sell half her assets," said Saxon Birdsong, a money manager at Baltimore-Washington Financial Advisors in Ellicott City.

Allfirst was another shock for Crooke, but the Enron case concerns her most, though she held no stock in the energy-trading firm.

"It's very scary. ... How many companies that are in the market are doing the same thing?" she said.

Crooke said she placed "kind of a panic call" to Birdsong last week from her home in Silver Spring, asking whether the money the couple has invested in the stock market should be moved somewhere "less exposed to this kind of thing."

"If I were 20 years younger, I would say it's not a real big problem because the market always pulled out. But when you're 70 years old, and it goes down, and you depend on it for your income, and it keeps dwindling and dwindling, you don't have time to wait."

Birdsong, who has been hearing similar concerns - especially from retirees and those nearing retirement - recommended the Crookes, who have about half of their investment in stocks, leave their investment alone. "I think it's important to note that financial markets do overreact, with robust abundance. What we see in firms like Tyco and Elan are gross overreactions," he said.

The Crookes didn't change strategies. "For now," Sarah Crooke said, "I'm letting it ride."

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