Investors worry as scandals rock markets

You have to know that corporate America is getting very nervous when the chairman of the world’s biggest retailer feels obliged to reassure shareholders that their company’s finances are squeaky clean.

That’s exactly what happened in early June at the annual meeting of Wal-Mart in the Arkansas community it put on the international map, Fayetteville.

Rob Walton, son of the legendary Sam Walton who founded the giant firm, actually went beyond simply telling the meeting that all was well. He actively encouraged Wal-Mart employees to “blow the whistle” on any perceived financial irregularities within the company.

Tough language needed
He might come to regret that open invitation in the months to come when disaffected staff try to use it as an opportunity to discredit unloved bosses, as will almost certainly happen.

But in the light of the scandals that are rocking some of the largest corporations in the U.S., he clearly felt that such tough language waneeded.

As I watch what’s happening south of the border, the parallels with our beleaguered government in Ottawa become increasingly obvious. Public confidence in the Liberals is being rapidly eroded by the ethics scandals that have been swirling around the heads of the Prime Minister and some of his cabinet colleagues for months.

The Paul Martin debacle certainly grabbed public attention. But the steady drip-drip-drip of new ethics revelations has been a major contributor to the marked decline in the popularity of both the government and the Prime Minister that the polls are now reflecting.

Public confidence hammered
America’s corporate scandals are having a similar effect, except in this case it’s public confidence in the stock markets that’s being hammered.

They’re now coming so fast that it’s hard to keep score: Adelphia, Tyco, ImClone Systems, which has dragged cultural icon Martha Stewart into the mess.

Ever since Enron collapse, it’s been one disturbing story after another. The big headlines have gone to the travails of Arthur Andersen, Merrill Lynch and the Wall Street brokerage community, Tyco and ImClone.

But there have been many other stories of alleged malfeasance and questionable accounting practices swirling in the background.

Next page: Whom to trust?

Whom to trust?
Investors don’t know what to believe or whom to trust. A major company that appears solid one day can go down in flames the next.

Newsday reported recently that a poll done in May by UBS/Gallup found that more than 80 per
cent of respondents felt that questionable accounting practices were driving investors away from stocks.

The poll also found that 40 per cent said they are less likely to invest in equities because of all this.

I’m sure that those confidence levels are even lower today.

Weighs on markets
The growing mistrust is weighing heavily on the markets, especially in the U.S. It is a major contributing factor to the dichotomy emerging between stock prices and the economy. These normally follow the same general track.

The huge unknown is how long this will go on and what other nasty surprises may be lurking in the wings.

Time, and tougher corporate governance, will eventually heal the wounds. But the healing process can only begin when the bleeding stops, and so far, we have seen no evidence of that happening.

No summer rally
I said in late March that unless April produced some strong earnings reports, the summer would likely be a wash-out for stocks. We had a few nice surprises, but nothing that got people excited.

Then came the next round of corporate scandals and all hope of a summer rally was dashed.

My best guess right now—and it is a guess, nothing more—is that we can’t expect a sustainable market rally to take hold until at least the fall. And that is contingent upon two things:

  • No more big corporate scandals
  • No major terrorist attacks on U.S. soil.
Be very selective
This does not mean you should stay out of the stock market. It’s during times like these when the foundations of a future rally are being laid.

But continue to be very selective in adding to your stock portfolio.

Focus on companies with a proven history of high ethical standards and strong cash flow.

And pay close attention to the statements made by senior officers. I liked what I heard from Rob Walton recently. I may just go out and buy some Wal-Mart shares.

Adapted from an article that originally appeared in the Internet Wealth Builder.