How far will the fear of more Enrons spread through the stock market? Maybe not as far as it should, says veteran strategist Byron Wien of Morgan Stanley Dean Witter. In an interview with BusinessWeek Associate Editor David Henry, Wien says it's too early to assume that the scandal will rout believers from what he calls "the cult of equities." Edited excerpts from their conversation follow:
Q: You've said the damage from Enron may spread beyond a few stocks with accounting issues to the broader market. Do you think that will really happen?
A: It should happen, but I don't know whether it will happen. The market is concerned, but right now the reaction to Enron is that it is an isolated example. To me, it is indicative of a larger problem. In fact, aggressive accounting to some degree probably exists in many other places.
Q: Why haven't the concerns spread beyond Enron and a few other specific stocks?
A: It's the cult of equities...everybody wants to believe that the good old days of 1995 to 1999 are coming back again. It is a struggle between the cult of equities and reality.
Q: How vulnerable is the market to this struggle? How rich are prices?
A: Relative to interest rates, the market is about fairly valued at 22 times my estimate for 2002 earnings. But in absolute terms, the market, no matter how you look at it, has a rich valuation. If you call earnings into question, the valuation is further in doubt. The market is based on trust, and if trust isn't as high, you would expect valuations to come down.
Q: But why won't the reality you see bring down valuations across the market?
A: It's a question of which force is more powerful. My feeling is that it will ebb and flow, back and forth. That's what you've seen so far in the market this year. I've said I expect the market to be down this year for the third year in a row.
Q: So we're in for trouble?
A: I'm not bearish, I just don't think the market is going to run away here. Eventually earnings will start to improve enough to support the valuations.
Q: Won't Enron make companies be more conservative in their accounting of their earnings?
A: Earnings are not going to run way up here.
Q: So you don't see a great move in the market?
A: The Enron experience and its aftermath will keep valuations from expanding.