Man Without Qualities

Thursday, February 21, 2002

How Many Were “Misled” and For How Long?

Many have claimed that the sharpest minds on Wall Street were misled by Enron’s financial statements. The following excerpt from the October 19, 2001 Reed Wasden Research weekly sector report indicates that Reed Wasden Research was “extremely skeptical” of Enron’s prospects even before October, 2000:

"For over a year now, Reed Wasden Research has warned investors to beware of Enron. We have been extremely skeptical of the company's future earnings and growth potential."

"Since November 2000, we have been cautioning Enron investors that the emperor has no clothes."

"What is clear from the P/E chart . . . is that the reason for the stock's volatility and 'bubble' was not the strength of its earnings but how investors perceived and valued those earnings."

"We believe Enron has lost investor confidence in management, the business model, and transparency of earnings. Management is clearly involved in a corporate clean-up which is likely to take a couple more years, resulting in a string of write-offs. Proceeds from pending asset sales will need to be used to pay off debt, and get the company's asset position back in shape. We believe Enron's stock will no longer trade at a premium to its peers. We also still believe there is a potential downside for the company as it negotiates what will surely be a difficult restructuring period.

"Likely catalysts that would cause us to review our position on the company would be: 1) full disclosure of trading operations that will illustrate actual trading revenues and EBIT, separated from sales of physical assets; 2) a clear strategy from management of how they will focus the business going forward, including exactly what assets will be rationalized and why such actions are in line with their strategy; and 3) more complete development of their expansion plans in Japan."

"We believe the company continues to fall short of any level of meaningful financial disclosure."

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