Mark your calendars.
Investor confidence is expected to return to the stock market as of Aug.14. That's the day that most companies file their most recent financials with the Securities and Exchange Commission. August is also when Congress breaks for its summer recess. With all the public outcry that has resulted from the accounting scandals unveiled at Enron, Worldcom and others, you can bet some sort of legislation will be coming out of Capitol Hill before those esteemed members break camp, or else they will face some populist outrage when they return to their constituents.
The scandals and resultant crisis of confidence has every government entity tripping over itself in an effort to address the confidence problem and, hopefully, halt the slide of stocks. The SEC's order could have far-reaching implications. It requires CEOs and financial officers of companies with more than $1.2 billion in revenues last year to swear, under oath and in writing, that the numbers in their companies' recent financial reports are accurate. If the numbers then turn out to be inaccurate, those officers could be liable for criminal charges of fraud and criminal charges of perjury, lying to the government.
Another proposal to beef up the SEC's arsenal would apply to all public companies. But that proposal won't be considered until after a comment period which ends Aug. 19.
The U.S. Senate has passed a sweeping reform bill in response to the crisis of confidence, establishing a new accounting watchdog as well as imposing stiff penalties for company executives that deceive investors. The U.S. House of Representatives is considering even tougher penalties for corporate crimes, raising the penalty for wire and mail fraud and tampering with documents to 20 years, from the current 5 years, and twice the Senate's proposal of a 10-year prison term.
The Senate bill must be reconciled with the house bill before it can be signed into law by President George W. Bush. The president has urged Congress to get a corporate reform bill to him before the August recess.
With time quickly running out before Congress recesses for the summer, chances are slim-to-none that a meaningful reform bill will be signed. But we could have Congressional hearings after the summer recess right up until the November elections -- at least that's what market veteran Jim Awad believes.
Awad, chairman of small cap value specialist Awad Asset Management, says there's a lot of work to be done between now and Labor Day, but between Labor Day and Christmas (at the latest) stocks should find a bottom. He expects the economic and earnings engines to kick in, but it will be a painful few months.
After more than three decades on Wall Street, Awad knows something about market recoveries. Small caps are often the first to recover from a market downturn, and for five of nine years from 1993 through 2001, the core portfolio of Awad Asset Management outperformed the Russell 2000 Index, the most widely used benchmark for small cap stocks. Last year, Awad's small cap core rose 14.8 percent, compared to a 2.6 percent gain for the Russell 2000.
And the companies that will lead us out of this bear market? Those that have simple balance sheets, sound accounting techniques and solid business models. Awad also says that investors will look for organic growth instead of growth-by-acquisition.
But what about those of us nearing, if not in, retirement? Jim's suggestion is to weed your portfolio now. Don't wait for the losers to come back. Don't average down. Just get rid of them. Position yourself to make back some money by buying conservative names in the small to mid-cap arena, companies that have little or no debt, cash on the balance sheet and modest multiples, or price earnings ratios. If Jim's outlook is right, and the economic and earnings engines to kick in, these stocks may benefit.
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