The question about how much blame is not about determining any verdict of guilty or not guilty as the courts will do this. It really relates to shareholders, employees, community and country losses suffered as a result of the collapse. In the end various parties have and may still be found to have a portion of the blame and shareholders and employees who have suffered most are certainly keen to see final outcomes to this situation. However one of the major contributors may never be accounted for; this being the market itself. The market (stock market) is made up of many components and this certainly includes investors. When we ask how much blame we are really looking at dollars lost. During the 2000 year the share price reached $US90 plus, in March/April 2001 period it was around $US55 to $US60. On 19th December 2001 the price was $US 0.19, that is 19 cents before Enron went into liquidation. Using the Reported Annual results for the year ended 31st December 2000 and assuming no changes into the future, I have calculated the underlying intrinsic share price as $US4.54. This calculating is based on normal traditional discounted cash flow methodology. A share price of $US4.54 is certainly different to a share price of $US55 to $US90. Basically the market over valued ENRON by more than 90%. There are a number of stocks are way over priced by the market and there are also stocks that are substantially under priced by the market. Generally over a period of time share prices of stocks that are substantially over priced fall back to a level more closely aligned to their underlying intrinsic value (or lower) where value is calculated on a trend analysis of recent past financial results. Similarly over a period of time share prices of stocks that are substantially under priced increase to a level more closely aligned to their underlying intrinsic value (or higher). Is it any surprise that the share price of Enron was destined to decline sharply? A rapid decline in share price can lead to a lack of confidence in the stock and further add to the decline in price. Downturn in confidence has been put up as a defense factor in the recent Skilling court case. A downturn in confidence can be triggered by a downturn in share price. The decline in a share price of a stock that is substantially over priced can happen in different ways and from different reasons. At some stage the market takes a closer look at the performance of the company and in particular the future forecasted financial performance components for the company and makes a judgment about these factors. If the current and future financial performance indicators are reduced or looked at detrimentally then the share price will decline as the market decides to sell down the stock. This is a downturn in confidence factor. There are a number of complex issues involved in the market and this article does not cover all these issues. A decline in share price can also be triggered by various external factors that include a decline in commodity prices, increasing inflation and interest rates and negative economic forecasts. In the end shareholders loss was substantial. A number of parties have been attributed a portion of the blame for this great and painful loss; however the major contributor was definitely the market. A share price of $US90 was excessive and was destined to be reduced. Clearly the market over valued ENRON by more than 90%. For many investors this over valuation has contributed substantially to their financial loss. Investors can avoid suffering more large losses that would be incurred by collapses similar to that of enron if they have answers to their questions on what is the underlying value of this stock? For more information go to http://www.enroncollapse.com Copyright protected 23rd May 2006 Peter Cobiac Economic Solutions (SA) |
