NEW YORK (CNN/Money) -
Tuesday night, the other shoe dropped.
Ever since Enron, investors have worried that something big was lurking in the wings. A steady stream of scandal -- Global Crossing, Qwest (Q: Research, Estimates), Peregrine, Adelphia -- kept the fear alive. And so it came: WorldCom (WCOM: Research, Estimates), perpetrator of what looks like one of the biggest accounting frauds in history. If trust in Corporate America was already broken, now it's in shambles. With that, many investors may decide to exit the U.S. stock market. And not come back.
"I think you're going to have people withdraw money for good," says Todd Clark, managing director of listed trading at Wells Fargo Securities. "People are going to say, 'I'd rather bet on the New York Giants because I have a better chance of guessing the result than of knowing what some management team is up to.'"
With the market whipping lower before a late-day recovery took it back to the flatline, Clark's worry was echoing all over Wall Street.
"We're seeing basically complete distrust in financial accounting in the Western Hemisphere," says Phil Ruffat of Mizuho Securities USA's futures division. "People are going to pack it up and go."
Of particular concern is global investors who, to judge from the recent declines in the dollar, had already been pulling money from our fair shores. Ruffat, who works closely with Japanese clients, says that foreign confidence in U.S. assets has fallen to a new low.
If that's what it's come to, one of the main drivers of the 1990s bull market has been turned on its head. Stringent accounting standards and active shareholder participation were supposed to make companies here more transparent than they had been in the past. This meant the risk of owning U.S. stocks was low both historically and compared to places like Japan.
And so both here and abroad investors ploughed money into our stock market. Paul Kasriel, chief U.S. economist at Northern Trust, points out that by the end of 2000 foreigners owned financial assets close to 25 percent of the U.S. capital stock, up from 11 percent in 1990. It is hard, he thinks, to imagine foreigners keeping up that level of investment given what's going on.
"Even without the fraud," says Kasriel, "return on capital has been plumbing the depths, the United States is at war, government spending exploding to the upside and we're imposing tariffs on steel and lumber. What's to like?"
And of course it's not just foreign investors who might be asking that question. U.S. investors have been just as burned, and have just as much reason for disgust at the shenanigans companies have played, as their foreign counterparts. There are plenty of places to put money besides stocks (bonds, money markets, gold, under the mattress) and plenty of people may opt to do just that.
While many market watchers, attuned to the big market bouncebacks from 1987, 1997 and 1998 talk of "capitulation" -- a period of blind selling that puts a firm bottom on stocks and marks the new bull phase -- the WorldCom debacle could just as easily mark the beginning of a long period of disinterest, where the stock market ends up being no better than a mugs game.
"We're taking a lot of the people out of the market permanently," says Bollinger Capital head John Bollinger. "We're losing a whole generation of investors."
What Bollinger expects is not the V-shaped rebound so many investors hope for but something like the long grind the U.S. saw in the 1970s and that Japan has been seeing for the past 13 years. After topping out at 1,050 in 1973, the Dow Jones Industrial Average wasn't able to pull clear of the 1,000 level until 1982. Tokyo's Nikkei hit its high back in 1989 and has ground steadily lower ever since then.
Maybe the prognosis for U.S. stocks isn't so dire as that but one thing seems certain: investors who think WorldCom is the end of the accounting imbroglio are in for disappointments. What's so disappointing about WorldCom is that it proves the cockroach theory -- where there was Enron, there was more.
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"Telecom is where people thought the next Enron was going to be, and they weren't disappointed," says David Hawkins, a Harvard Business School professor who acts as an advisor to Merrill Lynch on accounting issues. Hawkins suspects that the breed of fraud that happened at WorldCom -- treating expenses as capital expenditures -- probably happened elsewhere in the telecom arena.
With that kind of backdrop, some investors suspect that any rallies in the weeks to come will be short-lived. "The feeling is that confidence in corporate America has deteriorated so much that maybe you're going to see the typical step up, followed by multiple steps down," said Seth Tobias of the New York-based hedge fund Circle T.
And as for those responsible for the WorldCom debacle?
"I hope these people go to jail," says Tobias.