The Enron Collapse

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Enron: Skilling & Lay: How Much Blame?

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 calculation 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 that 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?


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Copyright 2002 Economic Solutions (SA) Pty Ltd

Be Aware!

The World Stock Markets have been in a downward trend over the last few months and are continuing to fall.

This is similar to the early 2000's when the large financial collapses of Enron and Worldcom had the effect of decreasing confidence in the market. There are more Financial Collapses coming from the Sub Prime Mortgage problems and the direction of the US economy.

There are currently a number of examples of financial collapses from "OVER Priced" Companies and "more" coming.   Northern Rock (UK); Carlyle Capital (Netherlands) and Bear Stearns (US). With Bear Stearns the partial (39.5%) take over offer of $10 per share on 25th March 2008 from JP Morgan Chase is more than 80% less than the traded price ($75 range) in early March 2008.  In the deal the US Federal Reserve subject to certain terms also guaranteed $29 Billion of Bear Stearns loans.

Accounting standards and Companies treatment of these has come under close scrutiny and assessment. Even so, now more than ever it is critical that Companies be closely scrutinised on the basis of their Future Cash Flows for the capital they have got under their control.

Investors need to know
how to correctly evaluate a stock and the questions that they should have clear answers to prior to investing. Our report on Investors need to know clearly answers these needs in an easy to understand way.

The report on the The Enron Collapse is a "MUST READ" for all investors as it clearly identifies and clarifies what is wrong with the current financial system and shows how investors can identify Enron type companies and thus avoid future losses.

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