US investors remain cautious

Will fears about accounting standards sap investor confidence?

		By David Schepp BBC News Online's North America business reporter

Confidence in US stock markets has slipped in recent weeks as investors remain dubious over investing after the collapse of energy-trading giant Enron.

Equities are cheap, really cheap!

Ian Shepherdson, High Frequency Economics

Enron managed to conceal the full extent of its debts from shareholders, prompting concerns over the reliability of financial statements which have left many investors wondering what other corporate gremlins might emerge in the coming weeks and months.

While the market has made strong gains in two days of trades on Wall Street, four consecutive days of losses registered last week gives a hint of directionless markets in the coming weeks, analysts said.

"The psychological aspects of greed and fear always are at play in the markets," says Henry Asher, president of the Northstar Group, a New York investment advisory firm.

Priced just right

Mr Asher told BBC News Online he believes that stocks for the most part are fairly priced and share prices have already taken into consideration the accounting scandals at Enron and other firms.

He says there are pockets of stocks that are "undervalued" - selling for less than they are worth.

That is an assessment Ian Shepherdson, chief US economist at High Frequency Economics, agrees with.

"Equities are cheap, really cheap!" he said of US stocks.

"The weakness in stocks since early January has left non-tech [stocks] - that is, the bulk of the market - looking very reasonably priced," said Mr Shepherdson.

In his view, the fear of more Enrons has become a very significant factor in the markets but one that cannot be counted on to last forever.

Too rich for some

On the other side of the fence sits David Blitzer, chief economist at Standard and Poor's (S&P), who believes stocks remain overvalued.

"I'm hard put to say they're cheap," he told BBC News Online.

What has Mr Blitzer pleading a contrarian view are share prices of firms within the S&P 500, a broad swath of US stocks, that are trading at 24 to 40 times earnings per share.

To consider stocks as cheap, investors must take an optimistic view of likely profit trends, he said.

"The bet is that earnings will go up very nicely this year and next," he said.

If that trend emerges, he acknowledged, then despite volatile stock prices in the meantime stocks may indeed look under-valued by the end of the year.

"That sounds almost too good to be true, but it actually happed in 1994," when similar stock and business cycles last existed, said Mr Blitzer.

Economic weakness

Spending by US consumers has largely driven the economy over the last year as American business cut back on expenses and investments.

The trend was especially evident during the last three months of 2001 when consumers responded in record numbers to discounting by Detroit auto makers, who enticed customers with zero-interest loans and huge rebates.

"One wonders how many cars US consumers can own or how many driveways they have," said Federal Reserve Bank of Boston president Cathy Minehan.

Now, domestic auto makers are scrambling to get sales going again, as consumers begin to rein in expenses in response to concern over uncertainty in financial markets, among other things.

Restoration of investor confidence has already begun, says Ed Yardeni, chief investment strategist for Deutsche Banc Alex. Brown.

"Markets are actually very efficient," Mr Yardeni says. "With respect to the accounting scandal... it's going to work."