During the last several weeks the market has made a dramatic comeback from the lows precipitated by the September 11 attack.  Those people that took advantage of the high volatility levels and low stock prices by doing covered writing strategies were rewarded handsomely in most cases. Others probably found that the recovery in stock prices has caused some welcome relief in the equity value of their stock holdings.

The issues I intend to address today are the lessons and warnings to be learned by the unfolding debacle in Enron Corporation.  I don't believe that my brokerage firm, PTI Securities, had any clients seriously hurt in Enron, but if it would have occurred in several other widely held stocks that would not have been the case. It is not my purpose generally to get on the social or political band box, but if it can help some of you take a second look at the level of risk you currently have and what you might be able to to to mitigate that risk, I will do so.

It is my serious belief that most investors, while not naïve, possess a certain trust in the U.S. system of investment and the idea and integrity of publicly traded companies. While I certainly agree with that general assessment, several developments and trends have occurred in the past several years which I believe are eroding that trust. I would not assume that the Enron situation is totally unique.

• Accounting statements: The term pro-forma keeps surfacing to describe the financial statements of even mature companies. The ability and willingness of management to ignore Generally Accepted Accounting Principles in public statements is very troubling, even if in the footnotes one is able to do the reconciliation. Those who know accounting are aware that accounting rules are not perfect, but at least there was a perception of being bound by some standard. Add to that the  belief that an independent team of outside auditors was holding management to some common standards, and also certifying to the public. This whole believability and oversight seems to have failed at Enron, as they now seem to be admitting to overstatement of profits of over $500 million. Are you confident in the financial statements for your investments?  Have you ever even read them?
     
• Management: It sure seems that in some cases the management is no longer the employees of the company and shareholders, but rather the company and employees become tools of the management. The arrogance is almost beyond belief. Enron management, aware that 61% of employee 401k plan money was in Enron stock, instituted an administrative lockdown on the 401k plan from mid-October through mid-November, prohibiting  employees from selling their stock. The stock moved from $34 to $9 during that period, accompanied by fairly aggressive insider selling by management. I do not believe this arrogance and lack of concern for shareholders and employees is totally limited to Enron. This should be a wake up call to all those who have an over-concentration in any company s stock, especially your employer.
      
• Boards of Directors: The purpose of a Board is to look out for the interests of shareholders, and to a certain extent the public good. Does anyone think these people were doing their job? From my experience as a six- year board member at the CBOE, I can certainly say that questioning management even in their worst moments does not make for a long tenure. Those who desire the role of pampered professional board sitter do not oppose management ideas or compensation. This behavior is certainly not unique to Enron.

Is everyone a crook? Of course not.  But I believe that what we used to refer to as specific risk, that risk associated with the non-diversified holding of an individual stock, may be increasing. At the same time, we know that there are many of you out there who have very large concentration issues. I would urge you to take a second look at the risk inherent in these positions if not hedged.           

Of course, we at PTI Securities would be happy to help you with this analysis, and if necessary suggest strategies to bring any excess risk into more of the comfort zone. Feel free to send me an email (TPH@PTIHedge.com) or better yet, give us a call: 800.821.4968.  Let's both make sure that a debacle like Enron never causes a huge problem for you.

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