- The Washington Times - Tuesday, July 30, 2002

Buyers stampeded back into the stock market yesterday, sending the Dow Jones Industrial Average surging nearly 450 points in its third-largest gain.
Coming after the Dow's even bigger increase of 488 points Wednesday, investors nursed hopes that the market's worst drubbing in decades, which had driven major indexes down to 1997 levels early last week, was finally coming to an end.
"This rally is for real," said Subodh Kumar, chief investment strategist with CIBC World Markets, noting that the nearly unanimous approval of a corporate reform bill in Congress last week and high-profile arrests of Adelphia executives were the catalysts for the market's turnaround.
The Dow posted its second-largest gain last Wednesday on news of the arrests and breakthrough in Congress, touching off a string of advances that has left the blue chip index 1,009 points higher after hitting a four-year low last Tuesday. The Dow's 447-point or 5.4 percent surge yesterday lifted the index to 8,712.
The advance drove up stocks across the board, with the Standard & Poor's 500 index also rising by 5.4 percent to 899. The technology-led Nasdaq Composite Index soared 5.8 percent to 1,335. European markets also rose dramatically by as much as 7 percent on renewed optimism yesterday.
Investors' concerns about the reliability and accuracy of earnings reports are being put to rest by the strict accounting reform legislation, which imposes harsh new criminal penalties for false financial statements, combined with tough enforcement, Mr. Kumar said.
President Bush, who plans to sign the legislation today, drove home the point again yesterday in a speech in South Carolina.
"If you're a CEO and you think you can fudge the books in order to make yourself look better, we're going to find you, we're going to arrest you and we're going to hold you to account," he said.
"If I'm reading what happened in Washington right, the quality of earnings is not a negotiable issue," Mr. Kumar said.
Investors are taking comfort in that, he said, as evidenced by the strong rally yesterday despite a $1.1 billion restatement of past earnings announced by Qwest Communications the sort of news that would have sent the market plummeting in earlier days.
On top of the outlook for improved financial information, earnings have been improving moderately after one of the sharpest profit recessions in history. The profits of companies in the S&P; 500 were up by an average of 1 percent in the second quarter, according to Thomson First Call.
Congress' quick approval of trade negotiating authority for the president, after years of stalemate, also is evidence of a "psychological" breakthrough in Washington on critical economic issues that will provide sustained support for the markets, Mr. Kumar said.
"People are worried about their economic well-being," he said. "The polls were clearly showing this was an issue that had to be dealt with. Politicians Democrats and Republicans read this correctly, that there could be a loss if they tried to get re-elected without having done something about it."
Despite the market's strong gains in the past week, some stock watchers remained skeptical that the rally would last.
One potential obstacle in the next few weeks is an Aug. 14 deadline laid down by the Securities and Exchange Commission for executives of major corporations to vouch for the accuracy of their financial statements.
Federal Reserve Chairman Alan Greenspan, among other financial gurus, is expecting more downward revisions, and those could upset investors further before the coast is clear for a sustained rally.
"I think most people are going to remain very nervous until the U.S. corporate amnesty has passed," although stocks have fallen to "very attractive" levels, said Brewin Dolphin, equity strategist at Steven Ford in London.
David A. Levy of the Jerome Levy Economic Institute said the idea that the worst of the corporate earnings scandals is behind is "utter nonsense."
It may be more difficult for executives to falsify earnings, he said, but earnings reports continue to be inflated by as much as 30 percent by such legal techniques as counting as income the market value of increases in company pension funds, and not deducting the cost of stock options though they are a major labor expense.
"The earnings revelations will continue for a long time," he said. "Investors are only beginning to discover a reality that is very different from the fantasy they believed."
Bryan Piskorowski, market commentator with Prudential Securities, said optimistic investors are likely to be tested in the days and weeks ahead.
"A beachhead has been established, and the bulls are launching their second assault," he said of yesterday's rally. "Now we must once again repel any afternoon counterattacks from the bears."
Some investors just couldn't resist the bargain prices for many stocks. "We are like kids in a candy store," said Eric Barden, portfolio manager at First Austin Capital Management. "We have a list of 20 companies that are undervalued by 40 percent to 60 percent."

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