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By: Caroline Alphonso
The Globe and Mail
Money & Markets
Thursday, January 2, 2003
After some encouraging signs, indexes headed down again.
Weak profits, political tensions and a rash of corporate
scandals made 2002 a year most investors would like
to forget, CAROLINE ALPHONSO writes.
Although there were a few new twists and turns, 2002
played out much the same way as the prior year -- hopes
for a market turnaround were quickly dashed as profit
warnings, geopolitical tensions and corporate scandals
surfaced.
There were few places for investors to hide. Many,
who were suffering through another year of heavy losses
in the markets, probably felt like looking under their
mattresses as a good alternative for stashing their
savings.
Adrian Mastracci, financial
advisor at Vancouver’s ‘fee-only’
KCM Wealth Management, says, “Investors have been
affected in a variety of ways. Perhaps more in 2002
than in any past year still within our memory.”
The major U.S. markets -- the Dow Jones industrial
average, the broad Standard & Poor's 500-stock index,
and the tech-heavy Nasdaq Stock Market composite index
-- lost ground for the third year in a row. By the end
of the year, U.S. equities, measured by the S&P
500 had fallen 23.4 per cent. The Dow, a gauge of 30
U.S. blue-chip stocks, had dropped 16.8 per cent and
the Nasdaq plunged 31.5 per cent.
Closer to home, Canada's benchmark S&P/TSX composite
index suffered its second consecutive annual decline,
falling 14 per cent.
It was a brutal year. Just as in 2001, North American
markets started the year on a cheerful note, showing
their resiliency after the Sept. 11 terrorist attacks
in the United States.
Observers knew it would be a bumpy road ahead, but
many were confident that a recovery, albeit modest,
would occur in the latter half of the year.
They were proved wrong.
Big, medium-sized and small companies delivered a string
of disappointments, issuing profit warnings and missing
analysts' earnings expectations. Even burger giant McDonald's
Corp. warned investors in December that it expects to
post its first quarterly loss since the company went
public 37 years ago, as weak same-store sales, higher
expenses and slimmer profit margins hurt the company's
fourth-quarter earnings.
"Investors have been affected in a variety of
ways. Perhaps more in 2002 than in any past year still
within our memory," Adrian Mastracci,
president of fee-based investment adviser KCM
Wealth Management Inc. of Vancouver, said recently.
"Practically all portfolios have felt the anguish."
To make matters worse, investors were left scratching
their heads, wondering if the numbers delivered by corporations
were even accurate.
Telecommunications giant WorldCom Inc. fessed up to
fraudulently inflating its books by at least $9-billion
(U.S.). WorldCom's accounting debacle eclipsed the Chapter
11 filing by collapsed energy trader Enron Corp. as
the largest U.S. insolvency. With more than $100-billion
in assets, the WorldCom bankruptcy was larger than Enron's
filing.
Indeed, names such as Enron, WorldCom and Tyco International
Ltd. became synonymous with corporate scandals.
Investors were shocked to learn about all this insider
corporate activity taking place, and watched as executives
such as former WorldCom executives David Myers and Scott
Sullivan, Enron chief financial officer Andrew Fastow,
and Adelphia Communications founder John Rigas did "perp
walks" for the press that prosecutors traditionally
reserved for the toughest criminals.
Even homemaking diva Martha Stewart came under public
scrutiny, not for her decorating advice, but her business
dealings.
Ms. Stewart, who sold stock in troubled drug maker
ImClone Systems Inc. (then headed by friend Sam Waksal)
a day before U.S. regulators issued a devastating ruling
against its cancer drug Erbitux, is facing the possibility
of civil charges from the U.S. Securities and Exchange
Commission and a criminal investigation by the U.S.
Justice Department.
She has denied any wrongdoing, but the question of
timing, compounded by Dr. Waksal's insider-trading confession,
has kept the doyenne of domesticity under a microscope.
With all these scandals coming to light, it's no wonder
investors took every opportunity to bail out of stocks
and mutual funds.
Regulatory officials, as well as U.S. President George
W. Bush stepped in, attempting to shore up investor
confidence.
In the wake of burgeoning accounting scandals, the
SEC ordered the top executives of 947 of the largest
U.S. domestic firms -- those with at least $1.2-billion
in annual revenue -- to swear to the accuracy of annual
reports and other filings.
And New York Attorney-General Eliot Spitzer tried to
do his part to restore credibility to the U.S. markets.
Ten major U.S. brokerage firms agreed to pay $1.4-billion
over allegations that analyst recommendations were inflated
in order to curry favour with corporate clients and
win lucrative banking deals.
But nothing was able to save the falling stock markets.
While many market watchers once thought technology
would help lead the charge again, surplus capacity still
weighed on the sector. Shares of Nortel Networks Corp.,
the beleaguered
telecommunications equipment maker, continued their
trip south, falling 80 per cent this year and closing
at $2.52 (Canadian) on the Toronto Stock Exchange. It's
hard to imagine that the stock stood above $120 in September,
2000.
The pain wasn't only felt in technology.
Canadian financial stocks were hurt, as banks grappled
with the quality of outstanding loans and weak stock
markets.
All was not lost though, especially when it came to
the Canadian economy. Consumers hung in, allowing Canada's
gross domestic product to post strong growth in the
first half of the year. While the economy cooled somewhat
in the latter half, it was still poised to end the year
on a healthy note.
And investors who put money into gold stocks were likely
sitting pretty in 2002. Concerns over a U.S.-led war
in Iraq and a drop in the U.S. dollar helped push the
bullion price to a five-year high in December. The price
of gold climbed almost 20 per cent this past year.
Furthermore, four of the five best-performing stocks
in Canada in 2002 were gold companies. Bema Gold Corp.
led the charge and was up 300 per cent, TVX Gold Inc.
rose 270 per cent, Kinross Gold Corp. was up 250 per
cent, and Glamis Gold Ltd. gained 220 per cent.
Energy was another of 2002's top stories.
Investors saw the blockbuster merger of PanCanadian
Energy Corp. and Alberta Energy Co. Ltd. that created
EnCana Corp., the biggest independent oil and gas producer.
Also, crude prices continued their ascent as fears
lingered of an attack on Iraq and a general strike crippling
Venezuela's petroleum industry persisted.
The price of oil stood at $31.20 (U.S.) a barrel on
the New York Mercantile Exchange at the end of the year.
On a final note, not many Canadian market watchers
will forget that 2002 was the year that the venerable
TSE 300 benchmark index disappeared to make room for
the newly named S&P/TSX composite index.
The new index hit a snag on its first day back in May,
as several data vendors experienced glitches getting
real-time index values out to clients, but things have
since been running on time.
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