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Dec 28, 2003 The recent decline in the United States Dollar, particularly in comparison with the Euro, has many concerned that foreigners will pull money out of the United States, particularly in financing the United States’ large debt load. Those concerns are real, and it will be interesting to see what will occur in the next year as the Fed has no driving impetus to start raising interest rates in the United States (which would give foreigners reason to continue to finance US debt). It is almost an act of chicken, to see who will move first. One related area that will also be of interest is the United States stock market. Here’s why - foreigners have no certain grounds to move money out of the US stock market, as their risk escalates tremendously if they do. That problem has been put in the spotlight recently with the sudden collapse of Italian giant conglomerate Parmalat, which was ruled insolvent just this week. Parmalat’s problem is similar across Europe - the accounting standards for European companies is much weaker than it is for US companies. Even with the recent problems in some US companies such as Enron, Qwest, and others, the accounting standards for US companies is far superior to Europe, and virtually anywhere else. These stronger accounting standards, which have indeed gotten even tighter after the Enron/WorldCom problems, makes the US stock market less risky than any comparable market. In any investment, protection of principle is vital, and takes precedence over any gains on principle. The sounder the investment, the more likely the return of principle. If your principle is at risk, then who cares about the gain on principle? The sudden, unexpected implosion of Parmalat points out that Europe is no safe haven for any dollars that some might pull out of the United States. Who says any European stocks are safe? Or European bonds? If there are no sound accounting principles that are followed, how safe is the money invested in such companies? In addition to being declared insolvent, Parmalat is being investigated for fraud, false accounting and market rigging. What is worse is that some European companies are protected at times by their respective governments and that tends to multiply and extend the problem instead of curing it. If these types of things are going on in the companies in Europe it follows that bonds as well as stocks could be affected. How can you believe the guarantee of a country which has been propping up the false accounting for some of its major players? You can’t. By any and every definition, Europe’s stocks - and bonds - are a much more risky play than the American markets. That risk will start to be seen more clearly as the Parmalat issue is finally dragged into the light. And do you really think that Parmalat is the only company that has such problems? What occurred in the United States over the past few years, the Enron/WorldCom fallout, has suddenly hit Europe. But the fallout in Europe will be much worse due to much more lax accounting standards. Watch how investors start to react to European companies - both stocks and bonds - in the coming year. The risk has always been there; the risk awareness has taken a sudden leap forward. There is no question that investing in a European company is going to be perceived as a real risk. In fact it is more than speculation, it borders more along the lines of gambling. If you don’t know that the financial facts about a company are real, or even what they are, how can you have any certainty of getting your money back from an investment in such a company? Without accurate, precise, in-depth financial statements, you are really rolling the dice with your money. The United States SEC has no counterpart which could be considered a true peer, and the US stock markets require a much stronger listing of financial facts than any other major player in the stock world. For that reason risk is mitigated to a large degree, and the risk that exists can be seen much more clearly and undertaken or avoided according to the investor’s individual choice. The United States is still the finest financial market in the world, and will look even better as Europe undergoes the shock of the discovery of Parmalat misdeeds and the invariable concern of other Parmalats that are about to be turned up. ------------ About the author: Dwayne Hines currently has 12 books selling in major bookstores and writes for major magazines such as Physical and FitnessRX. Email Dwayne Hines: dhines@3dinet.com Comment on this column in the forum. Tell a friend about this site! ------------ |
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