Discerning the bottom line

ONLY a fool or an incurable optimist would call the bottom of the market on the strength of yesterday's storming performance. The Footsie clawed back almost 200 points as the Dow roared to its third-biggest points gain ever. Last Wednesday, it scored the second-biggest rise on record.

Whether you think shares will rise, fall or mark time over the next decade, further steep falls as well as rises are inevitable in the weeks and months ahead, not least because markets never move in straight lines.

In this climate, it would take only the rumour of fresh wrongdoing or trading difficulties to send prices scurrying southwards. And, as my colleague Lauren Chambliss says, over the next few days we can expect to see a succession of men in suits sporting Wall Street's latest look - a shiny pair of handcuffs - which is unlikely to lighten the mood.

The recovery, when it comes, will not descend from the heavens like a refreshing shower of rain, sprinkling good cheer and buying opportunities evenly across the market. It will be patchy and hard to predict. Indeed, the bottom may already have been reached in some stocks while for others it may never come. Investors will have to make their own judgment.

In these markets, discrimination is the key. It always has been. It just got left behind in the bull-market frenzy.

Crash course

ONE unexpected beneficiary of the market turmoil, 91-year-old Charles P Kindleberger, has been tracked down in his comfortable retirement in Boston. Sales of his classic 1978 work, Manias, Panics, and Crashes: A History of Financial Crises, have been enjoying a revival in recent months as investors look to the past for clues to the future.

Kindleberger, who admits to rather enjoying the current crash in an 'I told you so' sort of way, famously warned of the looming technology stocks bubble as early as 1996 in the foreword to a new edition of his work. It has been revised four times since publication but, at 91, he understandably does not feel up to a fifth revision. If he did, though, it might make alarming reading.

In a recent interview with the Wall Street Journal, Kindleberger warned of a developing bubble in the US housing market, notably on the West Coast. He highlights the near-$3 trillion of mortgages owned or guaranteed by the governmentsponsored Fannie Mae and Freddy Mac, which he fears is stoking a speculative bubble.

Such fears have been dismissed by Federal Reserve chairman Alan Greenspan. But then it wasn't Greenspan who predicted the technology crash six years ago.

Skill that counts

TODAY'S report from the Fraud Advisory Panel highlights the need for auditors to adopt what it calls 'an attitude of professional scepticism' in their work.

The besieged profession deals in figures, some of which, as recent scandals have shown, clearly bear little relationship to reality. But it seems they should be sharpening up their people skills too.

While auditors are not fraudhunters, simply looking at the figures they are presented with is not enough in this climate. The Panel urges them also to assess the people who provide those figures and the pressure they might be under.

Blaming a 'shoot the messenger' syndrome, the Panel says it has identified specific cases where fraud was concealed by managers not wanting to rock the boat. Being aware of such pressures could be a valuable tool in fraud detection.

But an auditor with highlydeveloped people-skills? Now that would be a shock to the system.