Joe Average walks away from Wall St

AMERICANS' faith in the stock market has been shattered. The value of their shares has tumbled. Their trust in brokers, who urged them to invest in companies while privately saying those same companies were rubbish, has been demolished.

Most important of all, accounting and insider-dealing scandals have finally ended the love affair between Joe Average and his mutual fund.

He suspects that there is something rotten in the state of Denmark - and the capital of this Denmark is Wall Street.

The explanations come on two levels. First, figures from the US show that in the first quarter of this year, post-tax profits grew by a measly one%.

Corporate America is making less than three-quarters of the money it made at its peak in 2000. And even with the Dow Jones index stuttering along at about 9,300, some 20% below its record high, there are still many reasons to fear that it might fall further. It is no longer underpinned by the confident expectation of steady growth in future corporate earnings.

But - and this brings us to the other level of explanations - the far graver issue is the sheer flakiness of the measurement of those earnings.

For years, American companies have been trying to corral losses from failed ventures - losses they would describe as one-offs - as exceptional items, ignoring their impact when calculating ' underlying' earnings of the business as a whole. Hence the apparent profitability of companies is enhanced.

This factor alone confuses the picture. Nobody is quite sure how much American companies make. And flowing from that, nobody is quite sure whether share prices are simply high relative to likely earnings or astronomically high.

THE price/earnings ratio of companies - the measure of their stock market worth relative to their earnings - is the starting-point for judging whether a share price is at the 'right' level.

But look at the situation in America. On some measures, the average quoted US company is valued at less than 20 times earnings. The investor has to spend less than $20 to secure the rights to each $1 of annual earnings. But take a harsher measure of corporate profitability and the average price/earnings ratio leaps to more than 40, making the market appear hugely expensive.

Then, of course, there is the Enron fear factor. Enron took the art of creative accounting to a new level. What if other companies have been up to similar tricks?

And just to add to this already sour brew is the stream of stories about various sleazy goings-on within the coterie of big investors.

This is a club that Joe Average knows he can never hope to join. He is an outsider. And he has an increasingly uneasy feeling that those within the club are not playing by the same rules as him.

MOST recent is the case of ImClone, a biotech company whose share price collapsed after the group was denied approval for a new cancer drug it was developing. ImClone's chief executive, Samuel Waksal, is now awaiting trial on insider-dealing charges of urging family and friends to sell their shares in the firm before the bad news was announced.

What has added piquancy to this yarn is the involvement of Martha Stewart, a self-styled domestic diva, a woman who tells millions of housewives through magazines, newspapers, books and radio how to make perfect pastry and decorate a dinner table. She had a shareholding in ImClone that her stockbroker sold just before the news about the rejection of its cancer drug became public.

Ms Stewart insists that she had previously asked for the shares to be sold if the price fell below a certain level.

She protests that she had no knowledge that catastrophe was about to befall the group.

Don't underestimate the symbolic importance of Ms Stewart being caught up in this affair. This is rather like discovering that Delia Smith has been arrested on suspicion of peddling porn or, even worse, serving Pot Noodles at a lunch party.

If a wholesome figure such as Martha Stewart is caught up in insider-dealing investigations, then, asks the average American punter, is nobody above this sort of racket?

On Friday, Wall Street fell by a further 170-odd points. The market looks sick and this sickness is infecting Britain.

This is a point on which Tony Blair ought to do some homework. Last week he told the Commons: 'The stock market has fallen, but it is still massively up on where it was five years ago.' Not so. The FTSE 100 stands at 4,605, almost exactly the same as five years ago. In the third week of June 1997 it closed at 4,594.

We can't trust politicians to give us a full and honest answer. Americans fear they can't trust Martha Stewart. They certainly can't trust US companies' accounts.

No wonder their faith in the stock market is shot to pieces.