A year ago I wrote: "do not expect rebound in the tech stocks in earnest any time soon !" My prediction was based on a thorough analysis of the situation in the telecom industry, one of the driving forces behind technology boom of the late 1990s.
Nevertheless, the tech stocks started to climb right after the prediction was made public and continued to do so throughout the rest of 2003 and the beginning of 2004. What was the reason of this ? The recent events shed some light on it.
In March 2004 Nortel (one of the biggest telecom equipment makers) suddenly announced that it will restate its financial results for the past 3 years and will delay its regulatory filings with the US Securities and Exchange Commission (SEC) for the first quarter of 2004. A few weeks later it turned out that this announcement was in response to "informal" request from the SEC to review Nortel's books. A few more weeks later the request was elevated from "informal" to formal. At this point Nortel conceded that it exaggerated its profit for 2003 by 100% (the likely cause of its stock growth in 2003). Soon thereafter, the U.S. Attorney's Office has launched a criminal probe into Nortel.
The question which immediately crosses one's mind is whether Nortel is unique or not. What if rise of NASDAQ (and not just of Nortel's stock) in 2003 was due to exaggerating profits by most companies ? Indeed, there is no reasons to think that Nortel is any better or worse than its competitors, such as Lucent, for example. Why, nevertheless, the SEC did not request, informally, its books ? May be it would trigger the same chain of announcements as at Nortel ?
There is a difference, of course, between Nortel and Lucent. Nortel is a Canadian company, whereas Lucent is its American counterpart (roughly of the same size and of the same market share). Both are struggling in the severe economic downturn. Both shed about 2/3 of its workforce (about 70,000 people). Both need a boost. And both likely resort to the same measures.
The purpose of government is, of course, to fight corporate corruption which threatens economy. But on the other hand, serving justice to companies violating laws inevitable results in hurting them (or even completely eliminating them) and thereby hurting economy (if the phenomenon is widespread and the companies are the pillars of economy). Thus, there is a clear physical (or rather political) contradiction: not fighting corruption threatens economy, but fighting corruption threatens it either !
Clever people on the SEC found an ingenious way to resolve this contradiction (without completing any course on TRIZ, though !) They serve justice to foreign companies and thereby strengthen their American counterparts !