UNDERSTANDING ENRON

We at Markowski Investments tend to be skeptics. After traveling around the block more than once we tend to mistrust press-release happy corporations singing how wonderful and rosy everything always seems to be.

Case in point is the Enron Corporation:

“Enron’s consistent earnings growth reflects the very strong market positions in all of our businesses. We have established unique networks in natural gas, electricity and, most recently, communications, that each have distinct advantages of scale and scope. Combining this strong market presence with our core skills and market knowledge, we are positioned to be the leading player in the largest and fastest growing markets in the world,” said Kenneth L. Lay, Enron chairman and chief executive officer. “The outlook for the company is excellent, and we are pleased to demonstrate that confidence by declaring the two-for-one stock split.”

PRESS RELEASE JULY 13, 1999

We have several clients of our firm that work for the company and when I press them for information regarding how and what the company actually does, they seem a tad confused.

So we did a little digging…

Enron, “we think” owns power plants, is building power plants in emerging markets and trades commodities.

Being a utility company, an investor might think that Enron would be a more “conservative” type of corporation. However, many of the new plants that Enron is building and or is currently operating are in markets where prompt payment of invoices is not always the norm. Another problem is currency exchange rates. We are not just dealing with Pounds, Yen or Euros here. Some of Enron’s most costly plants are located in South America, plus an expensive new venture in India.

There is no information telling us that these ventures will end up prosperous; however we tend to get a little nervous when companies paint such rosy pictures regarding very complicated and difficult endeavors.

Now the real kicker on Enron that has got our wheels spinning is their commodity trading business. One of our clients who will remain anonymous is an energy trader for the company.

He is 27 years old.

Commodity trading for Enron is their fastest growing business. This is the most perplexing thing for me. Commodity trading is no walk in the park. Enron is not just trading in “normal commodities,” they are trading such items as weather and bandwidth.

NOTE: Personally, I would love trade a foot of snow in January for some 85-degree weather. Basically, this means that Enron is now getting into the tricky business of derivatives. In essence, creating assets. This type of trading brought down Long Term Capital Management and almost caused a worldwide panic.

Does this make me nervous? Yup! Corporations such as Goldman Sachs who have been in the trading business for over 100 years have not had the success that Enron has been producing.

Could be me… call me crazy, but that to me is a little unbelievable. You ask why? Although, my client is a great guy, he never graduated from college. He also has no experience trading or any knowledge of the commodity markets. Sorry folks, beginners luck only lasts for so long.

I could be way off base on this one. Enron could be something that is truly extraordinary. Maybe I am not that bright, however I do not understand it. If I cannot understand a company I certainly am not going to buy it. If you own it, be careful watch your downside exposure and good luck. Enron certainly seems to have a lot of it.