when fundamentals fail us point & figure technical analysis enron: the anatomy of a collapse

When Fundamentals Fail UsWhen Fundamentals Fail Us

Point & Figure Technical AnalysisPoint & Figure Technical Analysis

Enron:Enron:The Anatomy of A Collapse

Point & Figure Technical Analysis

www.dorseywright.com© Dorsey, Wright & Associates 2001



Our Basic PhilosophyOur Basic Philosophy Fundamental analysis plays Fundamental analysis plays

an important role.an important role. It tells us WHAT to buy. It tells us WHAT to buy. Technical analysis is just as Technical analysis is just as

important, however. important, however. It tells us WHEN to buy.It tells us WHEN to buy. Using only one without the Using only one without the

other is like playing the other is like playing the piano with just one hand; piano with just one hand; you can make much better you can make much better music with both hands on music with both hands on the piano.the piano.



Enron‘s CredentialsEnron‘s Credentials

The world‘s foremost power and gas trader.The world‘s foremost power and gas trader.

Ranked 7th in the Fortune 500. Ranked 7th in the Fortune 500.

Ranked 16th in the Fortune Gobal 500.Ranked 16th in the Fortune Gobal 500.



Enron‘s Fundamentals Then ...Enron‘s Fundamentals Then ...

Revenues: $100.8 billion.Revenues: $100.8 billion.

Profits: $979 million.Profits: $979 million.

Assets: $65.6 billion.Assets: $65.6 billion.

Stockholders‘ Equity: $11.5 billion.Stockholders‘ Equity: $11.5 billion.

Market Value March 15, 2001: $49.7 billion.Market Value March 15, 2001: $49.7 billion.

EPS (year 2000): $1.12.EPS (year 2000): $1.12.



... And Now... And Now

Close, Dec. 3, 2001: $0.26Close, Dec. 3, 2001: $0.26

52-week Range: $0.12 - 52-week Range: $0.12 - $81.78$81.78

Earnings Per Share: $0.21Earnings Per Share: $0.21

Market cap: $220 Market cap: $220 millionmillion



Enron‘s demise was swift...Enron‘s demise was swift...



And though trouble was And though trouble was looming ...looming ...

August 14, 2001, CEO Jeffrey Skilling August 14, 2001, CEO Jeffrey Skilling resigns.resigns.

October 12, 2001 Andersen‘s Enron Chief October 12, 2001 Andersen‘s Enron Chief Auditor begins two-week document Auditor begins two-week document destruction effort. destruction effort.

October 16, 2001 Enron reports first October 16, 2001 Enron reports first quarterly loss in more than four years.quarterly loss in more than four years.

October 22, 2001 SEC opens investigation October 22, 2001 SEC opens investigation into Enron partnerships.into Enron partnerships.

November 8, 2001 Enron restates earnings November 8, 2001 Enron restates earnings dating back to 1997 by $600 million.dating back to 1997 by $600 million.



Analysts were slow to react ...Analysts were slow to react ...

On November 25, 2001 more than half of the On November 25, 2001 more than half of the fundamental analysts following Enron rated it a fundamental analysts following Enron rated it a Buy. Six rated it a Strong Buy, and two rated it a Buy. Six rated it a Strong Buy, and two rated it a Buy.Buy.

Now, let‘s take a look at what the fundamentals Now, let‘s take a look at what the fundamentals AND the technicals showed as Enron stock fell from AND the technicals showed as Enron stock fell from its 52-week high of $84.87, to a low of $4.14 on its 52-week high of $84.87, to a low of $4.14 on November 27, 2001.November 27, 2001.



We‘ll begin in March 2001, well after Enron raised We‘ll begin in March 2001, well after Enron raised earnings estimates for the year...earnings estimates for the year...



March 12, 2001 $61.27: Price Target cut at Prudential.March 12, 2001 $61.27: Price Target cut at Prudential.

March 12, 2001 $61.27: Reiterated Strong Buy at Lehman.March 12, 2001 $61.27: Reiterated Strong Buy at Lehman.

March 14, 2001 $62.75: Raised to Accumulate at March 14, 2001 $62.75: Raised to Accumulate at Commerzbank.Commerzbank.

March 21, 2001 $55.89: Reiterated Near-term Buy at March 21, 2001 $55.89: Reiterated Near-term Buy at Merrill Lynch.Merrill Lynch.

March 22, 2001 $55.02: Reiterated Accumulate at March 22, 2001 $55.02: Reiterated Accumulate at Commerzbank.Commerzbank.

March 26, 2001 $55.02: Let‘s go to the chart...March 26, 2001 $55.02: Let‘s go to the chart...

Fundamentally, things looked ok ...Fundamentally, things looked ok ...



85 --------------------------------|----------------------- 84 X X Relative Strength chart already83 X B X X O X O X * in O‘s after reversing down in82 X O X O X O X X O X O X O X * December 2000.81 X O X O X O X O X O | 1 X O X O *80 X O X O X O X O ----------- X --| O --- X O X O - * ---- 79 X O X O X O O X X X | O X O X O * 78 O X O X O X O X O X | O X 2 O * Bearish Resistance line 77 O X O O X O X O X | O X O Double Bottom at $77 after 76 O O O X O X | O X O hitting strong resistance75 ----------------- O --- X O ----| O --- X --- O -- in the lower 80’s – Supply 74 O X | O X O is gaining the upper hand 73 O X X | O X O while demand is weakening.72 O X O X | O X O 71 O X O X | O X X O X 70 ----------------- O X O --------| O X O X --- O X O Sector goes to Bear Confirmed69 O X | O X O X * O X O at 70% - high risk area.68 O X | O O X * 3 O 67 O C | O * O Another sell signal after a 66 O X | * O lower top at $67 on March 26! 65 ----------------- O X ----------|---------------- O ---- 64 O | O 63 | O 62 | O 61 | O 60 -------------------------------0|0--------------- O ---- 59 0|1

Meanwhile, the Point & Figure Chart Meanwhile, the Point & Figure Chart showed...showed...



And Dorsey, Wright & Assoc. said ...And Dorsey, Wright & Assoc. said ...

March 26, 2001 $55.02 DWA Comment: Shares of ENE fell March 26, 2001 $55.02 DWA Comment: Shares of ENE fell out of bed quickly after violating the trendline at $68. out of bed quickly after violating the trendline at $68. Rallies have been useful for selling into or initiating short Rallies have been useful for selling into or initiating short positions. See little on the technical side to disrupt that positions. See little on the technical side to disrupt that pattern going forward. RS is in a column of O‘s and main pattern going forward. RS is in a column of O‘s and main trend is negative. Initial resistance is at $60, the $67. trend is negative. Initial resistance is at $60, the $67. Support $52. Support $52.



Still, the fundamentals were slow to Still, the fundamentals were slow to develop ...develop ...

April 16, 2001 $59.44: Reiterated Recommend List at April 16, 2001 $59.44: Reiterated Recommend List at Goldman Sachs.Goldman Sachs.

April 17, 2001 $60.00: Reiterated Near-term Buy at Merrill April 17, 2001 $60.00: Reiterated Near-term Buy at Merrill Lynch.Lynch.

April 18, 2001 $61.62: Reiterated Recommend List at April 18, 2001 $61.62: Reiterated Recommend List at Goldman Sachs. Reiterated Accumulate at Goldman Sachs. Reiterated Accumulate at Commerzbank.Commerzbank.

May 21, 2001 $54.99: Price Target cut at Prudential.May 21, 2001 $54.99: Price Target cut at Prudential.

June 8, 2001 $51.13: Reiterated Attractive at Bear June 8, 2001 $51.13: Reiterated Attractive at Bear StearnsStearns

Let‘s go back to the chart...Let‘s go back to the chart...



Enron Point & Figure Chart March 26 – Sep. 6, 2001 ...Enron Point & Figure Chart March 26 – Sep. 6, 2001 ...

66 O X O *

65 O X O ----------------------- * - Bearish Resistance Line 64 O X O X * 63 O X O X O * 62 O X O X X O * 61 O X O X O X 5 60 O - O X O ------- X O ----------------------------------- 59 O X O X X O X 58 O X O X O X O X O 57 O X O X O X X O X O 56 O X O X 4 X O X O O X 55 --- O X O - O X O X --- O X O --------------------------- 54 O X O O O X O 53 O X O X O 52 O O 6

51 O X Major Bearish Catapult at $51 after trying

50 --------------------------- O 7 ---- to build a base in the 54 to 60 area. 49 O X O 48 O X O 47 O X O X 46 O X O X O 45 --------------------------- O X O X O ------------------- 44 O X O X 8 43 O O X O

42 O O Another Double Bottom at $42. 41 O Another Double Bottom at $41. 40 ----------------------------------- O ------------------- 39 O 38 O 37 ----------------------------------- O ------------------- 36 O 35 O 34 9 33 O 32 O



And Dorsey, Wright & Assoc. said ...And Dorsey, Wright & Assoc. said ...

April 4, 2001 $56.57 DWA Comment: Remains below the April 4, 2001 $56.57 DWA Comment: Remains below the Bearish Resistance Line and well into oversold territory at Bearish Resistance Line and well into oversold territory at present price ranges. Still, recent action has formed a present price ranges. Still, recent action has formed a consolidation pattern on the trend chart, whcih can be consolidation pattern on the trend chart, whcih can be broken on a move to $54. That move would break a broken on a move to $54. That move would break a double bottom and complete a Bearish Triangle pattern. double bottom and complete a Bearish Triangle pattern. RS is in O‘s here and we would continue to avoid ENE RS is in O‘s here and we would continue to avoid ENE here. Those looking for a tight trade to the downside may here. Those looking for a tight trade to the downside may initiate a short position on the breakdown at $54, but initiate a short position on the breakdown at $54, but keep in mind that we are already oversold. keep in mind that we are already oversold.



And ...And ...

June 8, 2001 $51.13 DWA Comment: ENE broke a spread June 8, 2001 $51.13 DWA Comment: ENE broke a spread triple bottom at $51 and remains below the Bearish triple bottom at $51 and remains below the Bearish Resistance Line. This stock has underperformed while the Resistance Line. This stock has underperformed while the utilities sector rallied, and now that the group is beginning utilities sector rallied, and now that the group is beginning to look suspect, this stock is one to fear. Continue to to look suspect, this stock is one to fear. Continue to avoid positions in ENE until we can see some clear signs avoid positions in ENE until we can see some clear signs of a bottom near-term. The bottom of the trading band is of a bottom near-term. The bottom of the trading band is $45. $45.



And ...And ...

August 13, 2001 $46.56 DWA Comment: Stock is making August 13, 2001 $46.56 DWA Comment: Stock is making lower tops and lower bottoms. The move to $42 in July lower tops and lower bottoms. The move to $42 in July took ENE below its March lows though the market remains took ENE below its March lows though the market remains above those lows. This divergence is typically negative. above those lows. This divergence is typically negative. Also negative is the trend and ENE is underperforming the Also negative is the trend and ENE is underperforming the market. Avoid this one. market. Avoid this one.

August 16, 2001 $38.93 DWA Comment: Shares of ENE August 16, 2001 $38.93 DWA Comment: Shares of ENE have fallen well below the initial bearish price objective of have fallen well below the initial bearish price objective of $44 and are now trading a point shy of the bottom of the $44 and are now trading a point shy of the bottom of the 10-week trading band. Still no convincing sign of a 10-week trading band. Still no convincing sign of a bottom here ...bottom here ...



But still the fundamentals lagged the But still the fundamentals lagged the technicals ...technicals ...

Sep. 6, 2001 $30.49: Raised to Buy at Sanders Morris Sep. 6, 2001 $30.49: Raised to Buy at Sanders Morris Harris.Harris.

Sep. 26, 2001 $25.15: Upgraded from Accumulate to Buy Sep. 26, 2001 $25.15: Upgraded from Accumulate to Buy at A.G. Edwards.at A.G. Edwards.

Oct. 3, 2001 $33.49: Reiterated Recommend List at Oct. 3, 2001 $33.49: Reiterated Recommend List at Goldman Sachs. Goldman Sachs.

Oct. 4, 2001 $33.10: Downgraded from Strong Buy to Oct. 4, 2001 $33.10: Downgraded from Strong Buy to Buy at A.G. Edwards; price target $40.Buy at A.G. Edwards; price target $40.

Oct. 9, 2001 $33.39: Raised to Long-term Buy at Merrill Oct. 9, 2001 $33.39: Raised to Long-term Buy at Merrill Lynch.Lynch.

Oct. 19, 2001 $26.05: Cut to Hold at A.G. Edwards.Oct. 19, 2001 $26.05: Cut to Hold at A.G. Edwards. Oct. 22, 2001 $20.65: Downgraded from Buy to Hold at Oct. 22, 2001 $20.65: Downgraded from Buy to Hold at

Prudential.Prudential.



Meanwhile, the technical picture was Meanwhile, the technical picture was unchanged ...unchanged ...

October 23, 2001 $19.79 DWA Comment: ENE falls amid October 23, 2001 $19.79 DWA Comment: ENE falls amid SEC inquiries, the chart breaks yet another bottom at $24 SEC inquiries, the chart breaks yet another bottom at $24 and moves to new chart lows. Best to let this dog sleep and moves to new chart lows. Best to let this dog sleep outside until some sign of a bottom is shown. outside until some sign of a bottom is shown.



And finally, some on Wall Street And finally, some on Wall Street capitulated ...capitulated ...

Oct. 24, 2001 $16.41: Cut to Sell at Prudential. Cut to Oct. 24, 2001 $16.41: Cut to Sell at Prudential. Cut to Long-term Buy at JP Morgan. Reiterated Strong Buy at Long-term Buy at JP Morgan. Reiterated Strong Buy at Lehman.Lehman.

Oct. 25, 2001 $16.35: Cut to Market Perform at Banc of Oct. 25, 2001 $16.35: Cut to Market Perform at Banc of America. Reiterated Buy at Salomon Smith Barney. S&P America. Reiterated Buy at Salomon Smith Barney. S&P changes Enron outlook to Negative.changes Enron outlook to Negative.

Nov. 1, 2001 $11.99: Cut to Near-term Neutral at Merrill Nov. 1, 2001 $11.99: Cut to Near-term Neutral at Merrill Lynch. Lynch.

Nov. 7, 2001 $ 9.05: Cut to Sell at A.G. Edwards.Nov. 7, 2001 $ 9.05: Cut to Sell at A.G. Edwards. Nov. 9, 2001 $8.63: Cut to Hold at Commerzbank.Nov. 9, 2001 $8.63: Cut to Hold at Commerzbank. Nov. 12, 2001 $9.24: Raised to Hold at Prudential.Nov. 12, 2001 $9.24: Raised to Hold at Prudential. Nov. 13, 2001 $9.98: Raised to Maintain Position at Nov. 13, 2001 $9.98: Raised to Maintain Position at

Edward Jones.Edward Jones.



While some held out until the bitter end ...While some held out until the bitter end ...

Nov. 21, 2001 $5.01: Cut to Market Perform at Goldman Nov. 21, 2001 $5.01: Cut to Market Perform at Goldman Sachs. Cut to Hold at CIBC. Cut to Sell at Edward Jones.Sachs. Cut to Hold at CIBC. Cut to Sell at Edward Jones.

Nov. 28, 2001 $0.61: Estimates reduced at Prudential. Nov. 28, 2001 $0.61: Estimates reduced at Prudential. Cut to Hold at UBS Painewebber. Cut to Sell at Cut to Hold at UBS Painewebber. Cut to Sell at Commerzbank.Commerzbank.

Nov. 29, 2001 $0.36: Cut to Hold at CSFB. Cut to Nov. 29, 2001 $0.36: Cut to Hold at CSFB. Cut to Underperform at RBC Capital Markets.Underperform at RBC Capital Markets.



What We‘ve Learned ...What We‘ve Learned ...

Sometimes the technicals collapse well in advance of the Sometimes the technicals collapse well in advance of the fundamentals.fundamentals.

Fundamental analysis is necessary to tell us What to buy, Fundamental analysis is necessary to tell us What to buy, but it can only do so much when companies hide their but it can only do so much when companies hide their fundamental problems, or give analysts bad information.fundamental problems, or give analysts bad information.

Technical analysis tells us When to buy, and can help us Technical analysis tells us When to buy, and can help us manage the risk of stock ownership.manage the risk of stock ownership.

© Dorsey, Wright & Assoc.

Copyright © 2001 Copyright © 2001 Dorsey, Wright & Associates, Inc.Dorsey, Wright & Associates, Inc.

Keep in mind that there is no assurance that this or any strategy will ultimately be successful or

profitable.

when fundamentals fail us point & figure technical analysis enron: the anatomy of a collapse

Documents

wright associates

enron partnerships

enron reports

enron stock

reiterated strong buy

collapse slide

reiterated nearterm

andersens enron chief