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Crime and Punishment, Coke and GE vie for honors, Greenspan, Indexing, a
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Jim Mahar
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Aug 01, 2002 01:59 PDT
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Crime and Punishment in Corporate America, Coke and GE vie for honors, a
mock interview with Alan Greenspan, indexing under attack and much more!
FinanceProfessor News August 1, 2002
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FinanceProfessor.com
Bringing the Real World to the Classroom and vice versa!
Sign up for the free Newsletter at www.FinanceProfessor.com
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Top Stories
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1. Crime and Punishment
2. 2002 and 1933: the similarities.
3. Coke leads the way on Executive options
4. GE gets the FinanceProfessor.com Company of the Week award!
5. A mock interview with Alan Greenspan
6. PWC sells Monday for $3.5 billion after HP wanted it for $18
Billion
7. Is Paul O’Neil’s job in trouble?
8. Contagion in Latin America
9. Indexing comes under attack
10. Student sues and wins case over poor instruction
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Hi everyone!
Well, a combination of a crash (hard drive at home, not the market),
working on several papers, then a vacation, and more computer problems
turned a 2 week break into something a bit longer than a month, but now,
quite a bit poorer but much refreshed and with a new computer at home, I
am ready to get back at it, so a new newsletter!
I hope you are all having a great summer! I am. I simply love this
warm weather. I can not get enough of it. Oh yeah, before I forget, I
had a great bike ride with Jonathan Godbey along the Blue Ridge Parkway
to near Mt. Mitchell--I had never ran or biked at over 5000 feet above
sea level, but did and really had fun. The climbs were unbelievable.
Definitely not at Lance Armstrong’s pace, but fun none-the-less!
Of course the main news story over the hiatus has been the growing
“crisis” in corporate governance and the resultant (at least in part)
decline in the stock markets. There have been so many stories that to
review them all would be terribly time-consuming and more than likely
fairly boring for reader and reviewer alike. However, I will hit some
highlights and try to summarize what has happened and what it means.
Also I want to thank you all who wrote to check that I was ok in my
absence. Your caring is appreciated. I also want to welcome all of the
new subscribers.
Be forewarned, this is a long one. I had much backlogged material to
use.
jim
JimM-@FinanceProfessor.com
and now the news:
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Top Story: crisis in Corporate governance
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We’ve all seen the headlines. They seem to be daily occurrences. Some
large company is accused of falsifying financial statements and ignoring
shareholders. The list is so long as to become almost meaningless, but
a few include: Worldcom, AOL, Dynegy, Qwest, and of course Enron, and
Adelphia. As more and more stories broke, investors lost confidence
with firm’s financial statements and the market in general. This led
to a rapid and large price drop that took US stock prices to 5 year
lows. Then as if the bungee-cord had reached its limit, stocks took
off with the Dow having two 400+ point days and its best five day period
since 1933.
http://www.nytimes.com/2002/07/30/business/30STOX.html
http://news.bbc.co.uk/1/hi/business/2158095.stm
http://news.bbc.co.uk/hi/english/business/newsid_2129000/2129979.stm
http://news.bbc.co.uk/hi/english/business/newsid_2130000/2130436.stm
http://www.guardian.co.uk/business/story/0,3604,765193,00.html
What caused the abrupt change? Well, it may be coincidence, but many
are citing the Adelphia case as the impetus for change. By publicly
cracking down on the Rigas family (who reportedly had tried to surrender
in private but were denied and led through the streets in hand-cuffs)
regulators were sending a signal that regulators have raised the cost of
being bad. This will likely lower the incidences of such
anti-shareholder behavior.
1933 and 2002 may be linked in more ways as well. 1933 saw many reforms
that strengthened regulation and improved investor protections. So too
with 2002 as it seems that the deregulation band-wagon has been left
behind. This was highlighted when President Bush signed into law a new
anti-fraud bill. Indeed Bush and just about every other politician
above the level of alderman wants to be associated with new regulations
that will prevent future accounting and fraud problems. While
undoubtedly things need to be done to control the excesses that we have
seen, the medicine may be worse than the disease. Hastily designed
regulations that harm companies (remember these are owned by
shareholders and employ employees!), may go too far. That said, tougher
enforcement, more transparency, timely reporting, and acknowledgment of
conflicts of interest are steps in the right direction. It is just that
when all the politicians are lined up on one side, it is time to be
nervous. Of course, I may one of those that Robert Kuttner spoke of in
the New York Times when he was quoted as saying: "You have a whole
generation of economists who have devoted their careers to supporting
deregulation and now they are twisting themselves into intellectual
pretzels to deny that they are recanting on deregulation.”
http://www.nytimes.com/2002/07/28/business/yourmoney/28ECON.html
http://www.washingtonpost.com/wp-dyn/articles/A23472-2002Jul30.html
http://www.washingtonpost.com/wp-dyn/articles/A23501-2002Jul30.html
http://www.cfo.com/article/1,5309,7499,00.html
Politicians weren’t alone as financial institutions also rushed to
prevent further problems. For example the Nasdaq announced that they
would tighten restrictions on the firms that they trade.
http://www.washingtonpost.com/wp-dyn/articles/A2479-2002Jul25.html
Why do we care so much about all of this? Financial literature is
replete with evidence that better investor protections lead to lower
costs of financing (i.e. Higher asset valuations) and more efficient
allocation of resources (consider for a moment even the latest internet
bubble, would investors have continued to bid up share prices if they
had seen the underlying accounting for some of the firms?). In an
upcoming JFE, Shleifer and Wolfenzon present an equilibrium model that
shows investor protections are generally beneficial to both the economy
and investors. This has implications not only domestically but also
when dealing with foreign investments. (good article even if the
modeling itself gets a bit heavy)
http://jfe.rochester.edu/01469.pdfare
These corporate troubles have been bad for both shareholders and
bondholders. So bad that 2002 will almost assuredly set a record for
the total amount of debt (in dollars) that is defaulted and the large
number of fallen angels (formerly investment grade bonds that have been
downgraded to junk status) has lowered prices (and raised yields). This
poor performance continues a recent trend that has seen $1000 invested
in 1997 fall to $961 even before inflation and taxes are taken into
account.
http://biz.yahoo.com/rc/020729/financial_bonds_junk_1.html
One of the causes of many of these problems is the troubling conflicts
of interest that exist in so many business relationships. For example
we have seen audit quality is often a function of auditor independence.
The same may be said of analysts who forgo quality to improve the firms’
investment banking relationships. One possible outcome will be for
more separation and possibly the end of “one-stop” financial firms.
Sure they have some economies, but the potential conflicts seem to
off-set these cost advantages. (BTW the first article will get you mad,
but is great for a class discussion!)
http://www.nytimes.com/2002/07/30/business/30ENRO.html
While Qwest turned themselves in, that does not mean they are without
sin. As the SEC turns up the investigation into improper revenue
recognition, more accounts of insider selling are surfacing, including
one board member who allegedly sold $1.5 Billion in stock! Their CEO
Joseph Nacchio reportedly sold $277 million in stock that he acquired by
exercising options for $29 million. As this pattern repeats itself,
(The Financial Times reports that overall execs at the firms that have
been in trouble cashed out $3.3 Billion prior to their troubles), we
should expect to see less reliance on stock options for managerial pay.
(for more I would recommend John and John’s paper that looked at this in
1985?)
http://www.msnbc.com/news/787515.asp
http://biz.yahoo.com/djus/020730/200207301559000822_1.html
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1028039797414&p=1012571727088
Want to read what Greenspan has to say about the problem but don’t want
to read through reams of congressional testimony? The Globalist has
done it for you and have produced a “mock-interview” with the Fed
Chairman. It is great! In many cases better than he would have answers
and it is even mostly true. ;-) One example: Q: How do you explain this
greed? A: "It is not that humans have become any more greedy than in
generations past. It is that the avenues to express greed had grown so
enormously." Good stuff!
http://www.theglobalist.com/DBWeb/StoryId.aspx?StoryId=2578
So have we seen the worst? Probably, but that said there will likely be
more companies announcing they will have to restate earnings, but this
should be seen as good news as they are now coming clean. Some firms
may make these public confessions willingly (such as Qwest) while others
may be dragged through the court of market opinion by the SEC or other
regulatory agency (such as the case of AOL-Time Warner.). August 14th
is looking like an important date as it will be when CEOs and CFOs have
to personally “vouch for” the firm’s numbers. Which may mean that they
can be held criminally liable and can not merely claim ignorance.
What lesson should we take out of this? Managers are people and people
are REMMs. Thus, if we create incentives for them to cheat, they will.
We may have swung too far in aligning incentives, but the idea is right.
We may need better accounting, but the concept is right. We may
misprice assets, but overall we do pretty well. Overall the markets are
more efficient now than they were a year ago. Why? Because investors
have demanded that firms improve their accountability and transparency.
What is troubling is that so much corruption had been swept under the
proverbial rug. For example, that few even in the local community knew
that the Rigas’ were effectively looting corporate coffers, is scary and
an indictment not only of the Rigases but also of both investors and
accountants.
Haven’t had enough yet? Try BusinessWeek for more:
http://www.businessweek.com/magazine/toc/02_18/B3781govern.htm
Other sources used:
Look for charges in the Worldcom case.
http://www.washingtonpost.com/wp-dyn/articles/A2567-2002Jul25.html
http://www.washingtonpost.com/wp-dyn/articles/A28269-2002Jul31.html
Senate Bill to Bush
http://www.washingtonpost.com/wp-dyn/articles/A2695-2002Jul25.html
http://www.nytimes.com/2002/07/26/international/26TRAD.html
Analyst independence and who knew what at Enron.
http://biz.yahoo.com/rf/020729/financial_citigroup_5.html
What Harvey Pitt could do
http://www.nytimes.com/2002/07/19/business/19NORR.html
Adelphia
http://www.nytimes.com/2002/07/25/business/media/25CABL.html
http://news.bbc.co.uk/1/hi/business/2150320.stm
Qwest:
http://www.washingtonpost.com/wp-dyn/articles/A14492-2002Jul28.html
Is AOL-TimeWarner in trouble? With the second investigation into their
accounting, the company’s bonds are trading as junk at 82 cents per
dollar.
http://biz.yahoo.com/rb/020731/media_aol_8.html
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Enron
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This is so good I decided to include an Enron section for the Washington
Post series on Enron and its former CEO Jeff Skilling. READ IT, it is
GREAT! For a quick flavor:
“The deal was "so stupid that only Andrew Fastow could have come up with
it," Kaminski would later say.
In fact, Fastow, Enron's chief financial officer, had come up with the
maneuver, with Skilling and others. In an obvious conflict of interest,
Fastow would run the partnership, sign up banks and others as investors,
and invest in it himself. He stood to make millions quickly, in fees and
profits, even if Enron lost money on the deal. He would call it LJM,
after his wife and two children”
http://www.washingtonpost.com/wp-dyn/articles/A14492-2002Jul28.html
http://www.washingtonpost.com/wp-dyn/articles/A14492-2002Jul28.html
The only real news in this case is that attention has now turned from
the accountants, to eth analysts and bankers. Citigroup, JP
MorganChase, and Merrill Lynch are now on the hot seat.
http://www.chron.com/cs/CDA/story.hts/business/1516913
http://www.thestreet.com/markets/matthewgoldstein/10034992.html
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Corporate Finance
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Dividends are cash payments from corporations to shareholders. In a
perfect Miller and Modigliani world, dividend policy is irrelevant. We
all know that. But guess what, the world is not perfect. Pushing for
lower dividends are taxes and market frictions that increase the cost of
external funds. Pushing for higher dividends is the corporation’s
inability to convince shareholders that things are going well at the
firm since dividends often are interpreted as a signal of the financial
health of the firm. This brings us to BP, who this week announced they
were increasing their dividend in the face of a slow economy and
relatively flat earnings. Why? To signal that they think things will
get better. To take this further, if investors do not believe financial
statements, look for more firms to up dividend payments (ceteris
paribus).
http://news.bbc.co.uk/1/hi/business/2161366.stm
While recent bankruptcies have focused attention on the fact that
shareholders, bondholders, and even employees lose, one group that has
not received much attention are other firms who do business with the
troubled firms. For example, MSNBC reported on Ensol a Maryland firm
that is owed about $1.2 million by Worldcom. As a result, the family
owned Ensol has had to layoff employees and is having a difficult time
making its own payments. (can you say contagion?) TO make matters
worse, credit checking is usually based on a company’s financial
statements and these were wrong in the case of Worldcom!
http://www.msnbc.com/news/787112.asp
In an upcoming JFE article, Michelle Lowry strengthens the case that the
volume changes in Initial Public Offerings (that is why are there many
IPOs in some periods, but very few in others) is a function of investor
sentiment, the relative level of information asymmetries, and the firm’s
demand for cash. Ok, so nothing is shocking about that, but what she
does do is to estimate the relative importance of each of the factors.
And the results suggest that “changes in firms’ demands for capital and
changes in the level of investor optimism explain a substantial portion
of the variation in IPO volume. Adverse selection costs [this is what I
called information asymmetry costs] are marginally significant and
appear to be of secondary importance.”
http://jfe.rochester.edu/01399.pdf
In a related story, the Nasdaq (ok, for you purists out there it is the
NASD) adopted new rules that will make it harder for firms (and
investment bankers) to cheat in the IPO process. Actually the new rules
are not saying anything new but rather are essentially just emphasizing
what was already supposed to be the rule. As the NY Times says: “The
rules deal largely with abuses in the allocation of hot new offerings,
by expressly prohibiting allocations in exchange for excessive
commissions or unusually high payments for any investment banking
service. Nor could an investment bank allocate shares based on a promise
to buy additional shares after trading begins, a practice known as
laddering.”
http://www.nytimes.com/2002/07/29/business/29NASD.html
Discouraged after hearing of all of the corruption and lack of
transparency? Take solace in Coke. (no not like that!) Coke
announces they will expense stock options! Hurray! A big first step.
And to make matters even better GE followed their lead. Unfortunately
an impromptu survey by the DallasNews found that very few firms have yet
opted to go the same route. Fearless prediction: by year’s end, at
least 10% of S&P 500 firms will be expensing their options.
http://www.washingtonpost.com/wp-dyn/articles/A4649-2002Jul14.html
http://news.bbc.co.uk/hi/english/business/newsid_2130000/2130009.stm
http://biz.yahoo.com/djus/020731/200207311344000830_1.html
http://www.nytimes.com/2002/08/01/business/01PLAC.html
It is not often that I agree with labor unions, but several unions have
been active in calling for companies to follow Coke’s lead and to
expense stock options. Surprisingly the SEC has said that firms need
not include this in their proxy statements. Additionally the AFL-CIO is
asking for less severance pay for executives and safer retirement plans
for workers.
http://biz.yahoo.com/djus/020729/200207292015000817_1.html
http://www.nytimes.com/2002/07/30/business/30WALL.html
One of the big reasons that options are used to align managerial and
shareholder incentives is because they offer unlimited upside and
because they have high leverage. This means that for small changes in
stock price, the option value changes significantly. It is important to
understand this leverage. However, as options are non-linear, behavior
can change around the kink as well. This is termed option fragility by
Hall and Knox in their new paper. The paper looks at the surprisingly
high number of underwater options (maybe a rising tide does not raise
all ships as approximately a third of all executive options were
underwater even at the peak of the bull market in 1999!) as well as how
firms handle this problem. They find that firms most frequently manage
this fragility by granting more options and relatively rarely resort to
repricing underwater options. (very interesting, but be forewarned, it
is also very long!)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=316576
Tyco and GE are often grouped together as throw-back firms. They are
each conglomerates in an age where corporate diversification is
generally seen as a bad thing and yet for years each firm did well. In
the post Enron world, each of these two conglomerates has been the focus
of attention for a lack of transparency, inefficient internal markets,
and high debt. This past spring, Tyco first announced they were doing a
spin-off but then failed to follow through which caused the stock to
fall still further even before their CEO was indicted on tax-evasion
charges. Now it is GE’s turn. Seeing what happened to TYCO, GE has now
announced that they would break their biggest subsidiary (GE Capital),
into four separate firms. If they go through with it, this should be
good news as investors will be better able to see inside the complex
financial statements. Stay-tuned.
Who says the person at the top doesn’t matter? Edward D. Breen the
president of Motorola was named new CEO and with the announcement the
stock climbed. Why? It is hoped that he will bring more openness and
honesty to the firm. And secondly it was because many feared the
announcement was not to name a new CEO but to declare bankruptcy.
http://www.nytimes.com/2002/07/26/business/26TYCO.html
Add Worldcom to the growing list of firms that have been delisted this
year. This means that the market that trades their stock (in this case
the NASDAQ) will not allow the stock to trade. Markets such as the NYSE
and Nasdaq maintain listing requirements such as a minimum share price
and financial disclosure as well as minimum profitability in order to
protect investors.
http://biz.yahoo.com/djus/020729/200207291750000740_1.html
Only months ago Dynegy was fighting to buy Northern Pipeline from Enron.
Well they succeeded and bought it for about $1.6 billion. Then they
found out they were needed cash so they sold it to the pipeline to
Warren Buffett for about $1 billion. The only solace that Dynegy can
take in the deal? ChevronTexaco’s stake in the pipeline (about a
quarter of the entire pipeline) is now worth about 10% of what it paid
for it in 1996. Morale of the story? Be careful of what you wish for,
you may get it!
http://biz.yahoo.com/rb/020729/utilities_dynegy_13.html
Similarly, IBM made their largest purchase ever by agreeing to acquire
PriceWaterHouseCoopers’s consulting arm (yes this is the same business
that the firm had also wanted to sell in an IPO, remember it was named
Monday?) for $3.5 billion which is a steal of you remember that last
year PWC turned down HP’s offer of $18 billion for the consulting
business. Gee, any second guessing there?
http://biz.yahoo.com/rb/020730/services_pricewaterhouse_17.html
http://www.washingtonpost.com/wp-dyn/articles/A23505-2002Jul30.html
http://biz.yahoo.com/rc/020730/services_pricewaterhouse_consulting_1.html
http://news.bbc.co.uk/1/hi/uk/2163472.stm
Do not feel sorry for Martha Stewart. While investigations continue,
Martha is far from the poor house!
http://www.nytimes.com/2002/07/29/business/29PLAC.html
The Bank of China’s IPO was vastly oversubscribed, due in part to an
allowance that gave individual investors the right to buy at a reduced
price.
http://news.bbc.co.uk/1/hi/business/2150815.stm
http://www.nytimes.com/2002/07/26/business/worldbusiness/26CHIN.html
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Investments
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Well this may force people to reconsider some trading strategies. In
recent years there has been a well-advertised trading strategy of buying
stocks that split. Of course this stems from the initial event study by
Fama, French, Jensen, and Roll back in 1969. In an upcoming Journal of
Finance article, Byun and Rozeff find little evidence of long-term
abnormal performance following most splits (they do find some positive
abnormal performance after 2:1 splits during certain periods and with
certain restrictions.)
http://www.afajof.org/Pdf/forthcoming/ROZEFF.pdf
Bradley, Jordan, and Ritter have found that IPO’s that had more analyst
coverage during the 1996-2000 period, did much better than those that
had no analyst coverage. But wait, this is not on the initial day of
trading, but at the end of the quiet period. Very interesting!
http://www.afajof.org/Pdf/February_03/QuietPeriod.pdf
Have you heard the latest discussion on market-timing? Louis Rukeyser
(quoted on MSNBC) may have summed it up better than anyone: “The person
who can tell you infallibly when we’re at the bottom or the top has not
yet been born, [but] trees don’t grow to the sky,” he said, “submarines
don’t dive to the center of the earth.” Meaning that overall market
timing is not perfect, but when things get over-bought or over-sold by
historical measures, some adjusting is called for.
http://www.msnbc.com/news/787060.asp
The Street.com’s Jon Markman has a very interesting article that
explains the differences in construction of the Nasdaq 100 and the S&P
500. In the article, Markman is critical of passive investing and extra
critical of the S&P selection of stocks for inclusion in their funds.
He correctly points out that when sectors are volatile, they will be
occasionally misrepresented in the index and this can impact returns.
For example, the S&P is down more than the many large actively managed
funds and the Dow in recent years. Why? In large part because the S&P,
in trying to be representative of the broader market, “weighted-up” tech
stocks during their run-up. Thus, the S&P (and funds that track the
Index) were more exposed to the volatile (and in hindsight overpriced)
tech sector. (Interesting article!)
http://moneycentral.msn.com/content/P25387.asp
So if we can’t believe the earnings number, what use is a Price/earnings
(P/E) ratio? The short answer is not much. Use the ratio only as one
tool of many.
http://www.nytimes.com/2002/07/21/business/yourmoney/21EARN.html
Circle August 14th on your calendars. Because it is by then that CEO’s
must personally vouch for the accuracy of their firm’s financial
statements. Already some (16 at last count) companies (including GE who
is in the running for Company of the Week for all of their investor
–friendly moves) have done so. (An interesting study idea would be to
look at how the stocks did relative to their peers—they were all up but
the news broke on a day when the Dow climbed 477 points, so a better
control is needed).
http://biz.yahoo.com/djus/020729/200207291959000809_1.html
http://biz.yahoo.com/rb/020731/manufacturing_ge_2.html
http://www.thestreet.com/markets/rebeccabyrne/10034509.html
http://www.washingtonpost.com/wp-dyn/articles/A28725-2002Jul31.html
Ok, this makes sense. Lawrence Kryzanowski and Arturo Rubalcava looked
at Canadian shares that trade in both the US and Canada, Finds that
investors who buy and sell in the US (where trading costs are lower)
tend to have shorter holding periods. This is consistent with Ahmed and
Mendelson’s famous 1986 paper that suggests those with longer holding
periods will trade in less liquid markets.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=314385
Incidentally, one reason why the costs may be greater in Canada is more
regulation
http://www.nationalpost.com/financialpost/story.html?id={07157A56-A356-4CFE-9ADF-B31385F02408}
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Financial Institutions and Markets
(also Money and Banking)
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Congratulations are in order for Ben Bernanke and Donald Kohn who were
approved for membership onto the Federal reserve board of governors.
This makes the first time in approximately 4 years that the governors
have had all 7 members. Bernanke, is the current head of Princeton’s
Economics dept while Kohn is already a Fed employee. Both are
(predictably) seen as experts on expert on monetary policy.
http://news.moneycentral.msn.com/breaking/breakingnewsarticle.asp?feed=OBR&Date=20020731&ID=1826450
http://www.nytimes.com/reuters/business/business-economy-fed-nominees.html
Remember Allied Irish Bank (AIB) and their subsidiary Allfirst? It is
the bank where rogue trader and family man John Rusnak worked. In
February it was announced that Rusnak had hidden losses of approximately
$700,000 in a deal that was reminiscent of Nick Leeson and Barings Bank.
Well, AIB weathered the storm very nicely thank-you and reported that
for the first half of the year, overall profit was up!
http://news.bbc.co.uk/1/hi/business/2163223.stm
The Canadian government got a compliment from Standard and Poors this
week. Citing the sound monetary policy of the Canadian central bank,
the ratings agency improved their rating. Consequence: Canada can
borrow more cheaply and the Canadian dollar rose.
http://biz.yahoo.com/rf/020729/economy_canada_ratings_1.html
Have you looked at a bank statement lately? Did you understand all of
the charges? This is especially true of credit card interest charges
(another reason to always pay your bills on time!) Well, if not, you
have company! In fact it took one mathematics professor from Cambridge
hours to compute the interest. Why? Many banks have added many charges
in an attempt to lessen their interest rate exposure. The only news
here is that the British Parliament is looking into it.
http://news.bbc.co.uk/1/hi/business/2160448.stm
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International Finance
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By a razor thin margin, Congress gave the president more power in
negotiating future trade agreements. Specifically the treaties will not
longer be able to be changed once they president aggress to it. Rather
the congress will only have accept-reject power.
http://news.bbc.co.uk/1/hi/business/2158305.stm
http://www.nytimes.com/2002/07/28/international/28TRAD.html
Is this too good to be true? Or too little too late? The US moves to
lower farm subsidies both here and internationally. Of course, this is
ironic as the US just passed a new “Farm Bill” that has drawn the ire of
many for its large subsidies.
http://www.washingtonpost.com/wp-dyn/articles/A2494-2002Jul25.html
The US dollar has continued to drift downward against most major
currencies in the weeks since the last newsletter. In fact it has
fallen so far against the Euro that it has broken parity and a dollar is
now worth about .98 of a Euro. The decline is in part a function of a
poorly performing stock market as foreign investors who sell shares
often want to repatriate their funds, but also in part due to a rising
trade deficit.
http://news.bbc.co.uk/1/hi/business/2138941.stm
http://www.washingtonpost.com/wp-dyn/articles/A5858-2002Jul15.html
http://news.bbc.co.uk/hi/english/business/newsid_2129000/2129500.stm
http://news.bbc.co.uk/hi/english/business/newsid_2129000/2129831.stm
(financial eggheads?!?!)
Some diseases have longer incubation periods than others. Back in the
spring numerous articles were written on the lack of economic spillover
from the troubles facing Argentina. Well, that has changed and we now
are seeing Argentina’s neighbors facing the effects of contagion. For
instance, the government of Uruguay shut down banks in an attempt to
prevent depositors from pulling out more money. And Brazil is facing a
declining currency itself. (See the next two articles)
http://www.nytimes.com/2002/08/01/business/worldbusiness/01URUG.html
http://www.washingtonpost.com/wp-dyn/articles/A28776-2002Jul31.html
Say what you want about Paul O’Neil (and in recent weeks people sure are
saying a great deal!) but he says what is on his mind. So when he
thought that more aid may be wasted to Brazil if there are corrupt
government officials, he said it. And now he is living with the
fall-out. However, his remarks affect not only him. For example, after
this comment, the Brazilian currency the Real fell by an additional 5%
(now down 28% against the dollar and even more against the Euro) since
many think the comments may signal less foreign aid from the IMF with
whom Brazilian representatives are meeting this week. The White House
stepped away from O’Neil’s comments and showed support for the Brazilian
government, but this has not stopped opposition groups from blaming the
Central bank for getting the Brazilian economy into trouble that is
beginning to remind some of Argentina.
http://news.bbc.co.uk/1/hi/business/2160949.stm
http://news.bbc.co.uk/1/hi/business/2160300.stm
http://www.washingtonpost.com/wp-dyn/articles/A23436-2002Jul30.html
(As an aside, this is just a guess, but O’Neil is on dangerous ground,
he is losing support on Wall Street, with investors, and
internationally. This is too bad as it is refreshing to see a
governmental official (other than Traficant) speak his mind.)
Speaking of the Argentina and the IMF, the IMF is again pushing more
austerity on the nation that has already had mass riots over cutbacks.
http://news.bbc.co.uk/1/hi/business/2160582.stm
The corporate accounting and fraud problems in the US have led Pakistan
to adopt tighter corporate governance proposals and new accounting rules
to increase transparency.
http://www.dawn.com/2002/07/30/ebr11.htm
This week’s example of privatization from France of all places.
Privatizations are when governments sell off assets to raise money and
improve the incentives (and hence efficiency) at the firm. The French
government is selling its 54% stake in AirFrance.
http://news.bbc.co.uk/1/hi/business/2159767.stm
Countries that want to improve their economy often turn to lowering
taxes. In some cases they decide to end taxes (either corporate or
personal, or both) in an attempt to draw new businesses. We now have
two new tax havens: Gibraltar and the Virgin Islands.
http://www.tax-news.com/asp/story/story.asp?storyname=8790
http://www.tax-news.com/asp/story/story.asp?storyname=8869
Three US style (shareholder first aggressive growth) CEOs were let go
from European firms, coincidence or part of a trend?
http://www.nytimes.com/2002/07/30/business/media/30EURO.html
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Economics
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I actually laughed aloud when I read Alan Task’s comment that it was the
US government’s time to restate financial numbers. The restatements
(called revisions when the government does it) have led to the
conclusion that the US economy does not look as rosy as it did. New
data shows that the recession was longer and deeper than had been
originally reported and that the recovery has begun to lose steam at
least in part due to falling US consumer confidence (which is likely the
result of the large market drop and continued bad news on the corporate
front.
http://news.bbc.co.uk/1/hi/business/2162178.stm
http://www.chron.com/cs/CDA/story.hts/business/1516866
http://www.washingtonpost.com/wp-dyn/articles/A25347-2002Jul31.html
http://www.thestreet.com/markets/aarontaskfree/10035203.html
Japan’s economy is in part falling again due to low domestic demand (is
this news?!) and a rising unemployment rate. This has been especially
hard felt in machine-tool orders that are down another 17.7 on the year.
http://biz.yahoo.com/rf/020729/manufacturing_japan_machinetools_1.html
http://biz.yahoo.com/rf/020729/economy_japan_5.html
Consumer spending seems has also dropped UK where it has dropped for the
second straight month. However, in what could be a sign of things to
come, US consumer confidence did decline in the last month although not
as much as forecasted after mid-month numbers were released.
http://story.news.yahoo.com/news?tmpl=story&ncid=580&e=2&cid=580&u=/nm/20020726/bs_nm/economy_consumers_dc_8
http://news.bbc.co.uk/1/hi/business/2150831.stm.
A quick tour of the globe shows that economies definitely are
correlated, but that the correlation is far from perfect. While the
Japanese economy is again showing some signs of weakness, Latin America
is feeling the effects of Argentina’s economic woes, the middle east is
slowed by violence, but the Chinese economy surprised economists by
growing at nearly 8%!
http://news.bbc.co.uk/hi/english/business/newsid_2128000/2128881.stm
http://news.bbc.co.uk/1/hi/business/2158238.stm
http://biz.yahoo.com/rf/020729/economy_chile_jobless_1.html
Hal Varian has an interesting piece on auctions in the New York Times.
Auctions seem more interesting now than when I sat in class and learned
about them.
http://www.nytimes.com/2002/08/01/business/01SCEN.html
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Personal Finance
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The bear market sure “put a hurting” on many who had planned on retiring
early. Sort of too little too late, but BusinessWeek has put together a
series of articles to help people cope.
http://www.businessweek.com/magazine/toc/02_30/B37930230retire.htm
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Energy Markets
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Nigeria has denied they are preparing to leave OPEC. Nigeria is the
cartel’s 5th largest producer and would weaken the already falling
market share of the group of 13 nations. Part of the reason that Nigeria
is thinking of leaving is that cheating on production quoats is rampant.
http://www.nationalpost.com/financialpost/story.html?id={0395DFC9-D3E2-418E-B99F-C7EB34D65EF0}
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Financial Service Industry
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Coincidence or dirty business? The NY Times asks whether Goldman Sach’s
execution of a 10,000 contract order to purchase call contracts (when
total open interest in the contract was only 1,400 contracts) was
designed to pump up the price of the Chip index. Why this is troubling
is that it occurred shortly after a Goldman analyst issued a buy
recommendation on the sector.
http://www.nytimes.com/2002/07/28/business/yourmoney/28WATC.html
With the market decline, investors are losing both money and patience.
The result: lawsuits against brokers are up. Advice to brokers. Always
document why the client is in the investments. That way, you have
protected yourself if things turn sour.
http://www.chron.com/cs/CDA/story.hts/business/1516943
Careful readers will observe that what was one of my main sources of
information (the Financial Times) is rarely included anymore. Why?
They have made changes to their website and the links are very “messy”.
Well, this week they also announced that ad-revenues were down 78%.
http://news.bbc.co.uk/1/hi/business/2158242.stm
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Accounting News
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There are new rules for accountants, that much is clear. Other things
are less clear. For example what exactly will the new oversight board
do and where does the SEC fit into the equation.
http://www.nytimes.com/2002/07/26/business/26BOAR.html
Not only the rules of the game, but the game itself has been changed.
What used to be good: keeping debt off balance sheets, is now seen as a
crime. http://www.nytimes.com/2002/07/26/business/26NORR.html
Well you can admire their persistence. Andersen lawyers continue to
fight in vain to get the verdict overturned. It really does not matter
anymore however as many employees have moved on and there is not much
left of the firm. I can not help but wonder what would have happened if
they had not destroyed evidence. Was what they did that much worse than
what other auditors missed (or approved) at any of these other firms.
For example, at Adelphia the firm says the Rigases took $1 billion. How
can you hide htat much?
http://www.washingtonpost.com/wp-dyn/articles/A28653-2002Jul31.html
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Money and Politics
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Have you noticed who has been laying low of late? VP Cheney. A person
more cynical than I would suggest that this is because he is facing a
possible SEC investigation of his own.
http://www.nytimes.com/2002/08/01/business/01HALL.html
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Of interest to students
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Well they got it right but have a glaring omission. Monster.com writes
about the importance of being atop current events in your field when you
are getting ready to interview. They then proceed to list some
electronic sites and newsletter and somehow left out the
FinanceProfessor Newsletter. What kind of operation are they running
over there?
http://finance.monster.com/articles/elecnews/
The average college graduate in the United Kingdom began off with an
average salary of 19,600 pounds.
http://news.bbc.co.uk/hi/english/education/newsid_2129000/2129089.stm
Students typically make poor consumers: many want less education even
though they are paying a fixed amount (for example many students-of
course none that I have ever known, but ones that I have read about
;-)-want out of class early, or want to have class cancelled, ). There
are exceptions. One University of Wolverhampton law student actually
sued his university over poor instruction. I guess professors may need
mal-practice insurance.
http://news.bbc.co.uk/1/hi/education/2163300.stm
http://news.bbc.co.uk/1/hi/education/2163590.stm
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Of interest to teachers
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Instead of the usual teaching ideas; I want to just give you some
reminders this week:
1. Don’t forget to book your flights and hotels for the FMA conference
in San Antonio.
2. The interview for August is with Robert Bruner. You will not want to
miss it. We will be talking predominately about teaching and I you will
not be disappointed! Look for the interview in about a week or two.
3. When making out your syllabus for class, why not include the
FinanceProfessor.com newsletter. Even if the students only read the
section their class is in, they will be much more up to date on current
events.
4. ENJOY THE REST OF THE SUMMER!
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FinanceProfessor.com news
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Look for some changes in the web-site in coming weeks. I have agreed to
pick up NY Times Business headlines and add a translation service so
that more international readers can participate more easily. It may
take a while, but they will get done.
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What I am reading
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I have been reading and ristening to so much I do not even know where to
begin. (I love driving long distances as it is a golden opportunity to
risten to books—even through Tennessee and West Virginia, where even the
interstates are curvy and hilly!)
I finished Band of Brothers by Stephan Ambrose. Good, but not great.
That said, I simply can not belief the sacrifices that these men made.
http://www.amazon.com/exec/obidos/ASIN/0743216458/finpapers/104-9378365-5272442
I read some of Fire by Sebastian Junger (he also wrote Perfect Storm
which I like much more). Fire was OK. Junger is one of the best
magazine article writers I have ever read. Unfortunately, this was a
book and the format got annoying after a while.
http://www.amazon.com/exec/obidos/ASIN/0393010465/finpapers/104-9378365-5272442
I ristened to theBest of Dragnet. I did not know it was a radio show.
It was fun to drive to it! I love the old reruns on TV.
http://www.amazon.com/exec/obidos/ASIN/157019386X/finpapers/104-9378365-5272442
I also finished into the Heart of the Sea. Very interesting. You know
it was interesting when even the endnotes held my attention! It is the
story of whaling from Nantucket and in particular the true story of the
Essex that was the foundation for Mobey Dick. A whale actually attacked
and sank the ship leaving the crew stranded at sea and forced to resort
to cannibalism.
http://www.amazon.com/exec/obidos/ASIN/0141802812/finpapers/104-9378365-5272442
I finished What if 2. Rarely has a book with such unbelievable
potential disappointed me more. Yes there are some great stories that I
will never forget, but all in all it disappointed me. The concept is
one of “how would things be different if X had or had not happened.” I
guess the problems develop because it is so hard to imagine what would
happen if things were changed. Let’s put it like this: the book is not
as good as the movie “It’s a Wonderful Life” which of course is dealing
with a fictional what-if.
http://www.amazon.com/exec/obidos/ASIN/0743509331/finpapers/104-9378365-5272442
I just started Shindler’s List. I am embarrassed to say I have never
read it. I have read other similar books but never this one, so I
started it today.
http://www.amazon.com/exec/obidos/ASIN/157019386X/finpapers/104-9378365-5272442
http://www.amazon.com/exec/obidos/ASIN/0671880314/finpapers/104-9378365-5272442
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Quotes of the week:
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The greatest discovery is that a human being can alter his life by
altering his attitudes of mind—Willaim James
There are three ingredients in the good life: learning, earning and
yearning.-- Christopher Morley-- From Selfgrowth.com
The naked truth is always better than the best dressed lie.--Ann Landers
(from Positive Press)
Time is the most valuable thing a person can spend--Theophrastus
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Well that is it. Sorry it was so long. I had so much collected
material that to clean my mailbox out I needed to use a great deal of it
:-)
Thanks for reading! I hope you liked it and learned something (or even
many things) from it!
If you have any ideas for the site or the newsletter please let me know.
Jim
JimM-@FinanceProfessor.com
In Western New York state where the weather has been beautiful of late.
I picked my first tomato yesterday but most are still very green. BTW
it is going to be a terrible apple year here. We have very very few
apples due to the late freeze (remember it snowed during finals).
Who had his worse race ever recently. It was so bad I went out and
bought a heart-rate monitor so that I can train more intelligently. Hey
it works for Lance Armstrong :-)
Who wishes the semester were another couple of months off.
Who is enjoying the Mets second-half comeback and who loved Lance
Armstrong’s victory. The Tour de France may well be my favorite
sporting event of the year.
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Oh and a final favor…pass this on to someone you think would like it….a
fellow student, a past teacher, your current teacher, your parents,
anyone who it might help. Thanks!
Thanks for forwarding this so much. That is the only way I know this
newsletter is growing so fast. :-)
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copyright 2002 FinanceProfessor.com
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