|
Markets drop, IPO irrationality?, Life after Greenspan, Group B, & more!
|
Jim Mahar
|
Oct 05, 2002 14:34 PDT
|
A look at irrationality in the IPO market, Life after Greenspan, A
return to 1996 or 1974? Will the Big 10 ever be a reality (and no I
don't mean in Football!), and MUCH more!
FinanceProfessor News
www.FinanceProfessor.com
**********************************************************
Top Stories
**********************************************************
1. Martha Stewart quits NYSE Board after broker assistant pleads
guilty
2. A recap of what is happening at Tyco, Enron, Adelphia etc.
3. Is irrationality and overconfidence at the heart of IPO anomalies?
4. Call it a strike or lockout, either way the economy suffers
5. Stock market falls to 1996 levels
6. The Vice Fund?
7. What is Harvey Pitt thinking?
8. What happens when Greenspan leaves?
9. What is after the Big 4? Will we see a Big 10?
10. PWC has a bad week
**********************************************************
Hi everyone!
Hope you have had a good two weeks! Other than being a tad busy, I
have. Thank you all for the many condolence messages form last week.
They are appreciated!
I also want to take a second and thank all of the alumni for who came
back for the recent Finance Club roundtable and who also helped out in
class. It was a valuable learning experience!
This week 20 students from the Bonaventure Finance club will be
traveling to NYC’s financial district to tour the NYSE and meet with
alumni and other former students to see what it is like working in NY.
This too would be impossible without the help of many of you so thank
you!
We have put together a resume book for the club and if any of you would
like a copy, please let me know. (additionally we will be putting them
online, so look for that too!)
Well there are so many great articles for class this week that I better
get out of the way and let you enjoy the newsletter!
jim
jimm-@FinanceProfessor.com
and now the news:
***********************************************************
Top Story: Corporate Governance crisis and aftermath
***********************************************************
Prosecutors got another step closer to Martha Stewart as Douglas
Faneuil, the assistant to Ms. Stewart’s broker, pleaded guilty to a
misdemeanor for accepting “hush money” in return for not saying more
about why Ms. Stewart sold her shares. In related news Martha Stewart
resigned from the NYSE board which some are construing
http://www.washingtonpost.com/wp-dyn/articles/A35295-2002Oct2.html
http://www.msnbc.com/news/813195.asp
http://www.msnbc.com/news/816658.asp
Months after it was first expected, former Enron CFO Larry Fastow was
arrested for fraud, money laundering, and conspiracy charges this week.
(He was even led off in handcuffs!) Fastow is facing charges that
could lead to over 40 years in prison and the return of over $37
million. However, it has been suggested that prosecutors are really
Fastow to testify against Ken Lay and possibly Jeff Skilling and
therefore may be willing to cut a deal.
http://news.bbc.co.uk/1/hi/business/2292733.stm
http://www.nytimes.com/2002/10/03/business/03FAST.html
http://www.washingtonpost.com/wp-dyn/articles/A35434-2002Oct2.html
http://www.washingtonpost.com/wp-dyn/articles/A35471-2002Oct2.html
One thing that has become abundantly apparent was that Enron’s vaunted
management was not as good as had been advertised. Many of their
projects were failures but then hidden from investors and analysts which
only saw the successes. It was the presence of these bad projects that
eventually led to the collapse of the shares. (The article has a great
explanation yet as to how Enron used its partnerships to shift unwanted
assets off of the Enron balance sheet while simultaneously generating a
gain on the sale.)
http://www.nytimes.com/2002/10/03/business/03FAIL.html
One consequence of the corporate governance scandals and new reforms
(such as holding executives personally liable) is that director and
officer insurance has become harder to obtain and prices have risen,
sometimes four fold. D&O insurance is designed to protect directors and
officers from lawsuits that stem from their roles at the firm. Another
likely consequence will be that executives (who are now taking on more
risk) will demand more pay.
http://www.cfo.com/article/1,5309,7797,00.html
To be in business is to take risks. With less D&O insurance and more
public scrutiny, some CEOs are now suggesting that they worry about
becoming too risk averse (remember, due to poor diversification and
often misaligned incentives, executives are often more risk averse that
shareholders would prefer) and that this risk aversion may hamper, not
only their own companies, but the economy as a whole. (In many ways,
what they are warning of is a return to the 1970s management model where
incentives were not aligned with shareholders (Sort of a pre
Jensen/Murphy 1990 world.)
http://www.nytimes.com/financialtimes/business/FT1031119858165.html
Tyco’s board probably knew about pay: Tyco International has said that
it was unaware of the extravagant loans and pay given to executives, but
minutes of the board’s compensation committee show it knew of many of
the payments months before the board took steps to disclose them, The
New York Times reported Monday. (I cannot decide if this makes me feel
better or not--on one hand I hope they knew, but then again, if they
knew and let it go on….well, like I said I can not decide).
http://www.msnbc.com/news/811710.asp
The news on the Adelphia Scandal is that the Rigases were indicted on
more charges this week. The family is maintaining that they did nothing
wrong and the father John Rigas made a rare public statement: “My family
and I have always acted with integrity and honesty and are committed to
restoring our credibility and that of Adelphia." While he may believe
that, I am hard pressed to fid many others that are willing to overlook
the self-dealing that seems to have occurred. But as we say in the US
“innocent until proven guilty” so, maybe.
http://www.msnbc.com/news/811816.asp
http://www.washingtonpost.com/wp-dyn/articles/A57468-2002Sep23.html
http://news.bbc.co.uk/1/hi/business/2294411.stm
http://www.washingtonpost.com/wp-dyn/articles/A35367-2002Oct2.html
The whole research-investment banking relationship has to be changed.
Now Salomon received a $5 million fine for issuing misleading research
reports. It is for just such actions that the SEC is pushing to
separate the investment banking and the research divisions. (See below
in the Financial Institutions Section)
http://www.msnbc.com/news/811839.asp
http://www.nytimes.com/2002/09/22/business/yourmoney/22TELE.html
Ok, so how widespread was the granting of IPO shares and other favors to
CEO’s in attempts to court their firm’s business? After the revelation
earlier that Saloman Smith Barney gave Bernie Ebbers the opportunity to
participate in hot IPOs, a congressional panel is now accusing Goldman
Sachs of doing the same with over 20 firms including Ford and Disney!
(what would Mickey say?!) While the legality is debatable, it sure
seems like a bribe.
http://biz.yahoo.com/rc/021002/financial_goldman_3.html
http://www.washingtonpost.com/wp-dyn/articles/A35407-2002Oct2.html
http://news.bbc.co.uk/1/hi/business/2297491.stm
Several top executives including, WorldCom’s Bernie Ebbers, are now
facing more legal problems as NY State sues for a discouragement of
profits from their IPO dealings.
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&cid=1031119780783&p=1014232938216
Socially responsible investing has taken on many meanings. From not
investing in tobacco and gambling stocks to environmental consciousness,
but SocialFunds.com is also taking the corporate governance banner on.
While admitting the Sarbanes-Oakley Act is an improvement, they are
pushing for more including an end to staggered boards, more disclosures,
and mandatory expensing of options.
http://www.socialfunds.com/news/article.cgi?sfArticleId=936
Boards of Directors are supposed to stop these corporate excesses. The
Boards are elected by shareholders and are the first line of defense
against the corruption we have seen. Business Week has an interesting
story on the best and the worst of US boards. (GREAT for class
examples!)
http://www.businessweek.com/bwdaily/dnflash/oct2002/nf2002103_8277.htm
***********************************************************
Corporate Finance
***********************************************************
There are essentially three anomalies in IPOs: 1) The initial
underpricing, 2) The long-term underperformance, and 3) The “hot market”
“cold market” cycle whereby the number of IPOs changes dramatically.
Ljungqvist, Nanda, and Singh tie these three anomalies together and
conclude that each can be traced back to investor over-confidence and
irrationality. Of course this draws into question market efficiency.
(Interesting paper!)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=282293
One of the things that bondholders and shareholders can disagree about
is called the over-retention problem. This is based on the presumption
that money that is paid out to shareholders increases the risk of
default, which harms bondholders. This idea was formed in the age of
large dividend payments, but is actually more interesting when looking
stock buyback programs. Like any good story, there are two competing
theories. On the one side is the idea that a buyback is a good signal
for the prospects of the firm which would make bondholders better off.
On the other side of the aisle is what will be called a wealth transfer
hypothesis that says that if the firms pay cash out to shareholders (in
any form) they do not have it for bondholders. Maxwell and Stephens
examine this issue and find that of buyback programs are bad for
bondholders. This is support for the wealth transfer hypothesis, but
there is still some positive signaling as evidenced by the finding that
total enterprise value does rise around buybacks. Moreover, the
buybacks are worse for holders of low-rated bonds and for larger buyback
plans. Great read! You’ll want to read it!
http://www.afajof.org/Pdf/forthcoming/Maxwell-Stephens.pdf
Owner-financing is a common tool to sell real estate. It is where the
seller “holds the mortgage” and helps the buyer finance the purchase.
It is also common in selling small private firms where the buyer cannot
obtain the necessary bank financing. However, owner financing is not
common at larger firms. That is why GE’s recent sale of Global eXchange
Services is newsworthy. When public bond markets balked at the deal, GE
agreed to lend $235 million of the purchase price to the buyer Francisco
Partners LP.
http://www.cfo.com/article/1,5309,7792,00.html
Dell Computers is famous for its working capital management: by keeping
their working capital low they avoid the problems of excess inventory
(such as obsolescence) while also improving cash flow (The NY Times
reports that accounts are stretched so that on average the company pays
bills 37 days after the receipt of the goods!). On the negative side,
Dell has some significant exposure due to their sale of some put options
(puts give the holder the right to sell the asset at an agreed upon
price). (An interesting article.)
http://www.nytimes.com/2002/09/22/business/yourmoney/22WATC.html
Firms are constantly faced with the question of what customers should be
allowed to pay on credit. As a general rule, the larger the profit
margin, the more you can afford to take chances with granting credit.
Now that the phone companies have seen rates fall and profits evaporate,
Sprint has decided that some customers are just not worth keeping and
are dropping them as customers.
http://www.msnbc.com/news/812169.asp
Palm Technologies did a reverse stock split (where shareholders turn
over many shares for one new and higher priced share). Why? To avoid
being delisted for having too low of share price. Remember, this is the
same firm who saw its stock price sky-rocket immediately after its IPO
in 2000.
http://news.bbc.co.uk/1/hi/business/2291663.stm
We know what happened. CEOs and other executives have been being bad.
Now the whys. One reason that many have pointed to is the increased use
of stock options. At the 2002 National Association of Stock Plan
Professionals, consultants who help design pay plans shouldered some of
the blame saying they did not explain the risks. Interestingly they
again blamed the Black-Scholes formula for overvaluing the option values
in the eyes of the managers. (Note the article says investors, but it is
most likely a mistake.)
http://www.nytimes.com/2002/10/05/business/05PAY.html
US and EU regulators took a small step towards standardizing takeover
rules. They are asking companies to inform them both at the same time
of pending deals. Well, baby steps are better than no steps, but this
is really not that much of move into an area that many executives feel
is hindering cross-border deals.
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1031119782004&p=1012571727162
While I did not see it in the seventh edition (it may be there), earlier
versions of the Brealey and Myers’ Corporate Finance text had the
example of noncash dividends. They cite the Dundee Crematorium which
offered shareholder cheap cremations. This Week the BBC follows the B&M
lead and lists perks that shareholders are entitled to in various firms.
Some examples: discounts, free samples, and even hotel stays.
http://news.bbc.co.uk/1/hi/business/2293929.stm
***********************************************************
Investments
***********************************************************
Most finance texts discuss pricing stocks with the constant growth
formula and the super normal growth formula. Let’s suppose we get it
wrong and think the growth rate is going to be much higher than it is.
What happens? We overbuild to have the necessary capacity. We bud up
stocks and when the truth is eventually found out, stocks tumble. Uh,
does that scenario sound familiar? MSNBC provides a very good look at
how these overly optimistic growth assumptions have hurt the telecom
sector. Interesting fact: less than 3% of the fiber optic wire that was
laid to meet the expected demand is actually being used!
http://www.msnbc.com/news/813117.asp
The California State Teachers Retirement fund adopted plans to disclose
how the fund votes its shares in proxy votes. This is a good move and
hopefully more funds will follow their lead. More transparency may end
the deals whereby the votes of fund managers are essentially purchased.
BTW Last week I commented that I felt it was a great ide for this new
reform to occur (whether voluntarily or not) and mentioned that it was
hard for me to believe that the fund company’s would fight it. The
obvious was then pointed out to me by Doug Nordman that many of these
fund companies are making much of their money managing 401k plans and
hence do not want to upset management.
http://biz.yahoo.com/rc/021002/financial_calstrs_2.html
Stocks continue their wayward ways as the Dow is at its lowest level
since November of 1997 while the last time the Nasdaq was at this low
was in September of 1996! This marks the sixth straight down week.
http://news.bbc.co.uk/1/hi/business/2301003.stm
http://story.news.yahoo.com/news?tmpl=story&ncid=580&e=1&cid=580&u=/nm/20021004/bs_nm/markets_stocks_dc
http://yahoo.smartmoney.com/theweeklylist/index.cfm?story=20021004
I love history. It tells us so much about the future. It gives us
perspective and helps us deal with new things. One thing that investors
often forget is that the market has been around for a long time. And in
that time the market has had some bad days. While history may or may
not repeat itself, The NY Times’ Floyd Norris compares this bear market
with that of 1974 and suggests that the worse may be over.
http://www.nytimes.com/2002/10/04/business/04NORR.html
I really like Wharton’s Knowledge website and newsletter. This week
John Bogle and Jeremy Siegel comment on what needs to be done to restore
confidence etc. Most of the remarks have been heard before, but Bogle
does suggest more dividend units to offset the use of options (the
reason for this is that dividends reduce stock prices which makes the
options less valuable thus creating managerial incentives to not pay out
cash. The article also points out that it will likely take a long time
before the high annual returns of the 1990s return.
http://knowledge.wharton.upenn.edu/whatshot.cfm
Need a refresher on ratios? MSNBC has a new Q&A section. This week’s
questions focus on PE ratios and other ratios. (Acronyms, I need more
acronyms)
http://www.msnbc.com/news/762355.asp
Ok, so you have heard of socially responsible investing. But what about
its opposite? The Vice fund has been launched to satisfy that niche.
The fund invests in tobacco gambling and alcohol stocks along with
weapon manufacturers. Not sure what I can say about that one except
that I will not be buying it. (although I guess we could argue their may
be a premium for holding these stocks.)
http://www.vicefund.com/
***********************************************************
Financial Institutions and Markets
(also Money and Banking)
***********************************************************
Oops! What is an error now and then? Bear Stearns accidentally entered
a $4 billion sell order when a $4 million order was desired. They did
get it mostly canceled (all by $622 million), but it still quite a
mistake.
http://www.washingtonpost.com/wp-dyn/articles/A35144-2002Oct2.html
Given the ineffectiveness of Chinese Walls (those imaginary lines that
separate the retail side of financial firms from the investment banking
activity), the SEC is proposing forcing the two to separate. (Actually
former SEC chairman Dennis Levine had suggested this but the proposal
never went anywhere back in the boom periods of 1999!) Among the other
proposals being laid forth is a further separation of IPO allocation
process and the investment banking side.
http://www.msnbc.com/news/813229.asp
http://www.nytimes.com/financialtimes/business/FT1031119889140.html
http://www.businessweek.com/bwdaily/dnflash/oct2002/nf2002103_3232.htm
Once again Harvey Pitt decided to go directly to the source and met with
executives from Goldman Sachs to find out how to separate investment
banking and the research/retail sides of the business. While the
separation is a great idea, the timing and appearance of this is, at
best, questionable as Goldman is already under SEC investigation (see
above) and Pitt never even told investigators that he was meeting with
Goldman. For the record this is not the first time that Pitt has come
under criticism for similar behavior: he also met with KPMG and Xerox
during on going investigations.
http://www.washingtonpost.com/wp-dyn/articles/A35365-2002Oct2.html
I owe the Nasdaq an apology. They have a really great university
package that I had wanted to review at the start of the school year but
I just got too busy and it got lost on my desk (literally!) But if you
are taking a finance class or teaching a finance class, you owe it to
yourself to check it out. If you teach an Investments class and want a
copy, let me know and I will forward your name to the “proper
authorities.” :-)
http://www.Nasdaq.com
In the last newsletter, we looked at how difficult it is to forecast
future growth rates of individual firms. This week Fed Chairman
Greenspan echoed that opinion but at the macro level. Thus, finding the
capacity of any large economy is not as easy as we may hope. Why?
Innovations are inherently unpredictable.
http://www.federalreserve.gov/boarddocs/speeches/2002/200209252/
When a business leader nears retirement there has to be a succession
plan in place. This is also true for the Fed. As Alan Greenspan has
been at the head of the Fed now for 16 years, the Fed is at least
indirectly preparing for his successor. One way they are doing this is
by debating the adoption of an inflation target. Greenspan has used one
(although the target itself was not explicitly laid out), and new Fed
Governor Ben Bernanke (the former Princeton economics professor) wants
to be sure that whoever takes over after Greenspan can have the same
success.
http://www.nytimes.com/2002/10/03/business/03FED.html
***********************************************************
International Finance
***********************************************************
Ok, here is a real market failure. The German Neuer market is going out
of business! Once touted as the European Nasdaq, the tech heavy market
has seen values fall by 96%. It finally gave up and the actual market
is closing!
http://news.bbc.co.uk/1/hi/business/2283068.stm
The IMF meetings focused much attention on whether nations should be
able to essentially declare bankruptcy. This is an interesting example
of how change begets more change. In the past decade or so many large
banks have shied away from lending to developing nations. As a result
the nations have had to turn to public debt markets, which has made debt
renegotiation much more difficult. This has increased the need for the
new law. Opponents of the law feel that any renegotiation is giving in
and will lead to more debt problems.
http://news.bbc.co.uk/1/hi/business/2288071.stm
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1031119791215&p=1012571727269
The always-happy people of the IMF say the global economy is more
fragile than when we last heard from them. While I know it is probably
true, it would still be nice to hear good news from them for a change.
:-)
http://news.bbc.co.uk/1/hi/business/2269758.stm
Some things definitely have changed. Even earlier last year, IMF
meetings were big things, now few people even pay attention. Why? In
part due to protests at past meetings and in part due to the slower
economy, the IMF has suggested that countries bring smaller groups.
Additionally increased security has made protest more difficult.
http://www.washingtonpost.com/wp-dyn/articles/A8424-2002Sep26.html
FT has a great article on Japanese banks. Not much new here except
again the Japanese Government is trying to get the banks to write off
their bad loans, but doing so may put some banks in deep trouble.
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1031119782663&p=1012571727126
Luiz Inácio Lula da Silva of the leftist leaning Workers Party is
leading in the presidential polls and foreign investors are scared that
Brazil may be the next to be hit with financial problems. This change
comes largely because the free market advances of the 1990s have failed
to live up to their promise. However, in the long run, the free market
moves are probably correct.
http://news.bbc.co.uk/1/hi/business/2285990.stm
http://www.nytimes.com/2002/10/05/international/americas/05BRAZ.html
Remember the recent Summit on Sustainable Development? It was held in
South Africa and dealt with many of the issues at the core of the
anti-Globalization debate. While many write-off such meetings as
nothing more than “tree-huggers” or the like, they do bring up many
valid points and ask many key questions. SocialFunds now has put out a
series of essays on the Summit. The essays would make for excellent
class room discussion.
http://www.socialfunds.com/page.cgi/rio.html
***********************************************************
Economics
***********************************************************
The bulk of economic data suggests that the US economy is growing very
slowly. For example, there were fewer jobs, chain store sales slowed yet
again, but many leading economists suggest a recession is not in the
cards.
http://www.msnbc.com/news/815442.asp
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&cid=1031119785994&p=1014232938216
http://www.nytimes.com/2002/10/05/business/05ECON.html
Need more evidence that the economy is not clicking on all cylinders?
New jobless claims were up again after a surprisingly good showing last
week. That said, there are still over 400,000 new claims last week,
which was the sixth week in a row of more than 400,000 new claims.
Surprisingly the unemployment rate dropped even though the number of
jobs was down.
http://news.bbc.co.uk/1/hi/business/2299793.stm
http://www.washingtonpost.com/wp-dyn/articles/A36938-2002Oct3.html
When is a strike not a strike? When it is a lockout. That is what has
happened at West Coast ports. In response to a presumed work slowdown
over contract negotiations, ships entering the US have been kept at bay
(literally!). This is putting a serious damper on imports into the US.
Over a billion dollars worth of product is being halted each day at a
time when the US economy needs any help it can get. If the lockout
continues, look for government intervention. While imports have dried
up and are causing some outages, so too have exports. This is hurting
US manufacturing and foreign firms who depend on US parts.
http://www.msnbc.com/news/814049.asp
http://www.msnbc.com/news/813221.asp
http://www.msnbc.com/news/814049.asp
http://news.bbc.co.uk/1/hi/business/2298147.stm
http://news.bbc.co.uk/1/hi/business/2302079.stm
***********************************************************
Energy Markets
***********************************************************
The US and EU continued to pressure OPEC for lower oil prices. The
debate raged even though OPEC had all but officially said it was not
going to raise production quotas. Even though oil is not that high in
real terms, both US and EU officials want lower prices to spur the
economy. That said, “saber-rattling” and threats of war with Iraq
continue to drive prices higher as did Hurricane Isodore in the Gulf of
Mexico.
http://www.washingtonpost.com/wp-dyn/articles/A51025-2002Sep22.html
http://www.nytimes.com/2002/09/22/business/yourmoney/22ENER.html
http://www.msnbc.com/news/812172.asp
Gas is gas? Trying to differentiate what many see is a commodity is not
an easy endeavor but necessary if the producers want to market on
anything other than alow cost basis.
http://www.dallasnews.com/business/stories/092102dnbusfivegrades.3af2.html
While much of the excitement and promise of energy deregulation has been
overshadowed by the Enron mess, there are victories as well. Take for
instance, the closing of several inefficient plants that are being
replaced by more efficient (and cleaner) new generating facilities.
http://www.chron.com/cs/CDA/story.hts/business/1604666
***********************************************************
Money and Politics
***********************************************************
If I hadn’t seen it from multiple sources (including the NY Times) I
would not have believed it. A US trade panel voted to again raise
tariffs on steel imports, this time to Mexico. (On the outside chance
that anyone who voted for these tariffs is reading this: you need a
schedule of when Economics courses are offered, please let me know.)
http://www.nytimes.com/2002/10/03/business/worldbusiness/03STEE.html
***********************************************************
Financial Service Industry
***********************************************************
Financial service jobs are safe from foreign competition. Right?
Wrong. Prudential has decided to move some of their jobs to India for
cheaper labor and a skilled workforce. While some in the UK are
complaining about the loss of jobs, the move really should come as no
surprise. Even a first year Economics student should have been able to
predict that jobs will migrate to where they are cheaper, in this case
nearly 80% cheaper!
http://news.bbc.co.uk/1/hi/business/2287789.stm
We knew it was too good to last. During the bull market days of the
late 1990s, financial firms, even Wall Street firms, relaxed a bit. But
as markets have fallen, we see many of these same firms retightening
their belts-literally and figuratively. This week Bear Stearns joined
the list of firms who have made it official: they banned business
casual. So it is back to the boring suits and ties :-(
http://www.washingtonpost.com/wp-dyn/articles/A47819-2002Sep21.html
Merrill Lynch’s new email training (wow that has got to be fun!) came
under fire from Cnn’s Lou Dobbs. Dobbs correctly claims that the firm
is just trying to prevent from being sued later when the wrong email was
saved.
http://money.cnn.com/2002/10/02/commentary/dobbs/dobbs/index.htm
As the market remains cold and the economy shows few signs of picking up
many investment banking firms are going through restructurings and
layoffs. After seeing many of the Wall Street firms do so, Wachovia
decided that they too would restructure in an attempt to cut costs.
Additionally Fidelity is cutting over 5% of its work force and JP
MorganChase is rumored to be laying off up to 4,000 of its employees.
http://www.msnbc.com/news/815180.asp
http://www.nytimes.com/financialtimes/business/FT1031119933335.html
http://www.charlotte.com/mld/charlotte/business/industries/banking/4193393.h
***********************************************************
Real Estate
***********************************************************
With mortgage rates at 40 year lows (under 6% in some areas!), many
homeowners are refinancing to get lower rates. Additionally about 10%
of those refinancing are also taking some money out and thus increasing
their debt.
http://www.msnbc.com/news/811931.asp
***********************************************************
Accounting News
***********************************************************
This is something I have been thinking about for a long time. What will
it take for a second-tier accounting firm (the so-called Group B) to
join the Big Four? CFO has an interesting look at what other players
are out there (especially the next six) and how their roles may change
as the result of the problems at the Big Four. Just to wet your
curiosity: on one hand the Big Four lost credibility and invincibility,
on the other hand investors are more demanding and the stamp of approval
of a lesser known audit firm may not mean as much.
http://www.cfo.com/specialreport/0,5487,344|0,00.html
http://www.cfo.com/Article?article=7803
PriceWaterhouseCoopers (PWC) appears to be close to settling with the
SEC over the improper booking of revenues at MicroStrategy.
Microstrategy is the one time high flying DC area firm that fell
dramatically (over 60%) when PWC told the firm it would need to restate
earnings downward.
http://www.msnbc.com/news/816957.asp
Sorry to those of you who work at PWC but it’s about time. Finally
there is some discussion of what PWC knew at Tyco. At the heart of the
issue is how executives could hide so much from auditors. PWC has been
largely silent on the matter, but will presumably say that Tyco
executives were fraudulent in the information they provided. Stay
tuned.
http://www.msnbc.com/news/814955.asp
Continuing with PWC, they completed the sale of their consulting
division to IBM. In a related story, KPMG has reportedly spent $5-$6
million on the new name for their consulting division and will spend up
to $40 million on an advertising campaign to get their new name in
front of the public. But for free, it is BearingPoint. (FWIW this is
significantly less than that spent by the other big accounting firms for
their names.)
http://biz.yahoo.com/bw/021002/22066_1.html.
Wharton does some really cool things! Later this month they are hosting
a conference to discuss the differences between international accounting
and auditing and that in the US. While both work well (sometimes) there
are differences that make comparing financial statements across
countries can be difficult and time consuming. As we saw in the last
newsletter, how to reconcile the differences is next on the agenda.
http://knowledge.wharton.upenn.edu/articles.cfm?catid=1&articleid=626
***********************************************************
Follow-up on past stories
***********************************************************
I got several comments on the Scott Burn’s story on when to take your
social security payments. The crux of the issue is that if you postpone
the payments, you get a higher payment but you get fewer payments. The
article went on to say that you would be better off postponing your
payments. Several readers were correct in saying that he should have
calculated the differences in present values. So I did. Using his
numbers and a 3% discount rate (rationale is that the cash flows are
adjusted for inflation and risk free, so the real rate should be used) I
find that if you live longer than 83 you are better off waiting. Of
course if you are already taking the payments don’t worry about it, as
the differences are quite small and in reality we should be taking the
expected cash flows and not giving each an equal probability of
occurrence. (You know, it would be interesting to see the
self-selection that occurs). BTW I’ll put the spreadsheet online when I
get a chance to make it look “pretty”. Of course this analysis assumes
that the government will not cut the payments etc which is of course
possible, but politically I do not think they will touch them for those
already eligible to receive the payments.
http://www.dallasnews.com/business/scottburns/columns/2002/stories/091702dnbusburns.38e2.html
***********************************************************
FinanceProfessor.com tip of the week
***********************************************************
Finance is too expansive (I won’t say hard) to try and cram all of it at
once. If you are a finance student, stay abreast of the material. Read
a little every day rather than trying to get it all the night before the
exam. Indeed I tell my students the most important determinant to doing
well on my exams is to be well-rested and able to think.
***********************************************************
FinanceProfessor.com Site of the Week
***********************************************************
Erisk.com has revamped their already good website---you’ll love it!
This is really the best I have seen for risk management as well as a
discussion of what has gone wrong at companies in the past. Also their
banking coverage is top notch!
http://www.erisk.com
***********************************************************
Financial Trivia/History
***********************************************************
Great at art, not so great at investing? In 1656 Rembrandt van Rijn was
forced into bankruptcy when his holding of shares in the Dutch East
India Company fell sharpily.
(The People’s Chronicle by James Trager)
***********************************************************
Teaching Ideas
***********************************************************
Going to miss some time for the upcoming FMA conference? Schedule a
night exam so that the students do not miss any class time. If you can
not do that, try to get someone to either take your class or at minimum
to show a finance related movie to the class.
When making out tests, try to include a few questions directly from the
book. It creates an incentive for students to read the book in addition
to just coming to class.
***********************************************************
What I am reading
***********************************************************
I have had almost no time to read lately, but I am trying.
I am still working on the Other Path: the Economic Answer to Terrorism
by Hernando De Soto It is the famous book on the economic response to
terrorism. I have to say I hope I would as brave as he was to publish
the work knowing full well that the terrorists would be against him.
The basic idea: improve the economy, you will have fewer terrorists.
http://www.amazon.com/exec/obidos/ASIN/0465016103/finpapers/104-9378365-5272442
I am about done with Pickett’s Charge in History and Memory by Penn
State’s own Carol Reardon. I like it but it is not the best book I have
ever read. A few of my favorite lines: “History is an Agreed Upon Lie,”
“Those who were in the battle may be least able to write about it.”
Good!
http://www.amazon.com/exec/obidos/ASIN/0807823791/finpapers/104-9378365-5272442
I started The Fortune Tellers: Inside Wall Street’s Game of Money,
Media, and Manipulation by Howard Kurtz. Several things really stand
out: how big of business reporting grew to be in the 1990s and how
important entertainment is to the reporting of the “news.”
http://www.amazon.com/exec/obidos/ASIN/0684868806/finpapers/104-9378365-5272442
I just bought (and have not started), the New Rules of the Worls by John
Pilger. I have to admit I have my doubts, but it came highly
recommended by a friend and subscriber, so I bought it. I pride myself
as being open minded and will even try an anti-globalization book.
http://www.amazon.com/exec/obidos/ASIN/185984393x/finpapers/104-9378365-5272442
*************************************************************
Quotes of the week:
*************************************************************
This is not a dress rehearsal. This is it!---Tom Cunningham
The mere sense of living is joy enough--Emily Dickinson
To give real service you must add something which cannot be bought or
measured with money, and that is sincerity and integrity. --Donald A.
Adams (form PositvePress.com)
The gain in self-confidence of having accomplished a tiresome labor is
immense---Arnold Bennett
*************************************************************
Thanks for reading! I hope you liked it and learned something (or even
many things) from it!
The next newsletter will likely be focused on the FMA convention in San
Antonio, os if you are presenting a paper there and have an online
version of it, please let me know if you would like it to be included.
Jim
JimM-@FinanceProfessor.com
Who is really glad WSBU is finally back on the air!
Who really needs a day off to just work on the website. I have many
more ideas for it than I have time to do anything with it!
Who ran in the SBU alumni cross-country meet last week. We lost to the
varsity team but had a lot of fun. My brother Mike was the first alumni
across the line.
Who is not really surprised that the Mets let Valentine go.
Who is amazed at how well Bledsoe has been playing!
This has nothing to do with Finance, but Campbell’s Soup is having a
contest and will donate one can of soup for each click to stop hunger.
The contest is to pick your favorite NFL team. So, since you just got a
free newsletter, the least you can do is to click on the Bills. They
are now in second place.
http://chunky.nfl.com/click_for_cans.html
http://www.chunky.com/click_thankyou.asp?tid=2 --link for the Bills
*************************************************************
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. :-)
*************************************************************
copyright 2002 FinanceProfessor.com
|
|
 |
|
