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Is Pitt in Trouble? CEO certification, returns following stock splits,
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Jim Mahar
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Nov 05, 2002 00:40 PST
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Harvey Pitt’s troubles, the value of CEO Certification, No LT abnormal
returns following stock splits, Islamic Finance takes steps in right
direction, elections, and MUCH more!
FinanceProfessor News November 5, 2002
www.FinanceProfessor.com
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Top Stories
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1. Harvey Pitt’s troubles worsen
2. Salomon Smith Barney to reorganize in an effort to end incentive
conflicts
3. Is CEO certification useless? New paper suggests so.
4. No abnormal long run returns after stock split?
5. Taxable preferred stock---debt without the interest deduction?
6. Who is next in the S&P 500?
7. US economy – still growing but showing signs of fatigue
8. Elections around the world (especially Brazil and Turkey)
9. Islamic Finance makes several moves in the right direction
10. FDIC sues E&Y
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Hi everyone,
Did you think I forgot you? Actually I owe you all an apology. I had
every intention of getting a newsletter to you two weeks ago, but simply
ran out of time. So I saved parts, scrapped the rest, and you will get
a newsletter this week instead. Traveling (NYC, San Antonio, and
Atlanta/Athens), in the midst of three papers, registering students for
classes, and picking up an extra class (International Finance) did me
in. But thank you to those of you who emailed and asked if everything
was OK. Your kindness is much appreciated. One the good side, things
are quieting down somewhat: this coming weekend will be the first since
August where with no company coming and no travel plans. Maybe I can
catch up on email and laundry!
There are many great stories this week! In fact too many. I had to
drop several of the academic papers (they can be saved much better than
time-dependent stories that decay very quickly) and the newsletter is
still too long.
The major news this week is on the reforms that have come about as a
result of the so called “corporate governance crisis.” In fact the
accounting section is so big that it could be accountingprofessor.com
;-)
Oh yeah, I added some new summaries of journal articles to the web-site.
I use these for my classes and they are something that I can do while
traveling, so I have about 8 to put up, so far only two new ones typed
up, but the rest will be coming soon!
http://www.financeprofessor.com/summaries/summaries.htm
Well I should shut up and let you get to the news. Enjoy!
jim
jimm-@FinanceProfessor.com
and now the news:
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Top Story: corporate governance the changes are being
felt.
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Many of the top stories in recent weeks have been the consequence of the
corporate governance problems we saw earlier in the year. We’ll first
go with quick recaps, and then look for some of the changes that have
come about due to the Enrons of the world.
Larry Fastow the former Enron CFO is facing 78 counts stemming from the
collapse of the Houston based energy trader. The charges rang from
Money Laundering to eating with his mouth open (just kidding--I had to
see if you were still reading). If convicted of all charges, Mr. Fastow
could get nearly 200 years of jail time. Look for a plea bargain, a
conclusion that no doubt worries Lay and Skilling.
http://story.news.yahoo.com/fc?cid=34&tmpl=fc&in=Business&cat=Enron
http://www.latimes.com/business/la-103102enron_wr.story
http://www.latimes.com/business/la-103102enron_wr.story
http://www.cfo.com/article/1,5309,8066,00.html
Shock of all shocks! Bernie Ebbers dominated the WorldCom board. Gee,
from press reports I never would have guessed that.
http://www.washingtonpost.com/wp-dyn/articles/A4974-2002Nov4.html
Stiles Kellett resigned his position as a Board Member at WorldCom.
While resigning from WorldCom’s board may seem a good career move, the
resignation was not totally voluntary. The Bankruptcy official
appointed to oversee WorldCom had been critical of the pay packages that
Kellett had signed while Bernie Ebbers was CEO. In addition to
resigning, Kellett (who had been on the board for over 20 years) agreed
to pay $120,000 for past use of the company’s airplane.
http://www.msnbc.com/news/827381.asp
Is Martha Stewart facing arrest? That is a good question. It is
looking more and more likely. Another big question is what will happen
to her firm without her. With her in trouble, the firm announced
earnings were down over 40%, but many feel this will get much worse if
she is actually indicted. In related news, Paul Harvey reported that
one of the most popular Halloween costumes this year was Martha in
stripes with handcuffs and a ball and chain.
http://news.bbc.co.uk/2/hi/business/2379011.stm
I am not sure how this should be taken. Hypothesis one: you have to pay
more to get the best. Hypothesis 2: being a board member for Adelphia
is a real headache and you need extra pay. Either way, the two new
Board members at Adelphia are getting up to $125,000 a year for serving
as board members. (BTW note again how companies in bankruptcy need
approval before they can make major decisions.)
http://abcnews.go.com/wire/Business/ap20021028_1101.html
Is this more bad news for Citigroup? The NY Times reports more evidence
of shady dealings with Worldcom’s Bernie Ebbers has been found. This
time the news involves loans granted to the ex-CEO that were accompanied
by an equity position by Citigroups’ Travelers. The equity position was
not illegal, but does seem slightly troubling given the fact that only
months later Ebbers picked Citigroup as the underwriter for WorldCom
deals.
http://www.nytimes.com/2002/11/03/business/yourmoney/03WATC.html
On the good side, Citigroup has decided to split its investment banking
off from its stock analyst side. While this should reduce conflicts of
interest that stemmed from analysts issuing buys to win investment
banking business, it does not go as far as some would like for Citigroup
will still own both divisions. That said, it was still a great move in
the right direction! (Incidentally, the move will result in the Salomon
being dropped from the firm’s retail arm.)
http://www.washingtonpost.com/wp-dyn/articles/A43404-2002Oct30.html
http://www.washingtonpost.com/wp-dyn/articles/A39684-2002Oct30.html
http://www.msnbc.com/news/828048.asp
http://www.chron.com/cs/CDA/story.hts/business/1640555
http://www.nytimes.com/2002/10/31/business/31WALL.html
The SEC proposed several rules changes that will strengthen investor
protections (see accounting section as well). One rule change will
drastically cut down on the use of pro forma earnings figures. Another
change prohibits insider selling when other employees are not allowed to
sell from their pension plans (or 401k plans). And finally another
change would make firms more fully disclose (in plain English) any off
balance sheet financing.
http://www.washingtonpost.com/wp-dyn/articles/A40623-2002Oct30.html
http://news.bbc.co.uk/2/hi/business/2378405.stm
http://www.chron.com/cs/CDA/story.hts/business/1640580
http://www.washingtonpost.com/wp-dyn/articles/A43303-2002Oct30.html
While Enron, Adelphia, and WorldCom were all US firms but other nations
have learned from their problems and have likewise moved to toughen
their investor protection laws. In Canada for example there is now a
bill that would give investors many of the protections in the US’
Sarbanes-Oxley Act. Similarly, the EU has decided to up investor
protections.
http://www.eubusiness.com/cgi-bin/item.cgi?id=95587&d=101&h=240&f=56&dateformat=%o%20%B%20%Y
http://www.nationalpost.com/financialpost/story.html?id={EA823F25-C097-4068-9440-B6B42390A36E}
A question has to be asked however is whether the rules already
implemented (in particular CEO and CFO certification of financial
statements) will be effective in reducing information asymmetries. The
first look at evidence suggests no. Bhattacharya, Groznik, and Haslem
find that there was essentially no difference between the certifiers and
the non-certifiers when the new rule was enacted. Why? Best guess “the
market had separated firms with good earnings transparency from firms
with bad earnings transparency before the SEC order.” A VERY
Interesting paper!
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=332621
It is widely known that Wall Street Investment bankers have been trying
to settle with government officials over potential misconduct dealing
with buy recommendations. What is not as well known is that any
settlement may also deal with the allocation of IPOs. While the
settlement may cost $2b (yes with a B), doing it on the hush-hush does
not suggest the problem of no transparency has been solved.
http://www.msnbc.com/news/830256.asp
A PWC (PriceWaterHouseCoopers) survey finds that executives are trying
to improve transparency. Come on folks, who thought this one up? A
survey? Why bother? It is like asking politicians if they oppose clean
air. Of course the executives are going to say they are trying to
increase transparency and that transparency is important.
http://www.barometersurveys.com/production/barsurv.nsf/vwAllNewsByDocID/C2464734264D3A8F85256C5D0066B2AA?OpenDocument
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Corporate Finance
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Long run performance studies are notoriously model-dependent and
difficult to perform correctly. Thus any study that uses long-run
returns deserves to be approached rather skeptically (see Fama JFE
1998). That said there have been numerous studies looking at abnormal
returns surrounding stock splits. Most have found some abnormal returns
and attributed this to increased liquidity or signaling. (However, why
this would not be picked up immediately by the market remained a
question) For this reason Byun and Rozeff’s upcoming JF article
deserves a look. They find no abnormal long-term returns following an
amazing sample of over 12,000 splits. This should be comforting to all
who believe in efficient markets.
http://www.afajof.org/Pdf/forthcoming/ROZEFF.pdf
(BTW while I thought I had included this before, but since it was
suggested by a loyal reader and was timely for my class, I figured there
are worse things than running the a good article twice. :-) )
As one of the few IPOs since the corporate governance problems of early
2002, Wynn Resorts gives us the best look at an IPO in quite a while.
There are several differences from days gone by. For starters, unlike
the majority past offers, this one was revised downward several times
from over $20 a share to $13. Moreover, the issuer actually had to buy
some of the offer and had a higher than market price! Moreover, the
price just sat at the offer price which suggests strongly that the offer
was poorly received and the investment banking syndicate was engaging in
price stabilization. (Another interesting thing is that the equity sale
was accompanied by a public debt sale, that likewise received a cool
welcome.) Good article.
http://slate.msn.com/?id=2073247
There has been much discussion of late (for example Business Week cover
story) as to whether mergers are good or bad for the various
stakeholders. One deal that has seemingly turned out bad for
shareholders has been the AOL time Warner merger which has gone so badly
that it may soon be undone. There has been at least some discussion as
to whether AOL should be spun-off. (A spin-off is when a parent firm
gives the shares of the subsidiary to existing shareholders which are
then free to trade the shares in the secondary market.) However, my
guess is that that talk was squashed which would explain why several top
AOL execs are heading for the exits.
http://www.msnbc.com/news/830536.asp
http://www.msnbc.com/news/827381.asp
http://www.msnbc.com/news/827513.asp
Along a similar vein, while it has long been theorized, there is now
mounting evidence that one group who does seem to lose when firms
acquire another firm is the acquiring firm bond holders. A working
paper by Billett, King, and Mauer finds that acquiring bondholders lose
a statistically significant 0.17%, while target bondholders on average
gain but it varies tremendously by credit quality (junk bonds go up 4%
while investment grade targets actually drop.)
http://www.bus.iastate.edu/mpiwowar/Seminars/BondMerger_1.pdf
Traditionally finance classes (including mine) have explained preferred
stock as a cross between debt and equity. While not deductible, it did
have fairly structured (and relatively safe in that they are paid before
common shareholders). Its existence was largely explained by the fact
that corporations did not need to pay taxes on the full amount of the
dividend received, but would on interest received. That explanation
goes out the window however with fully taxable preferred stock. It is
fully taxed to both individuals and corporations. Not surprisingly it
carries a higher pre-tax yield. Investors in lower tax brackets (often
retirees) therefore prefer them.
http://www.nytimes.com/2002/11/03/business/yourmoney/03PREF.html
One of my favorite areas of corporate finance is looking at how people
are paid. It is always interesting to see how pay influences behavior
and how people react to pay (both favorably and negatively). A while
ago we saw how executive compensation at British firms has been moving
more in line with that of the US (more options, and higher levels). Now
the same can be said for Australia where pay at the top 50 firms has
gone up a mind-boggling 500% since 1995. Not surprisingly, the high pay
is drawing criticism there as well.
http://www.theage.com.au/articles/2002/11/02/1036027086438.html
Speaking of pay, expect option pay to decrease and more firms to
disclose how pay is set in the future. Moreover, in England there is
now a debate as to how much disclosure of pay is necessary. Currently
only board member pay need be disclosed but in a push for transparency,
many are suggesting that more should be required.
http://www.guardian.co.uk/business/story/0,3604,823656,00.html
Microsoft must feel like a giant weight has been removed from its
shoulders. A judge approved its settlement to end the anti-trust case
that has been hanging on the firm for roughly 3 years. In the
settlement, Microsoft will have to divulge some of its software secrets
and promise to be good in the future.
http://www.dallasnews.com/sharedcontent/dallas/business/stories/110102dnbizmicrosoft.75483.html
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Investments
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In terms of point on the Dow, October 2002 was the best month the index
has had in 16 years up 11%. That said, many “bears” are maintaining
that the rally is nothing to get excited about, but rather just a trap.
http://www.washingtonpost.com/wp-dyn/articles/A33759-2000Jun21.html
In the “every cloud has a silver lining” department, Scott Burns points
out that as the result of the bear market in U.S. stocks of the past 3
years, most stock mutual funds, and in particular most index funds, have
what could be called a reverse tax overhang. That is due to the fall in
value of stocks in their portfolio, these funds can appreciate
substantially without having to distribute capital gains in the event of
sales. (This got me thinking – if one explanation of the traditional
closed-end fund discount is a tax overhang, have these discounts gotten
smaller?)
http://www.dallasnews.com/business/scottburns/columns/2002/stories/102902dnbusburns.5d079.html
The S&P 500 is arguably the most important index in the world (Ok, so
maybe the Dow is more famous, I think the S&P is more important). Firms
are dropped from the index periodically when they go bankrupt, are
delisted, fall in value so far as to no longer be representative of the
overall market. Currently 26 of the 500 firms have stock prices less
than $5.00 (including Dynegy that has fallen a remarkable 96%!) which
some are saying means they should be dropped and as per normal, there is
great speculation as to who may be the next to be added. My bet?
Amazon.
http://money.cnn.com/2002/10/30/pf/investing/q_indexchanges/index.htm
Can the market be beaten on a risk adjusted basis? I personally doubt
it, but am open-minded enough to enjoy the sport of trying. Here is a
very interesting look at one guy who is trying to do just that. And so
far, according to this, his plan seems to be working! Which begs the
question, why is he telling us? FWIW His method looks for low price to
sales stocks that are growing (Why low P/S and not P/E? One explanation
is that it is harder to play accounting games with sales.). (I would
like to see how he is measuring risk! Value stocks defined by low
Market to book or low Price to Sales are probably riskier (see second
link for more on this) than the overall market, thus beating the S&P or
other index is not enough.)
http://www.chron.com/cs/CDA/story.hts/business/1643638
http://www.efficientfrontier.com/ef/902/vgr.htm
Mutual fund fees are up again. This is one of the many bad things that
has happened as a result of the falling stock market. Why? Economies
of scale in reverse.
http://www.dallasnews.com/business/columnists/pyip/stories/110402dnbusmoneytalk_.113c0.html
If the rising fees of actively managed funds have you pondering
indexing, you will get comfort in this review article by Frank
Armstrong. Nutshell view: indexing seems to do better than most active
investing. (see next story as well)
http://www.investorsolutions.com/NewsletterGate.cfm?Mem=17304&Cnt=377&NID=88&Track=Art&Link=art_Academic_support_for_indexing.cfm
Interesting factoid alert! “Only 580 of the current 8,187 domestic
equity funds existed 15 years ago. In addition, the average tenure of a
portfolio manager is only 3.8 years.” That is the finding of Scott
Burns who looked at Morningstar and found that over the past 20 years,
passive indexing beat roughly 85% of the funds. (It should be noted
that before the market began falling, this number was MUCH higher, but
as the market has fallen, so too has the ratings of index funds (in part
because they are fully invested unlike most actively managed finds)).
http://www.dallasnews.com/business/scottburns/columns/2002/stories/110302dnbusburns.4f26.html
History has already proven former SEC chairman Arthur Levitt correct on
many things. For example he called for the separation of auditors and
consultants, and argued for stronger Chinese Walls and now he is telling
investors, not to abandon the stock market just because of a few bad
years. I look forward to reading his new book.
http://www.chron.com/cs/CDA/story.hts/business/1644243
While not all money mangers are in favor of the public disclosure of all
proxy votes, I feel I have to give praise to those that have come
forward and expressed their approval. So the news that Christian
Brothers Investment Services urged others to publish proxy votes earns
inclusion. However, CBIS really deserves credit for not waiting for the
government to tell them they have to disclose their votes: as their
Frank Coleman their executive VP “points out…CBIS has voluntarily
disclosed its own proxy-voting policies and proxy votes to clients since
1999. We consider such disclosure fundamental to the fiduciary duty we
owe our client participants to vote their proxies in a manner consistent
with their best interests.”
http://www.socialfunds.com/news/release.cgi?sfArticleId=1374
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Financial Institutions and Markets
(also Money and Banking)
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Federal governor Ben Bernanke gave an interesting speech recently. In
the speech to New York business economists, Bernanke played the role of
Fed apologist and described how it was not the Fed’s role to prevent the
stock market (and some would say the real estate market) from becoming
over-valued. This is in part due to identification difficulties and in
part because of the difficulties in trying to deflate the bubble.
Rather, the Fed “should ensure that financial institutions and markets
are prepared for the contingency of a large shock to asset prices,”
while also “reducing the probability of boom-bust cycles occurring in
the first place” through “more transparent accounting and disclosure
practices and working to improve financial literacy and competence of
investors.” (Uh, Ben, where is the reference to financeprofessor.com
newsletter? I am sure it was just an oversight.) By the way, the speech
also includes a great history lesson on how attempts to pop the market
“bubble in the 1920’s led to the depression in the 1930’s).
http://www.federalreserve.gov//BoardDocs/Speeches/2002/20021015/default.htm
It is always nice for students to see the same types of things that
their home country does to increase the economy (for example lowering
interest rates) is also done elsewhere. Moreover, central banks can
also lower reserve requirements to spur more lending. Sure it is what
the Fed does, but it is also what central banks around the globe do. For
example, this week, India’s central bank both lowered rates and cut
reserve requirements while the government is also lowering the tax
burden.
http://news.bbc.co.uk/2/hi/business/2370805.stm
http://news.bbc.co.uk/2/hi/business/2398943.stm
The big question on everyone’s lips is whether the Fed will cut interest
rates to improve the economy. If we believe the futures markets, then
the answer is yes (see the derivatives section below), but the Fed is
being careful not to tip its hand too early (especially since there are
only so many rate cuts before interest rates hit rock bottom.)
http://news.bbc.co.uk/2/hi/business/2402211.stm
If we use net interest margin as a measure of success (which is
questionable at best), banking reform in Pakistan has not yet had the
desired effect. In part it is because the reforms were not fully
thought out, but it is also in part because changing operations takes
time. However, the biggest in complaint in Pakistan seems to be the
timing of the reforms. For example, they argue that government fiscal
policy reform is needed before public debt markets should be opened,
however in reality it happened the other way around.
http://www.dawn.com/2002/11/04/ebr2.htm
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International Finance
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Arguably the biggest story internationally was the election of the
Justice and Development party in Turkish elections. Turkey has
obviously had its problems in recent years with rampant inflation, and
economic crisis, a plunging currency, and severe recession, but
investors often prefer the known even if it is bad, to the unknown, so
the election results at first scared many in the West (the Justice and
Peace party has Moslem ties and is headed by Recep Tayyip Erdogan who
was once banned from Parliament for “inciting a religious riot.”).
However, the more they part talked, the better they sounded. Indeed
they called for free trade and the maintenance of close ties with the
west. If they live up to their words, this could be a watershed
election. It could be the example for other Islamic states to cooperate
and be integrated into the global economy. It was on this hope that the
stocks and the lira rose.
http://news.bbc.co.uk/2/hi/business/2396223.stm
http://biz.yahoo.com/rf/021101/energy_gas_outlook_2.html
http://www.eubusiness.com/cgi-bin/item.cgi?id=95512&d=101&h=240&f=56&dateformat=%o%20%B%20%Y
In an other election story, the Brazilian elections are over and the
winner is Luiz Inacio Lula da Silva (Lula) the leftist leaning
candidate. This has further scared foreign investors who fear a
reversion to high government spending and pulling back from free trade
talks. In response, the Brazilian stock market is down about 30% on the
year. One likely result of the election is the free trade zone for the
western hemisphere will be more difficult. (see next story)
http://www.msnbc.com/news/827119.asp
http://news.bbc.co.uk/1/hi/business/2380667.stm
Western Hemisphere free trade talks resumed (this time in Ecuador). The
goal of the meetings was to create a free trade zone for the entire
Western Hemisphere by 2005, but that may or may not happen. On one side
are those who feel that free trade would improve the situation of all
involved. On the other side stand those who feel that the poor nations
will be at a competitive disadvantage. The worst part of it is that
they are both right. In the long run free trade is good for both sides,
but in the short run, it can be a painful transition.
http://www.nytimes.com/2002/11/03/business/yourmoney/03VIEW.html
http://www.nytimes.com/2002/11/02/international/americas/02QUIT.html
One of the most important topics today is the gulf between the haves and
have-not’s . Whether this is for political reasons, (poverty can be a
breeding ground for political instability and even terrorism), economic
reasons (if the poor had money they would buy more of our products), or
purely humanitarian grounds (20% of children in Mozambique die before
the age of five and an estimated 1.2 billion people live on less than $1
per day), most agree that something needs to be done. Like critics say
some of the problem is due to the globalization (ending protection can
put some people out of work – see the U.S. steel tariff debate), but
corruption and a lack of infrastructure also play important roles. So
what can be done? Business Week reports that temporary aid, training,
and even micro – loans can help. The question is however, who will pay
for this and whether the money would actually be spent productively or
if it would be wasted on corrupt political bureaucracies and economic
schemes that do little to solve the problem. If you are in an
international finance class, read it – it makes for a great essay
question on tests! :-)
http://www.businessweek.com/bwdaily/dnflash/oct2002/nf20021010_1694.htm
http://www.businessweek.com/bwdaily/dnflash/oct2002/nf2002104_6209.htm
Along those lines, Saudi Arabia’s Prince Alwaleed bin Talal spoke out IN
FAVOR of globalization. Citing the fact that the Middle East and
Africa have largely failed to adopt free trade and as a result their
economies have suffered, he said it was time to reach out to other
nations. The question is therefore why did these areas miss the boat?
In large part it seems to be because of government officials feared
losing power. I refuse to believe the argument that is provided in
DAWN that the Arab nations have little to offer!
http://news.bbc.co.uk/2/hi/business/2371633.stm
http://www.dawn.com/2002/11/04/ebr4.htm
Given the belief that free trade is good, it will be interesting to see
if the US has anything to say about Pakistan’s new plan to impose import
duties on certain goods to protect its local economy. Of course this is
bad news, but it is the exact same thing that the US did to protect its
steel industry.
http://www.dawn.com/2002/10/30/ebr1.htm
There seems to be a growing consensus among economists that the US
dollar is over valued. This indulgence has been reported pointed out by
economists at the World Bank and IMF. Both the US’s net foreign debt and
is current account default hit levels not seen since the US Civil War
(1861-1865.) In part as a result, the Euro has risen above parity with
the dollar.
http://news.bbc.co.uk/1/hi/business/2387723.stm
http://www.sounddollar.org/
http://www.ebnonline.com/economywatch/news/story/OEG20010803S0038
http://boston.bizjournals.com/boston/stories/2002/05/20/newscolumn6.html
I just do not know what to say anymore about this. For the 7 millionth
time, the Japanese government has announced plans to get their economy
up and out of its doldrums. AND ONCE AGAIN it seems that they have not
gone far enough to get to the root of the problem: troubled bank loans.
As if by rote, the news of the new changes was met with selling in
Japanese stock markets. In an interesting twist to this whole thing, the
NY Times reports that one reason that more aggressive changes were not
made is that some in Japan fear that in the weakened state many
financial firms would become targets of US led firms and worse the
so-called “vulture funds” that conceivably cause a financial panic and
take over many of the weaker firms.
http://news.bbc.co.uk/2/hi/business/2375763.stm
http://news.bbc.co.uk/2/hi/business/2379627.stm
http://www.nytimes.com/2002/10/31/business/worldbusiness/31YEN.html
What can go wrong for small farmers during the transition to free trade
can be shown looking at the cocoa market in the Ivory Coast. The small
farmers have not been able to benefit from the price increases and have
been further hurt by civil war. While the economist in me realizes this
is a temporary problem and in the long run things will get better, it is
still hard to forget the pain and suffering that the people go through
to get to that long term benefit.
http://www.nytimes.com/2002/10/31/business/worldbusiness/31COCO.html
The Central Banks of 8 Islamic countries have agreed to have a common
regulator that will oversee financial institutions in all of the nations
in an effort to improve accountability and transparency. This could be
huge. While Islamic financing (which is based on both religious
teachings and business incentives), is still a small segment of the
market, it is growing rapidly ad the standardization can only be good
for further growth. In a related story the United Arab Emirates has
agreed to begin “registering and certifying hawala brokers” this will
allow money launderers and terrorist groups to be better traced. (BTW
I had the opportunity to see a seminar on it while in San Antonio and
even at 8:30 AM on a Saturday, it was one of the better attended
sessions.)
http://news.bbc.co.uk/2/hi/business/2393685.stm
http://news.bbc.co.uk/2/hi/business/2396645.stm
Vietnam is pushing for admittance into the WTO. While it may take some
time (particularly since they are having troubles with Catfish now),
this is a step in the right direction! The bid has the support of the
EU.
http://news.bbc.co.uk/2/hi/business/2397431.stm
Stock ownership by individuals vary greatly across countries. For
example, in Japan, only 10% of stock is owned by individuals. However
this is slowly changing and individuals are beginning to take more of an
interest in the market. For example there are now about 200 investment
clubs. (for perspective, the US has about 30,000)
http://www.nytimes.com/2002/11/03/business/yourmoney/03CLUB.html
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Economics
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The economy grew at an impressive (indeed surprising) 3.1% for the 3rd
quarter which if it were to continue would be great news, and would make
it very unlikely that the Fed would need to cut interest rates.
However, few believe that the performance will continue and the recent
dockworkers strike/lockout (you choose the word you prefer) will
continue to have some lasting effects. Unemployment was again up (to
5.7%), confidence is down, and car sales (which earlier in the year had
been very strong) have cooled as sharply as the weather—with the big
three each reporting sales down about 30%. Therefore, a Fed rate cut
may be in the offering, but is not a lock.
http://news.bbc.co.uk/2/hi/business/2380721.stm
http://www.latimes.com/business/la-103102economy_wr.story
http://news.bbc.co.uk/1/hi/business/2389815.stm
http://www.washingtonpost.com/wp-dyn/articles/A54531-2002Nov1.html
http://www.businessweek.com/investor/content/nov2002/pi2002114_1358.htm
Alan Greenspan gave a fascinating speech on education this week. HE of
course stresses the importance of learning, both in and out of a
classroom, and its importance on the economy. Interestingly he also
talked about the importance of a liberal arts education.
http://www.federalreserve.gov/boarddocs/speeches/2002/20021029/
Data from both the University of Michigan and the Conference Board
suggest that US consumers are not feeling very confident about the
economy. If this leads to reduced spending (and there is some debate
about whether it does-see the Slate article) the timing of this loss of
confidence (prior to the important holiday buying season) does not bode
well for the economy or the stock market.
http://www.msnbc.com/news/827556.asp
http://news.bbc.co.uk/2/hi/business/2372635.stm
http://slate.msn.com/?id=2073376
Russia provides an interesting case of what can go wrong. The
government is again growing, the economy is slowing, and in some circles
people are reverting to bartering.
http://www.themoscowtimes.com/stories/2002/11/01/041.html
As we heard this summer, the Israeli economy continues to suffer as the
tech slowdown, tourism slowdown, and war with Palestine have now forced
the nation into its third year of recession. (BTW note how recession is
defined here: a decline in per capita GDP. Thus while overall GDP is
growing, it is not keeping up with population growth.)
http://news.bbc.co.uk/2/hi/business/2397953.stm
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Energy Markets
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Increased demand in Europe and lower supplies (especially in natural
gas) may mean low supplies in the US, which could cause higher prices
and increased volatility if the winter is a hard one.
http://biz.yahoo.com/rf/021101/energy_gas_outlook_2.html
http://www.themoscowtimes.com/stories/2002/11/01/046.html
http://www.dawn.com/2002/11/04/ebr9.htm
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Real Estate
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Home ownership in the US is at an all time high, thus, it should not be
surprising that mortgage debt is also rising. That is the gist of a
study by William Natcher who found that once the home ownership was
accounted for, the debt levels were not the problem that some in the
business press have been reporting (for example, that mortgage debt is
up 70% since 1995.)
http://www.businessweek.com/bwdaily/dnflash/jul2002/nf20020731_4273.htm
Are we looking at a bubble in the real Estate Market? It is hard to
say, but the market has been very firm in the face of a slowing economy.
Big worry? The market prices collapse and the debt levels make bad
times worse, plunging the country into a recession.
http://abcnews.go.com/sections/business/DailyNews/forbes_iraq_021101.html
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Derivatives
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Derivative contracts can tell us a great deal about what the market is
thinking. The most famous example of this is the implied volatility on
options. Consider the black-Scholes Option pricing model. There are 5
variables used to price a call option. All are observable except the
expected volatility. However, when the price is known, the volatility
can be backed out. This implied volatility has been the focus of much
scrutiny over the years. Another example of derivatives telling us what
the market believes is in the case of Futures on Fed Funds. Using future
contracts, one can back out the probability of for the Fed changing
interest rates. As of Thursday the market said there was a 63% chance
of the Fed cutting rates next week to spur the economy.
http://www.nytimes.com/2002/10/30/business/yourmoney/31PORT.html
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Accounting News
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How appropriate. Just in time for Halloween William H. Webster admitted
he had some skeletons in his closet. Webster, who was selected to head
the newly formed Accounting oversight board, used to be head of the
audit committee of US Technologies, a firm that is both almost
insolvent, being sued for fraud, and is under investigation. But to
make matters worse, somehow it seems that people did not learn of this
until AFTER he was approved. (so much for due diligence). He
reportedly had told SEC chairmen Harvey Pitt, but Pitt once again made a
questionable decision and neglected to tell any one until after the
selection was official. The failure to tell others was so egregious
that by Friday the White House was questioning their support of Pitt and
Pitt himself OK’d an investigation into the mess. (Which if you think
about it is very funny: “Yeah, go find out what I knew.”) Whether Pitt
is around or not, the oversight board will meet for the first time on
November 13.
http://www.nytimes.com/2002/10/31/business/31ACCO.html
http://www.washingtonpost.com/wp-dyn/articles/A45339-2002Oct31.html
http://news.bbc.co.uk/1/hi/business/2388687.stm
http://www.washingtonpost.com/wp-dyn/articles/A54941-2002Nov1.html
http://www.washingtonpost.com/wp-dyn/articles/A54878-2002Nov1.html
http://slate.msn.com/?id=2073450
http://www.accountingweb.com/item/95330
http://www.nytimes.com/2002/11/01/business/01NORR.html
http://www.washingtonpost.com/wp-dyn/articles/A5127-2002Nov4.html
The FDIC is suing Ernst and Young for $2 billion for “deliberately
withholding knowledge of accounting improprieties” at Superior Bank.
The suit claims that the firm’s had conflicts of interest and that as a
result knowingly allowed the bank to overstate assets in the late 1990s.
The suit is seeking approximately $500 million in actual loses and
treble in punitive damages.
http://www.washingtonpost.com/wp-dyn/articles/A54214-2002Nov1.html
http://news.bbc.co.uk/1/hi/business/2389901.stm
http://www.cfo.com/article/1,5309,8071,00.html
Pro forma statements have been the cause of much consternation (and many
errors- by investors). To end these problems the SEC is proposing to
require any firm that issues a pro forma statement to explain why and
how it differs from traditional GAAP accounting practices. Additional
accounting rules changes include more fully disclosing (in plain
English) any off balance sheet financing.
http://www.washingtonpost.com/wp-dyn/articles/A40623-2002Oct30.html
http://news.bbc.co.uk/2/hi/business/2378405.stm
http://www.chron.com/cs/CDA/story.hts/business/1640580
A variant of pro forma statements that is common in real estate firms is
the Funds from Operations (FFO). In the words of Colorado State
Accounting professor Lynn E. Turner, a former chief SEC accountant “The
real issue with FFO is there's no common definition to what's in FFO.”
Of course this makes it difficult to compare one firm to another. BTW
the reason that this is news is that Rouse company (I kid you not, that
is there name!) may have pushed the envelope too far and even though
there is no definition of FFO, excluding pay to the CEO seems a tad
much.
http://www.washingtonpost.com/wp-dyn/articles/A43243-2002Oct30.html
As part of their ongoing internal investigation into past accounting
practices (of course the firm is also being investigated by the SEC),
QWEST has said they will have to restate past financial statements again
and may have to write down up to another $40.8 billion in assets! BTW
the original auditor? Andersen.
http://www.msnbc.com/news/827522.asp
http://news.bbc.co.uk/2/hi/business/2370657.stm
http://news.bbc.co.uk/2/hi/business/2379181.stm
http://www.msnbc.com/news/828052.asp
More people will be able to file both electronically and for free due to
a new agreement reached with the IRS and a consortium of tax preparers.
Additionally, Bush proposed a 15 day extension for those who file
electronically which is sort of bizarre.
http://www.chron.com/cs/CDA/story.hts/business/1640797
The New York Times provides an interesting look at the revenue
recognition games that were going on at Tyco. While stating that the
worst is probably behind Tyco, the article also draws into question
whether the new management is really serious about getting to the bottom
of all of the accounting problems.
http://www.nytimes.com/2002/10/25/business/25NORR.html
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Of interest to students
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Looking for internships? USAToday reports that more and more firms are
putting their internships online. Literally. You do the internship
from your campus via the internet! A great opportunity for those at
small campuses far from financial centers.
http://www.usatoday.com/money/companies/management/2002-10-21-virtual_x.htm
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FinanceProfessor.com Lesson of the week
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Professional football is the most popular sport in the United States and
offers various examples and metaphors for use in a finance class. A
few examples (from a working paper by some guy named Mahar and Rodney
Paul: For example, did you know that a specialist on the NYSE has
almost the exact same job as a Sports “bookie”?
Look for a link in the next newsletter!
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FinanceProfessor.com Sites of the Week
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If you are doing any sort of academic research and you do not look at
FEN and research-finance.com, your search is not complete. Both are
HIGHLY recommended!
http://www.research-finance.com/
http://www.ssrn.com/fen/index.html
http://www.financeprofessor.com/finresearch/financialresearchmainlinks.htm
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Financial Trivia/History
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Did you know that a typical Journal of Finance article has 35-40 pages
and, on average, 528 words per page? That was just one of the many
interesting things I learned at the FMA conference in San Antonio.
http://faculty.sba.udayton.edu/chan/moveup.pdf
In order to pay off a portion of the money owed to creditors, Enron
auctioned off many of their assets recently. Top price of $44,000 was
bid for a signature Enron “E” tile. All told this auction, which is the
first of at least two, raised $3.3 million.
http://www.chron.com/cs/CDA/story.hts/business/1640919
The Wilshire 5000 now tracks about 5700 firms.
http://www.wilshire.com/Indexes/Broad/
Fun with Statistics! Ok, so it is only tangentially related to Finance,
I know most of have taken stats and if so you might find this
entertaining. It looks at probabilities of things we see in the news.
http://abcnews.go.com/sections/scitech/WhosCounting/whoscounting.html
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Of interest to teachers
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Wonder what other professors are doing? A forthcoming paper in
Financial Management may help you find out. It is by Cham, Chen, and
Steiner and finds that getting published in one of the top 16 journals
is a lot harder than we all think. Even just looking at those that do
get a hit, the median number of papers is 1. The authors also find
that US schools still dominate (well looking at US journals, I am not
sure if that should be surprising) but that some foreign schools are
making inroads. The paper also rates schools on their publications.
OK, so maybe it does not have the excitement of college football’s BCS
rankings, it was still pretty interesting. The top five: Penn, NYU,
Chicago, Harvard, and Michigan. (the rankings start on page 28).
http://faculty.sba.udayton.edu/chan/moveup.pdf
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What I am reading
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I finished The New Rulers of the World: by John Pilger To say the least
it was an disturbing book. While not exceptionally well-written (it
backtracks regularly, repeats itself frequently, and more or less jumps
around) the stories are heart-wrenching and deeply troubling. Pilger
looks at the effect of sanctions on Iraq, western interests in
Indonesia, the mistreatment of Australian aborigines, and the so-call
new world order. Although occasionally unproven (he cites reports while
criticizing those on the other side for the same thing) Pilger
none-the-less screams out for more transparency of both government and
even media reporting.
http://www.amazon.com/exec/obidos/ASIN/185984393x/finpapers/104-9378365-5272442
I started reading Sex, Drugs, and Economics: an Unconventional
Introduction to Economics by Diane Coyle. It uses economics to
investigate various real life events. For example, why drug prices are
high. BTW Diane Coyle has her PhD from Harvard and been a visiting
Research Fellow at the London School of Economics.
1587991470
http://www.amazon.com/exec/obidos/ASIN/1587991470/finpapers/104-9378365-5272442
I finished Pickett’s Charge in History and Memory by Penn State’s own
Carol Reardon. I liked the first third of the book, but grew tired of
it. 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.”
http://www.amazon.com/exec/obidos/ASIN/0807823791/finpapers/104-9378365-5272442
I actually have finished a few others, but I will save them for next
week, this is already too long!
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Quotes of the week:
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A good beginning is half the battle--Portuguese Proverb
[People] build too many walls and not enough bridges--Sir Isaac Newton
Give light and the people will find their own way--Scripps-Howard motto
Make yourself an honest man, and then you may be sure that there is one
less scoundrel in the world.—Thomas Carlyle From
http://www.positivepress.com
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Wow…Sorry that was so long. I really have to find time to get back on a
more regular schedule. There were so many stories I just could not drop
them with a clear conscience.
I almost forgot to tell you about the FMA conference in San Antonio. It
was great meeting so many subscribers! Really weird meeting someone and
them telling you everything you have done for the past 6 months. Video
highlights of the conference will be available shortly at
http://www.fma.org
Thanks again for your patience.
Jim
JimM-@FinanceProfessor.com
Whose racing season is over for the year. I started lifting again
seriously this past week. I will be getting more serious about yoga
next week.
Who is convinced Western New York has the worst weather in the
continental US. We have been cold and overcast since early October and
snowing this past week.
Who spent much of his time while in San Antonio at Trinity University.
What a great place! I got more research done in 3 days than I have in
the past 3 months! And increased my mileage to over 90 miles a week for
the first time in months. If you have never been, you really should
check out the school, I was very impressed. And it is interesting the
first day there I ended up helping some finance students in the library!
I couldn’t resist!
Who was disappointed by the Bills loss to the Patriots, but not awfully
surprised.
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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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