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Globalization, D&O insurance, Super Bowl, to peg or not to peg, & more!
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Jim Mahar
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Feb 07, 2003 01:30 PST
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Globalization, D&O insurance, Super Bowl trading rule, to peg or not to
peg, capitalism as a leap of faith, and MUCH more!
FinanceProfessor News February 7, 2003
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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 Ten Stories
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1. The Shuttle disaster: a look back at the Challenger explosion
2. Davos and Port Allegre: Two ends of the earth?
3. The Deal for the Sabres falls through, is the team on thin ice?
4. Martha Speaks
5. Do Michael Johnson, Kareem, Vida Blue and Eric Dickerson have D&O
insurance?
6. Should you buy stocks since Tampa won the Super Bowl?
7. US stock ownership up again
8. War takes economic toll on Middle East and Global economy
9. Changes in Retirement accounts
10. Capitalism is a leap of faith which may explain why poor nations do
not jump
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Hi everyone!
Let me start off with an apology. This grew much longer than I had
planned. I went back and cut some, but cutting more would leave
important material out of some class, so long it is, and I will let you
read only what you feel is important for you.
This week it seems a good time to mention how much finance and the news
itself are intertwined. Few things happen without impacting some area
of finance. Of course this is most apparent right now with the likely
war in Iraq casting a shadow over economy, oil, and stock markets.
In what is eerily timely again, there is a fascinating article on market
efficiency and price discovery following the Challenger Disaster by
Maloney and Mulherin. You will want to read it.
Overall the newsletter has some great stories this week. I had a very
tough time limiting the “top ten” to ten!
jim
JimM-@FinanceProfessor.com
Oh yeah, the FinanceProfessor.com site is undergoing some construction
that has left some links inoperative and a few links totally lost. Be
patient, we will get it back and improved shortly.
and now the news:
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Top Story #1: The Columbia
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While it may not be the most important economic story, it is the most
timely and will get top, albeit short, billing.
What will be the economic impact of the Space Shuttle? Overall probably
not that much. It will impact the space industry and the stock market
immediately processed that information as the price of some contractors
fell not so much on culpability as the lowering of estimates of future
earnings as NASA will likely cut back on shuttle launches.
http://www.washingtonpost.com/wp-dyn/articles/A16810-2003Feb2.html
I was lucky enough to be at Penn State when this paper was taking shape
and it has long been one of my favorites to use in class. It speaks of
the speed of discovery, source of information, and the amazing ability
of the market to identify the cause of the explosion (O-rings produced
by Morton Thiokol), whereas the official investigation into the cause
took months! VERY INTERESTING!
http://papers.ssrn.com/sol3/papers.cfm?cfid=155086&cftoken=31988492&abstract_id=141971
Having read that, what does the market know something this time? Alliant
(the former Morton Thiokol) was down the most. But that is not to say
they are to blame, but they derive a larger proportion of the earnings
from the shuttle than other contractors. (mmm, could it be similar last
time? While the paper does address that I still am not totally
convinced. (FWIW who makes the tiles? How about the foam insulation?)
Could the drop in price have been not because Morton Thiokol was to
blame, but because they had the most to lose if the shuttle was to be
grounded?)
http://biz.yahoo.com/rb/030203/shuttle_aerospace_stocks_4.html
http://www.thestreet.com/_yahoo/stocks/troywolverton/10066098.html
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Top Story #2: Davos-World Economic
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The World Economic Conference in Davos Switzerland was scheduled to be
the top story, not so much for the news created at the meeting (it was
nothing special) but because the issues raised at the meeting are some
of the most important things on the financial horizon.
This conference has grown into a yearly discussion on the economy of
world as well as globalization. This year was slightly different as
threat of ware hung over the meeting. The consensus, if there is such
a thing at these meetings, and was that the world economy was slow and
would likely continue to be slow for the near future partially as a
result of the fear of war in the Middle East. Free trade and that
something must be done for the poor nations of the world were also major
topics.
http://news.bbc.co.uk/1/hi/business/2685963.stm
http://economictimes.indiatimes.com/cms.dll/html/comp/articleshow?artid=35482961
http://www.nytimes.com/2003/01/27/business/worldbusiness/27FUNK.html
http://www.iht.com/articles/84829.html
http://news.bbc.co.uk/1/hi/business/2703445.stm -nice recap!
While Africa was not in spotlight as much as in previous years, African
leaders still did meet and vowed to stay the course towards more free
trade while asking for more help to fight poverty and aids. A promise
for some of this help for Aids was forthcoming in the President Bush’s
State of The Union Address.
http://www.voanews.com/article.cfm?objectID=B7346EB8-83AD-45BA-920F4244264BE5AB
http://news.bbc.co.uk/1/hi/business/2696263.stm
http://news.bbc.co.uk/1/hi/business/2701307.stm
Free trade is one of the pillars of the World Economic Conference and in
spite of the war talk and slow global economy this year was no
exception. Free trade is always controversial and several poor nations
complained that free trade was making the poor nations poorer in order
to benefit the rich nations. This “Reverse Robin Hood” idea is
prevalent in many developing nations and is at the crux of globalization
debate.
http://www.abc.net.au/news/justin/nat/newsnat-26jan2003-39.htm
Some evidence of this gulf between the rich and the poor can be seen as
Lula (the Nick name for the New Brazilian leader) asks for food aid for
his and other countries while strongly complaining against the
appearance of free trade in the reality of protections by many wealthy
countries.
http://7am.com/cgi-bin/wires02.cgi?1000_2003012704.htm
In part due to increased security and limited accessibility to world
leaders, Most Anti-globalization protestors stayed away and held their
own conference, the World Social Forum, in Port Alegre, Brazil. As per
normal, anti-globalization protestors come in all shapes, sizes, and
with differing causes; some were environmentalists, others backers of
women rights, and were there “just because.”
http://news.bbc.co.uk/1/hi/business/2691927.stm
http://www.nytimes.com/2003/01/26/international/europe/26DAVO.html
http://news.bbc.co.uk/1/hi/business/2695093.stm
The BBC, whose coverage dominated US-based coverage, had reported at
both conferences keeping journals. Both are interesting!
http://news.bbc.co.uk/1/hi/business/2695987.stm
http://news.bbc.co.uk/1/hi/business/2701231.stm
http://news.bbc.co.uk/1/hi/business/2701307.stm
Can a kinder, gentler, more giving capitalism develop? That is the hope
of many at both conferences. Where capitalism drives the economy, but
then those that are enriched recognize their responsibility to help the
less fortunate. For example: Bill Gates pledged $200m for health issues
and others were there to show their support (ex. George Soros and Lynn
Fritz.)
http://news.bbc.co.uk/1/hi/business/2701307.stm
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Corporate Finance
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AOL-Time Warner recently reported a $99 billion loss. Yes, that is
$99,000,000,000. Wow. That is approximately how much Time-Warner lost.
That is hard to imagine. Almost over $300 per person for everyone in
the US! How could a company lose that much? A large part was due to a
write down of goodwill and then there is the thing about increased
competition, and a possible price war in the dial-up arena and continued
squabbling between the AOL and Time Warner and well you get the picture.
Going forward it will be interesting to see how the company adapts as
they now have a new CEO and Ted Turner has stepped down (remaining on
the Board).
Directors and officers insurance is designed to protect board members
from lawsuits that stem from serving on a board of directors. The
importance of this can be shown quickly
In this week’s Znetix case. The firm, which manufactured exercise
equipment (how did I never hear of them?) ceased operations in 2002.
But prior to that had purchased TBG Development in 2000. Now the former
owner of TBG Development is suing almost everyone who had any ties with
Znetix. Including Michael Johnson, Kareeem Abdul Jabbar, Eric
Dickerson, and Vida Blue. If the firm still has D&O insurance (which I
would bet is unlikely given they are now out of business) , the
insurance company would protect the officers and directors. (BTW
FinanceProfessor Jonathan Karpoff is interviewed in the Seattle coverage
of the lawsuit.)
http://www.komotv.com/stories/22845.htm
http://seattlepi.nwsource.com/business/107238_znetix05.shtml
In a related story, D&O Insurance Premiums have climbed in the wake of
last year’s corporate governance scandals. Why? More lawsuits and more
payouts. For example, this past week AIG took a $1.8 billion write-off
--25% of this went to larger than anticipated D&O payouts
http://cbs.marketwatch.com/news/story.asp?guid=%7BA0D29ED6%2D27F4%2D4C2D%2D8C41%2DAC4B1339C98B%7D&siteid=mktw
Maybe not quite so many Kmarts are closing after all. At least more
stores (true about 300 were announced to be closed, so ten is a
relatively small number) will remain open after threats of imminent
closings won a few lease concessions. In other news on Kmart, the firm
has accused its former CEO of fraud and the grocery distributor Flemming
has ended its contract with the fading retailer.
http://biz.yahoo.com/djus/030127/2030000919_1.html
http://biz.yahoo.com/rc/030203/retail_kmart_2.html
http://www.freep.com/money/business/probe25_20030125.htm
http://boston.com/dailynews/031/economy/ALL_BUSINESS_Kmart_s_woes_exac:.shtml
http://www.nytimes.com/2003/01/25/business/25SHOP.html
Martha Stewart broke her self-imposed silence and talked with the press.
And what did she say? Not much. She is puzzled by the reaction to
reports of her possible insider trading, she will not quit her business,
and she has lost over $400 million as a result of the events. All is
all, nothing earthshaking. Although it again shows the market is a
harsh disciplinarian as I doubt any court would fine her $400 million
for selling about 4000 shares!
http://www.nytimes.com/2003/01/27/business/media/27MART.html
http://www.chicagotribune.com/business/chi-0301270213jan27,0,2524553.story?coll=chi-business-hed
http://www.chron.com/cs/CDA/story.hts/business/1760218
Sometimes takeovers fall through and that was the case with the NHL’s
Buffalo Sabres. After a deal by a Hamister led team for the bankrupt
team (the bankruptcy is largely the result of the Adelphia-Rigas scandal
of last year) when public financing did not come available, the team was
again placed on the auction block. So if you want to buy a hockey team
and promise to keep it in Buffalo, let me know and I will get you in
contact with the right people :-)
http://news.bbc.co.uk/sport1/hi/other_sports/us_sport/2722641.stm
Competition for a new factory can often be fierce between
municipalities. No where is this more true than in the case of auto
plants. San Antonio recently won a bidding contest with five other
North Americans cities for a new Toyota plant. In return for the new
jobs, Toyota got a package worth an estimated $133 million.
http://www.dallasnews.com/sharedcontent/dallas/business/stories/020503dnbustoyota.5f4fb.html
Can Global Crossing come back? In spite of pending legal trouble and
name almost as disgraced as Enron’s, they are planning on coming back
and issuing shares again. My unasked for advice? Change your name! No
investor is going to be anxious to buy Global Crossing stock with the
stigma of last year’s collapse still fresh in everyone’s mind.
http://biz.yahoo.com/rf/030203/telecoms_globalcrossing_1.html
And I quote: “You can never fool cash, You may be able to fool someone
with the profit and loss (account), but you can never fool (them on)
cash." So said Carl-Henric Svanberg the new CEO of Ericsson as quoted
in Forbes. (Yeah I know this is probably an accounting topic, but we do
it in corporate so here it goes ;-) one of the benefits of writing this.
BTW, Ericsson was up on the news of his hiring even though he is new to
the industry (he used to make the hotel key machines and locks).
http://www.forbes.com/business/newswire/2003/02/06/rtr871935.html
http://www.iht.com/articles/85946.htm
http://www.lightreading.com/document.asp?site=lightreading&doc_id=28021
Slate’s Moneybox (which I love to read) criticizes the phony sacrifices
some CEOs are making by taking a $1 year salary. Why is this phony?
Because the bulk of their pay is in options, grants, etc and not in
salary.
http://slate.msn.com/id/2077899/
Should the CEO also be the chairman of the board? There are good and
bad points for such a combination, but as the tide turns towards
stricter governance, look for more companies to require different people
hold each spot.
http://www.washingtonpost.com/wp-dyn/articles/A38087-2003Feb6.html
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Investments
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While much work (academic, media oriented, and industry related) has
identified a strong relationship between fund performance and new money
invested in a mutual fund, chasing returns can often backfire as this
article looking at what investment styles have done well in Australia
shows.
http://finance.news.com.au/common/story_page/0,4057,5895818%255E14302,00.html
In a related article, Lynch and Musto examine the puzzling finding that
investors seem to disregard really bad performance. That is if a fund
does well in one period, more money tends to come to the fund in the
next period and conversely less money come in following bad
performances. But what has been puzzling is why really bad performers
are seemingly judged roughly the same by investors as only marginally
bad performers. One hypothesis that has been floated (Ipploito 1992)
is that any return below a threshold is seen as being the same. Now in
a forthcoming JF article, Lynch and Musto suggest the reason may be that
really bad performers are likely to change strategies and/or managers so
that their previous bad performance may carry less weight. (I’ll
suggest another possibility---some investors may be looking for volatile
funds and banking on for reversion—see above article).
http://www.afajof.org/Pdf/forthcoming/howinv.pdf
After reading the forthcoming JF paper by Hischleifer and Shumay, I
propose that the financial center of the US be moved to Arizona. Why?
For the second time in recent months there is academic evidence that the
stock market does better when it is sunny out. This current paper finds
that the transaction costs PROBABLY make it unprofitable to try to take
advantage of it, but after looking at 26 markets for 15 years, a Z stat
of -3.96 for returns as a function of cloud cover suggest that the sun
plays an important role. How is unclear, but a leading hypothesis
suggests that it may be psychological. (Yes this was included before,
but it is now forthcoming in JF, so I figured you might like to see the
changes.)
http://www.afajof.org/Pdf/forthcoming/shumway.pdf
So you watched the Super Bowl but only for investment advice? Huh? No
it has nothing to do with trying to track the economy off of the
commercials. You wanted to see the game to use the Super Bowl
Indicator. The indicator, which of course if nothing more than a
spurious relationship, suggests that when the NFC team wins it foretells
a good year for the stock market and when the AFC wins it is time to get
out of the market. Overall it has done pretty well with it being
correct almost 80% of the time! (uh, well maybe) past performance does
not guarantee future results as the week ate rthe win was marked by
falling prices).
http://www.nytimes.com/2003/01/24/business/25PLAC.html
http://news.bbc.co.uk/1/hi/business/2697291.stm
Surprisingly given the slow economy and bear market, the percentage of
US households that own stock continues to climb. It is now over 50%!
That is up from only about a third in 1990. This is mostly thought
mutual funds as only 21.(% own stock directly. An other interesting fact
from is that the household net worth for the poorest 20% rose about 10%
while for the top 20% it rose 69%! (Unfortunately it does not say
whether that is median or average. The average in this case would be
very biased.)
http://www.buffalonews.com/editorial/20030128/1043430.asp
http://newstribune.com/stories/012403/bus_0124030926.asp
http://www.wsoctv.com/sh/money/stories/money-193070520030123-080158.html
Short sellers may be right after all. Short sellers (those investors
who sell shares and then hope for a price decline in order to buy the
shares back at a profit) are hugely unpopular with management as the
short sellers are hoping the shares fall in value and by selling the
shares, helping to lower valuations. Now a new study by Owen Lamont
suggests that when firms complain about short sellers (possibly because
of a lack of confidence in their stock?), the short sellers generally
are right and the stock ends up falling.
http://biz.yahoo.com/rf/030126/markets_shortsellers_1.html
http://www.nytimes.com/2003/01/26/business/yourmoney/26WATC.html
Speaking of short sellers, The Financial Review has an interesting
article on the apparent role that short sellers can play in REDUCING
volatility. Why? They flatten the peaks and valleys of stock
movements. Additionally the article looks at where the short sellers
were (on the sidelines because of limited float of many shares) during
the dot.com run-up of the late 1990s. (note to my students: stop and
internalize this one!)
http://afr.com/financialservices/2003/01/31/FFXYXCLJJBD.html
The Journal of Portfolio Management has two interesting articles
(Ilmanen and Hoisington/Hunt) that suggest the expected return
differential between stocks and bonds is not as great as we have been
lead to believe. Now this is coming after a bear market in stocks, so
it is not completely unexpected, but still it definitely should get us
thinking more about diversification and the usefulness of using
historical risk premiums that are shown to vary significantly over
various time horizons.
http://www.iijpm.com/issue.asp
The SEC is now requiring stock analysts to state in their reports that
hey did not receive any payments for the opinions expressed. The new
rule is called Reg, AC or Regulation Analyst Certification.
http://www.washingtonpost.com/wp-dyn/articles/A36311-2003Feb6.html
So how much have you lost as a result of the bear market? A new study
by the London School of Business and Am puts the figure at $13
Trillion dollars (reportedly $2000 per person on the earth!).
Additionally the report finds that since 1900 globally stocks have
earned about 5.4% while bonds in some nations (Germany, Italy, and
England among them) have actually had negative returns for the same
period (I did not know that!).
http://www.bangkokpost.com/Business/07Feb2003_biz60.html
http://www.thisismoney.com/20030205/nm58795.html
http://www.london.edu/ifa/Research/Working_Papers/working_papers.html
Although I can not find it there)
What is the Dow? Slate answers the question and has some very cool
factoids. For example the relative importance of various companies with
high stock prices but fewer shares outstanding in the Dow vs. the S&P
500.
http://slate.msn.com/id/2077785/
http://www.financeprofessor.com/introcorpfinnotes/marketindicies.html
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Financial Institutions and Markets
(also Money and Banking)
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Last week the Fed decided to leave short-term interest rates as
unchanged, but in their comments suggested that the Economy is stronger
than many fear and if it weren’t for the Iraqi situation, a rate hike
might be in order because of the strengthening economy.
http://news.bbc.co.uk/1/hi/business/2707555.stm
In related news, this week the European Central Bank decided to leave
well enough alone and did not adjust their rates but the Bank of England
did cut rates to a 48 year low.
http://www.msnbc.com/news/869410.asp
http://news.bbc.co.uk/1/hi/business/2732645.stm
http://www.msnbc.com/news/869418.asp
Fed Governor Mark Olson gave a great speech looking back at last year’s
“corporate governance crisis”. The speech was aimed at trying to
determine f new legislation led to more problems being reported and
while the answer on that is unclear, Olson does a phenomenal job of
laying out what he feels were the causes. Good article!
http://www.federalreserve.gov/boarddocs/speeches/2003/20030206/
With many large bankruptcies last year and a falling stock market that
placed added burden on some already under-funded pension plans, the
Pension Benefit Guaranty Corporation is facing mounting difficulties. As
a result the pension insurer went from an $8 billion surplus, to a
deficit in only one year! And with more blow-ups looming, the 44
million Americans whose pensions are guaranteed by the PBGC are getting
a tad nervous. Look for higher insurance premiums in the future.
http://www.nytimes.com/2003/01/25/business/25PENS.html
While the SEC has been under much fire for retreating on several
reforms, one reform that was passed is the new proxy-disclosure
requirements for mutual funds. This will require mutual funds to
disclose how they voted their shares (which in reality are the shares of
their clients). This is a good thing for investors and should make
companies more shareholder friendly.
http://www.thestreet.com/_tsclsii/funds/beverlygoodman/10064337.html
William Donaldson, the new SEC appointee, went before Congress this week
in his confirmation hearings. He said that his first task will be to
appoint a new head to the accounting industry oversight board.
http://www.washingtonpost.com/wp-dyn/articles/A31840-2003Feb5.html
Much news has been coming out of the SEC in recent weeks. Not only did
Donaldson finally go before congress to be confirmed to the top spot
(see above), but also several new rules were approved including a new
rule dealing with custodial accounts and Reg AC, oh yeah, an as
expected, proposed funding was up in the Bush Budget.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2003/01/26/BU141401.DTL
http://abcnews.go.com/wire/Politics/reuters20030122_691.html
http://www.newsday.com/news/politics/wire/sns-ap-bio-box-donaldson0205feb04,0,2095071.story?coll=sns-ap-politics-headlines
http://www.sec.gov/news/press/2003-20.htm
http://www.thestreet.com/_tsclsii/markets/marketfeatures/10067378.html
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International Finance
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Capitalism is a leap of faith and a new paper by Macculloch and Di Tella
suggests that a lack of faith may be holding back less developed
countries and can explain the finding that poor nations are more likely
to have “left-ward leaning” government. Why? Many have experienced
corruption and are less willing to “believe in” capitalism and to the
degree that corruption leads to more calls for government intervention,
poor nations may be more willing to accept government policies which are
not conducive to business and the economy. Hence poor nations often
fall further behind. Not strictly finance, but interesting!
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=361560
Wow was Venezuela busy this week. The strikes have largely ended as
more strikers gave up and went back to work, then the government decided
to go ahead and peg the Bolivar (the Venezuelan currency) to the US
dollar. But this was done with a twist. Only those who have approval
(and hence most likely not those who went on strike) can convert to the
dollar, the others are forced to use the Bolivar. The pegging is thus
at once both an attempt to prevent the continued decline in the value
of the currency and also serve as a means of strengthening the power of
president Hugo Chavez. (or at least that is the View of the Washington
Post) A big concern: can the government maintain the peg while also
suffering through a serious economic depression.
http://biz.yahoo.com/rf/030127/markets_venezuela_bolivar_2.html
http://news.bbc.co.uk/1/hi/business/2731421.stm
While it is very early in his Presidency, the early verdict quite
favorable for Lulu (Brazilian President Luiz Inacio Lula da Silva) has
seen the markets accept his policies (at least in part) and the Real has
stopped its fall. He is not out of the woods by any means, but so far,
so good.
http://news.bbc.co.uk/1/hi/business/2713503.stm
While Venezuela was pegging its currency, Egypt was allowing its Pound
to float freely. Not surprisingly it did not float very well (dropping
16% in value) but the act of floating the currency is seen by most
experts as a good thing for it allows the market to handle imbalances
and make adjustments for inflation and economic conditions.
http://www.metimes.com/2K3/issue2003-5/bus/analysts_laud_pound.htm
Ok, if you expected one nation to be suffering from the threatened war
in Iraq you would likely say Kuwait, Iraq’s neighbor Kuwait. But no, in
fact the stock market is up sharply while it makes reforms (including
allowing women to trade), and the economy is largely unimpeded. (As an
aside, the Dallas News article provides an interesting look at the
incredible wealth of the nation!)
http://www.dallasnews.com/business/columnists/jlanders/stories/020303dnbusworldview.61dee.html
Less red tape in Red Square? It seems that way and this is good news
for the Russina economy!
http://news.bbc.co.uk/1/hi/business/2732435.stm
Can you say Kleptocracy? If you can here is exhibit #1. Ten years ago
Turkmenistan’s leader President Saparmurad Niyazov promised that within
the decade the all families would have a house and a car. Well it is
ten years later and the nation is still very poor (one of the poorest on
earth). But at least some people have cars. The government has started
handing out Mercedes! Really. Well, not to everyone mind you, but
rather only governmental officials. (and you think US politicians are
corrupt!)
http://news.bbc.co.uk/1/hi/business/2729053.stm
Exhibit #2. Swaiziland’s King Mswati III remains under fire (at least
figuratively) for his plan to use government money to purchase a private
plane. http://news.bbc.co.uk/1/hi/business/2691545.stm
The Bank of Japan itself may be running out of money and may need a
capital infusion and it is in part for that reason that the BoJ is
fighting an inflation target that would mean they would have less
flexibility.
http://mdn.mainichi.co.jp/news/20030127p2a00m0bu013000c.html
http://www.businessweek.com/magazine/content/03_05/b3818169.htm
We have seen over the past generation, that foreign buying of US dollars
helps finance a large US trade deficit. In a move that would be harmful
to the US, more countries are calling for an international currency to
replace the dollar as the world’s standard.
http://www.dawn.com/2003/01/27/ebr13.htm
The prolonged war between Israel and Palestine continues to hurts the
economies of each nation. (I wish I had an answer to stop the
fighting. At some point both sides will have to realize that the
fighting is making both nations poorer and agree to live together even
if neither side likes the other.)
http://news.bbc.co.uk/1/hi/world/middle_east/2704261.stm
http://news.bbc.co.uk/1/hi/business/2697705.stm
http://news.bbc.co.uk/1/hi/business/2697883.stm
With so many other things going on, the UK vote on the Euro is on the
back burner and may not happen until 2005.
http://news.bbc.co.uk/1/hi/uk_politics/2703517.stm
I recently volunteered to give a talk on the Japanese economy. I really
do not know where I will begin, but to say it is time for a major
shakeup. The minor adjustments have done little and now bankruptcies
are again threatening to push banks further into trouble and with them
the economy. While towards the end of the week, there were some
marginally improved signs, overall stagnation is the key attribute.
http://news.bbc.co.uk/1/hi/business/2709845.stm
Yet another sign that Iran is opening to the West. They now taking with
India and truing to copy their success in attracting information
technology firms.
http://www.metimes.com/2K3/issue2003-5/bus/iran_looks_to.htm
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Economics
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Well it seems like things are getting better, but it is hard to say for
sure. (how is that for hedging my bets? Greenspan would be proud!)
While US labor productivity was down slightly in December, it was up
overall a strong 4.7% for the year which bodes well for the overall
state of the US economy. Durable goods were up, but it as largely
defense related. On the plus side construction remained strong and
manufacturing continues to show some signs of life. Other numbers were
tougher to gauge: retail sales were below expectations, car sales were
slow, and job growth is anemic at best.
http://wire.ap.org/?PACKAGEID=BIZeconomy&SLUG=RETAIL%2dSALES
http://www.msnbc.com/news/869421.asp
http://money.cnn.com/2003/01/28/news/economy/durables.reut/index.htm
http://money.cnn.com/2003/01/28/news/economy/durables.reut/index.htm
http://news.yahoo.com/fc?tmpl=fc&cid=34&in=business&cat=us_economy
http://www.washingtonpost.com/wp-dyn/articles/A38088-2003Feb6.html
Part of the problem in forecasting is that no one knows what will happen
on the Iraqi and Korean fronts. The uncertainty has many companies
holding back on hiring or spending decisions and as a result, it is one
of the slowest times for job growth in 20 years!
http://www.dallasnews.com/business/columnists/ashah/stories/012703dnbustexasview.5a67b.html
http://www.metimes.com/2K3/issue2003-5/bus/iraq_uncertainty_drips.htm
If you ever are too upbeat, read some of Bill Gross’ writings. Talk
about an unhappy camper. The head of PIMCO’s Total Return bond fund
paints a gloomy picture for the economy.
http://biz.yahoo.com/rf/030203/financial_pimco_gross_1.html
With all the things to worry about, the recent upswing in commodity
prices might be seen as a good signal that we will not have the
deflationary woes of Japan. However, as Alan Greenspan noted: "There
are some well-founded reasons to presume that deflation is more of a
threat to economic growth than is inflation.” (BTW there is definite
deflation in come areas of the economy. For example food and
electronics. Did you know a Burger king Whopper cost more 20 years ago
than today!)
http://www.nytimes.com/2003/01/19/business/yourmoney/19ECON.html
http://www.msnbc.com/news/863248.asp
Discretionary income is always the first to be cut back when times get
tough, so it should be no surprise that leisure firms are being harder
hit than others due to the slow global economy.
http://news.bbc.co.uk/1/hi/business/2695617.stm
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Personal Finance
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Bush’s tax plans are much more far reaching than originally reported.
Possibly most important would be several new plans that would replace
existing IRAs, 401ks, and the like. The new plans would allow more
money to be set aside and would simplify retirement planning. That
said, I will be amazed if much of this gets through Congress. Even if
both houses are controlled by Republicans.
http://www.msnbc.com/news/869159.asp
A survey from England suggest that 20% of people at afraid of their own
finances. Those British are a brave people, I would have guessed the
percentage would have been higher than that!)
http://news.bbc.co.uk/1/hi/business/2696277.stm
This one is both fun and educational. Ten things that we should have
taught you in high school but didn’t. For example #1. the importance of
saving. http://www.fool.com/News/Foth/2003/foth030127.htm
With tax time in the US right around the corner, CNN looks at five
underused tax deductions. In the “Every cloud has a silver lining
department,” included on the list is making the most of investment
losses, which given the bear market seem to be rather plentiful this
year!
http://money.cnn.com/2003/01/17/pf/taxes/q_underusedbreaks/
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Energy Markets
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Jeffrey Richter became the second Enron energy trader to plead guilty to
fraud. He admitted to manipulating prices around the California “Energy
crisis” of 2000 and early 2001. Prosecutors are counting of Richter
(and Timothy Belden who pled guilty in October) to cooperate and lead
them to still bigger fish. They obviously would love to snare Jeff
Skilling or Ken Lay in what would be a political coup for any
prosecutor.
http://www.msnbc.com/news/868814.asp
More than anything else financial markets are build on trust, thus the
possibility that price fixing and false reporting of trades occurred is
serious and has many firms worried about potential (Probable) lawsuits.
http://biz.yahoo.com/rc/030203/utilities_gas_lawsuits_1.html
After at first saying that they could pump more oil if need be (that
statement has been doubted by some) and that current price is
exaggerated on war fears, things changed when Venezuela came back
online (at least to a large degree) and now OPEC is considering whether
to cut production.
http://www.msnbc.com/news/863708.asp
http://news.bbc.co.uk/1/hi/business/2691539.stm
http://www.msnbc.com/news/868461.asp
Want to read some tea leaves? That is the game that some are playing
after watching the moves of Syria. Syria for years has been seen as not
having great oil or gas reserves. (well at least for the Middle East).
Now however, they have been selling off development rights, joining in
joint ventures, and possible most telling, looking into an
infrastructure to move and distribute large amounts of oil and natural
gas. These moves have led the Middle East Times to speculate that their
may be more beneath the ground than originally thought.
http://www.metimes.com/2K3/issue2003-5/bus/syrian_moves_hint.htm
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Money and Politics
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The debate over Bush’s plan to cut taxes continues. On the plus side a
cut will put more money into the hands of consumers. On the down side,
ithe changes that are getting the most coverage (dividend tax cut in
particular) are more of a long term fix than a short term pick-me up.
And if it does not spur the economy, then the deficit will grow. As a
result several Nobel Prize winners (including Stiglitz, Modigliani,
Arrow, and Sharpe) are coming out against the plan. Which may be in
deep trouble as a result of growing deficit projections (see below)
http://yahoo.smartmoney.com/theproshop/index.cfm?story=20030122
http://biz.yahoo.com/bw/030131/312208_1.html
http://news.bbc.co.uk/1/hi/business/2735269.stm
One problem is that the dividend tax cut may not be the best tax to cut.
Scott Burns agues that other cuts would have a more significant, and
quicker, impact on the economy.
http://www.dallasnews.com/business/scottburns/columns/2002/stories/012103dnbusburns.e6eb.html
Bush proposed his new 2004 budget which calls for increased spending and
growing budget deficits. Obviously that gave people on both sides of
the aisle a nice target.
http://www.msnbc.com/news/868560.asp
http://www.sfgate.com/cgi-bin/article.cgi?f=/news/archive/2003/02/03/national0934EST0529.DTL
http://news.independent.co.uk/business/news/story.jsp?story=375359
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Financial Service Industry
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CSFB suspended their top investment banker in tech sector over allowing
(more like ordering from the articles) his staff to destroy documents
tied to IPOs. This destruction is most likely the result of him being
under investigation for allowing conflicts of interest to exist.
http://www.voanews.com/article.cfm?objectID=481E9F62-E59F-4D62-962AA7A187DDDF9D
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Derivatives
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Why are derivatives needed? Check out the volatility of the Pakistani
sugar market. It really is a boom or bust commodity. With derivatives,
these movements can be hedged and both buyers and sellers protected.
http://www.dawn.com/2003/01/27/ebr2.htm
It sure is ICEY. The ICE (InternationalContinental Exchange) surprised
skeptics by reporting record volume last year. While that is
interesting, the really interesting part of the story is to look at the
changing makeup of energy trading in the post Enron-Post California
Energy Crisis world. Many markets dried up (two bad puns in one
story-sorry) while other liquid markets continued to prosper.
http://www.forbes.com/markets/commodities/newswire/2003/02/04/rtr869606.html
Volume on other derivative markets was also very strong as investors and
speculators alike tried to profit from (or hedge against) volatility
brought about by the possible war with Iraq.
http://www.forbes.com/markets/newswire/2003/02/04/rtr869601.html
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Accounting News
***********************************************************
Easy come easy go. In 1999 and 200 Ronald LeMay and William Esrey
exercised stock option and profited to the tune of over $170 million.
Rather than pay taxes on this gain, the Sprint executives took the
advice of their accountant (Ernst and Young) and set up a tax shelter.
Now the IRS is likely to disallow the shelter. However, a bigger problem
for the executives is that the money owed is now far more than the value
of the shares. This may force the formerly very wealth men into
bankruptcy.
http://reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=2185236
http://www.lightreading.com/document.asp?site=lightreading&doc_id=28044
http://www.nytimes.com/2003/02/07/business/07NORR.html
http://www.washingtonpost.com/wp-dyn/articles/A38057-2003Feb6.html
An article by Bodie, Kaplan, and Merton (wow!) in the Harvard Business
Review suggests that the new accounting treatment of stock options will
force companies to expense the options, but at a value lower than the
true value (i.e. .a risk neutral valuation such as the Black-Scholes
model). Why? Well most likely because the firms lobbied successfully
that the executives are not risk neutral and do not value the options as
much, even though the cost to shareholder is higher.
http://www.nytimes.com/2003/02/07/business/07NORR.html
CEOs were to blame more than anyone else in SEC investigations from 1997
to 2002. Overall “111 of the 227 investigations of improper financial
reporting and disclosure” involved CEOs and presidents. The most common
transgression? Revenue recognition problems.
http://story.news.yahoo.com/news?tmpl=story&ncid=580&e=3&cid=580&u=/nm/20030127/bs_nm/financial_sec_enforcement_dc
It’s tax time!
http://money.cnn.com/2003/01/20/pf/millionaire/q_accountant_stackup/index.htm
Even with sales up slightly, auditors at Eddie Bauer announced that they
have serious doubts whether the retailer will be able to continue to
operate. This is really not a surprise as the firm just now released
their 2001 financial statements! (which of course had already drawn the
ire of the SEC and the Nasdaq who delisted the stock last summer).
Citing declining sales, high debt levels, and non-compliance in many
debt covenants, KPMG “issued its opinion that "these matters raise
substantial doubt about the company's ability to continue as a going
concern."”
http://seattlepi.nwsource.com/business/107248_eddie05.shtml
http://www.suntimes.com/output/business/cst-fin-spiegel05.html
http://www.thespiegelgroup.com/ReleaseDetail.cfm?ReleaseID=81891
http://seattletimes.nwsource.com/html/businesstechnology/134630023_retail07.html
The Alternative Minimum Tax is growing in importance as more so-called
middle class payers are being forced to pay the AMT due to large
deductions or one-tie gains
http://www.msnbc.com/news/869112.asp
KPMG charged with fraud for looking the other way and “allowing Xerox to
manipulate its accounting practises and close a $3bn "gap" between its
actual results and those reported to the public.”
http://news.bbc.co.uk/1/hi/business/2707957.stm
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Of interest to students
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Monster.com has some great ideas for your job hunt:
1. Video tape your own mock interviews and replay them trying to pick up
things you can do better. 2. Use a head-hunters (not always possible
but worth a try none-the-less), and 3. Make a good “first” impression.
http://finance.monster.com/articles/012102/
http://finance.monster.com/articles/recruiter/
http://interview.monster.com/articles/twominutedrill/
How much should you expect to be paid? Here are some sites that help
you identify your “market wage.”
http://redirect.monster.com/finance/03-01-13/salary.asp
http://www.accountemps.com/FreeResources
http://www.payscale.com/research/vid-19571/fid-6886
http://content.salary.monster.com/articles/salary/expectations/
The UK job market for grads is not much better than in the US.
http://news.bbc.co.uk/1/hi/business/2706665.stm
What is the worst thing about writing a paper? Often the bibliography.
(don’t you hate the punctuation etc? Well here may be your answer. A
site that does it for you. You enter the information, and they do the
formatting. (it also has a very cool which serch engine is right for
me? Section)
www.noodletools.com
http://www.noodletools.com/debbie/literacies/information/5locate/adviceengine.html
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Of interest to professors
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Not strictly speaking a finance site, but Kwan Choi of Iowa State has
put together the begginngs of a book on how to get published in
academia. Writing a book is a time consuming task and in the interim,
he has been kind enough to let us see what he is writing. Many great
tips from how to write, to what not to write, and even how to deal with
rejection.
http://www.ag.iastate.edu/journals/rie/how.htm
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FinanceProfessor.com Lesson of the week
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A sportsbook (aka a legal bookie)is really very similar to a specialist
on the NYSE.
From Mahar and Paul 2002: “Madhaven and Sofianos (1998) and Hasbrouck
and Sofianos (1993) show that the specialist’s revenues come largely
from the small fees they collect on each trade and not on taking
positions and trading on their own accounts. The specialist benefits by
the volume of trades like the sportsbook: the more trades that are
placed or the more bets that are taken, the more the broker or
sportsbook makes. Like the sportsbook, the specialist on the NYSE is
generally not involved in the trading, and will become involved in
trading when there is an imbalance. When an imbalance occurs, the
specialist trades on his/her own account and/or adjusts prices until
balance is restored.
The similarities between a sportsbook and a specialist do not end there.
Both will also temporarily stop trading if there is major information
that is about to be released. For example, a sportsbook will not
publish a line when an injury to an important player leaves doubt as to
whether the person will play. In the same way, a specialist will
request a temporary trading halt when a major takeover is about to be
announced or a CEO steps down.
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FinanceProfessor.com Site of the Week
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MBAdepot---whether you are an MBA student, plan on going to grad school,
or just want to see a cool site with much helpful information this is
one you have to check out! And to make things even better, the founder
went to the University of Rochester and is now in Austin!
http://www.MBAdepot.com
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Financial Trivia/History
***********************************************************
Rising health costs are partially die to growing obesity in the US. A
new study estimates medical expenses run $1500 more for obese employees.
http://news.yahoo.com/fc?tmpl=fc&cid=34&in=health&cat=obesity_and_weight_issues
Success breeds new entrants. Now that the legal barriers to entry are
falling, both Las Vegas and Atlantic city are seeing increased
competition for the gambling dollar. This is leading to lower profits.
http://biz.yahoo.com/djus/030203/1245000735_1.html
3/01/24/commentary/column_sportsbiz/superbowl_bookmaking/index.htm—great
article on what a sports book is!
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Teaching Ideas
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Start off each class asking the students to tell you three things they
learned in the previous class.
Keep moving! Standing in one place allows you and your students to lose
concentration. Move around the room, change positions, change tones of
voice. Just keep moving!
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What I am reading
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I am all done with April 1865: the Month that Saved America by Jay Winik
except for the notes. I really liked it! Possibly my favorite Civil
War Era book!. GREAT.
http://www.amazon.com/exec/obidos/ASIN/
1402502192/finpapers/104-9378365-5272442
I ristened to Atlanta: Fall of the South’s Gate City. It was very good
but very short!. Amazing fact: Atlanta was the south’s second largest
city with a population of only about 20,000!
http://www.amazon.com/exec/obidos/ASIN/1570425108/finpapers/104-9378365-5272442
I am also reading Sherman’s Horsemen by David Evans. It is very
interesting, but it is long and of lat I have had little time to
actually read, so it may take a while.
http://www.amazon.com/exec/obidos/ASIN/0684863650/finpapers/104-9378365-5272442
I finished Wilt. I have to find a few others from the series. Sharpe
is flat out Hilarious.. (Reminds me of the announcers in the new Nike
commercial where the streaker runs through the soccer game.)
http://www.amazon.com/exec/obidos/ASIN/o394724186/finpapers/104-9378365-5272442
I started From Beirut to Jerusalem by Thomas Friedman. I like it a lot.
I just can not imagine living in the Beirut he describes. So far I
have liked this MUCH better than his book on globalization. In fact I
may have to go back and try that one over as I was very unimpressed the
first time through.
http://www.amazon.com/exec/obidos/ASIN/1559942800/finpapers/104-9378365-5272442
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Quotes of the week:
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Let no person say what they would or would not do, since we are not
judges of ourselves till circumstances call us to act---Abigail Adams
Discipline is the bridge between goals and accomplishments---Anonymous
(from my desk calendar)
The act of leadership is deciding what to do, and then getting [people]
to want to do it.—Dwight D. Eisenhower
Optimism and pessimism are infectious and they spread more rapidly from
the head downward than any other direction.-- Dwight D. Eisenhower
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Thanks for reading! I hope you liked it and learned something (or even
many things) from it! I had fun with this one. Sorry it was long, but
there were so many good stories.
Jim
JimM-@FinanceProfessor.com
Who absolutely loves the new Cheerios cereal with freeze dried fruit! I
think I have had 4 or 5 boxes already. (I eat a lot of cereal!)
Who has decided really cold (below zero) is better than 30 degrees and
slippery. Running has not been as much fun of late as normal.
Where both the Bonnies mens’ and women’s basketball teams have fallen on
some hard times. Both will need to rally in the conference playoffs to
have a post-season shot.
Who is really tired. It is time for bed.
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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 2003 FinanceProfessor.com
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