|
Front Running, SARS, Greenspan, is CAPM alive again?, and more!!!
|
Jim Mahar
|
Apr 23, 2003 13:19 PDT
|
Iraqi Reconstruction, SARS, surgery for Greenspan, CAPM back from the
dead?, Front-running, and more!
FinanceProfessor News April 23, 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 Stories
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1. Iraqi Reconstruction
2. SARS
3. CAPM- back from the dead? Maybe just measurement error.
4. Executive pay remains under fire.
5. Front Running on the NYSE?
6. Interview with a trader/professor
7. Closing time at the Australian Stock Exchange.
8. Alaska begins lawsuit
9. Alan Greenspan has surgery and gets Bush’s blessing.
10. FASB says to expense stock options
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Hi everyone,
Wow, what a newsletter. There are numerous articles that are going to
force me to rework my class notes. So be forewarned, do not read any
further if you do not want to learn something new :-)
BTW sorry it has been a while. There just always seems to be too much
to do. As a result, this will almost assuredly be the last newsletter
for the semester. So an early good luck on finals and congratulations
to all graduates. Be sure to stay abreast with changes in finance by
continuing to read the newsletter
Jim
JimM-@FinanceProfessor.com
And now the news:
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Top Story I: the aftermath of War in Iraq
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Well the fighting is largely over in Iraq and now the reconstruction
begins. This may prove most costly than the war itself.
Of course the other nations in the region will also feel some of the
fall out from the war (if for no other reason tourism was way down),
however, it appears that this may be less traumatic than originally felt
and most nations in the region expect to grow for 2003. In the longer
run, many are optimistic that the overthrow of Saddam’s regime may have
positive effects on the region’s economy. HOWEVER, this really is still
speculation, so we will have to wait and see.
http://story.news.yahoo.com/news?tmpl=story2&cid=568&ncid=749&e=6&u=/nm/20030418/bs_nm/economy_mideast_dc
The war itself cost a bit less than anticipated. The Pentagon estimates
that the war itself (so far) only cost about $20 billion (or roughly $70
for everyone in the US). However, the reconstruction of Iraq may cost 3
to 5 times as much. However, as before these estimates are very
preliminary.
http://story.news.yahoo.com/news?tmpl=story2&cid=540&e=10&u=/ap/20030416/ap_on_re_mi_ea/war_us_military_735
About $1.7 billion of the money being used to rebuild Iraq will be Iraqi
money previously seized by the US.
http://story.news.yahoo.com/news?tmpl=story&ncid=578&e=3&cid=578&u=/nm/20030417/ts_nm/iraq_dollars_dc
Some of the money for rebuilding will no doubt come from the Iraqi oil
that has again begun to flow. The speed at which the oil fields have
come back online has led to oil prices declines and even OPEC talks to
cut production. However, to OPEC, US control of Iraqi oil is a real
wildcard: will the floodgates be opened?
http://www.chron.com/cs/CDA/ssistory.mpl/business/1870813
http://www.msnbc.com/news/903007.asp
http://www.msnbc.com/news/902852.asp
http://www.washingtonpost.com/wp-dyn/articles/A17690-2003Apr22.html
http://www.msnbc.com/news/904068.asp
http://news.bbc.co.uk/go/em/-/2/hi/business/2969115.stm
As for the actual reconstruction, the privately–held US firm Bechtel,
possibly in part due to political ties, won a major contract to help the
rebuilding, but there will be many many many more.
http://news.bbc.co.uk/2/hi/business/2957875.stm
http://www.nytimes.com/2003/04/18/international/worldspecial/18REBU.html
http://news.bbc.co.uk/1/hi/business/2930457.stm
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Top Story II.
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This one is more as a result of what could happen, rather than what has.
It is SARS. Yes, it has hurt the economy of S.E. Asia and Toronto, but
if things get more out of control, then we have seen only the tip of the
iceberg.
In Toronto, tourism is off by more than it was immediately after 911 and
the disease is still fairly contained.
http://story.news.yahoo.com/news?tmpl=story&ncid=594&e=1&cid=594&u=/nm/20030421/hl_nm/health_pneumonia_canada_dc
http://www.economist.com/agenda/displayStory.cfm?story_id=1713808
You have to feel for the airlines and other tourism related industries.
First there’s an economic slowdown, then 911, then threats of terrorism
and war, and now SARS. While firms around the globe are being affected,
Delta’s President used the term “an Extinction level event,” the real
damage may be (for now at least), concentrated in Asia where fears of
SARs has caused air travel to shrink to a level that many airlines are
likely to not make it.
http://news.bbc.co.uk/1/hi/business/2945393.stm
http://news.bbc.co.uk/1/hi/world/asia-pacific/2945275.stm
http://news.bbc.co.uk/1/hi/business/2891459.stm
http://www.msnbc.com/news/901142.asp?0si=-
Throughout Asia, companies are taking steps to protect themselves from
the disease. For example, Flextronics is ending all but the most
necessary travel. This is bad for the travel industry but is also
putting a serious damper on the Asian economy.
http://biz.yahoo.com/rc/030421/tech_flextronics_sars_1.html
For once being extremely optimistic, the UN estimates that “the combined
effect of SARS and the war would cut almost half a percentage point off
economic growth throughout Asia this year.” From the reports of most
private and even WTO economists, this could be extremely optimistic. If
the disease continues to spread, some are suggesting the drop could be
much greater. For example, those feeling the impact of the disease
include Australian fishermen who are suffering because few are going out
to eat in Asia. In Hong King alone the government announced $11B to aid
businesses hurt by the disease and Singapore has agreed to give $130
million to its travel industry in an attempt to save firms from pending
bankruptcy.
http://www.washingtonpost.com/wp-dyn/articles/A48096-2003Apr17.html
http://www.economist.com/agenda/displayStory.cfm?story_id=1713808
http://www.rnw.nl/hotspots/html/sars030407.html
http://news.bbc.co.uk/2/hi/business/2968703.stm
http://news.bbc.co.uk/1/hi/business/2965985.stm
http://www.dw-world.de/english/0,3367,1429_W_838622,00.html
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Corporate Finance
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Adrian and Franzoni have a very cool paper. It looks at the value
anomaly (that is value stocks outperform their CAPM prediction). They
find that this may be explained by how we measure beta, specifically
Franzoni, in his 2002 paper, finds that the beta of both value stocks
and small stocks has fallen dramatically. This may lead investors to
“require an expected excess return that is proportional to the riskiness
they perceive, the econometrician observes a premium in excess of the
realized riskiness of these stocks.” In English, this means that
investors use a higher than realized beta in their estimates of required
return. This could be enormous! Time to rewrite my notes!
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=391562
Bankruptcies are like time-outs in sports. They are designed to allow
the firm to gather itself together and hopefully negotiate new deals
that will allow the firm to continue operating. A good example of this
is with Fleming, (ok, so it just happens to be a grocery
example—coincidence!) who is now operating under bankruptcy protection
after their contracts with Kmart were recently ended. (BTW this also
shows the problem of tying too much of your business to a single
customer!)
http://www.kansascity.com/mld/kansascity/business/5534823.htm
Speaking of bankruptcy and Kmart, the retailer is about to come out of
bankruptcy. What makes this story so interesting is that it lays out
the various arguments that creditors are having with management and how
the existing shareholders will be left with nothing. Also the
projections are worth noting. Kmart expects sales to climb
substantially even after closing 30% of their stores. Definitely worth
reading!
http://story.news.yahoo.com/news?tmpl=story&ncid=580&e=3&cid=580&u=/nm/20030422/bs_nm/retail_kmart_dc
http://www.quicken.com/investments/news_center/story/?story=NewsStory/dowJones/20030423/ON200304230021000011.var&column=P0DFP
http://news.bbc.co.uk/2/hi/business/2968785.stm
Apple apparently has until the end of April to decide to buy Vivendi’s
Universal Music division. Apple is reported to be interested in it for
setting up a new downloading service. While more recent reports have
the deal not happening, it is still possible, so stay tuned. (get it?
;-) )
http://www.smartmoney.com/bn/ON/index.cfm?story=ON-20030416-001110-1234
http://www.msnbc.com/news/901019.asp?
In what may be the largest insider trading case in years, several AOL
executives has been accused of insider trading for selling shares and
cashing in option positions around the AOL merger with Time Warner.
Additionally the suit accuses the executives with knowingly committing
accounting fraud to make the deal with Time Warner more attractive.
Departing Steve Case and Ted Turner are both named in the lawsuit.
http://news.bbc.co.uk/1/hi/business/2947579.stm
http://www.washingtonpost.com/wp-dyn/articles/A23775-2003Apr14.html
CEO pay has been in the news a great deal of late. On both sides of the
Atlantic, executives have been under fire for high levels of pay when
their shareholders have not been earning high returns. For example,
Reuters came under fire for large executive bonuses even though the firm
had lost $769.3 million.
http://news.bbc.co.uk/1/hi/business/2944081.stm
While CEO pay at firms gets much publicity, CEO pay at non-profit
organizations can also be a source of controversy.
http://www.washingtonpost.com/wp-dyn/articles/A14892-2003Apr12.html
Schering-Plough named its new CEO. It is Fred Hassan and he got quite
the compensation plan! It’s a great example of how CEO pay is made up
of different forms and also how options vest etc.
http://channels.netscape.com/ns/news/story.jsp?floc=FF-APO-1310&idq=/ff/story/0001%2F20030421%2F165579970.htm&sc=1310
http://www.msnbc.com/news/902902.asp
Dave O’Reilly of ChevronTexaco wasn’t as lucky. His CEO bonus was cut
by 86% after the firms had a bad year in 2002.
http://money.cnn.com/2003/04/14/news/companies/chevrontexaco.reut/index.htm
WorldCom opts to change their name back to MCI. Why they changed it in
the first place? Good question.
http://www.washingtonpost.com/wp-dyn/articles/A22438-2003Apr14.html
http://www.quicken.com/investments/news_center/story/?story=NewsStory/dowJones/20030414/ON200304140250000600.var&column=P0DFP
http://www.dallasnews.com/sharedcontent/dallas/business/stories/041403dnbizworldcom.fb516f11.html
Scott Sullivan, the former CFO of WorldCom, pled innocent to the new
charges of bank fraud and making false loan applications. (Sullivan is
the “supposed ringleader” of WorldCom and has already been charged with
conspiracy and securities fraud) and is the target of numerous lawsuits.
http://cbs.marketwatch.com/news/story.asp?guid=%7B98723E9C-F7B2-4B03-8923-E590C200A083%7D&siteid=google&dist=google
http://www.msnbc.com/news/901089.asp?0si=-
http://www.middle-east-online.com/english/?id=5257
http://www.nytimes.com/2003/04/23/business/23WORL.html?ex=1051761600&en=13249237a2b0cdbb&ei=5062&partner=GOOGLE
After getting concessions from their unions, American Airlines admitted
the obvious and stated that bankruptcy is still a possibility. This
admission in addition to perks held onto by executives (largely
retirement and bonus related), angered many and threatened the previous
concessions. In the end the execs came to their senses and gave up
their controversial pay packages, but union members said it was too
little too late and demanded a new vote.
http://news.bbc.co.uk/2/hi/business/2958019.stm
http://story.news.yahoo.com/news?tmpl=story&ncid=580&e=1&cid=580&u=/nm/20030418/bs_nm/airlines_american_dc
http://story.news.yahoo.com/news?tmpl=story&ncid=580&e=2&cid=580&u=/nm/20030420/bs_nm/airlines_american_dc
http://www.msnbc.com/news/902836.asp
There has been a big increase in activity in the market for corporate
control lately. For example, United Technologies has expressed an
interest in Chubb, Sears sold their credit card division, Viacom bought
Comedy Central, Berkshire Hathaway acquired Clayton Homes, and
Hotels.com was bought out for $1.1 billion.
http://news.bbc.co.uk/go/em/-/2/hi/business/2963579.stm
http://www.nytimes.com/2003/04/21/business/worldbusiness/21DEAL.html?dlbk
http://www.nytimes.com/2003/03/26/business/26DEAL.html
http://www.newsday.com/business/ny-biz-viacom0422,0,7011102.story?coll=ny-business-headlines
http://money.cnn.com/2003/04/02/news/companies/berkshire.reut/
http://www.dallasnews.com/sharedcontent/dallas/business/stories/041403dnbizworldcom.fb516f11.html
In other merger news, a large horizontal deal was done between Russian
oil firms Yukos and Sibnelt. They have agreed to a deal that will
create the world’s 4th or 5th largest oil producer (one that produces
more than the whole nation of Canada!).
http://www.nytimes.com/2003/04/21/business/worldbusiness/21RUSS.html?dlbk
http://online.wsj.com/article_email/0,,SB105087616429095200,00.html
http://www.washingtonpost.com/wp-dyn/articles/A17375-2003Apr22.html
GE shareholders almost got rid of their executives golden parachutes.
That the shareholders failed is not surprising, that it was so close is
noteworthy!
http://reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=2615105
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Investments
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With apologies to Semisonic, Aitken, Comerto-Forde, and Frino look at
closing time. Not the closing time of bars, but the closing at the
Australian Stock Exchange. One way of classifying markets is whether
there is continuous trading or if periodic auctions are held. Quite a
few markets have adopted some version of an auction market for either
the open or the close. This trading mechanism allows orders to
accumulate. The rationale is that by gathering a larger number of
participants you can get better liquidity and lower transaction costs.
In 1997 the Australian Stock Exchange adopted a closing call auction.
Aitken, Comerto-Forde, and Frino examine this and find that about 2.5%
of trades take place at the close. Interestingly, these trades are not
new trades (that is, volume has not increased significantly), but trades
that were being done earlier are being pushed back to the close. That
is rather than trade over the previous two hours, when the market is
still open, the traders wait to trade at the end of the day when there
is greater liquidity. (Bar joke deleted)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=391564
Anthony Gu finds that the January effect may be gone. There can be
several possible reasons for this, for example, lower bid-ask spreads
mean less bounce in January, but the most likely explanation is that
once investors learned of the effect, trading on this information led to
its demise. Interestingly, if there is much of a January effect, the
authors suggest that it is more pronounced in large firms than in small
firms. (I guess I better go re-do my notes again!)
http://www.sciencedirect.com/science/article/B6W5X-479TSTW-1/2/c9e8181b6e6988ce12344fff32b1729a
I try to be as open-minded (or more so) than the next guy, but there are
some things that boggle my mind. For example Astrological Finance.
Yes, tying stock returns and horoscopes together. Forbes interviews on
the stars in this area. (Sorry, you didn’t really expect me to let that
one go by, did you?)
http://www.forbes.com/2003/04/14/cz_jd_0414adviser.html
Contrarian investors take special notice in the number of analysts who
are recommending stocks as a buy (i.e. Bulls) and those who believe
stock prices will fall (bears). In this line of reasoning, too many
bulls are bad news as they have already purchased the stock. Thus a
large number of bears is seen as a good thing. Thus when everyone
thinks the market is going up and has already bought, there is little
money left to push stocks higher. It usually doesn’t. Which is as good
of explanation as most as to why the market has not climbed after the
war in Iraq ended.
http://www.nytimes.com/2003/04/20/business/yourmoney/20STRA.html
http://money.cnn.com/2003/04/23/commentary/bidask/bidask/index.htm
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Financial Institutions and Markets
(also Money and Banking)
***********************************************************
NYSE specialists have been accused of front running. This practice
involves momentarily halting electronic order submission so as to allow
the specialist to place trades that will become nearly risk free profits
once the electronic orders are executed. For example, if there are
several buys in the electronic queue, then the specialist will cut in
line and place trades that will be executed prior to those in line. The
NYSE and SEC are reportedly investigating specialists over dozens of
cases. However, the NYSE denies this, so maybe they are and maybe they
aren’t. My guess is that they are, or should be!
http://www.nytimes.com/2003/04/18/business/18WALL.html
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1048313884803&p=1012571727108
http://www.boston.com/dailyglobe2/112/business/Fleet_fined_150_000_by_NYSE+.shtml
http://money.cnn.com/2003/04/22/news/nyse_stocks.reut/
http://www.quicken.com/investments/news_center/story/?story=NewsStory/dowJones/20030422/ON200304220212000589.var&column=P0DFP
http://www.nytimes.com/2003/04/23/business/23PLAC.html
http://www.nytimes.com/2003/04/22/business/22PLAC.html
One of these firms in trouble (although it is unclear whether this was
part of the alleged, double secret NYSE investigation or not) is Fleet,
who has a specialist division that was fined $150,000 for failing to
list customer quotes and not trading when the specialist should be
trading and then trading when there was no need to trade (which sounds
much like front running).
http://online.wsj.com/article_email/0,,SB105088613248096000,00.html
Speaking of the NYSE, it made a good step this week when it agreed to
tell investors when a listed firm no longer meets the NYSE listing
requirements. The NASDAQ already does this.
http://www.nytimes.com/2003/04/18/business/18NYSE.html
With the rising US budget deficit, the US government is looking for more
efficient ways to raise money. After already bringing back their 5-year
notes, there is now talk about bringing back 10 years notes.
http://biz.yahoo.com/rf/030421/economy_treasury_debt_1.html
Well yeah….Michael Moskow the Chicago Fed President stressed the
importance of financial education. This is particularly true with more
of the burden of investing being placed on the individual AND there
being more choices than ever before. Gee tell us something we don’t
know :-)
http://biz.yahoo.com/rf/030421/economy_fed_moskow_1.html
Fed Chairman Alan Greenspan underwent prostate surgery but expected to
be back at the helm later this week. He is suffering from a
non-cancerous enlarged prostate.
http://channels.netscape.com/ns/news/story.jsp?floc=FF-APO-1310&idq=/ff/story/0001%2F20030421%2F165479939.htm&sc=1310
http://www.sltrib.com/2003/Apr/04222003/business/49999.asp
In related news, President Bush is reported to be behind Greenspan for
another term. This comes as a slight surprise as Bush’s economic
advisors have been dissatisfied with the nation’s economic performance
and have placed some of the blame on Greenspan’s shoulders.
http://story.news.yahoo.com/news?tmpl=story&ncid=578&e=1&cid=578&u=/nm/20030422/ts_nm/bush_greenspan_dc
http://www.washingtonpost.com/wp-dyn/articles/A17684-2003Apr22.html
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International Finance
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The World Bank reaffirmed the importance of aiding the poor in spite of
the costly rebuilding of the Iraqi economy. Included in the
announcement was the announcement by John Snow (US Treasury Secretary)
for some small increase in US help. This $100 m increase is contingent
of the World Bank being able to show measurable results. An
interesting, and VASTLY underreported part of the story is that the
World bank also reported the number of people living on less than $1 a
day fell overall to about 1 billion people This number is horrific by
any measure, but where it has been reduced is telling: China and India.
Two nations who have adopted free trade. On the other hand elsewhere
(see Middle East and especially Africa) the number living on less than
$1 a day has actually gone up.
http://www.washingtonpost.com/wp-dyn/articles/A19924-2003Apr13.html
Privatizations involve the government selling off state owned assets in
order to raise money, create better incentives, and improve efficiency.
Typical examples include utilities, transportation, and in some cases
even the mail. Now Israel is considering privatizing some of their
military!
http://news.bbc.co.uk/1/hi/business/2966571.stm
Kenya is just one of many nations with more people than jobs. The
Kenyan government is trying to combat this by increasing education and
initiating an “ambitious” job creation plan to put up to 2 million more
Kenyans into higher paying jobs.
http://news.bbc.co.uk/1/hi/business/2946085.stm
Cuban capitalism? There are two words rarely seen together, but the
Huston Chronicle reports that capitalism is slowly entering the last
bastion of communism in the western hemisphere.
http://www.chron.com/cs/CDA/story.hts/business/1878951
China and Brazil’s improved economic ties provide a good example of how
trade can help both nations and that there is often much politics
involved in getting to free trade.
http://www.nytimes.com/2003/04/23/business/worldbusiness/23BRAZ.html
Pakistan has decided to begin subsidizing exports. While this move
won’t be popular, nor good for the global economy, the US cannot say
much due to their own tariffs and subsidies.
http://www.dawn.com/2003/04/23/ebr11.htm
Some Muslims, angry at the US for the war in Iraq, are reportedly
pulling money out of the US and investing in Pakistan.
http://www.dawn.com/2003/04/23/ebr7.htm
***********************************************************
Economics
***********************************************************
Has the US economy turned the corner? While it is obviously difficult
to say, some indicators are suggesting the worse is behind us and the
economy is poised to rebound. For example, the Kansas City Fed repots
that manufacturing picked up in March. Likewise, a report has US
inventory levels rising which often foretells future growth, but so far
there is little convincing evidence..
http://www.forbes.com/markets/economy/newswire/2003/04/14/rtr938958.html
http://www.forbes.com/markets/economy/newswire/2003/04/14/rtr938813.html
http://www.washingtonpost.com/wp-dyn/articles/A22199-2003Apr14.html
http://www.newsday.com/business/ny-bzecon0424,0,6960351.story?coll=ny-business-headlines
Now that most of the fighting is over in Iraq, the attention turns to
the global economy. Opinions are mixed as to whether it will quickly
rebound or slip back into slow motion.
http://www.msnbc.com/news/901003.asp
Need proof the core rate of inflation is more important than the overall
change in CPI? For the past three months, volatile energy prices have
been up, nearly 80%, while the core rate of inflation in the US has been
up less than 1%.
http://www.msnbc.com/news/900989.asp
http://story.news.yahoo.com/news?tmpl=story2&ncid=1203&e=10&u=/nm/20030416/bs_nm/economy_prices_dc&sid=95609869
***********************************************************
Personal Finance
***********************************************************
Sure you want that new car, but how much debt is too much? 40% of Gross
Income? 30%? Take the Smart Money quiz and see where you stand.
http://yahoo.smartmoney.com/debt/calculator/index.cfm?story=debt-toomuch
Need another reason to pay off your credit cards? Many card companies
are now tying fees to the outstanding balance. Additionally most credit
card companies are finding new ways to increase fees. Interestingly
“Penalty fees are now the third-largest source of revenue for major card
companies, after interest and the surcharge merchants pay to accept the
cards.”
http://www.nytimes.com/2003/04/20/business/yourmoney/20CRED.html
Personal finance tips, including why it is often worthwhile to check you
bank statement. (A measure which I do much too rarely!) I guess I
assume they are right.
http://channels.netscape.com/ns/pf/banking.jsp
***********************************************************
Energy Markets
***********************************************************
Pricing electricity is actually very difficult. High volatility and non
normal distributions make most modeling quite inaccurate. Bodily and
Del Bouno look at electricity as a real option and have a very
interesting (and surprisingly easy to follow) paper. One caveat that
they correctly stress is that the Black-Scholes model can not be used to
price the resulting options.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=374381
OPEC is widely expected to cut production to keep prices from falling
below OPEC’s $22-$28 price target. The first cuts may be merely getting
back to their already agreed upon quotas. Estimates for months have had
OPEC producing well over the limits they agreed to.
http://www.middle-east-online.com/english/?id=5257
http://biz.yahoo.com/ap/030420/opec_meeting_1.html
***********************************************************
Enron and Andersen
***********************************************************
Now that some time has passed from the collapse of Enron and the
corporate governance crisis, we are seeing more books come out on the
subject. This week the NY Times gives us a chapter from two of them.
In “Final Accounting” by Barbara Ley Toffler and Jennifer Reingold, we
are given a look at life at Andersen, most notable is the 1999 quote by
Andersen’s Steve Samek, “The day Arthur Andersen loses the publics trust
is the day we are out of business.” In “Power Failure” by Mimi Swartz
and Sherron Watkins, discusses what it was like to work at Enron. (hint,
don’t go fishing :-) )
http://www.nytimes.com/2003/04/20/books/review/20NORRIST.html
http://www.nytimes.com/2003/04/20/books/chapters/0420-1st-swartz.html
http://www.amazon.com/exec/obidos/ASIN/0385507879/finpapers/104-9378365-5272442
http://www.nytimes.com/2003/04/20/books/chapters/0420-1st-toffl.html
http://www.amazon.com/exec/obidos/ASIN/0767913825/finpapers/104-9378365-5272442
***********************************************************
Financial Service Industry
***********************************************************
Does the pressure of “hitting targets” lead financial advisors to make
false claims and to pressure clients into buying certain products? To
see, the BBC went undercover. What they found is very discouraging.
Some misreported risks, others led the investors to believe that the
investments were risk free. Which again shows why investors need some
basic information and financial knowledge.
http://news.bbc.co.uk/1/hi/business/2966561.stm
Merrill Lynch reported that their cost cutting led to a 6% increase in
profits for the large financial services firm by increasing its
efficiency.
http://www.thestreet.com/_tsclsii/markets/matthewgoldstein/10080834.html
Alaska is suing many of the parties that had a role in the WorldCom
collapse. For example: investment bankers, auditors, and analyst firms
who failed to report the problems that WorldCom was having. Included as
defendants are Citigroup, JP Morgan Securities, Bank of America,
Deutsche Bank, Goldman Sachs, and the list goes on and on. Not yet
included is the janitor at the firm’s main office.
http://biz.yahoo.com/rf/030422/telecoms_worldcom_1.html
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Derivatives
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Ever wonder what determines whether a stock has options or not? IN a
forthcoming JF article, Mayhew and Mihov find that the volatility of the
underlying stock is the main determinant. Moreover, unlike some
previous literature, they find that the volatility does not decrease
after the options begin trading.
http://www.afajof.org/Pdf/forthcoming/MayhewMihov.pdf
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Real Estate
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Too much of a good thing? The case of home equity loans. Some
economists and bankers are worried that in the wave of refinancing that
has occurred over the past few years, borrowers have taken on too much
debt.
http://www.nytimes.com/2003/03/26/business/26HOME.html
Low mortgage rates and better weather helped new housing starts come on
quite strong after a bad period in February. But the overall housing
market does show signs of slowing.
http://story.news.yahoo.com/news?tmpl=story2&ncid=1203&e=9&u=/nm/20030416/bs_nm/economy_housingstarts_dc&sid=95609869
http://www.msnbc.com/news/900025.asp
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Accounting News
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Ok, let’s give it up for the FASB :-) They have come forward (finally a
cynic would say) and said that options should be expensed :-)
Specifically: “options ‘are goods and services that are being exchanged
and you must recognize it just as you would other goods and services.’"
Hurray!
http://www.washingtonpost.com/wp-dyn/articles/A17602-2003Apr22.html
Sometimes the real world is stranger than fiction. Imagine the movie
where A large accounting firm went out of business and the offices are
taken over by the Accounting Oversight board. Yeah sure. Too fake. Oh
wait, that is what happened. Actually the real news in this story is
that the board has finally agreed on what it is going to do. For
example last week “it voted to take over the onerous task of setting
auditing standards” and to investigate the Big Four.
http://biz.yahoo.com/rf/030420/accounting_board_1.html
The US is set to adopt the UK style of pension accounting, which will
force firms to recognize gains, and loses immediately.
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1048313884056&p=1012571727108
Oh no, not again! Andersen, which is still operating outside of the US,
is in trouble again. This time for failing to spot troubles at HIH
Insurance. Quoting the report by Justice Owen: “Andersen did not obtain
sufficient audit evidence to support its conclusions….In my view,
Andersen's approach to the audit in 1999 and 2000 was insufficiently
rigorous to engender in users confidence as to the reliability of HIH's
financial statements.
http://www.theage.com.au/articles/2003/04/16/1050172645904.html
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FinanceProfessor.com Interview
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Brian Hale a former student of mine is now taking a class with Dr.
Altfest associate professor at Pace University and president of L.J
Altfest & Co. Both were kind enough to provide an interview for us.
BH: As you have said in class you are a value investor, to those who do
not know what that is can you provide some insight into your investment
strategies and how it relates to the efficient market hypothesis?
Dr. Altfest: The EMH states that the current price for shares is the
“best price” it’s the reasonable price and you can’t outperform
systematically. Fundamental analysis says by digging deep enough you can
find that current price does not represent the best price there is
potential for above average gains. Fundamental analysis is what
underlies value orientation as does psychological factors. The value
investor looks for ones that are out of favor in regard to both aspects
and looks in the barrel of stocks and picks the ones that are less
wanted. I am a believer that value orientated is a more profitable way
to invest.
BH: Building off your views of market efficiency do you feel markets are
more or less efficient now during a time of war and low investor trust
due to the corporate governance debacles of the recent past?
Dr. Altfest: The average investor is myopic and focuses on near term.
Iraq war is significant near term too much stress placed on it and fear.
Market went down last 1000 points to the bottom was the Iraq war.
Corporate governance and the burning that people got by tech stocks went
hand and hand. The topic of corporate governance has peaked and is
likely to decline. Copra rate governance issues and cooking the books
have always been there they are just highlighted as they usually are
after a speculative period and they will be there in the future but with
lower predominance with less highlighting for a time. . Fundamentally
the predominance is the media.
BH: Do you feel your time in the real world has had a profound influence
on how you approach academia and vice versa?
Dr. Altfest: I definitely believe the two help each other. I get ideas
that I use in investments that come from academic concepts and things I
discuss day to day and on the other side it is more apparent as you
bring real life experience into classroom and show how the theory is
discussed and has great application as I apply it myself.
For the full interview (and others) check out
http://www.financeprofessor.com/financenotes/speeches/speechesmainpage.html
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Financial Trivia/History
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So are you interested in how celebrities care for their finances? This
is a petty cool site about celebrity finances
http://www.bankrate.com/nsc/news/investing/fameandfortune.asp
Warning, this would have been better for April 1, but then again what if
it is true? Those of you who have had me in class know that I use time
machines all the time in class, so why not use them to make money
trading in the stock market?!? (It is HILARIOUS!)
http://tv.yahoo.com/news/wwn/20030319/104808600007.html
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Of interest to students
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Interviewing for a job or internship? We prepared. Have some questions
ready to ask the person doing the interview. You will seem more
prepared and you will learn much about the job as well.
http://forums.monster.com/viewmessage.asp?messageid=2817040
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Of special interest to FinanceProfessors
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Doing an event study? Atkis, deBodt, and Cousin find that noisy run ups
matter. That is, the choice of the pre-event period, and how the study
is done, may influence the findings. You’ll want to read this if you
are doing any event study research!
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=391566
I was asked to introduce a new journal to you. It is Finance-Letters.
Its founder and managing editor is Ercan Balaban of the University of
Edinburgh. From their press release: “Finance Letters© (FL) is a new
international journal aiming at publishing high quality research
findings in all sub-areas of finance. FL also aims to disseminate
valuable research as quickly as possible among academics, policy-makers,
regulators and practitioners. Every effort is made to reach a decision
on a submission within two months following the date of receipt of the
document. FL is believed to fill a significant gap as a double-blind
refereed letters journal publishing short accounts of new original
research. Letters should normally be less than 2,000 words in length.
Introduction, literature review and data must be kept to a minimum.”
For information contact: Ercan.B-@ed.ac.uk
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What I am reading
***********************************************************
I finished RiverTown. Very good! Highly recommended as a look into
China through the eyes of a US citizen/runner/teacher. Very
interesting.
http://www.amazon.com/exec/obidos/ASIN/0060953748/finpapers/104-9378365-5272442
The Money Tree by Ronald Groenke and Wade Keller. Now I must confess,
the reason I started this is because the authors are subscribers to the
newsletter, but it has turned out to be a interesting book. If I had
just a little more time I think I would give their strategy a try. It
is a very fast and interesting read--written as a novel, yet is full of
financial strategies and terms. I am still not 100% convinced that
opportunity costs are completely considered but definitely worth the
time!
http://www.amazon.com/exec/obidos/ASIN/0967412811/finpapers/104-9378365-5272442
http:// www.KellerPublishing.com
I started Loopholes of the Rich: How the Rich legally make more money
and pay less tax, by Diane Kennedy. My advice, skip the intro which
will bore you, and skim the rest. At least first time through there are
some good ideas, but much is sort of obvious.
http://www.amazon.com/exec/obidos/ASIN/0446678325/finpapers/104-9378365-5272442
Yoga for Busy People, by Dawn Groves. Sort of a yoga-lite. Good, but
nothing great. May be better for a person who has never done yoga.
http://www.amazon.com/exec/obidos/ASIN/0786101792/finpapers/104-9378365-5272442
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Quotes of the week:
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A friendship that exacts oneness of opinion and conduct is not worth
much---Mohandus Gandhi
Laziness is nothing more than the habit of resting before you get
tired---Jules Renard.
In motivating people, you've got to engage their minds and their
hearts---Rupert Murdoch
Goodness is the only investment that never fails---Henry David Thoreau
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Thanks for reading! I hope you liked it and learned something (or even
many things) from it!
If you have any ideas for the site or the newsletter please let me know.
Jim
JimM-@FinanceProfessor.com
Where the fall-out from the Basketball “situation” continues. We will
be getting a new president, a new Athletics Director, and a new Coach.
Lesson: don’t cut corners. In the end, the truth will come out.
Where the forsythia just came out in time for Easter but then we turned
cold again.
Who is excited about the Bills’ off-season. Hopefully they can keep the
momentum going in this week’s draft.
Who has planted several new apple trees and transplanted quite a few
pine trees but no real gardening yet. Too cold.
Who absolutely loves the “new” Counting Crows CD
Who thinks the Mets should try a new closer.
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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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