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Martha's in trouble, new Fama & French, Transparency and Pay, Deflation?
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Jim Mahar
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Jun 05, 2003 00:22 PDT
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Martha Stewart Indicted, a new Fama and French paper, Transparency and
Pay, Deflation or recovery?, Stocks rebound, Orange County, and MUCH
more!
FinanceProfessor News June 5, 2003
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FinanceProfessor.com
Bringing the Real World to the Classroom and vice versa!
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Top Stories
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1. Martha in hot water
2. FCC changes the rules of the game
3. Executive pay: transparency and outside directors
4. TV spin-offs
5. The CBOE’s new electronic trading system
6. US market climbs, Dow above 9000!
7. International Finance from Argentina to Zimbabwe
8. Economic pick-up or deflation on horizon?
9. Orange County and Merrill Lynch together again.
10. Graduated with no job? Join the crowd.
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Hi everyone,
Well it has been a while…with finals, getting a couple of papers out,
losing my “assistant,” and other assorted things the newsletter got
pushed to the back burner for a while. Sorry about that. Hopefully I
can find some extra time for the web site and newsletter in the coming
weeks. One good part about the less frequent newsletters is there were
literally thousands of great articles to choose from. Hopefully I
picked some good ones.
I should get out of the way and let you get to the news. Enjoy!
jim
JimM-@FinanceProfessor.com
and now the news:
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Corporate Finance
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Martha, Martha, Martha. In recent days the business news has been
dominated by the indictment of Martha Stewart. In a week where some of
ImClone products were reported to actually help fight cancer, the
insider trading scandal and Martha Stewart stle the spotlight. Ms.
Stewart and her broker were each indicted for lying to officials.
Stewart maintains her innocence and claims she is being used as a
scapegoat to scare others due to her high profile. As a result of the
charges, Martha stepped down as CEO and Chairperson of Martha Stewart at
least temporarily. It is unlikely, but conceivable, that she could do
jail time.
http://story.news.yahoo.com/news?tmpl=story&cid=568&ncid=578&e=1&u=/nm/20030604/bs_nm/media_marthastewart_dc
http://news.bbc.co.uk/1/hi/business/2960748.stm
http://www.chron.com/cs/CDA/ssistory.mpl/business/1936641
http://www.nytimes.com/2003/06/04/business/04HOME.html
http://money.cnn.com/2003/06/04/news/martha_indict/index.htm
http://www.boston.com/dailyglobe2/155/business/Stewart_s_woes_gain_little_sympathy+.shtml
http://www.msnbc.com/news/922014.asp
http://news.bbc.co.uk/2/hi/business/2963920.stm
http://www.washingtonpost.com/wp-dyn/articles/A15052-2003Jun4.html
Pre Martha-Stewart (PMS?) the most reported corporate story has been the
FCC decision to loosen media ownership restrictions thus allowing a
single firm to own more outlets. The vote was 3-2 along party lines
(Republicans were for it). As expected the decision was controversial
and many protesters were immediately apparent. Two views of the case
were presented by FCC chairman Michael Powell and Jesse Jackson.
Powell, the son of Colin Powell, said that the new rules were balanced
to protect “diversity, localism and competition in the American media
system.” Alternatively, Jackson said he “fear[ed] the domination of the
media by the few.” Additionally, Jackson said. “It's time to
redistribute media ownership.” Following a similar deregulation of the
radio industry in 1996, there was a major consolidation. A major factor
in the vote was the spread of new information sources (example the
newsletter you are now reading). Given the public outcry the ruling
raised, look for Congress to push for some revisions and possible
reregulation.
http://washingtontimes.com/national/20030603-122030-8205r.htm
http://news.mysanantonio.com/story.cfm?xla=saen&xlb=180&xlc=1005889
http://money.cnn.com/2003/06/02/news/companies/fcc_congress/index.htm
http://edition.cnn.com/money/2003/06/04/news/fcc_senate/index.htm
The newest Fama and French paper is ready! (Believe me in some circles
that is more exciting than the next Harry Potter book, but F&F do not
get the widespread press coverage). In this paper they look at the
survival rates of firms that are newly listed on major US stock
exchanges. They find that while more firms are listing (excluding last
couple of years), the survival rate for these firms has declined. Their
explanation for this is that lower costs of equity have enables “weaker
firms…to become viable candidates for public equity financing.”
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=279302
While the article is actually about fees earned by investment bankers,
it gives an interesting look at direct issue costs. “While convertible
offerings often generate 2 percent fees, equity offerings often hit 4
percent and IPOs up to 7 percent.” Moreover, the article reports that
according to Thomson Financial that “equity offerings are down 41
percent this year from a year earlier, to $48.7 billion, while IPOs are
down 95 percent, to $734 million. Merger activity, meanwhile, has
dropped 26 percent.”
http://reuters.com/newsArticle.jhtml?type=businessNews&storyID=2765004
Outside (or independent) directors may not make much difference to
executive pay. That is the finding of Wan’s new paper that finds no
significant variation of pay or of performance at firms that could be
tied to independent board members. (mmm, sounds like an endogenity
problem to me---firms that need the monitoring, have more, those that
don’t, don’t, so it is hard to find anything cross-sectionally---see
Hartzell and Starks JFE(2003) who combat a similar problem of
institutional ownership using changes in ownership. Thus a suggestion:
look at changes in board make-up).
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=392595
http://www.afajof.org/Pdf/forthcoming/hartzell_starks.pdf
It has long been a well-known fact that investment and cash flow are
positively correlated. Some view this as a free cash flow problem
(example Lamont on oil firms’ investment following shocks to the
industry) while others think this is a market imperfection problem
whereby costs of external financing are so great that firms pass up
positive projects due to lack of funds. While both sides no doubt have
much validity, the market imperfection side won some support by a new
paper by Gonzalez that finds that in countries with more legal
protections (more investor friendly) there is less sensitivity between
capital investments and cash flow.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=392592
Transparency is a great thing. After the UK required companies to
disclose their remuneration packages and to put them to a company-wide
vote, UK investors began rebelling against what they call “US-style”
pay. For example, recently at an HSBC shareholder meting a shareholder
said “ask not what the company can do for you, but what you can do for
the company” in response to HSBC’s executive pay plan. This is just one
of many cases where shareholders are voting against high pay packages
and large severance packages.
http://www.latimes.com/business/la-fi-brits2jun02,1,302324.story?coll=la-headlines-business
Similarly, the UK is pushing for tighter controls on director pay.
British Trade Secretary Patricia Hewitt urged companies to tighten
severance pay packages and limit the length of directors appointments.
Digby Jones, director general of the Confederation of British Industry
summed up the corporate response to calls for new legislation by arguing
that “"Transparency and shareholder activism are the ways to police
directors' pay, not legislation.”
http://news.bbc.co.uk/1/hi/business/2958208.stm
MSNBC and Slate have a funny look at CEO contriteness. That is, when
the firm falls in value how well the CEO apologizes. The fact is, that
many do not appear to be very contrite and many refuse to take any
blame.
http://www.msnbc.com/news/919563.asp
Spin-offs are nothing new in the TV business. In any given year it
seems like several sitcoms are started from some other show. So it is
only appropriate that CableVision stock climbed on the news that they
would spin-off their satellite and cinema operations. In this context,
a spin-off is when the parent firm gives shares in a new company (a
subsidiary of the parent) to the parent’s shareholders. Spin-offs
improve transparency and managerial incentives. Moreover, as Miles,
Woolridge, and Cusatis showed, many of the spun-off firms eventually are
taken over by another firm that values their assets higher than the
current owner.
http://www.thestreet.com/stocks/media/10090925.html
Disney investors got court approval to continue with their lawsuit
against the Board of Directors for giving former president Michael Ovitz
a $140 million severance package for working less than 2 years! Of
course, all is not well at Disney as the stock is in the teens after
being in the 40s only a few years ago, so nothing gets shareholders more
upset than a low stock price.
http://www.latimes.com/business/la-fi-rup3.7jun03,1,3545693.story?coll=la-headlines-business
http://www.kansascity.com/mld/kansascity/business/5998612.htm
http://www.msnbc.com/news/917915.asp
In part due to the reduction in the taxes on dividends, firms are again
increasing dividends. For those of you who may have missed it, the top
tax on dividends was reduced from 38.6% to 15%.
http://www.latimes.com/business/la-fi-wrap3.2jun03,1,271231.story?coll=la-headlines-business
After what seems like years of speculation, Palm and Handspring (even
their names are made for each other!) have finally agreed to tie the
knot. The deal will not be finalized until after Palm spins off its
software division, but it is hoped to be completed by fall. Both firms’
stocks climbed on the announcement.
http://money.cnn.com/2003/06/04/news/companies/palm/index.htm
http://www.nytimes.com/reuters/business/business-tech-handspring.html
http://news.bbc.co.uk/2/hi/business/2963590.stm
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Investments
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Stocks have had a very good run of late. Up about 20% the Dow is again
above 9,000 while the S&P 500 is now up 22% since mid March.
http://www.nytimes.com/reuters/business/business-markets-stocks.html
http://money.cnn.com/2003/06/04/markets/dow9000/index.htm
http://www.newsday.com/business/ny-biz-stox0602,0,6730490.story?coll=ny-business-headlines
http://www.washingtonpost.com/wp-dyn/articles/A33759-2000Jun21.html?nav=hptoc_b
The turn of the year effect is the CAPM anomaly that finds that stock
returns are influenced by the calendar. IN particular that small firms
due better in the period right after the tax year end. (this has been
used to explain portions of the small firm effect and is based on the
idea that investors sell their losers for tax reasons.) Dai looks at
this using
the market-adjusted returns and tax code information for the 1984-1999
period. He finds that “the size of previous capital loss, the tax rate,
the interest rate [as well…]; limitations on the capital loss
write-offs, the length of the holding period during which the capital
loss is tax-deductible, the size of the listed firm.” All help to
explain the return behavior.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=392034
With brokerage firms dropping stock coverage (example Citibank recently
cut over 100 firms from its universe of coverage), more firms who want
coverage are paying for it. Investors should know who is paying for the
research as there are inherent conflicts of interest (example: an
analyst may not want to say anything bad if bad news would mean losing
the contract).
http://www.latimes.com/business/la-fi-orphan3jun03,1,4171294.story?coll=la-headlines-business
In a somewhat related story, if you are the head of a brokerage firm,
expect to be told that you must personally certify that you have the
correct control measures in place to protect shareholders from false
reports.
http://www.nytimes.com/2003/06/04/business/04PLAC.html
http://biz.yahoo.com/djus/030605/0030000012_1.html
Rigobon and Sack looked at the US financial market responses to war.
They found stocks fell, there was a move towards Treasuries (the
so-called flight to quality), spreads between hi and low grade bonds
increased, and oil rose. None of which should come as any surprise but
it is always nice to get academic confirmation of what seems, but is not
always, obvious.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=390980
One of the really cool and also really frustrating things about finance
is that just when you think you get a handle on it, a new paper comes
out and makes you think again. In recent years there have been a slew
of papers that draw market rationality (and by association efficiency)
into question. For example, in 1998 Dichev (1998) found that distressed
firms earn less than would otherwise be predicted for firms of
equivalent risk (Three factor model) This is a problem for market
efficiency believers since the distressed state of the firms should
already be priced in such a manner as to result in the “correct” level
of return for the level of risk. So for the past 5 years, EMHers (my
term for believers of those who believe in the Efficient Market
Hypothesis) have been on the defensive. Aggrawal and Taffler have come
to the rescue! They include a more complete model of the risk-return
relationship and once “the impact of changes in GDP growth rate and the
impact of stock market movements” are considered, “bankruptcy is, in
fact, being appropriately priced by the market.” So market efficiency
adherents can breathe a bit easier. :-)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=392587
(BTW sorry that was so long, but there were several key concepts to
include, probably worth a read, even if it is too long.)
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Financial Institutions and Markets
(also Money and Banking)
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The CBOE’s new electronic trading system took another step by winning
regulatory approval. The new system will begin next month and is
expected to work in unison with the current floor.
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1054416344868
After being on the market for months, the NASD finally sold the American
Stock Exchange for $110 million.
http://money.cnn.com/2003/06/02/markets/nasd_amex/
http://www.nytimes.com/2003/06/03/business/03PLAC.html
http://www.bayarea.com/mld/mercurynews/business/5997449.htm
Fed Governor Susan Bies spoke recently to the Conference of State Bank
Supervisors in Asheville NC. Bies first pointed out the importance of
state charted banks (they make up about 75% of all banks in the US and
account for roughly 50% of the assets in the banking system). She then
turned her attention to corporate governance is a worry at any firm.
For Federal regulators it is especially so at banks. It was in this
context that Bies discussed the internal controls, internal and external
audits. Pretty interesting.
http://www.federalreserve.gov/boarddocs/speeches/2003/20030530/
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International Finance (from A to Z)
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Argentina welcomed Nestor Kirchner as president this week after his main
competitor threw in the towel. Kirchner replaces former president
Duhalde. Argentina has experienced severe economic troubles, mounting
debt, and a serious imbalance between social classes. In an attempt to
solve these problems, the new leader has again opened talks with the
international lenders (IMF) in hopes of getting new capital. Some of
these problems stem from a weak central government and string provincial
governments that make reforms difficult. (Note to US readers: we may owe
yet another thanks to Alexander Hamilton!---sorry TJ))
http://news.bbc.co.uk/2/hi/americas/2935974.stm
When we take a longer term look at the changing face of finance, we can
see definite changes in certain regions. For example, over the past
20-30 years there has been a significant movement towards more market
oriented financing in Europe. Rajan and Zingales look at this trend and
discuss some of the causes and consequences. Morevoer, they speculate,
that political support for a continuation of this movement may be
waning. Interesting analysis!
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=389100
While the US dollar has fallen significantly against most major
currencies in recent months, the debate has raged as to whether the weak
dollar was a US strategy or just being driven by market forces. This
past weekend at the G8 meetings, President Bush tried to assure the
world that the US was still in favor of a string dollar and had not
abandoned it to help manufacturers.
http://news.bbc.co.uk/2/hi/business/2937614.stm
http://www.iht.com/articles/98314.htm
http://www.forbes.com/2003/05/23/cx_da_0523topnews.html
http://www.forbes.com/business/newswire/2003/06/02/rtr987829.html
http://quote.bloomberg.com/apps/news?pid=10000085&sid=aM_fy0NTvCgM&refer=Europe
Global exports were down slightly again this year to just under 19% of
the global economy. However, what happens in the future will largely
depend on whether nations can agree to continue to move towards
free-trade. As the G8 met and pushed for free trade and a stronger
dollar, others are not so willing to agree.
http://www.nytimes.com/2003/06/01/business/yourmoney/01GLOB.html
The US and Pakistan will soon meet to discuss making trade easier and
cheaper. Already Pakistan has made major strides in opening their
trade doors.
http://www.dawn.com/2003/06/04/ebr1.htm
http://www.dawn.com/2003/06/04/ebr3.htm
Similarly Japan is meeting with several African countries in an attempt
to help spur trade and hopefully end the poverty that reigns over much
of the continent. However, as we have mentioned before, in many
regions, war, corruption, and violence have to end before the trade can
take place.
http://news.bbc.co.uk/2/hi/business/2949586.stm
http://www.nationaudio.com/News/DailyNation/Today/Business/Business050620030.html
Wow. It is hard to imagine the poverty. That is the exact response
that leaders of the so-called “poor people’s conference” want to evoke.
Their conference, which ran concurrently with the G8 meetings, was held
outside with none of the amenities of the better-funded conference of
world leaders. Rather, participants were happy for a mat and a banana.
http://news.bbc.co.uk/1/hi/world/africa/2957372.stm
There are no easy answers to some questions. One of which seems to be
what to do about the Japanese banking system. The troubles just go on
and on. The government recently was forced to bail out the fifth
largest bank and only one reported a profit. But the real scary thing
is that bank officials still (after 10 years?) refuse to acknowledge all
of the problems and most claim they will be profitable next year.
Maybe. On the plus side, Japan finally seems ready to increase their
money supply more sharpily.
http://www.nytimes.com/2003/05/01/business/worldbusiness/01YEN.html
http://news.bbc.co.uk/2/hi/business/2937756.stm
Zimbabwe economy is in virtual shambles. After confiscating land from
white farmers, the nation has seen the economy grind to a standstill as
inflation is rampant (they are printing money around the clock), and the
unofficial exchange rate is plummeting. Moreover, the unemployment rate
is nearly 70%! This is possibly the best example in recent years of
political turmoil and corruption destroying a nation’s economy. While
it is hard to see into the future, it is doubtful that there will be
significant change until the nation gets its act together.
http://news.bbc.co.uk/1/hi/business/2955308.stm
http://www.thestar.co.za/index.php?fSectionId=129&fArticleId=164089
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Economics
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While there are pockets of strength and some indications that things are
getting better (service sector and productivity both up), the threat of
deflation is still with us. Greenspan, in a classic Greenspanian (new
word!) pronouncement, suggested the economy was picking up but also
again hinted at a rate cut. The market is telling us the same as
interest rates continue to fall.
http://www.nytimes.com/aponline/business/AP-Germany-Central-Bankers.html
http://story.news.yahoo.com/news?tmpl=story&cid=580&ncid=580&e=2&u=/nm/20030603/bs_nm/economy_centralbankers_greenspan_dc
http://www.federalreserve.gov/boarddocs/testimony/2003/20030521/
http://biz.yahoo.com/rb/030603/markets_bonds_8.html
http://www.msnbc.com/news/921983.asp
http://www.businessweek.com/bwdaily/dnflash/jun2003/nf2003064_5621_db014.htm
http://story.news.yahoo.com/news?tmpl=story&cid=580&ncid=580&e=4&u=/nm/20030604/bs_nm/economy_fed_mcteer_optimism_dc
Hal Varian has an excellent article discussing deflation, its causes
(either excess supply or too little demand), a history lesson (including
a look at post Civil War America), and winners and losers in deflation
does come about. You’ll like this article!
http://www.nytimes.com/2003/06/05/business/05SCEN.html
Europe is also suffering and the pressure for a rate cut there increased
as well. A rate cut there would also help slow the climb of the Euro
(decline of the dollar).
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1054416358006
http://www.forbes.com/business/newswire/2003/06/04/rtr990884.html
Given the slow recovery of the tech-sector, it is no surprise that the
California economy is suffering more than the rest of the US.
http://www.msnbc.com/news/919640.asp
While notoriously difficult to interpret, one data point that possibly
is pointing to deflation is rising inventories at the retail level.
(why hard to interpret? Inventories also climb before higher sales, but
in this case the article is saying that the inventory build-up is
unintentional.)
http://www.latimes.com/business/la-fi-retail2jun02,1,5879822.story?coll=la-headlines-business
The US Dept of Labor is changing the way it calculates the labor
figures. These changes will make it more difficult to compare numbers
across time. For example, the make-up of industries will be changed
dramatically. This will NOT impact the way unemployment figures are
calculated.
http://www.washingtonpost.com/wp-dyn/articles/A15094-2003Jun4.html
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Personal Finance
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Not to scare people, but if you are depending on a pension, I try to
increase diversification in any way possible. All too frequently we are
seeing underfunded plans that can not pay their liabilities. While the
Pension Benefit Guaranty Corp does help insure most payments, it is not
complete and has limits (currently $44,000 a year). So even assuming
the PBGC’s fiscal health, diversification is a good idea :-).
http://www.buffalonews.com/editorial/20030604/1016475.asp
Social security Italian style---it’s not pretty!
http://news.bbc.co.uk/2/hi/business/2960656.stm
Looking for some cool calculators? They will help determine payments,
rent vs Buy and Much more!
http://www.bankrate.com/latc/rate/calc_home.asp
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Energy Markets
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After falling sharply, oil prices climbed back over $30 a barrel as
inventory levels fell and rumors of further OPEC cuts are again
circulating.
http://money.cnn.com/2003/06/02/markets/oil/
http://www.nytimes.com/2003/06/03/business/03OIL.html
http://reuters.com/newsArticle.jhtml?type=businessNews&storyID=2864700
While Iraqi oil is beginning to flow again, the speed at which all
facilities can be back online is slower than originally thought. It
will be late summer before production is up to full capacity. Why? The
Iraqi facilities were in disrepair is the story most cited. A large
question that remains is what the role of OPEC will be in the future.
Some believe the US will us Iraqi oil to break the cartel. Stay tuned.
http://news.bbc.co.uk/2/hi/business/2933756.stm
http://www.metimes.com/2K3/issue2003-22/bus/opec_worried_by.htm
http://www.msnbc.com/news/921881.asp
Should Iraq live up to agreements made by the Hussein government? No is
the answer the US led interim government is giving. This is ending some
oil deals with Russian and Chinese firms.
http://news.bbc.co.uk/2/hi/business/2937702.stm
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Money and Politics
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Bush’ opponents were given more ammunition with the passage of the
recent tax cut that increases the child exemption for all but the
poorest families. The rationale was that cuts had to be made somewhere.
That said, I bet we will hear this again come election time!
http://www.msnbc.com/news/919762.asp
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Financial Service Industry
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The fallout continues from the cases of analyst and security firms
issuing biased reports. April’s $1.4 billion settlement may have gotten
the firms off the hook, but now the SEC is supposedly going after
individuals. Asking for more evidence, the SEC is now looking into
emails and whether the analysts themselves were guilty of knowingly
misleading investors.
http://news.bbc.co.uk/1/hi/business/2960406.stm
http://www.latimes.com/business/la-fi-probes3jun03,1,5350945.story?coll=la-headlines-business
According to the Wall Street Journal, Prudential Securities is under
investigation for faking documents whereby customers supposedly gave the
firm the order to change investments.
http://www.msnbc.com/news/919927.asp
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Derivatives
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Possibly the most famous derivatives case in US history is the Orange
County debacle where a well-financed county ended up in bankruptcy.
Much of the blame was placed (in my opinion largely unfairly) on the
county’s broker Merrill Lynch. The firm ended up paying about $400
million to the county and was locked out of doing business with the
county until this week when a 3-2 vote favored ML.
http://biz.yahoo.com/rf/030603/financial_orange_1.html
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Real Estate
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A still slow economy and the talk of possible deflation sent mortgage
rates lower to yet another record low. This time the average 30%
mortgage in the US is at 5.31%
http://www.msnbc.com/news/913361.asp
Did you know that over the past 30 years, nationwide housing prices have
never declined year to year? Of course they have in certain areas, but
never for the entire US. Now that does not mean they can not in the
future, but…. Interestingly housing prices are up 92% for the last 10
years.
http://money.cnn.com/2003/05/16/pf/yourhome/homeguide_willitlast/index.htm
Overall US real estate prices are still rising, although slower than the
last few years.
http://www.nytimes.com/2003/06/03/business/03HOME.html
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Accounting News
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What happened in the financial markets when Andersen got in trouble?
Chaney and Philipich reported in the Journal of Accounting
Research(2002) that stock prices of Andersen audited clients fell
further than those of Non Andersen audited clients. Now Callen and
Morel give lukewarm confirmation of this stock price drop by finding
that over the entire 4 month period there was a price significant price
decline, but they find mixed results in looking at other windows.
Overall, it does look like stock prices fell for Andersen audited firms.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=341440
In a related paper, two guys named Godbey and Mahar (yeah you may have
heard of them) look at implied volatilities and found that the implied
volatilities of equity options on Andersen audited firms’ stock went up.
This fits the hypothesis that auditor quality can be used to reduce
information asymmetry and when Andersen’s reputation suffered, the risk
(as measure by implied volatility), also went up.
http://www.financeprofessor.com/Jimspapers/implied%20volatility%20and%20auditors/Mar14-submitted%203.14.doc
(for what it is worth I do have a more recent version of this paper but
it is not online, most of it is the same).
IBM is now being investigated for improper revenue recognition. FOLKS,
STOP IT! Play by the rules. Please!
http://www.nytimes.com/2003/06/03/business/03BLUE.html
http://www.latimes.com/business/la-fi-ibm3jun03,1,3771010.story?coll=la-headlines-business
Accountants are like umpires or referees. Hearing about them is almost
always bad. This is now true at Ernst and Young who was in the press
this past week after the SEC recommended the accounting giant not be
allowed to take on any new clients for 6 months as a penalty for
“compromis[ing] its independence” with PeopleSoft. While harsh, some had
feared that the SEC would ask for even more including possibly temporary
termination of all audits, a penalty that may well have been a death
penalty. http://www.msnbc.com/news/919925.asp
http://www.accountingweb.com/item/97628
Things were only slightly better at PWC as they were fined $1 million
for its 1997 audit of Smartalk. To make matters worse, the accounting
firm knowingly destroyed audit documents. Mmm, have we heard this one
before? Additionally the partner in charge of the case agreed to not
practice for 1 year.
http://www.washingtonpost.com/wp-dyn/articles/A28418-2003May22.html
http://www.accountingweb.com/cgi-bin/item.cgi?id=97609
But at least KPMG was not in the news, right? Uh, wrong. They are now
being used by the United Way (how is that for a PR nightmare?) for not
catching the $1.9 million embezzlement of Jacquelyn Allen-MacGregor who
was writing checks to herself out of a United Way account and then
destroying the checks.
http://www.accountingweb.com/cgi-bin/item.cgi?id=97615
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FinanceProfessor.com Lesson of the week
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A student asked this week what is free cash flow:
Free cash flow is cash that is available after all positive NPV projects
are invested in. So it is the cash that is available to go back to
investors.
Since investment projects not accepted are not observable, we make a
sometimes bad assumption that all projects are invested in are positive
NPV projects.
Hence from a practical perspective (and not theoretical), free cash flow
becomes the cash flow available after all capital expenditures.
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FinanceProfessor.com Site of the Week
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It is the web site to accompany the Van Horne and Wachowicz Fundamentals
of Financial Management text book. Both the text and the web site are
great!
http://web.utk.edu/~jwachowi/wacho_world.html
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Of interest to students
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Just graduated and can’t find a job? You are not alone! It is a very
tough market with an amazing 61% of graduates planning on moving back
home.
http://money.cnn.com/2003/06/02/pf/college/q_gradhome/index.htm
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Teaching Ideas
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Conduct a draft! Have everyone submit resumes, then select team
leaders. These leaders can then draft the others. That way the groups
are more balanced (instead of having only A students in one group), the
students get practice on hiring, everyone has to get a resume, and it is
fun. One caveat, do not let everyone know the order of picks. Have the
leaders sequestered ;-)
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What I am reading
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Let’s see, what have I been reading? A partial list (or at least of the
ones I liked the most)
The Endurance (I had read it before, but liked it so came back to it).
The story of an amazing trip by Ernest Shackleton. I have asked myself
many times, How did anyone live?
http://www.amazon.com/exec/obidos/ASIN/0684863650/finpapers/104-9378365-5272442
The Adventurist by Robert Pelton. Very good! Looks at life in the most
dangerous places on earth. Would not want to have written it, but
reading it is fun.
http://www.amazon.com/exec/obidos/ASIN/0767905768/finpapers/104-9378365-5272442
Getting it Done: How to lead when you are not in Charge. This was given
to me and it actually is much better than I expected.
http://www.amazon.com/exec/obidos/ASIN/0787117536/finpapers/104-9378365-5272442
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Quotes of the week:
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Often intuition will guide you. If it feels right, it probably
is.---Oprah Winfrey
(quoted by FranklinCovey)
People are wise in proportion, not to their experience, but to their
capacity for experience---George Bernard Shaw
[People] do not eat in the long run---they eat every day---Harry Hopkins
[People] are born to succeed-not to fail.---Henry David Thoreau
in Dean LaBaron’s Book of Investment Quotations
http://www.amazon.com/exec/obidos/ASIN/0471153508/finpapers/104-9378365-5272442
It’s always too soon to quit---Norman Vincent Peale
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Well there you have it. I hope you enjoyed it and learned something (or
even many things) from it! :-)
I think for the summer this will continue to be a once a month
newsletter, but then again I may change my mind…lol…please let others
know about it. I always lose quite a few subscribers to bounces over
the summer when school email accounts are either closed or full. So
please help me out and forward this to a couple of friends and have them
subscribe. It is free and just helps me stay motivated to write when
more peole are reading it.
Thanks again and do keep in touch. I will try to reply to you but
sometime I get a few too many emails to handle alone. But I do read
them all.
Jim
JimM-@FinanceProfessor.com
At St. Bonaventure where construction of the new on campus fitness
center has JUST begun.
Where the spring has been the coldest that I remember. I have been
running in a coat most days :-(
Who absolutely loves the smell of lilacs and wild phlox.
Who is preparing for several long bike rides in coming weeks culminating
in a ride of over 100 miles (130 I think) in the hills of North
Carolina.
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copyright 2003 FinanceProfessor.com
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