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NYSE governance, WTO is OUT, Real options and risk aversion, and much mo
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Jim Mahar
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Sep 25, 2003 00:36 PDT
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NYSE governance crisis, WTO free trade talks, Real options and
managerial risk aversion, steel tariffs backfire, and much more!
FinanceProfessor News September 25, 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. Grasso steps down as president of NYSE
2. WTO free trade talks are OUT
3. The effect of risk aversion on managerial decision making
4. A new R&D anomaly
5. PSUs not PSU! (yes multiple meanings!)
6. Mutual funds have a tough time
7. Productivity and the economy
8. OPEC cuts production
9. Tariffs are bad for an economy! New report on steel tariffs.
10. Are Accountants to blame?
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Hi everyone!
I hope you have all settled into your semester. As promised there is
more of an emphasis on the news in this newsletter. There obviously are
still some academic articles, but more of a mix. While not as many
academic articles as the last newsletter, some of the articles are just
too cool. You will love them!
I am amazed at how busy this semester seems. Not sure why but it seems
like every second of every day I have something to do. Which is why
this did not get out Monday like I had planned. Oh well.
If you have a suggestion of a paper to include or your own paper that
you would like to have included, it really helps if you can send me a
link to the paper instead of the actual paper. Thanks! :)
jim
JimM-@FinanceProfessor.com
BTW if you missed my 9-11 tribute page, I had enough requests to leave
it up, here it is
http://www.financeprofessor.com/911/index9112003.html
and now the news:
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Top Story:
How much is too much? A look at the controversy surrounding Grasso’s
pay
Short view: it is not just the pay!
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What started as a fairly minor story about a large pay plan really took
on a life of its own as the uproar over the pay package for the NYSE’s
Dick Grasso is arguably the biggest corporate and institutions story in
several months. Grasso originally was set to receive a $186+ million
pay package. The payment almost immediately drew criticism from all
corners. As the criticism grew, Grasso gave back about $48 million of
the pay, but this did not appease his critics who now included board
members, NYSE employees, and shareholder groups including California
State Pension plan, North Carolina’s State Pension fund, and the NY
State Pension plan. On top of this criticism were numerous newspaper
editorials calling for Grasso’s resignation.
On Wednesday Grasso called a special board meeting. During this phone
meeting and in the face of mounting criticism, (in the press, from the
SEC, and from various stakeholder groups mount), Grasso tendered his
resignation to the board. Somewhat to Grasso’s chagrin, the resignation
was accepted by the board of directors.
Grasso had worked for the NYSE since 1969 (he began at $82 a week!) and
had been president since 1995. Looking back at Grasso’s reign one finds
that he oversaw the NYSE during some of its most fast changing times.
While the NYSE did lose market share on his watch, things were much
better than many had feared for the NYSE. Facing competition from both
new and existing markets, Grasso helped differentiate the exchange as a
place that strived to protect investors while also offering the best
possible execution of trades. However, Grasso is probably most known
for his rallying of his “troops” following the events of September 11,
2001.
However, there were some puzzling actions (such as remaining on boards
of firms on NYSE while in the role of regulator and president of the
exchange) and failing to adequately improve the corporate governance on
the NYSE. This was problematic as how could the NYSE call for improved
governance for the firms that list on the exchange if the exchange
itself did not have its house in order. Additionally, few would argue
that Grasso’s pay was not at least quite generous. In his first full
year as president, he was paid an estimated 50% more than his
predecessor. Moreover this pay grew quickly to over $30 million by 2001
(or at least it appears that way, it is hard to say as the NYSE is
famous for its secrecy and this pay does not include any bonuses or the
like). Ironically (and maybe coincidentally) Grasso’s predecessor was
William Donaldson. Yes the same William Donaldson who is now the head
of the SEC and has publicly spoken out against the pay plan. (It should
be noted that Donaldson’s pay package while presumably lower in value,
was at least as secretive as Grasso’s).
http://www.thestreet.com/pf/markets/matthewgoldstein/10111429.html
No doubt one of the first changes that we will see is improved
transparency. At a time when investors and regulators are demanding
more disclosure and transparency, the NYSE is a bastion for information
asymmetries and a lack of transparency. This can be demonstrated by
showing what happened once the Grasso story broke. First no one knew
how the pay was set or why it was so high. Then, like sharks with blood
in the water, reporters were quick to find more examples of “excess” and
apparent conflicts of interest that occurred on Grasso’s watch.
For instance the NY Times reported that this plan was “six times as
generous as those at major financial services companies.” And MSNBC
uncovered that charities who were associated with board NYSE board
members received significant donations from the NYSE. These payments
may not be problematic, but without disclosure, it seems like they are
hiding something which is not a good thing.
http://www.nytimes.com/2003/09/18/business/18PLAC.html
http://www.msnbc.com/news/968992.asp
However, in the end, Grasso may still have a last laugh. If he can
prove that he was dismissed without good cause (an unlikely event), then
his forced resignation could trigger an additional $57 million payment
for dismissal “without cause.”
http://www.usatoday.com/money/markets/us/2003-09-24-grasso-severance_x.htm
So who will be the next president? Not many people are stepping up in
line. For now John Reed, the former chairman of Citigroup, is serving
as interim president. His pay? $1.00
http://www.marketwatch.com/news/yhoo/story.asp?source=blq/yhoo&siteid=yhoo&dist=yhoo&guid=%7B68FDB434%2D5BBE%2D4B97%2D812C%2D9CED074E5B4C%7D
http://www.forbes.com/2003/09/22/cx_da_0922topnews.html
http://www.nytimes.com/2003/09/19/business/19CHIE.html
http://www.nytimes.com/2003/09/19/business/19BOAR.html
http://www.nytimes.com/2003/09/19/business/19NORR.html
http://www.washingtonpost.com/wp-dyn/articles/A35519-2003Sep19.html
http://news.bbc.co.uk/1/hi/business/3122508.stm
If indeed this type of pay plan is a problem and an indicator of more
serious governance problems at the exchange, then reforms are needed or
the next president will be the same. (As Fool.com points out this is a
nice definition of fungibility). While the exact shape of the reforms
for the NYSE are unknown, it is easily within the realm of possibility
that the NYSE may be forced to give up its role as a regulator.
Additional changes may be to limit conflicts of interest by not having
NYSE board member from firms who trade on the NYSE. In the short term,
the next in line of fire will almost assuredly be the board of Directors
who approved the pay plan. Stay tuned.
http://www.nytimes.com/2003/09/18/business/18PLAC.html
http://news.bbc.co.uk/1/hi/business/3122508.stm
http://www.businessweek.com/bwdaily/dnflash/sep2003/nf20030918_9486_db035.htm
http://www.fool.com/news/commentary/2003/commentary030923dg.htm
Many of the large pension funds that pushed for Grasso’s resignation are
now pushing for more lasting reforms. CALSTRS (Calpers’ sister fund)
took the lead but shortly many others joined in pushing for a breakup of
market function and regulation functions.
http://biz.yahoo.com/rf/030923/financial_calstrs_nyse_1.html
http://sanjose.bizjournals.com/sanjose/stories/2003/09/22/daily22.html
http://news.ft.com/servlet/ContentServer%3Fpagename%3DFT.com/StoryFT/FullStory%26c%3DStoryFT%26cid%3D1059480057505
http://www.philly.com/mld/inquirer/business/personal_finance/6819978.htm
Longer term the NYSE is also facing many operational decisions. Not
least of which is how it is going to continue to compete with the
multitude of electronic trading platforms. As many have pointed out
specialists do provide important services, but this service is most
valuable in market downturns, and whether investors will pay for this or
not is still up for debate.
In an attempt to determine how widespread the large pay plans are, the
SEC (Donaldson) is asking that all of the financial markets disclose
their executive pay. Seeing what each is paid will be interesting.. In
the background are those markets that are already publicly traded and
hence already disclose their executive pay. For instance the Chicago
Merc’s James McNutty’s pay while lower than Grasso’s, is still pretty
high by most standards and above most of his peers when options are
included. Thus, the question arises as to whether more disclosure would
in fact dramatically lower the pay.
http://www.nytimes.com/2003/09/24/business/24PLAC.html
http://www.forbes.com/markets/newswire/2003/09/24/rtr1090379.html
Additional sources used:
http://www.msnbc.com/news/967497.asp
http://www.msnbc.com/news/967365.asp
http://www.msnbc.com/news/967359.asp
http://news.bbc.co.uk/1/hi/business/3114616.stm
http://money.cnn.com/2003/09/17/markets/grasso_meet.reut/
http://news.bbc.co.uk/1/hi/business/3117786.stm
http://www.forbes.com/2003/09/11/cx_da_0911topnews_2.html
http://www.washingtonpost.com/wp-dyn/articles/A62752-2003Sep11.html
http://www.forbes.com/newswire/2003/09/09/rtr1077345.html
What others are saying:
“Each troubling detail of the package: its basis on cash; the lack of
comparability with CEO's of other major financial institutions (let
alone the heads of quasi-regulatory agencies); the apparent dozing on
the job by the NYSE compensation committee; not to mention the size of
it, is so appalling as to be almost comical. The type of mathematical
and moral calculus that structured the compensation package, and
Grasso's twisted logic in explaining it, is more in keeping with the
leadership of the Enron's and WorldCom's of the world, than it should be
with the executive of the world's most prestigious stock exchange”
http://www.tompaine.com/feature2.cfm/ID/8910
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Top Story: WTO and G7 meetings
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The second biggest finance story since the last newsletter was the WTO
and G7 meetings.
It was almost impossible to miss the news of the breakdown of Free trade
talks at the World Trade organization’s meetings in Cancun. Unlike past
meetings (see Seattle etc) most of the fireworks took place inside the
meetings as free trade advocates clashed with anti-globalization
adherents. Chief among the issues was the ending of agricultural
subsidies.
Outside the meetings, with some exceptions (notable among these
exceptions were one protestor who killed himself over what he viewed as
unfair agricultural competition as well as hundreds of protestors who
decided the best way to get attention was to strip their clothes) the
protests seemed more subdued than in past years. (This might be
attributed to an estimated 20,000 security personnel who were on hand.)
In the end the meetings “broke down” as talks ended and Free trade was
put on hold. But as Canada’s National Post correctly points out, this
is not the end of the Free Trade. In fact, the collapse of the WTO
talks may lead to more manageable free-trade agreements and possible end
the retaliatory atmosphere that now predominates. (well, maybe. Seems
a bit optimistic doesn’t it.)
http://www.timesonline.co.uk/article/0,,5-817637,00.html
http://news.bbc.co.uk/1/hi/business/3108460.stm
http://news.bbc.co.uk/2/hi/business/3108460.stm
ost.com/financialpost/story.html?id=FFB0CFFE-255F-494F-813A-33EDE869CC71
---very good article!
http://cgi.citizen-times.com/cgi-bin/story/editorial/41910
On the heels of the WTO debacle, G7 nations met in Dubai. These
meetings had a less ambitious goal and were at least successful in that
no one left the meetings. The consensus of these meetings were to allow
currency markets to function with less intervention by central banks.
Now if the players actually do that, or if it is just lip service to US
attempts to jump-start the manufacturing sector with a lower Dollar, is
still unclear. The IMF was not very happy with what its leaders saw as
interference in the world’s currency markets.
http://news.bbc.co.uk/1/hi/business/3136198.stm
Controversy surrounding farming subsidies
http://news.bbc.co.uk/1/hi/business/3102108.stm
After the meetings, the US dollar did drop in value against most major
currencies. This was especially true against the Yen where the Bank of
Japan has been quite active in intervention in the markets over the past
month.
Be careful what you wish for! The US dollar drop, while good for
manufacturing, may lead foreign investors away from US markets. This
would likely drive down US stocks and drive up US interest rates.
http://www.bayarea.com/mld/mercurynews/business/6840006.htm
http://money.cnn.com/2003/09/23/commentary/bidask/bidask/
The US also pushed for other nations to improve their economies so that
the US consumer would not be left as the only engine for economic
growth. While this may be economically the right move, few nations like
to be told what they should do.
http://reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=3491544
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Corporate Finance
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Ok, this is my favorite article of the week! It is by Erwan Morellec of
the University of Rochester. He models the effect of managerial risk
aversion on manager’s decision making. He shows that risk-averse
mangers are more likely to invest early. In his words: “to speed up
investment, leading to significant erosion of the value of the option to
invest.” Why is this? Again quoting: “By investing, the manger
transforms a real option into a productive asset. Because the
volatility of a call option is always greater than the volatility of the
underlying asset, investing reduces idiosyncratic risk and thus improves
managerial utility.” GREAT article!
http://papers.ssrn.com/abstract_id=422600
Why include a freeze-out provision in takeover contracts? Because if
not, investors would not tender shares. How is that? Consider the
Grossman-Hhart (1980) view that if the takeover is in fact value
maximizing, then shareholders would have an incentive to not tender
their shares but to wait for the stock price to increase. Of course if
shareholders knew this, then they would all wait sand the deal would not
get done. Freeze-outs force shareholders’ hands and thereby eliminate
the problem of non-tendering shareholders, thus enabling takeovers to
occur. In an soon to be published JF article, Amihud, Kahan, and
Sundaram look at the economic desirability of such freeze-outs. (BTW
Wall Freeze-Out does not have the same ring as Tenth Avenue Freeze Out.)
http://www.afajof.org/Pdf/forthcoming/FreezeoutLaws.pdf
Need another anomaly? Eberhart, Maxwell, and Siddique provide us one in
their upcoming JF article. They examine an enormous sample of 8,313
firms that “unexpectedly” raised R&D expenditures. Not surprisingly
they find (like others before them) that there is a positive stock
response. However, what is sort of surprising is that there is
significant under reaction to the announcement and a subsequent
long-term drift where the firms increasing R&D experience positive
abnormal returns.
http://www.afajof.org/Pdf/forthcoming/MS1617-R3.pdf
John Finnerty provides a very interesting look at the various ways of
pricing employee stock options. Indeed it may be required reading for
any class that covers pay issues.
http://207.36.165.114/FMAOnline/JohnFinnerty.pdf
One consequence of the uproar over the Grasso pay plan at the NYSE has
been that many corporate boards are again focusing on executive pay.
This is true around the globe. For instance, the in Canada a new study
finds that a quarter of firms studies could suffer a dilution of at
least 10% from stock option exercise. Moreover about 14% of Canadian
firms studied were not disclosing pay as per the Canadian rules.
http://www.nynews.com/newsroom/092003/d0120grassomainbar.html
http://www.globeandmail.com/servlet/ArticleNews/TPStory/LAC/20030923/RCOMP23/TPBusiness/TopStories
http://www.globeandmail.com/servlet/ArticleNews/TPStory/LAC/20030924/ROPTI24/TPBusiness/TopStories
PSU! And this time I am not talking about Penn State University but
rather Performance Share Units. GE announced that CEO Jeffrey Immelt
will no longer receive stock options but rather PSUs. These units are
designed to reward executives when the shareholders are made better off,
but unlike options only have value if certain operating conditions are
met. Thus they are in some ways a hybrid between market based and
operating based pay. For example half of Immelt’s PSUs require the
firm’s operating cash flow to increase by 10% or more while the other
half require that GE’s shareholders’ total return meet or exceeds the
broader market.”
http://www.courier-journal.com/business/news2003/09/18/biz-3-GE18-4366.html
Call them what you will, Parachutes or kiss-offs, Severance packages can
soften the blow of being fired! The theory is that if the manager
fights the firing, (s)he may cause more trouble for the firm. So a
generous parachute can lower the fighting/etc. However, with the
packages being so large, many wonder if managers really are putting
anything at risk.
http://www.thestar.com/NASApp/cs/ContentServer?pagename=thestar/Layout/Article_Type1&c=Article&cid=1064355912120&call_pageid=968350072197&col=969048863851
I can, at some emotional level, empathize with those who feel CEO pay is
too high. But I can not agree with a solution that calls for capping
pay. Even if it is “shareholder led.” Worse yet would be if we would
try to make it a law. How un-American and un-economic, is that? My
advice: require complete disclosure and get out of the way.
http://www.washingtonpost.com/wp-dyn/articles/A32694-2003Sep18.html
Microsoft, long famous for paying no dividend, doubled its dividend in
order to use some of the firm’s enormous cash horde. (Definitely a cool
article for introductory finance classes! Looks at free cash flow and
discusses why growth firms typically do not pay dividends).
http://news.bbc.co.uk/1/hi/business/3104140.stm
Wow, IPO news! It has been a while. Sigma Tel has priced its IPO.
Things of interest. The firm is selling 7 million shares. Current
owners are selling 3 million (they combine the sale to reduce
transaction costs) and the underwriters have a GreenShoe option for 1.5
million additional shares.
http://reuters.com/financeNewsArticle.jhtml?storyID=3474558&type=newIssuesNews
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Follow-up on past corporate stories
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In a case that seems to be going at tectonic speed, the first Enron
official was sentenced to five years in jail. Former treasurer Ben
Gilsan pleaded guilty to criminal conspiracy. Notably none of the big
guys: Lay, Skilling, or even Fastow (who was named in the same charges
as Gilsan) have yet to be tried.
http://news.bbc.co.uk/1/hi/business/3097668.stm
Do you remember the FCC ruling that gave media firms more leeway in
merging? Congress does and is trying to block the new rules from taking
effect. Why? A fear of a few media companies controlling all
information pathways. Countering the argument of course is the fact
that so many now get their news from the web and outlets like
FinanceProfessor ;)
http://www.msnbc.com/news/967400.asp
http://www.nytimes.com/2003/09/17/business/media/17FCC.html
Tyco’s CEO was charged with using company money for apartments and
lavish (and expensive!) furnishings-including the now legendary umbrella
holder. Well the case has finally gone to trial.
http://biz.yahoo.com/rc/030923/crime_tyco_trial_1.html
http://www.newsday.com/business/printedition/ny-bzli243466718sep24,0,4460043.story?coll=ny-business-print
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Investments
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Chen, Noronha, and Singal report in a forthcoming JF article that when
stocks are dropped from the S&P 500, there is a temporary price decline.
However when firms are added, the increase is seemingly permanent.
This asymmetry is seemingly counter to most widely held views that
demand curves for individual stocks are elastic. The authors suggest
that this asymmetry is due to “investor awareness” whereby the investor
becomes aware of the stock when it is admitted to the index but
investors do not forget about the stock once dropped.
http://www.afajof.org/Pdf/forthcoming/ChenNoronha.pdf
That the volatility of the equity risk premium and the risk-free rate
are larger than most models predict has long been known and discussed
(for example the seminal Mehra and Prescott 1985 paper). Bansal and
Yahon try their hands at explaining why this puzzle exists (their paper
will appear in an upcoming Journal of Finance (JF)). They model the
“consumption and dividend growth rates as containing (i) a small
long-run predictable component and (ii) fluctuating economic
uncertainty.” In other words, market participant’s risk aversion varies
with conditions and hence drives the market to be more volatile than the
underlying economic conditions would suggest. Interesting paper!
http://www.afajof.org/Pdf/forthcoming/Bansal_Yaron.pdf
Mutual funds have had a bad run of late. From poorly aligned
incentives, to soft money for brokers to hawk some funds, to failing to
pay promised discounts, to increasing fees, and now to allowing some
investors to trade funds when they should not have been allowed, the
funds have been accused of abandoning the small investors (customers)
that the depend on. Et tu Brute? Well you sometimes get what you sow
and in this case in addition to most government regulations (including
changes in the way funds are allowed to advertise), look for investor
law suits, some of which have already started.
http://www.washingtonpost.com/wp-dyn/articles/A4107-2003Sep13.html
http://www.msnbc.com/news/965075.asp
http://www.businessweek.com/bwdaily/dnflash/sep2003/nf20030918_7505_db049.htm
http://www.miami.com/mld/miamiherald/business/6849969.htm
http://www.nytimes.com/2003/09/24/business/24MUTU.html
A lifecycle fund is a fund that adjusts to your expected life stage.
These funds have been a tremendous success with dollars invested up
32,131% to nearly $40 billion since 1992. By the way, to those of you
unfamiliar with this type of fund, the fund manager adjusts the makeup
of the portfolio to correspond to the age and needs of the investors.
Thus, if you invest as a young adult, the makeup of the fund will be
mainly equities but as you (and the rest of the investors) age, the
portfolio manager changes the composition of the fund towards more
income producing investments (Of course this strategy ignores an
alternative strategy whereby the investor would not reduce her/her
equity ownership per se, but rather through a combination of equity and
long-term call options would limit the downside risk of the equity
ownership.)
http://biz.yahoo.com/ibd/030912/funds_1.html
Continuing a longer-term trend, Fidelity has decided to drop the
front-end loads on their select funds. Remember front-end loads are
fees charged at the time of purchase, back end loads are fees charged at
the time of sale.
http://biz.yahoo.com/rf/030919/financial_fund_fidelity_1.html
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Economics
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Don’t you hate to say “I told you so” Yeah, Me too. ;) But in this
case, I have to. (Really, it is in my contract—whenever anyone does
something that goes against economic common sense, I have to point it
out.). About 18 months ago President Bush drew my ire for imposing
tariffs on steel imports. Well guess what? It turns out they were a
mistake. Really? Go figure. To quote MSNBC “Some economists say the
tariffs may have cost more jobs than they saved, by driving up costs for
automakers and other steel users.” So
http://www.msnbc.com/news/968866.asp
http://www.nytimes.com/2003/09/18/business/18SCEN.html
Fed Governor Donald Kohn gave an interesting and important speech
recently on the effects of productivity on an economy. Specifically he
addressed the productivity growth of the late 1990s that created the
excess capacity that set the stage for current low inflation and job
losses. As Kohn stressed this is a short run phenomenon and “The rise
in productivity is unambiguously beneficial over the long run.”
http://www.nytimes.com/2003/09/14/business/yourmoney/14VIEW.html
http://www.federalreserve.gov/boarddocs/speeches/2003/20030924/
As if to show that Kohn was correct, we may be seeing the end of the
“capacity glut” as fewer jobless claims were reported and most
economists and institutional investors believe the economy is turning
for the better. However, consumer confidence is still low and demand
has yet to live up to expectations.
http://washingtontimes.com/upi-breaking/20030908-074252-1341r.htm
http://www.nytimes.com/2003/09/19/business/19ECON.htm
While VP Dick Cheney and most economists are predicting growth of at
least 4%, there are those who doubt his rosy prognostications. Why?
Current measurements are failing to pick up like most had hoped. For
example retail sales have grown slower than estimates, job growth has
failed to materialize, and consumer sentiment is falling. Add
uncertainty from Iraq and rising oil prices and doubts arise.
http://news.bbc.co.uk/1/hi/business/3104372.stm
http://edition.cnn.com/2003/BUSINESS/09/14/us.cheney.reut/
While rising commodity prices and an improving economy have alleviated
many of the US’ fears of deflation, there is still some risk of it.
This is especially true given the excess capacity that still exists in
the global market. This week the Central Banks of Japan, Fuji, and
other nations have said they would maintain easy monetary policy to spur
the economy and to lower the deflation risk.
http://news.xinhuanet.com/english/2003-09/23/content_1095842.htm
http://www.yomiuri.co.jp/newse/20030917wo03.htm
http://reuters.com/financeNewsArticle.jhtml?type=economicNews&storyID=3492890
Even if deflation is probably not going to happen across the board, we
do see it in certain sectors of the economy. For example-clothing
prices are falling and some manufacturers are selling products at the
same prices they did in the 1980sAnd of course computers and most
technology goods are lower now as well.
http://news.bbc.co.uk/1/hi/programmes/working_lunch/3122142.stm
http://www.nbc5.com/irresistible/2507360/detail.html
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Financial Institutions and Markets
(also Money and Banking)
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As was widely predicted, the Fed decided to hold the line on interest
rate hikes. And then went a bit further and suggested that in spite of
the apparent strengthening of the US economy, deflation is still a
possibility and thus that the low rates (Fed Funds target is 1%) may be
here for “a considerable time.”
http://www.msnbc.com/news/967404.asp
http://news.bbc.co.uk/1/hi/business/3114544.stm
http://www.bankrate.com/brm/news/bank/20030912a1.asp ( Fed’s job will
be easy next week)
The Bank of England on the other hand is hinting that a rate hike may be
in the offering. Although they recently voted to keep rates the same,
the released minutes of their September 4th meeting suggest that several
members are concerned with increased consumer borrowing and spending.
http://news.bbc.co.uk/1/hi/business/3116216.stm
http://news.bbc.co.uk/1/hi/programmes/working_lunch/3122142.stm
http://www.bankofengland.co.uk/mpc/mpc0309.pdf this is the minutes of
the meeting. Pretty interesting!
In a move designed to flatten the yield curve, the Bank of Japan is
lengthening the maturity of the securities it buys in open market
transactions. Long term rates have been rising in Japan as the Japanese
economy is showing signs of life. In order to prevent rising rates at
the longer end of the yield curve from stifling this recovery, the BOJ
decided to purchase some securities with longer maturities.
http://biz.yahoo.com/rf/030912/economy_japan_boj_1.html
ENGLISH please! Have you ever read a Fed announcement then wondered
what you just read? You are not alone. Notorious for convoluted speech
and long, rambling thoughts, the Fed is considering adopting new means
to communicate their intentions and thereby reduce costly informational
asymmetries.
http://www.washingtonpost.com/wp-dyn/articles/A32257-2003Sep18.html
Is inflation coming back into the picture? The CRB Futures Price index
is up by 7% in recent months and there are some signs of rising labor
prices.
http://www.forbes.com/2003/09/11/cz_sf_0911sf2.html
http://futures.tradingcharts.com/hist_RB.html
While the recent climb in global markets has helped lessen the pension
risk that many firms are facing, the troubles are not over as firms had
been too optimistic in their forecasts of returns and hence are now
underfunded.
http://www.quicken.com/investments/news_center/story/?story=NewsStory/dowJones/20030905/ON200309050120000058.var&column=P0DFP
http://news.bbc.co.uk/1/hi/business/3133992.stm
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International Finance
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Stop me, stop me stop me, stop me if you think that you’ve heard this
one before. (who sang that song? The Smiths? Morrisey?) US trade gap
increases, again. In response both the US and EU upped the pressure on
China to allow the Yuan to float freely. (see top stories above)
http://money.cnn.com/2003/09/11/news/economy/trade_gap.reut/index.htm
http://news.bbc.co.uk/1/hi/business/3100782.stm
http://www.iht.com/articles/109895.html
The aftershocks of the WTO breakdown were felt in Duabi as the IMF and
World Bank met for their annual meetings. Both groups were careful to
set lower goals and to be more conservative.
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1059479977341
The IMF stated the obvious when it said that Arab economies must reform
before the Middle East can have lasting peace. In the absence of such
reform, the poor will become poorer and the gulf between rich and poor
with grow. (gee where have you heard that before? ;) )
http://news.bbc.co.uk/1/hi/business/3097436.stm
You have heard about the G7 and probably even G8, but what about the
G20? It is the newly coined name for a group of 23 developing nations
that worked together to block the free trade agreement at WTO meetings
(see top story). These nations felt that the WTO was too controlled by
the US and EU.
http://allafrica.com/stories/200309170180.html
Sweden became the most recent country to reject the Euro as their
currency. The vote may have pushed back the vote in England on the
adoption of the common currency.
uid=%7BB85C16FB-D5FE-42BA-AC07-EB0F5869AA5C%7D&siteid=google&dist=google
http://www.washingtonpost.com/wp-dyn/articles/A9820-2003Sep14.html
While the wealthier nations are voting to not adopt the Euro, poorer
nations are anxious to join. The NY Times gives a fascinating analysis
of why and what this means.
http://www.nytimes.com/2003/09/21/weekinreview/21LAND.html
Very interesting article on Chile and the former Pinochet government.
Contrary to most reports, it appears that the often time ruthless
Pinochet at least knew what he was doing economically. That said, it is
no excuse for much of the behavior.
http://news.bbc.co.uk/1/hi/business/3096542.stm
Is the Chinese Yuan undervalued? It sure seems so. So when politicians
and businesspeople around the world begin calling for china to allow the
Yuan to float, many Chinese people get nervous and sell off foreign
investments.
http://money.cnn.com/2003/09/19/news/international/g7_china.reut/
http://afr.com/articles/2003/09/15/1063478122984.html
http://www.forbes.com/markets/newswire/2003/09/15/rtr1081311.html
http://quote.bloomberg.com/apps/news?pid=10000177&sid=aaceggbwG0AA&refer=market_insight
Due to high inflation Zimbabwe gets a new currency albeit a temporary
one. Their economy is in such shambles that it almost not worth calling
it an economy. In August, the inflation rate was a mind-boggling 426%.
http://news.bbc.co.uk/1/hi/business/3116716.stm
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Energy Markets
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After originally saying they see no reason to change quotas, OPEC
ministers surprised the market with a production cut that sent oil
prices sharply higher. The cuts (which do not impact Iraq) are designed
to get production back to pre-war levels.
http://www.bayarea.com/mld/mercurynews/business/6840006.htm
http://news.bbc.co.uk/1/hi/business/3134406.stm
http://www.middle-east-online.com/english/?id=7122
http://www.forbes.com/markets/newswire/2003/09/24/rtr1090477.html
Speaking of Iraq, Iraq is back in OPEC. An original founding member of
the oil cartel, it has been missing since the 1990 Gulf War.
http://www.voanews.com/article.cfm%3FobjectID%3D2B3CABB9-2A81-44E2-92919AAF2617B015
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Money and Politics
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With a rising deficit drawing the criticism of many including the World
Bank, John Snow said that the US deficit will be halved by 2008.
http://abcnews.go.com/wire/Business/ap20030923_1296.html
http://www.nytimes.com/aponline/business/AP-Money-Summit.html
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Accounting News
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OUCH, This one is going to be controversial! Just don’t blame the
messenger! ;)
In a hard hitting article Kane looks at the accounting profession and
does not like what he finds. After laying out “an unremitting flood of
accounting scams” he “traces a major part of the problem to the flawed
ethics of the accounting profession” Which he claims “by designing and
certifying reporting options that help troubled firms and rouge managers
to conceal adverse information from outside stakeholders, the highly
concentrated accounting industry manages to insulate fro serious
sanctions the economic rents it can earn from cleverly abetting
deceitful behavior.” Wow. This one is definitely worth reading and
discussing.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=396694#
http://www2.bc.edu/~kaneeb
http://www2.bc.edu/%7Ekaneeb/DangersofDisinfo.doc
Would tax cuts increase investment? “In a survey of senior tax
executives conducted by Big Four firm Deloitte & Touche, a majority of
executives indicated that a reduction in the top corporate tax rate
would not be enough to encourage an increase in capital investments.”
http://www.accountingweb.com/cgi-bin/item.cgi?id=98132&d=815&h=817&f=816&dateformat=%B%20%e,%20%Y
The Senate Banking Committee is considering forcing even more consulting
activities form audit activities. This time it is tax consulting.
http://www.accountingweb.com/cgi-bin/item.cgi?id=98133
Calpers continues to push for more auditor independence.
http://biz.yahoo.com/rf/030911/financial_calpers_1.html
Looking for more accounting news? I HIGHLY recommend AccountingWeb.com.
It is really good!
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Finance and accounting humor
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A special thanks to Ed Kane of Boston College for forwarding this!
Moe and Curly are playing craps on the sidewalk. Larry is walking
towards them dejectedly, holding a gray sack with a $ on it
Curly: Why so glum, chum?
Moe: Yeah, you cashed the check, didn't yah?
Larry: Yeah, but...
Moe: Well, give it here, then. (Moe grabs the sack from Larry in
violent motion. Opens up the sack and, with eyes increasingly bulging
out pulls out a wedge of lemon, a sprig of parsley, a leaf of iceberg
lettuce and a single U.S penny. Moe glares at Larry Hey, what
gives?
Larry: I was trying to tell you, Moe--the bank garnished my wages.
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Financial Trivia
***********************************************************
Forbes reports that the wealth of the top 400 richest people grew b
about 10% last year. Topping the list is still Bill Gates whose net
worth is estimated at $46,000,000,000. Interestingly, the Waltons are
the richest family with 5 (YES FIVE) of the top 10. (I guess John-Boy
did well! ;) )
http://www.msnbc.com/news/968977.asp
http://news.bbc.co.uk/1/hi/business/3121428.stm
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Of interest to FinanceProfessors
***********************************************************
Teaching Tips:
1. Always carry colored chalk or pens in your bag. It is something I
wish I did, but rarely do.
2. People falling asleep in class? Do something different. Anything.
Turn the lights on, turn them off, change volume of voice, jump up and
down, stand on your head. Just do something to keep them awake.
3. Start class by asking students for three things they learned in the
previous class. It may surprise you!
4. Start each course with an introduction. And not just the boring
vita stuff which most students do not care about. Let the students know
you as a person.
5. Have FUN! Teaching is the only job where you can be paid to be the
class clown. Have fun and the class will too!
Have a paper but are looking for an outlet. FMA online has a good
listing of finance journals.
http://207.36.165.114/assocs.htm#journals
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What I am reading/have recently read
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Colin Fletcher’s The Man who Walked through time. The story of
Fletcher’s walk through the Grand Canyon. Pretty good. Not great.
http://www.amazon.com/exec/obidos/ASIN/0679723064/finpapers/104-9378365-5272442
Beautiful Mind. Fascinating look at Nobel Prize winning John Nash, the
man behind the famous Nash Equilibrium. I had my doubts but really
enjoyed it.
http://www.amazon.com/exec/obidos/ASIN/0743224574/finpapers/104-9378365-5272442
The Inefficient Stock Market: What pays off and Why, by Robert Haugen.
Very interesting and well researched. I disagree with some of it and
think he is stretching things too far in other parts, but it is
interesting and has some great examples for class.
http://www.amazon.com/exec/obidos/ASIN/0130323667/finpapers/104-9378365-5272442
Financially Fearless by 40 by Jason Anthony. Lots of practical advice.
Mainly personal finance stuff (which is often not covered in class) but
some investment coverage as well. Fast read.
http://www.amazon.com/exec/obidos/ASIN/0452284333/finpapers/104-9378365-5272442
How Wal-Mart is destroying America (and the World). Wal-Mart is always
a thorn in my side. On one hand I love their efficiency and from a
consumer perspective what they done much to lower prices etc., but I
confess I am not a fan of some of their business practices (not letting
competitors record prices, when founder Sam Walton was famous for doing
the same to his competition) and their addition to suburban sprawl.
Hence when I was given the book to read I did skim it. Not great, in
fact not very good, but it is interesting to see the business world
through the eyes of a non-business person.
http://www.amazon.com/exec/obidos/ASIN/1580082319/finpapers/104-9378365-5272442
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Quotes of the week:
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True friendship is like sound health; the value of it is seldom known
until it is lost---Charles Colton
Friendship is precious, not only in the shade, but [also] in the
sunshine---Thomas Jefferson
Self-pity is our worst enemy and if we yield to it, we can never do
anything good in the world---Helen Keller
“Everything happens for a reason" Is no reason not to ask myself if I am
living it right---John Mayer
No matter how hard the past, you can always begin again today---Budda
(on my calendar)
*************************************************************
Well that is that. It took longer to write than I hoped but I hope you
liked it! I really liked many of the articles. Thanks to all of you
who forwarded me story ideas. I appreciated them, even if I did not
include all of them.
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
Who is more concerned with Penn State Football now than at the beginning
of the season. Things are not going as planned.
Who was thrilled by the start the Bills had gotten off to this year, but
then horrified by their performance on Sunday against the Dolphins.
This week’s game against the Eagles may be quite a battle.
Who is always saddened with the end of summer. Fall is far from my
favorite season. Although I guess football does make it a little better
;)
Who is looking forward to Denver for FMAs. See you there!
Who never had a George Strait CD before this week but since buying it, I
am trying hard to wear it out in a single week! I have had it on almost
around the clock. VERY good.
http://www.amazon.com/exec/obidos/ASIN/B00007JSKI/finpapers/104-9378365-5272442
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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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