Accounting information and capital markets

Good stock pickers are valuable!

2010-03-01T09:42:00.001+11:00

Andrew Bolton has historically done well at stock pickking. That's why lots of investors are throwing money at him for his Chinese ventures.

The trust is attracting widespread interest from investors because of Mr Bolton's spectacular investment track record. More than 12,000 private investors have already registered to be sent the prospectus.

Fidelity is confident of raising $US1bn in what would be a record for a new conventional investment trust in Britain. It will take a 1.5 per cent annual management charge, which equates to $US15m.

Communication

2010-03-01T09:34:00.003+11:00

It's important to not just have a good strategy, but to be able to communicate it as well. NAB seems to have doubters on both fronts: The Australian

Key graf:

The question now is whether the NAB narrative is understood.
Mr Clyne believes it is, but admits investors are tough critics who are keen for answers.
"We outlined our strategic view and what's critical to us is that we consistently deliver against that," Mr Clyne said.

Remember too that NAB has better resources than most to try and explain its strategy.

Once again, it's hard to beat the market..

2010-02-19T11:06:00.003+11:00

..even if you job is to do exactly that. We're talking about fund managers here; the 'league tables' are out.

James Dunn in The Australian:

According to Phillip Gray, editorial and communications manager at Morningstar Australasia, last year 325 of 609 (or 53.6 per cent) actively managed large-capitalisation Australian share funds outperformed the S&P/ASX 200 Accumulation Index (which counts capital gain plus dividends reinvested.)

Over three years, 262 of 502 funds (or 52.2 per cent) beat the index. Over five years, the winning proportion fell to 41.7 per cent (176 of 422 funds), while 45 per cent (64 of 142 funds) came out in front after 10 years. After 15 years, 33 of 55 funds (60 per cent) were ahead.

This is no great surprise.

Apple's profits

2010-01-29T17:11:00.002+11:00

Here's the impact of an accounting change for Apple: a new FASB standard allows them to be more aggressive in the recognition of revenue than was previously the case.

As reported in The Australian. Discussion at Gadgetophilia.com

Apple discusses the matter on the website here.

Woolworths' fails to impress

2010-01-29T16:58:00.002+11:00

Woolies' results indicate why you need to consider macro, as well as industry and firm-specific information when looking at ratios over time.

The effects of the stimulus package mean that future sales growth may not match recent growth, as per this report in the Herald suggests:

The percentage sales growth was, however, half the gains it recorded last year when, as Mr Luscombe put it, ''we had all the moons aligned'' - lower petrol prices and interest rates, the Federal Government's stimulus package and people choosing to shop for pricier food over eating out at restaurants.

Woolworths' argument is that retail sales grew at unsustainable rates last year thanks to the stimulus package, and that a two-year growth rate comparison is more valid. Its two-year sales growth average was 6.5 per cent.

What the day traders are up to...

2009-11-06T10:31:00.002+11:00

Certainly an alternative investment strategy to trying to identify good businesses that are undervalued, then buying and holding!

From the Sydney Morning Herald.

They are the new breed of derivatives traders: they have no clients, they trade their firm's own money using high-powered computer programs like F1 - Formula One, so-called because it is so fast - based on secret algorithms.

US sharemarket officials and Congress are mulling bans on some of their tricks. And it is so profitable, the big banks are using it. The New York Times and The Wall Street Journal have devoted pages to the dark arts of ''high-intensity'' and ''low-latency'' trading and the world of ''dark pools''.

2009-09-17T09:16:00.002+10:00

Credit ratings agencies still under fire for their role in the GFC. Here's the Herald with the latest thoughts.

The essential conflict many of these agencies face is described here:

Critics want the cosy club inhabited by the three big credit ratings agencies to be replaced by a system with more accountability to investors, and less crippling conflicts of interest.

So what can be done to fix the credit rating agencies, seen by many as the unsung villains of the crisis?

Some suggestions include holding the firms responsible for their opinions in the courts, breaking up the oligopoly, and cutting investors' reliance on ratings. None is foolproof but each attempts to address the conflict of interest that was brutally exposed by the credit crisis.

A credit rating from one of the big three firms is virtually indispensable for companies looking to raise debt on the market. But it is now clear the incentives in the current system were skewed to encourage agencies to provide as many ratings as possible, at the expense of good advice.

For decades issuers have paid for the ratings because they need them most, and it has been in the agencies' interest to approve as many ratings as possible. However, the Bank for International Settlements says growth in structured finance - complex bundles of corporate debt - created huge systemic risks for this arrangement.

Explaining your accounts

2009-09-01T13:24:00.003+10:00

I have mentioned in class that companies can use voluntary disclosure to explain how the accounting rules impact on their results, and also that we have seen examples of this with the adoption of A-IFRS accounting standards in Australia.

Here's one example - Westpac provided this presentation in April 2007 (note - link to pdf file).

How banks can manage earnings

2009-09-01T11:02:00.001+10:00

No surprises, it's the loan-loss reserve. Businessweek with more details.

Inept boards - Krispy Kreme

2009-09-01T10:02:00.002+10:00

From the New York Times (2005). Posted as KK is one of the case studies. Also shows the problems of rapid growth and franchising.

Security analysts & insider trading

2009-09-01T09:58:00.003+10:00

The better the job you do as an analyst, the closer you get to insider trading. Apparently. An old (2005) New York Times article about the drug approval process and the work of security analysts

Stock options

2009-09-01T09:55:00.002+10:00

From a few years back, how companies were trying to 'ignore' the requirement to expense stock options. This one was about the stressing of "pro forma" results, i.e. excluding the impact of expensing options. From the New York Times in 2005.

And a bit of background from the year before in Forbes focusing on Silicon Valley. Why hi-tech? Well that's where a large number of companies were paying large proportions of salaries as options.

Xerox and lease accounting

2009-09-01T09:48:00.004+10:00

Here's an old one from the New York Times (by old, I mean from 2002) about Xerox's battles with the SEC over lease accounting.

And an even older one (from 2000) in Forbes about nonrecurring items that turn out to be, well, recurring.

Steven Mayne on the recent earnings results

2009-08-31T12:28:00.001+10:00

In the Herald.

ASIC takes action against

2009-08-18T10:02:00.002+10:00

After a long time during which ASIC has been accused of being too lenient on enforcement issues, action is taken against auditors involved in a corporate collapse.

THREE partners of accountancy giant KPMG have been banned from acting as auditors for periods of up to two years over their involvement in the $390 million collapse of the Westpoint property empire.

Leases and valuation

2009-08-13T15:56:00.003+10:00

We were speaking this week in class about adjusting for accounting distortions. Here's a link to a recent article about capitalising operating leases by Aswath Damodaran from New York University. It's in the Journal of Applied Research in Accounting and Finance (JARAF), Vol. 4, No. 1, pp. 3-29, 2009

Here's the abstract:

When analyzing or the value of a firm, there are three basic questions that we need to address: How much is the firm generating as earnings? How much capital has been invested in its existing investments? How much has the firm borrowed? In answering these questions, we depend upon accounting assessments of earnings, book capital and debt. We assume that the reported operating income is prior to any financing expenses and that all debt utilized by the firm is treated as such on the balance sheet. While this assumption, for the most part, is well founded, there is a significant exception. When a firm leases an asset, the accounting treatment of the expense depends upon whether it is categorized as an operating or a capital lease. Operating lease payments are treated as part of operating expenses, but we will argue that they are really financing expenses. Consequently, the stated operating income, capital, profitability and cash flow measures for firms with operating leases have to be adjusted when operating lease expenses get categorized as financing expenses. This can have far reaching implications for profitability, financial leverage and assessed value at firms.

Some old accounting analysis / earnings qaulity articles

2009-08-10T09:45:00.003+10:00

Here's one by Gretchen Morgenson in the New York Times about how to spot and undo questionable accounting.

Also an old Businessweek cover story back from 2004 - Fuzzy Numbers.

News Corp - underlying economics or big bath?

2009-08-09T18:21:00.009+10:00

News Corporation recently announced its full year 2008-09 earnings, and they included large write-downs. By large, we mean just under $US9 billion. Now we'd expect large write-downs given the impact of the "Global Financial Crisis"; but now would be a good time to take an aggressive approach to write-downs. Here's how The Australian (owned by News Corporation) reported the results. Here's the New York Times take on it. Here's the conference call transcript News held with analysts and investors.

* Photo by Flickr user oh_simone. Original photo here.

Security analysts & incentives

2009-08-07T10:48:00.002+10:00

Not surprisingly, there still seems to be some pressure on (sell-side) security analysts to provide an optimistic outlook. Here's Andrew Main (City Beat) on analyst Brett Le Mesurier leaving the industry.

Le Mesurier's form includes being the first analyst to have put a sell on Babcock & Brown -- "not early enough" as he ruefully put it yesterday.

He's got a reputation for calling things as he sees them, which may not be an instant hit with the big corporate brokers. Take his view on NAB: "It's the worst-performing bank, and they've consistently delivered in that department."

He admitted such lines don't make him instant friends on the sell side.

"But the fund managers love it."

Australian retailing

2009-08-07T10:24:00.002+10:00

How successfully implementing your strategy can benefit your competitors.

Matthew Stevens in The Australian:

SOMETIME before Christmas Bernie Brookes and his fellow owners of Myer Group could be given 1.5 billion reasons to thank Mark McInnes for being such a fine retailer.

This might seem a strange proposition, given that McInnes runs David Jones and is the bloke lauded for the impressive restoration of the brand and balance sheet of Australia's up-market department store operator.

* Photo from Flickr user Voice Pictures. Original photo here.

Australian business podcasts / vodcasts

2009-07-29T12:54:00.012+10:00

ABC radio's Radio National provides access to a number of business-related podcasts that might be useful if you wish to know more about the business environment in Australia. You can subscribe to the business podcast at the link.

You'll also find vodcasts from groups like Macquarie Bank.

Here's another one, bnet Australia with a marketing focus, but still providing some strategy-related materials. You can apparently subscribe to their podcasts on itunes.

Beijing restaurants (& Sydney restaurants)

2009-07-28T17:10:00.008+10:00

I have a friend who is off to Beijing next week for a week. If anyone has any tips for good eating (not western food) there, it would be great if you could let me know. [I also want good eating tips for when I next visit Beijing].

Here are my tips for "best value lunches in Sydney" (not cheapest, but best value).
1. Marque Go for the Friday lunch. Review (about as good a review as you'll find) in the Sydney Morning Herald here.

2. Restaurant Balzac - closer to uni, and $5 more than Marque, but a good value Friday lunch.

UPDATE: In case $50 is a bit too much for a meal, here are some cheaper, but still very tasty restaurants in Sydney.

1. Spice I Am - go to the Surry Hills one, not the Darlinghurst one. Good cheap, spicy Thai food. No decor.

2. Kiroran Silk Road Uigher Restaurant - Dixon Street, Chinatown. Ridiculously cheap Xinjiang restaurant.

3. Mamak - Chinatown. Great cheap Malaysian. Best roti in town.

4. Maya Masala - good cheap vegetarian Indian restaurant on Cleveland Street, Surry Hills.

Note: I've been advised that the restaurant in the photo above is:
Shun Xin Zhai Beijing Noodle Restaurant 顺心宅老北京炸酱面
Address: No. 40, Shuiyuan Wuchang, Huajiadi, Chaoyang District, Beijing, China
朝阳区花家地小区水源五厂40号(方舟苑小区对面)
I've eaten there and it's great!

Fair value accounting

2009-07-28T10:38:00.009+10:00

Well we're into the reporting season. One of the things I have previously suggested we look out for is the impact of "mark-to-market" accounting; especially for businesses that have a relatively large amount of investments in listed assets.

Last night Lateline Business ABC television interviewed the Managing Director of Australian Foundation Investment Company (AFIC), who announced a 75 percent fall in full year profit. The Australian Foundation Investment Company (AFIC) says the slump, to $103 million, reflects a big fall in realised gains and a more than $100 million impairment charge. Transcript and video here.

UPDATE: Not suprisingly, AFIC is calling for an overhaul in the accounting rules for 'impaired' assets. From The Australian:

"The (accounting) standard doesn't make a lot of sense for us," AFIC managing director Ross Barker said. "We have $1 billion in our revaluation reserve, but we can't offset any of that against the assets that we are holding below-cost."

AFIC, he said, was making its views known to international and domestic bodies that review and create accounting standards.

An exposure draft where mark-to-market gains and losses would all be taken through the profit and loss statement, or the balance sheet, would not help, according to the AFIC chief.

The first option would create volatile earnings streams, while the second would mean the dividends that AFIC earns from its investments would also have to be taken through the balance-sheet as an adjustment to reserves.

UPDATE: Here's Argo, another listed investment company, with a similar tale.

Managing director Rob Patterson said the $64.4m loss after tax was not the best measure of the company's performance over the financial year, as it did not reflect the income received from the investment portfolio and was inconsistent with the company's long-term investment philosophy.

A more accurate indicator, he said, was the operating profit of $163.4m, which was down 10.4 per cent from the previous financial year.

The return on the company's investment portfolio over the financial year was a loss of 16.8 per cent, outperforming the benchmark All Ordinaries Index, which declined by 22.1 per cent.

How accounting rules can affect business strategy

2009-07-27T13:35:00.004+10:00

The change to 'mark to market' accounting for certain asset classes continues to impact on the business environment. Today, Adele Ferguson shows us the impact on some of the Macquarie Group listed vehicles.

The demise of Babcock & Brown, Allco Finance Group and the unravelling of the complex structures behind the Macquarie satellites are a stark reminder that investors have had a gutful of backing a model that was good for the head stock/external manager and bad for investors.
...
A statement from ASIC late last month on "fair values", no doubt speeded up the model's demise. ASIC said "careful consideration should be given to whether assets are traded in active markets. Most ASX-listed securities are actively traded, in which case, quoted prices should be used".

This would have given the Macquarie boys some major heartburn. In its latest results, released in May, profit was down 52 per cent, as chief executive Nicholas Moore made a $2.5 billion writedown on assets such as MIG, MAP, BrisConnections, real estate equity investments, loan impairment provisions and CDO exposures.

Keep an eye out in the upcoming reporting season for the impact of mark-to-market driving write-downs and hits to earnings.

The ongoing debt problem

2009-07-27T13:31:00.002+10:00

According to Adele Ferguson in The Australian,

CORPORATE Australia is sitting on a $200 billion debt bomb that needs to be refinanced over the next three years, with analysts warning some infrastructure and small companies will collapse under the mountain of debt.

What to expect in the reporting season

2009-07-22T11:48:00.001+10:00

ANALYSTS believe the August full-year profit reporting season will mark the low point of the earnings rout, suggesting now could be the right time to start looking at cyclical stocks again. As companies prepare for what is tipped to be the worst reporting season in 20 years, most equity strategist are forecasting that earnings will hold up in fiscal 2010. For the 1510 listed companies with a June 30 balance date -- 72 per cent of all the companies listed on the Australian Securities Exchange -- reporting season has already begun and will conclude on August 28. Almost all of the companies will post their full-year reports during August.

From The Australian

Competition in retailing

2009-07-22T11:38:00.004+10:00

Following on from the earlier post about the entry of Costco, here's John Durie in his Martin Collins column in The Australian talking about the currents goings on.

John filed his column before Woolworths announced its full year sales figures. Up 7.5% to just under $50billion.

Toxic assets & increased transparency

2009-07-22T11:34:00.003+10:00

Kenneth Scott and John Taylor argue in the WSJ that mandated disclosure is needed to help address the (still ongoing) issue of getting so-called "toxic assets" off bank balance sheets.

It's a(nother) good little summary of (part of) the problem, and how regulation is attempting to address the issue.

The Dot Com crash case study

2009-07-21T17:44:00.008+10:00

Next week in class we're looking at the Dot Com crash. One of the things to think about: is there any parallel between that and the sub-prime 'meltdown' that led to the "Global Financial Crisis"? While you're thinking about that, here's a video of Emeritus Professor Sidney Winter, the Michael Crouch Visiting Professor in Innovation and Entrepreneurship at the Australian School of Business, in conversation with renowned US economist Dr Alice Rivlin.

If you can't see the video, click through here.

Costco arrives in Australia

2009-07-21T17:36:00.007+10:00

And gives us a heads up on how they intend to make money. Via The Age.

''We operate with low margins and with our membership fees, we can sustain low margins,'' Australian Managing Director Patrick Noone said in an interview. ''Lower prices are important because people shop with us to get value.''

Folks I know in the States speak highly of Costco. Let's see how they go about it here.

Photo credit: Flickr user brewbooks. Used under Creative Commons licence

Credit ratings agencies (finally) facing the music?

2009-07-20T11:06:00.006+10:00

Adele Ferguson in the Australian highlights some of the upcoming legal proceedings involving the credit ratings agencies, particularly with respect to the 'sub-prime' mortgage backed securities. Not too soon, either.

Here's the start:

THE spotlight is about to return to the culpability of credit ratings agencies in the global financial crisis following a decision by the biggest pension fund in the US to sue over "wildly inaccurate" ratings on the $US600 billion ($750bn) of synthetic derivatives sold to investors.

This, coupled with a court case to be heard in NSW Federal Court this week, could open the floodgates for third-party litigation against the credit rating agencies. It should also corral the regulators into finally doing something about the so-called independence and enormous power of agencies such as Moody's Investors Service and Standard & Poor's.

From the comments below - a link to a guest lecture by Brad Walters, General Manager, Financial Analytics, Corporate Scorecard held at the Australian School of Business, UNSW:

QAN financial and non-financial news

2009-07-13T14:33:00.004+10:00

Another article showing the importance of knowing what you need to look for. Qantas' recent earnings announcement - Michael Pascoe goes behind the Income Statement.

Here's the start:

The passenger figures Qantas released to the stock exchange yesterday weren't flash - but the unannounced financial reality was much, much worse.
While Qantas told the ASX its May Qantas International and Jetstar International revenue seat factors were up 4 and 4.8 percentage points respectively, it didn't say that its yield on the combined international business had collapsed by 25 per cent.

Understanding how QAN makes its money is the starting point.

CEO compensation - here come the $$s

2009-07-13T14:30:00.004+10:00

Looks like the GFC isn't hurting the bankers too hard, over in the U.S at least. The Wall Street Journal has the details. Well sort of, you only get the highlights of the article unless you are a subscriber.

Meanwhile, back in Australia, investors are told to keep an eye on executive pay. Quite rightly, too! Mirriam Steffens in the SMH with the details.

Dividend yields

2009-06-18T11:02:00.001+10:00

High dividend yields - can they be sustained? Here's Tim Boreham in the Australian having a look.

Let's all raise capital

2009-06-01T16:39:00.002+10:00

Australian companies are leading the world in capital raisings it seems, and part of the reason is the Australian regulations that make capital raisings easier to undertake.

Super funds seem to be looking for investments, and rights issues at below market seem to be attractive.

Analyst coverage and small cap firms - Australian evidence

2009-06-01T16:32:00.003+10:00

Yep, happening here as well. The Australian reports.

It all suggests that the firms themselves see analyst coverage as important, notwithstanding the recent (& ongoing) criticism that securities analysts have come under. Assuming that research on small caps is informative, or that the visibility from coverage is beneficial, there's some scope for the market to fill the demand for small cap research.

Analyst coverage matters?

2009-05-27T16:55:00.001+10:00

Seems to, according to this Wall Street Journal article (subscription required to view full article). Here's how it starts:

A year ago, investment analysts from seven brokerage firms shadowed the financial progress of Intevac Inc., a small, Santa Clara, Calif., technology firm. Today, a lone analyst is all that remains.

"That coverage was pretty important to us," says Jeff Andreson, Intevac's chief financial officer. Among other woes, losing coverage "hurts liquidity, making it harder for our institutional investors to build or sell positions," Mr. Andreson says.

Intevac isn't unique. Whether due to layoffs, attrition, retirement or brokerage firms moving analysts around, Wall Street's map of corporate coverage is shrinking these days.

Westpac cuts dividend

2009-05-06T13:14:00.002+10:00

Westpac joins the ranks of the dividend cutters this week. Some accounting analysis helps explain why.

More bad debts for the banks

2009-05-04T12:26:00.003+10:00

Some of the banks are set to report this week, and more doom and gloom is expected, particularly with respect to bad debts. Bad debt provisioning is always one area where managers have some discretion. In the current climate, asset writedowns are also going to be of interest, and have been the focus of discussion of Macquarie's recent results announcement.

Banks and mark to market

2009-04-27T11:54:00.001+10:00

Here we (finally) have a defense of mark-to-market accounting - in The Economist.

Key graphs:

Standard-setters should defuse the argument by making clear that their job is not to regulate banks but to force them to reveal information. The banks, their capital-adequacy regulators and politicians seem to dream of a single, grown-up version of the truth, which enhances financial stability. Investors and accountants, however, think all valuations are subjective, doubt managers’ motives and judge that market prices are the least-bad option. They are right. A bank’s solvency is a matter of judgment for its regulators and for investors, not whatever a piece of paper signed by its auditors says it is. Accounts can inform that decision, but not make it.

What they used to teach you at Stanford

2009-04-27T10:29:00.001+10:00

Seven lessons learned by someone who received an MBA back in 1972.

Value investing - still appropriate?

2009-04-27T10:27:00.002+10:00

Ben Steverman in Businessweek asks whether value investing is still the way to go.

Disciples of the value strategy, like Berkshire Hathaway's (BRKA) Warren Buffett, focus on the long-term intrinsic value of a company, hoping to buy shares in good companies at reasonable prices. By focusing on value, they avoid fast-growing firms with expensive stocks, and, by thinking long term, they try not to worry about the fickle gyrations of the market from month to month or day to day.

But amid a severe recession and financial crisis, true value has proven to be a slippery concept. "It's only a value if you can accurately assess today what the future profits will be," says Richard Sparks of Schaeffer's Investment Research. Particularly for financial stocks—some of which haven't or won't survive the crisis—it's nearly impossible to identify the long-term value, whether through profits, cash flow, or other measures.

Buffet on mark to market accounting

2009-04-27T08:33:00.002+10:00

Warren Buffet offers his thoughts on accounting and the GFC. WSJ link here

Now comes Warren Buffett, a big investor in Wells Fargo, M&T Bank and several other banks, who, during his marathon appearance on CNBC Monday, clearly called for suspension of mark-to-market accounting for regulatory capital purposes.

We add the italics for the benefit of a House hearing tomorrow on this very issue. Mark-to-market accounting is fine for disclosure purposes, because investors are not required to take actions based on it. It's not so fine for regulatory purposes. It doesn't just inform but can dictate actions that make no sense in the circumstances. Banks can be forced to raise capital when capital is unavailable or unduly expensive; regulators can be forced to treat banks as insolvent though their assets continue to perform.

Mums and dads and super

2009-03-06T10:36:00.001+11:00

Mums and dads don't understand super, apparently.

More reform pushes for credit rating agencies

2009-03-06T10:19:00.001+11:00

And they need it, too. Though to say that they 'caused' the GFC is attributing a bit too much blame, I think.

Richard Glayas in the Oz.

Private equity and Pacific Brands

2009-03-04T15:46:00.001+11:00

Looks like the PE guys did OK out of Pacific Brands.
Michael West in the Herald has the story.

Invest in index funds?

2009-03-04T08:33:00.003+11:00

More evidence (reported in the New York Times) that it's hard to systematically beat the market.

Similar stuff from Australia - this time the Sydney Morning Herald.

Dividend imputation

2009-03-04T08:27:00.002+11:00

Ken Henry, the head of Treasury, flags a possible change in the taxation treatment of dividend income. Hmmm; as long as they don't ONLY remove imputation, then it could work. Recall that the arguement for imputation is that it removes the double taxation on dividends; first in the hands of the company as it pays tax on its taxable income, and then in the hands of the investor when it receives that income in the form of a dividend.

Naughty baords

2009-03-04T08:22:00.001+11:00

Terry McRann reports

And more from Andrew Main about disclosure (particularly of bad news).

CEO pay and its disclosure

2009-03-04T08:17:00.004+11:00

Lots of media coverage of CEO pay, especially in light of the Pacific Brands decision to move some operations to China. Here's an example.

Michael West in the Herald also chimes in.

Two quick thoughts:
1. Why should government-imposed 'caps' on pay be limited to the business sector (or more particularly, to firms that receive some sort of government assistance)? Why not entertainers, or sportsmen who receive say Australian Institute of Sport assistance. Let's at least be consistent.

2. In the case of Pacific Brands, the bonuses in question appear to have been earned in 2007-08, which happened to be a record year for the company.

Analyst target prices

2008-12-09T10:38:00.004+11:00

Useless, according to Anthony Klan.

That is because the analysts who set them are highly compromised by the companies they cover, according a leading fund manager.

Challenger Financial Services Group equities head Peter Greentree said analysts were reluctant to report sell share recommendations for fear of access to briefings and internal company documents being revoked.

That's somewhat anecdotal evidence - so what about the more rigorous analysis?

Brav and Lehavy have a paper in the Journal of Finance that finds a significant market reaction to the information contained in analysts' target prices, both unconditionally and conditional on contemporaneously issued stock recommendation and earnings forecast revisions. Using a cointegration approach, we analyze the long-term behavior of market and target prices. We find that, on average, the one-year-ahead target price is 28 percent higher than the current market price.

Taking a different approach, Mark Bradshaw finds that target prices tend to be used to justify analysts' stock recommendations.

Regulating the ratings agencies

2008-12-09T10:33:00.002+11:00

Well, that's the proposal, anyway. John Durie isn't convinced. Here's what he sees as the nub of the issue:

The real problem is the inherent conflict of interest in the rating agency model, because the person who wants the rating pays for it.

In the midst of the inquiries into ratings industry, according to The Economist, emails were discovered where one analyst, when asked why he was rating a bit of toilet paper, replied: "We rate everything, even if it is structured by cows we rate it."

If someone will pay you to rate their paper and that's your business, then you rate it.

GFC - what can we learn / teach?

2008-11-20T15:38:00.002+11:00

How do we learn from the GFC (TM)? Here's what a few business school deans think.

Analyst influences market...

2008-11-18T11:03:00.002+11:00

Looks like it might still matter what analysts think. From The Australian

Asciano requested a trading halt yesterday after its shares plunged as much as $1.085 to a record low of 63.5c in the first 20 minutes of trading.

The sell-off was sparked by a massive downgrade from Citigroup analyst Sanjay Magotra, who slashed his target price on the stock from $6.08 to just 82c and reversed his trading recommendation from "buy" to "sell".

Not sure if this is a man bites dog or a dog bites man story...

Bank provisioning

2008-11-12T11:14:00.005+11:00

One way that banks respond to changes in economic circumstances is via the level of provisioning. It's been interesting to see how the Australian banks have adjusted their level of provisioning in response to the Global Financial Crisis (TM). Here's an article by Richard Gluyas in The Oz focusing on the Commonwealth Bank.

Key graf:

But not only that, Mr Williams said CBA's provisioning coverage was "lacking" compared to its peers. Total provisions as a proportion of risk-weighted assets was only 0.77 per cent, compared to 1.27 per cent for ANZ, 1.11 per cent for Westpac and 0.86 per cent for NAB. "Should, as we anticipate, the environment continues to deteriorate, this will likely result in higher provisioning charges in the near term," Mr Williams said. The bar had been lifted on capital adequacy, Citi said, and CBA was at risk of "not measuring up".

Remuneration consultants

2008-11-03T12:15:00.003+11:00

Michael West in the SMH gets stuck into them. And rightly so! More on this later.

The old wall street is dead

2008-10-23T09:41:00.001+11:00

Andy Kessler in the Weekly Standard has a go at explaining the recent meltdown.

Does private equity create wealth?

2008-10-16T08:31:00.002+11:00

Here's a recent paper by Masulis and Thomas (Prof's of Finance and Law at Vanderbilt) posted on SSRN that has a look at the issue.

Abstract:

Private equity has reaped large rewards in recent years. We claim that one major reason for this success is due to the corporate governance advantages of private equity over the public corporation. We argue that the development of substantial derivative contracts and trading has significantly weakened the governance of public corporations and has created a need for financially sophisticated directors and much closer supervision of management. The private equity model delivers these benefits and allows corporations to be better governed, creating wealth gains for investors.

Merger activity in Australia in 2007

2008-10-09T17:59:00.001+11:00

Here's an essay on Australian M&A activity in 2007.

Total M&A activity in Australia grew from USD$108 billion in 2006 to USD$133 billion in 2007. Surprisingly, Australia's M&A activity over 2007 was the highest amongst the Asia-Pacific economies, followed closely by Japan with M&A deals worth USD$124 billion

Bond ratings

2008-10-08T15:38:00.001+11:00

Here's a nice NYT article on the (failure of) the bond rating agencies. [H/T: Finance clippings]

Mark to market accounting- a 'clarification' from the SEC

2008-10-01T21:35:00.002+10:00

The SEC and FASB have made a recent announcement on mark to market accounting.

"When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."

Though that's what managers can do already. SFAS 157 allows 'mark to model' accounting. Prof Bainbridge has already made this observation.

Can we blame the accountings?

2008-09-26T11:52:00.002+10:00

In relation to the current subprime/Wall st mess:

According to Anthony Randazzo at Reason (amongst many others)

Third, the SEC should suspend the "mark-to-market" accounting rules for long-term assets that are driving firms into bankruptcy. Essentially, these regulatory rules are forcing firms to value their assets at much lower prices than what they would be worth long-term. The intent of mark-to-market regulation was to keep firms from overvaluing themselves and deceiving investors. Instead the law has artificially devalued financial institutions as a whole, which hurts their investors. As Steve Forbes noted recently, "The mark-to-market mania of regulators and accountants is utterly destructive. It is like fighting a fire with gasoline."

Not so, say the ISAB (surprisingly :) [Note: pdf link]

Technical analysis

2008-09-24T17:31:00.003+10:00

We're talking this week about technical and quantitative analysis. Barclays Global Investors has been doing it pretty well this decade. Here's a Businessweek article explaining why.

Big US companies buying back

2008-09-24T09:14:00.002+10:00

A number of large US companies are starting to engage in buybacks again. Microsoft, HP and Nike are all undertaking new buybacks. Some are to signal undervalued share prices, some to manage dilution created by employee stock plans.

Here's the Wall Street Journal report.

Seven's corporate strategy

2008-09-24T08:39:00.002+10:00

Questions have been raised about the Seven Network's corporate strategy, as well as the communication of that strategy to investors. Nick Tabakoff has the details.

Key grafs:

KEY institutional shareholders, corporate governance specialists and analysts have questioned the Seven Network's investment strategy in the wake of its revelation on Monday it had incurred losses from its strategy to "park" hundreds of millions of dollars in listed securities.

The company revealed it was down a total of $57 million on paper on a portfolio of listed stocks it has refused to disclose to the market. The company has also crystallised a total of $14 million in "realised losses" on the portfolio, after selling out of about $200 million worth of stock in recent weeks.

Hmmm, seems a bit odd. I'd sooner make my investment decisions than have Seven management do it for me.

More on the Meltdown

2008-09-22T17:03:00.003+10:00

There's a whole heap of information out there on the latest Wall St saga. Why not go to the Wall Street Journal as a start?!

Here's a 'local' story on how these thing happen. [H/T: Andrew Bolt's blog]

Wall st hits the wall

2008-09-16T20:52:00.003+10:00

Guess you want at least some info on what on earth is happening over the ditch?! Here's a useful summary with plenty of links: at mediabistro
H/T: Instapundit

Oh, have a look at the ASX webpage to see the announcements by the Australian banks outlining their exposure to Lehman.

Value or momentum!

2008-09-15T11:10:00.002+10:00

Turns out both.

Found this paper by Clifford S. Asness, Tobias J. Moskowitz, and Lasse H. Pedersen1 (note: pdf link) via an article in the New York Times.

Here's the abstract:

We study jointly the returns to value and momentum strategies for individual stocks within countries, stock indices across countries, government bonds across countries, currencies, and commodities. Value and momentum generate abnormal returns everywhere we look. Exploring their common factor structure across asset classes, we find that value (momentum) in one asset class is positively correlated with value (momentum) in other asset classes, and value and momentum are negatively correlated within and across asset classes. Long-run consumption risk is positively linked to both value and momentum, as is global recession risk to a lesser extent, while global liquidity risk is related positively to value and negatively to momentum. These patterns emerge from the power of examining value and momentum everywhere at once and are not easily detectable when examining each asset class in isolation.

LTCM

2008-09-15T11:03:00.001+10:00

A reminder about what can go wrong, even when smart people are involved. A New York Times essay on Long Term Capital Management.

Righst issues

2008-09-12T11:33:00.005+10:00

An article in The Age (that I can't find onlnine, but an abstract is here. According to some Monash & Birmingham University academics, the way in which a company chooses to raise capital impacts on reputation and even company value. Balachandran, Faff and Theobald have an article in the Journal of Financial Economics. Abstract of the journal article on SSRN here.

Postgraduate courses

2008-09-09T14:48:00.003+10:00

The Oz had a nice special last weekend (Sept 6-7) aobut postgraduate study; both by coursework and research. Here's one nice article from the special. Sensible advice.

Business Spectator

2008-08-22T10:51:00.003+10:00

I keep forgetting to post this, but here's a good free business media resource. Business Spectator.

Babcock and Brown - profit warning fallout

2008-08-22T10:47:00.003+10:00

Yikes. The CEO and Chairman to go, as part of a wider review after B&B's share price took a beating following the profit warning a few days ago.

Macquarie Airports - buyback

2008-08-22T10:42:00.002+10:00

Buybacks as a means of capital structure management: Macquaire Airports announce a buyback in conjunction with asset sales. Note that MAP's 'preferred (earnings) measure is "proportionate earnings before interest, tax, depreciation and amortisation".

Can the ASX stay a monopoly?

2008-08-16T18:05:00.003+10:00

It's long been argued that there's no compelling reason (or even good reason) for ASX to remain a monopoly provider. Here's another; an ROE of 70% for it's latest results. Have a look at Adele Ferguson's story.

Babcock and Brown's profit warning

2008-08-12T18:48:00.004+10:00

B&B shocks the market with a profit downgrade, only a few months after affirming previous guidance. B&B are unable to provide a precise estimate of the likely write down ("between 25 and 40% below (the previous guidance)" - and they're still in discussions with their auditors as to the extent of the write down..

One fund manager said it was "just terrible" that Babcock was producing such a wide range of possible numbers so close to the August 24 date when it had to report for the six months to June 30.

"Why now? Where have they been that they give us a range of between 25 and 40 per cent below the previous corresponding period?" he said.

"It's a month and 11 days past the book's close date for the half year number. It's pathetic."

Obvious questions will be asked about compliance with disclosure obligations.

Any impact on restrictions based around debt agreements?

Deutsche Bank said: "While non-cash impairment provisions are disappointing, we note they are excluded from calculations pertaining to the group's three times interest coverage covenant, suggesting (yesterday's) announcement is unlikely to compromise BNB's position with its bankers."

The sub-prime mess still has an impact

2008-07-25T10:51:00.005+10:00

Today, the National Australia Bank announced an increase in its provisioning by $830 million for exposure to CDO (collateralised debt obligations) which house some of its exposure to the US sub-prime market. NAB's share price dropped by over 10% on the announcement. The disclosure related question, of course, is when did they know about this?

Rights issues - disappearing?

2008-07-25T10:47:00.002+10:00

Possibly, according to Bryan Frith in The Australian. They are being replaced by "accelerated renounceable entitlement offers". Primarily it seems to reduce the risk faced by underwriters.

Audit fees and earnings quality

2008-05-23T09:52:00.002+10:00

This is a bit of a twist on the usual story. The 'concern' about audit and advisory fees is usually expressed like this: higher fees (either absolute or at a relative level) can be thought of as akin to a 'bribe' to the auditors, who will then sign off on financial statements that present a company in a better light than they perhaps should. That's how the regulators seem to view the problem. It's been harder for researchers to 'prove' that this is the case: think about the difficulties in measuring both "earnings quality" and also the level of the 'economic bond' between auditor and client.

In this example (Diverseport Fixed Income), it looks like the auditors and advisors were going for the $ just before a collapse.

St George Westpac takeover

2008-05-23T09:39:00.003+10:00

Seems not all St George shareholders are happy with Westpac's proposed takeover. Here's one of the major shareholders, Orion Asset Management's Dushko Bajic, reported in The Oz.

St George had not indicated its opinion of its value. "I find it frightening that the board has not identified its own valuation of St George as a stand-alone entity. How can you be sure of the value of Westpac's scrip and, even more outlandishly, the value of a merged St George/Westpac scrip, when you haven't established your own valuation of your own stock?

"And by the way, it's not good enough to draft in an independent expert after the event -- you've already set the goalposts," he said.

Seems a fair complaint. Note though that simply providing an independent expert's report will not solve everything. See prior posts here.

NAB's pro forma earnings

2008-05-14T11:19:00.004+10:00

Adele Ferguson takes apart National Australia Bank's "cash earnings" figure. Once again, the issue with firms reporting non-GAAP, or pro forma earnings, is that of comparability. Comparing NAB's results with those of competitors for this reporting season, and comparing NAB's results over time.

Blame ASIC?

2008-05-13T09:16:00.003+10:00

ASIC's chairman argues that ASIC should not be blamed for recent upheavals in the market (oh, other than the short selling stuff). It's an interesting one, though. To what extent should we, and can we, regulate against bad business decision, and bad investment decisions? However, even acknowledging that we can't protect all against all of their bad decisions doesn't mean that companies should be able to go around breaching disclosure rules and the like, seemingly without any meaningful penalty.

Nyles lowers earnings forecast

2008-05-05T09:06:00.002+10:00

As reported in The Oz, Nylex lowers its earnings forecast. Note the focus on EBIT and EBITDA numbers, and in particular the 'normalised EBITDA' nubmers. It's not until the end of the article that net income (or net loss) gets a mention!

Macquarie Bank

2008-04-22T11:14:00.002+10:00

Here's a nice piece on Mac Bank by Michael West with some financial policy analysis (level of debt), accounting analysis (write-down of assets) and management communication (disclosure about the level of write-downs, and questions about debt levels).

Dividends and franking credits

2008-04-22T10:45:00.003+10:00

Here's a good overview of dividends, and Australia's franking credits system (dividend imputation).

That's thanks to our system of "franked dividends" (or "dividend imputation") introduced by the Labor government in 1987 and improved by the Coalition government in 1996.

The system is logical -- and simple. When a company pays tax on its profits to the Australian government, and then pays a dividend to its shareholders, the shareholders receive credits ("franking credits") for the income tax already paid by the company. These credits, which apply whether the Australian resident owns shares directly or through a managed fund, are included in the shareholder's tax return both as income and as tax already paid.

The extent of the benefit depends on the shareholder's marginal rate of tax. If the company pays tax on its profits at the full company tax rate of 30 per cent and distributes a dividend, a taxpayer on the 30 per cent tax rate (which this year applies on taxable incomes of $30,000 to $75,000) effectively receives the dividends tax-free.

Have a look at the whole article. Note also the impact of continuing economic uncertainty could result in decreases in dividends, or at least a stop to increases in them. Probably more so in the U.S than here.

"Re-equitisation"

2008-04-22T09:09:00.003+10:00

Jeebus. Apparently that's what they're calling the process of getting more equity onto the balance sheet. That's what happens when debt falls out of favour. Which is currently is. See Michael Sainsbury's analysis here. In the case of Wesfarmers, getting shareholders to stump up more money to pay back the loans taken out for the Coles takeover.

Branding

2008-04-22T08:55:00.004+10:00

We here a lot about the importance of branding in generating (abnormal) returns. In a recently released survey, Google tops the global brands.

Closer to home, here's how branding is reported for some of the local retailers:
David Jones & Myer and changing demographics, and Just Group focuses on the so-called Generation Y.

Insider trading

2008-04-17T15:59:00.002+10:00

The 7.30 Report on ABC1 did a nice show on insider trading by directors of Australian companies, and the regulators' response, last night.

Transcript and video available at this link.

This one's got the lot

2008-04-14T11:22:00.003+10:00

General Electic has announced its first quarter profits, and disappointed the market. The Wall Street Journal (as featured in The Australian) has the story. Some business analysis:

GE's results also shake another common Wall Street belief, that large multinational conglomerates have become safe stock market havens.
GE, which recorded more than half of its $US173 billion in 2007 sales outside the US, did post strong international results, but not enough to fully counter its problems at home.
"It's evidence that you can't offset declining US earnings by having operations in the rest of the world," said Sherry Cooper, global economic strategist at BMO Financial Group.

Some accounting analysis:

On the consumer-lending side, Mr Sherin said GE would likely increase loss provisions beyond the planned $US600 million for the year because of increased delinquencies.

Some discussion of the role of analysts:

One reason for Wall Street's surprise: GE usually works closely with analysts in giving guidance on where its earnings are likely to land. The company generally meets the consensus estimates of Wall Street analysts.
This time, the analysts were way off. Their consensus suggested GE would record earnings per share from continuing operations of US51c. Instead, the number was US44c, down 8 per cent from a year ago. Overall, GE earned $US4.3 billion ($4.6 billion), or US43c per share, in the first quarter, down from $US4.57 billion, or US44c per share, in the same quarter a year earlier.

And another example of the impact of missing analysts' forecasts:

The disappointing results put new pressure on Mr Immelt to shake up the company he took over six years ago. GE's closing share price of $US32.05 on Friday is 19 per cent below its level when Mr Immelt became chairman and CEO just before the September 11, 2001 terror attacks, although the share price is well above its 2002-03 lows.

ANZ and disclosure

2008-04-11T08:28:00.003+10:00

ANZ's involvement in the Opes Prime "collapse" is, according to Adele Ferguson, raising eyebrows.

As usual, allegations of not informing the market when they knew of trouble are being thrown about.

ACA Capital's (A US insurance firm) monoline business had its credit rating slashed to junk bond status in December. It took Canadian bank CIBC until January 14 to reveal that it would have to write down its exposure to ACA by $US2 billion, and others, including Merrill Lynch and Citigroup, made similar announcements around the same time.

It took ANZ until February 18, or more than eight weeks after ACA's original announcement and four weeks after every other bank revealed its exposure.

This delay sent shivers up the spines of investors, who started to wonder what else was lurking in ANZ's balance sheet as well as what was going on off balance sheet, which has more than doubled to $1.73 trillion during the past three years.

Opes, short sales and market transparency

2008-04-02T09:07:00.002+11:00

John Durie in The Oz highlights the issues that ASIC faces in dealing with matters like the Opes collapse. As Duries suggests, avoiding regulatory buck-passing is the key.

Several firms engaged in stock lending offered last year to provide information about their practices to the ASX. The ASX, in its infinite wisdom, said it did not know what it could do with the information. One interpretation: we can't make money out of knowing this, so don't tell us.

Should there be changes to our disclosure laws?

2008-03-26T16:56:00.003+11:00

Paul Kerin in The Oz argues for 'fundamental reforms', not knee-jerk reactions.

He argues:

These dramatic changes require a major rewrite of compulsory disclosure rules. We should replace the outdated singular "reasonable person" benchmark with a more specific test. For example, we could require directors to disclose information if at least, say, 5 per cent of actual or potential investors may deem it price-sensitive. Recent outcries suggest many investors think director margin loan information is. I don't, but as a director I shouldn't deprive many investors of information they think is valuable just because I don't.

This change would generate more disclosures. Directors could readily minimise investor overload risk by flagging announcements that they consider most material. Investors who trust directors could just read the announcements the board flags. Others could readily scan the announcement's web page for items more relevant to them.

This would provide directors with valuable information, too. Observing price impacts of the various announcements helps them understand - rather than pre-judge - what investors find useful. With better information and less wriggle room, directors would serve shareholders' interests better and investors would be better informed.

BTW, you can find the actual continuous disclosure listing rules at the ASX website. <- link to pdf of chapter 3 of the ASX Listing Rules.

Got disclosure?

2008-03-18T14:03:00.002+11:00

More continuous disclosure problems, this time from Hedley Leisure & Gaming (Bryan Frith in the Oz is all over these CDR breaches).

Here's the start of the article:

ONLY a week after telling the ASX that Hedley Leisure & Gaming property fund did not possess any undisclosed information that would explain a sharp fall in the price of the fund's securities, the directors have admitted that the fund is seeking to reduce debt through asset sales.

The directors yesterday obtained a trading halt of up to two days because the fund was finalising divestment transactions to reduce debt. The halt would end when the fund made an announcement on the divestments.

On March 5, the ASX queried HLG about a two-day slump of 44 per cent, from $1.49 to a low of 83.5c. HLG immediately obtained the halt to enable it to properly respond, which it did last Monday.

HLG replied that it wasn't aware of any information that hadn't been announced but which, if known, would explain the price movement.

Business strategy - don't forget the demography

2008-03-06T11:46:00.006+11:00

Bernard Salt in the Oz provides a timely reminder that changing demographics will impact on both business strategy and forecasting. If the nature of a population (target market) is changing, then that's worth taking into account in assessing the likely success of a business strategy.

Business spectator / RealClearMarkets

2008-03-05T11:49:00.003+11:00

While I remember, here's a good resource of Australian financial/business information: Business Spectator.

Kind of a local RealClearMarkets, which is great for U.S stuff.

Disclosure, accounting, debt, breaches

2008-03-05T10:51:00.001+11:00

City Pacific has it all. And Bryan Frith of the Oz is all over it. Here.

Ten Questions Every Investor Should Ask

2008-03-05T09:27:00.001+11:00

Janice Revell in Fortune produced a really good summary for equity analysis. Read it here.

Again, what's the number one rule?

1 HOW DOES THE COMPANY MAKE MONEY?

If you don't know what you're buying, you're hardly in a position to know what you should be paying for it. So before you buy a stock, you need to get a handle on how the company earns its dough.

How did they value stocks?

2008-03-05T09:14:00.004+11:00

A good old article (from 2001, yep, 2001!!!) from Gretchen Morgenson in the New York Times discussing the ways that analysts and salesmen were trying to value stocks back in the internet bubble days. In short, because these companies weren't reporting positive earnings, folks were looking for something else to use as a valuation metric (like number of viewers, or internet clicks, or marketing expenditure). Turns out that turning a profit is still a good way to stay in business, and continuing to make losses is a good way to go out of business.

The article (page 3) also discusses the extensive use of 'pro-forma' earnings numbers being peddled by companies at the time (and it still continues).
Last para in the article reads:

Byron Wien, chief United States investment strategist at Morgan Stanley, is fearful that companies that spin their results using pro forma figures could do serious damage to investor confidence in the financial markets. "Corporations have a lot of flexibility in how they report results," he said. "Nobody knows more about the truth than the corporate executives themselves. Taking a short-term view of truth may make things look good in a quarterly report. But it will ultimately catch up with them."

That is a good description of what seems to be happening today.

And continuous today.

Warren Buffett

2008-03-05T08:58:00.005+11:00

Here's the latest Chairman's Letter from Berkshire Hathaway: pdf link. Have a read.

And a key section (from page 6):

Businesses – The Great, the Good and the Gruesome
Let’s take a look at what kind of businesses turn us on. And while we’re at it, let’s also discuss what we wish to avoid.

Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stockmarket purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.

A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business
“castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the lowcost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies
whose moats proved illusory and were soon crossed.

* Photo taken from JasonSmith's public flickr stream. Original photo found here.

When in doubt, blame the accounting rules

2008-03-03T10:29:00.003+11:00

That's what's happening in the U.S., with respect to losses being recorded by some of the financial services firms. The requirement that financial instruments be 'marked to market' means that when the value of the loans (i.e. the investment in the loans made by the financials) falls, this needs to be reflected in the balance sheet.

Wall Street Journal article. Key grafs:

But these market seizures are what have made market values so contentious. Robert Herz, chairman of the body that sets the accounting rules governing the use of market values, the Financial Accounting Standards Board, acknowledged the difficulty investors and companies are facing.

"But you tell me what a better answer is," he said. "Is just pretending that things aren't decreasing in value a better answer? Should you just let everybody say they think it's going to recover?"

Others who favor the use of market values say that for all its imperfections, it also imposes discipline on companies. "It forces you to realistically confront what's happening to you much quicker, so it plays a useful purpose," said Sen. Jack Reed (D., R.I.), a member of the Senate banking committee.