Analyst target prices

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

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?

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

Analyst influences market...

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

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

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

The old wall street is dead

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

Does private equity create wealth?

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

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

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

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?

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

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

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

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

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

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!

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

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

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

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

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

Babcock and Brown - profit warning fallout

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

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?

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

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

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?

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

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

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

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?

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

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

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

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"

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

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

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

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

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

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?

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?

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

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

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

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

Ten Questions Every Investor Should Ask

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?

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

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

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.

Got margin loans?

If you're a director, and you do have margin loans, get ready for some disclosure. The Australian reports that The Australian Securities Exchange and ASIC were going to require directors to disclose their margin loans. Red flag to a bear, anyone?

ABC Learning: debt issues

Some financial policy analysis; particularly leverage (debt).

The unfortunate ABC Learning again. The amount of debt, the conditions relating to the debt, and the quality of assets supporting the debt are all referred to here.

How to short sells and win!

Andrew Main in The Australian.

Current or non-current liabilties?

Turns out, the difference is important. Allco Finance Group, who've been in the news of late, issued financial statements with just under $2billion of liabilities classified as non-current, when they should have been current. Elizabeth Knight argues that they company and it's auditor (KPMG) should have been slightly more forthcoming about 'correcting the record'. She refers to both audit and non-audit fees paid to KPMG; two things often said to be associated with auditor independence.

Who's to blame?

Michael West summarises the gnashing of teeth about the current 'meltdown'.

Key paragraph:

There is a pattern to these implosions. Every company - Centro, Allco, MFS and now ABC Learning - have five things in common: greed, leverage, risk, suspect corporate governance and complex corporate structures.

and also:

Moreover, on transparency, we won't hear too much from the ASX as it has made a mockery of transparency by kowtowing to the big investment bank clients and making the broker identities on its own trading system anonymous. Its own disclosure is not good enough.

To ASIC, the corporate watchdog; both its bite and bark are small.

There's a book in the reasons why but one is cultural. The SEC in the US is a far more rigorous sheriff.

Let's see how much changes.

Meeting analyst forecasts

Is still considered important. Here's a report about QBE who missed analyst forecast in their recent half yearly profit announcements. Share price dropped, as is usually the case.

Continuous Disclosure

Lots of continuous disclosure matters around at the moment:
Allco Finance

Also ABC Learning - and the issue of disclosure of short selling.

In short, there are plenty of complaints that the continuous disclosure regime isn't doing what it's meant to be doing. This is on top of allegations that the ASX shouldn't be acting as a profit making enterprise as well as having a monitoring and regulatory role. Here's a piece by Bryan Frith that argues against a knee-jerk reaction in stripping the ASX of its regulatory role.

ABC Learning

Some analysis of ABC Learning, which seemed to have a bad day yesterday. And today.

Forecasting

Involves trying to work out what will happen in the future - a good starting point is to work out how things might change from what you currently observe. Here's an article that describes how analysts expect earnings to decline going forward.

John Durie highlights the problems in going from profits (largely capturing what has happened) to market price (capturing what the market expects to happen).

CORPORATE Australia is in a lot better shape than the stock market would indicate, but then that's due in part to the fact that the market is trying to predict a very uncertain future and that the profit results are yesterday's news.

Certainly, the numbers from high-profile companies released over the past week have done much to calm nerves, as shown by the dramatic turnaround in Wesfarmers' stock price yesterday from a 2.7 per cent fall to a 5.3 per cent rise in a matter of minutes after the release of its results.

It's good to be 3?

We're in reporting season at the moment, so lots of stories about companies' financial results. Here's one from 3 - note in particular how the company refers not only to various accounting measures: total loss, revenue, EBIT, but also non-financial numbers (like total customers and churn rate). It's how you analyse all of these factors that impact on your forecasts for such a company going forward.

Investing

The bottom line of this article is perhaps the most important.

MAKE sure you understand what you are investing in. If you don't, don't touch it.

That's pretty much what we try and convey in the Business Analysis week of the FSA course.

Insider trading

Apparently it happens on the ASX. Who'd a thunk it? So, how to make money if you're trading against insiders? Invest in Index funds or stocks, or be very careful if you're 'day trading'.

Off Balance Sheet Liabilities - the banks

Adele Ferguson in the Oz has a nice back page article on the extent of the off-balance sheet activities(typically exposure to derivatives) of the major banks. It's one of the reasons why the banks are especially hard to value using financial statement data alone.

Why do a buyback?

It's one way for managers to 'put their money where their mouth is'. Managers often say that the market undervalues their shares. Offering to buy back the shares gives a pretty clear signal of what managers think they're worth.

Here's Boral's buyback, recently announced.

Reporting season

It's half yearly reporting season, so plenty of articles about focusing on company profits. Note that most of these articles are going to compare actual profits with forecast profits, where the forecasts are based on what analysts anticipate.

Here's an example:
Coca Cola (The Australian)

Note also the use of 'pro forma' profits being used by managers. Pro forma earnings are GAAP earnings (i.e., determined in accordance with the accounting rules) with some adjustments. Usually the adjustments make the pro forma profit higher than the GAAP profit. Cochlear is an example.

Does the way you report a profit matter?

If you're a shareholder in the Commonwealth Bank (CBA), the answer seems to be yes. They announced yesterday that they would be coming into line with their peers and excluding from profit unrealised gains and losses on derivative securities used for hedging. This resulted in a big sell-off, on the expectation that CBA were sitting on big losses from their derivatives. Richard Gluyas reports in The Australian.

Turns out that CBA is sitting on a small unrealised profit, not loss. And the shares jumped back up.

Part of the problem is the lack of guidance in the accounting standards. From the first linked article:

Chief financial officer David Craig said in the announcement that the bank had examined the definition of cash net profit after tax used by its industry peers and analysts, given that accounting standards provided no guide on the components that should be included.

CBA, he said, had decided to adopt "emerging industry practice", excluding unrealised gains and losses on derivatives used for hedging purposes.