Thursday, October 13, 2005

Pension Plan Poker

Identifying the true cost of pension plans on a corporate income statement is an extremely frustrating financial analysis exercise. Pension obligations are actuarily rebalanced every three years depending on how the fund did (read is the stock market up or down). Corporate statements can skate around pending obligations and still comply with accounting standards and rules of disclosure.

Markets are fixated on quarterly results, yet pensions costs are only reconsidered every three years. Pension contributions need to be adjusted annually. This avoids reality suspensions followed by the obligatory unforeseen circumstances statement. By adjusting annually investors achieve transparency coupled with conscious understanding of financial reality. If its bad news then so be it. Your first loss is usually your sweetest. Investing is a full body contact endevour. Waiting three years only generates mega problems.

License Investor Relations Officers

others are required to register and be licensed to conduct business. Investor relations officers do not seem accountable in the same fashion. This at best leaves a wide range of standards in hiring practices. At worst the public is poorly served through both incompetance or outright wrong-doing.
Licensing and education training standards that would or should apply protect the public. Imagine this problem: An investor makes an inquiry and receives a response. The investor relations officer is an employee of the company and does not have any primary or strong obligations to the investor. This makes the caveat emptor dynamic highly tricky. At times it is impossible. We cannot rely on the current SEC process to protect the investor in many small and grey area matters. But the threat of lossing ones livelihood does provide a base line defense for the investing public.
Licensing would also help protect the investor relations officer against unscrupulous executives and managements from leaning on the individual and abusing their power as employer coercing inappropriate behaviours. Licensing would allow the investor relations officer to operate from an integrity platform and become the first line of defense against investor misinformation. Right now too many investor relations officers drive the get-a-way cars.

Weekend Follies Sep 17-18, 2005

Several culprits in the weekend follies. That is companies issuing news releases at odd hours over the weekend. This usually creates some keen skepticism with the Financial Skeptic requiring extra doses of caveat emptor.

They are
Mercury Air Group (AMEX:MAX)
Worldwide Restaurants (NYSE:SZ)
Oscient Pharmaceuticals (NASDAQ:OSCI)
Freescale Semiconductor (NYSE:FSL)
Centex Corporation (NYSE:CTX)
Digital Gas (OTC Pink Sheets DIGG)

Turning on a Dime

Corporate Executives seem to be able to turn on a dime when reporting bad news. Analysts , investors and financial journalists cover a stock and ask questions. Management continues to say no problem. Then sudden claims of unforseen problems. Investors find the problem suddenly left at their door step like unwanted babies.
Recently Open Text which trades on NASDAQ (symbol OTEX) did just that. Now everyone is speculating about what the real issues are. There should be penalties for managements which claim these surprises. I find it very hard to believe that large sophisticated companies do not have the radar to see most issues coming at them. If they do not then they should not be running a company.
When sudden reversals occur there should be more regulatory oversight with appropriate penalties.

Financial Fog

Words can obscure as well as inform. A business journalist recently reporting on Nortel's (NT on the NYSE) continuing executive suite turnover (apparently the lawyers are now leaving ....hmm) casually mentions that "Nortel recently returned to a regular financial reporting schedule". The sentence softens the intense financial pain that occured. Billions were lost. Thousands of jobs disappeared. Pain of every description imaginable occurred on a grand scale. But now Nortel is supposedly returning to a regular financial reporting schedule.
Call a spade a spade. Substantial malfeasance occurred to the point where executives could not properly report what their accounting position was. Investor trust was eroded. Financial fog terminology is laughable.

Category 5 Nonsense

An inordinate number of companies are issuing earnings warnings citing the devastating impact of Katarina. Many companies already had doubtful earnings outlooks. Now managements are hiding behind mother natures wrath and pretending that they were sort of OK before. The sad reality of disasters is that they do stimulate certain types of economic activity, while at the same time stripping away old legacies which no longer serve us well.
Truth be known some executive teams are just setting up their next bonus by reducing current expectations and hoping the corporate boat lifts with higher economic activity.

Google Spin

Google (GOOG) the latest internet stock darling announced the hiring of a Mr Cerf, touted to be one of the fathers of the internet. (shades of Al Gore) The stock is trading at stratospheric PE multiples and needs a lot to satisfy investor expectations. I become skeptical when the corporate spin machine continues to spew press releases about personalities. While it appears that Mr Cerf has a distinguished past and offers a lot in the future, Google is so large that one individual cannot make that much of a difference.
Sometimes when following executive appointments I think I am reading the sports page and not the business page. Long term investment and wealth creation does not rest on the abilities of one or two individuals.

Disclosure or Corporate Puffery

Investors suffer from information overload. Press releases are issued like rounds from a Gattling Gun. Some information is Reg FD oriented and of interest to the investor. Other information is corporate puffery designed to impress clients or suppliers. It probably confuses the investor. How is an investor to know what to pay attention to? The classic noise vs. substance conundrum. Important releases are to be filed with SEC and Edgar. But not all releases are labeled as having been so filed. This creates a grey area, which is too broad for an investor to monitor. If you cannot see it how will you possibly react?

Is their some way that an investor can identify a press release as being issued under Reg FD or other securities regulations without having to go to EDGAR or other government repositories?

I put this question to the SEC by email. Awaiting the response.

Weekend Skepticism

Bad news is frequently bled out into the investment mosaic over weekends and late evenings. There are some who feel that the investing comunity will miss the bad news. A review of corporate press releases over this Labor Day weekend has yielded several releases that create skepticism. Some were even issued in the wee hours of the morning. Keep an eye out for future developments.
NYSE Listed companies are Medtronic (MDT), Pfizer (PFE), Ace European Group (ACE).
NASDAQ listed companies are Affymetrix (AFFX), Stratagene (STGN), Chiron (CHIR), Flamel Technology (FLML)

Financial Blog Integrity

Seeking Alpha a financial blog listed on my Blog roll had an interesting observation about financial integrity of bloggers and other internet purveyors of financial information. In short the industry is short on integrity and long on games. This of course frustrates those who try to say something and then find themselves questioned by the cynical and jaded. Have a read, it is worth your time.
Just for the record the financial skeptic is here to point of the sins and foibles of the corporate and financial spin meisters. We hardly spend much time on anyone stock. There are too many problems to point out. While we do not spend time celebrating business much like main stream business media we do believe in reward for effort. We do not believe in reward for subterfuge and financial sleight of hand.

Exculpatory Legal Baffelgab

explaining the new spin off of their financial advisory subsidiary into a stand alone entity. This is an organization that wants to manage your money. The press release relied on too much exculpatory legal bafflegab. Essentially they want you to know about the transaction. But they need for some reason to have this weasal clause that basically says listen to us but for legal purposes we are not liable for anything. This from a company that manages private wealth. I know they are not the only company to rely on this sort of verbiage. Have a read if you can stay awake.
This release includes forward-looking statements, which are subject to risks and uncertainties. The words "expect," "intend," "will" and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to update or revise any forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, (i) the underlying assumptions and expectations related to the spin-off of Ameriprise proving to be inaccurate or unrealized, including, among other things, the likelihood of and expected timing for completion of the spin-off, the expected date the shares of American Express and Ameriprise will trade as separate issues, the timing and development of a "when issued" trading market for Ameriprise common stock and the timing of the mailing of the information statement to American Express shareholders, and (ii) the timing of the New York Stock Exchange's approval for listing of the Ameriprise common stock. Additional factors related to these and other expectations are detailed in the registration statement on Form 10, as amended, filed by Ameriprise with the Securities and Exchange Commission.
SOURCE American Express Company

Corporate Law Bad News 24/7

One of the blogs I follow is corporatelaw It is listed on my blog roll. Investors should look at this source of information. If you are used to the usual newfeed of regurgitated corporate spin this one will knock your head back. It actually reports on much of the malfeasance and other investor toxix events that are occurring. It seems that there is a never ending parade of lawsuits, SEC actions and criminal investigation into corporate wrong doings.

Teflon Communications

CEO persona's and corporate communications seem to be DNA clones of Teflon coating. Very important that nothing truly sticks but the sizzle and taste are crucial. Unfortunately because the wagons are circled and candid comments are rare, CEO's and corporations find it difficult to act in the context of unvarnished truth. The main fear I believe a CEO has is that once the teflon coating is scratched the frying pan is deemed hazardous to your health and destined for the garbage.
We want big things from a CEO. But investors listen closely if you want a fantasy go to the movies not the stock market.

Smoke Screens in the Investment Mosaic

Recent flurries of press releases caught my eye. General Motors, General Electric, Verizon and last but not least Wal Mart. Observe how companies create smoke in the investors perception.
General Motors just issued a press release announcing support for an Ethanol vs Gasoline project. Fuel Prices are crippling the western world and GM now wants you to now about an obscure project. Clearly the press release is designed to deflect attention away from consumption challenged models that are the GM mainstay.
General Electric announces two major projects into two major fields. The press releases create the appearance that they are taking over the world. No mention of any financial metrics. Basically just trust us with these two major new efforts. You have to be sure that internally GE's executives needed to go through the numbers to be convinced. But they chose not to share insights with investors. This is how companies suddenly change character, problems develop and suddenly everyone is saying wait a minute I did not know that about them.
Verizon issues five yes five press releases within one twenty four hour period. They are all product and marketing announcements designed to create the aura of an invading army making great strides on the field of battle. Much like the Pentagons recent drive to Bagdad. Sure you got there and now what.
Wal Mart had the sneakiest one of all. Recently they missed their sales number. Hey it happens no one is happy but what the heck. Next day Wal Mart issues a press release that they are now funding a missing child find help service. A noble cause. But the $200,000 donation is small change for Wal Mart. They need the latest news on investor screens to be something other than a missed sales report which has true investor significance.

Press Release Flurries

Beware the company that issues flurries of press releases. Just as winter flurries obstruct vision for drivers press release flurries obstruct vision for investors. If a company feels obligated to disseminate regulatory information at almost every turn of the business wheel then maybe its not business but a card game. Card games are unpredictable and contain many features beyond control of managers and investors. Casinos are not stock exchanges. Yet companies insist on issuing flurries of releases. This strategy, much akin to a duck beating the water with its wings before attempting to take flight, is designed to create the impression of much underlying business activity.

Bill Carrigan an independent stockmarket analyst writes on Aug 14 in his Toronto Star weekly column "Getting Technical" ".....Companies typically issue countless press releases in third up-leg advances in order to keep investors upbeat on the company's prospects and to invite new investors to the table-or trough"
Third leg is frequently the final leg. Many including I hold the view that press release flurries do indicate the end of the line.

Check out Bill Carrigans web site I have no connection with Bill Carrigan but find his insights useful.

Late Breaking News Sucker Factor

Corporations are increasingly relying on late day and end of week after hours SEC filings and press releases. The Machiavellian calculation is that investors large and small are not looking. The calculation has merit. Investors do not expect or are not inclined to be searching for news after supper on a Friday. Whatever happened to trading hours as determined by stock exchanges? This technique also bypasses the editorial cut off times of major business/financial media such as daily newspapers, CNBC, Lou Dobbs on CNN and other investment shows that air late in the day. The calamity continues the next business day when investors scan their screens, see news but conclude its old because it was issued yesterday or last week.
Reg FD and dissemination now requires us to monitor investments 24/7.

Investors Beware

Investors beware. Corporate press releases are full of spin tricks designed to lead you to their conclusions. One style of press release the seemingly benign corporate profile. There is no news here. The profile a sophisticated calling card attracts basic attention. Such critical information such as mission statements and url's are usually included. The news is not hard. Regulators look at it and say "so what there is nothing of substance". Yet a steady diet has an effect. Much like that pretty girl that walks by your table every once in awhile. You may tend to notice after a while. Be careful of the mood lighting and background music. She does want the attention and knows how to work it.

Courts interfere with SEC

Sad to say that business groups have obstructed the SEC from imposing excellent rules regarding the independence of Boards of Directors for Mutual Funds. What are they afraid of? Its a said day for capitalism when management does not want to be accountable to their boss. The shareholder investor. The independent investor put up the cash and hired management. Not the other way around.
Senior managers are acting like spoilt professional atheletes and trashy media celebrities. Wanting their cake and eating it also.
The market revolves around trust. Mutual funds and companies that without independent boards will eventually experience sub standard returns. Quite a few will crash and burn. Where will this court case be when more scandals hit the front page and our pocket books. Polticians will rush to enshrine these rules in hastily drafted legislation. Management has pulled the pin on the hand grenade. The grenade will eventually go off. Who will be holding it?

Reg FD is Working

Reg FD seems to be working according to Mark Chen an assistant professor at the University of Maryland. In an update to a study first presented to the American Finance Association in 2003 the professor is concluding that companies are no longer tipping analysts. Or at least they are not correcting their forecasts as closely. In pre Reg FD days analyst forecasts where almost always bang on. After Reg FD became law forecasts are no longer s accurate. The forecasts over time seem to be less accurate. It would appear that the sell side analyst operating without inside information is only capable of pedestrian results with an increasing component of guesswork.
Gee a sell side analyst who is not special. Why are they there in the first place. Caveat emptor.