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From: FinanceProfessor [FinanceProfessor@lb.bcentral.com]
Sent: Friday, December 21, 2001 5:55 PM
To: List Member
Subject: Argentina, Enron, executive ownership, the economy, and Merry
Christmas!!!

Argentina, Enron, executive ownership, the economy, and Merry Christmas!!!

FinanceProfessor News December 21, 2001

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FinanceProfessor.com
Bringing the Real World to the Classroom and vice versa!
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Top Stories
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1. Argentina
2. Enron
3. Corporate Ownership improves performance-maybe
4. 80s rewind: mergers and acquisitions
5. As if 2-11 weren't bad enough, Winfield loses $1 million
6. International Finance takes center stage
7. Is the economy picking up? Maybe.
8. A Christmas Miracle? Japan agrees to increase money supply!
9. Implied volatilities
10. MERRY CHRISTMAS!

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Wow, it has been a while, but I hope this makes up for it. You will definitely have something to read over the quiet days of break. LOL.

I do not even know where to begin. Two top stories and then great stories throughout. you definitely got your money’s worth this week :-) Oh wait it is free. I forgot. Well then Merry Christmas, or a more politically correct, happy holidays!

I do not know who is happier when finals are over, the students or the teachers, but money is on the teachers. It is such a relief to turn in grades. And yes all of my students passed this semester.

Sorry that it has been a while for the newsletter. I was out of town at a conference (New Orleans) and then finals, the combination of the two left me with zero time. But I am back and finals are done so I get to get back to this. It actually feels very good to be writing again., Hopefully I can keep up a more regular schedule this coming semester.

Congratulations to all of you who graduated this past week. You never get the publicity of spring grads, but you have earned it just the same. So congrats!

Oh, and Merry Christmas and Happy Holidays to all of you. Next week I will give you some New Year resolutions as well as a look back at the year.

jim

JimMahar@FinanceProfessor.com

and now the news:

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Top Story: Argentina
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After months of worrying about it, it finally happened. Argentina has a crisis on their hands. Violence erupted on Wednesday as thousands of protesters hit the streets. Unfortunately the protests turned violent as the mops went on a looting rampage that has left over twenty people dead and a new administration in office.

What set off this wave of violence? It is hard to say for sure but after roughly 4 years of recession, more fears of a currency downgrade, and an unemployment rate near 20%, it was only a matter of time before something gave. It seems the final straw may have been the freezing of bank accounts and the halting of government pension plans.

In response to the violence, the president declared a “state of siege” which allowed the government to enact stricter security for the next 30 days. The security came too late for many as not only were over 20 killed but also hundreds others were injured.

On Wednesday night Finance Minster Chavallo’s apartment was also reportedly attacked which led him to resign less than a year after taking over the position in an attempt to control government spending and right the economy. While his austerity plans were unpopular with the populace, contrary to the reports on Paul Harvey, Chavallo’s resignation may be bad news for the economy. Chavallo is a free market adherent who was responsible for trying to make sure Argentina repaid its debt without which future inflows seem even less likely.
http://www.washingtonpost.com/wp-dyn/articles/A3715-2001Dec19.html

As if that were not enough, President Fernando de la Rua resigned later on Thursday leaving a power vacuum at the top. No matter who is leading the country, either a currency devaluation or a default seems even more likely. Here Argentina, like others before it (can you say Mexico in 1994), is caught between a rock and a hard place. On one hand the nation can no longer afford to maintain the currency peg. Investors know this and this fear has led many investors and Argentine citizens alike to take their money out of the nation, which of course makes it even more difficult for the Central Bank to maintain the peg. On the other hand, many of the nation’s debts are dollar denominated (similar to the Tesbono debt during the Mexican crisis). Thus, a devaluation would make the debt even more expensive.

On Friday Ramon Puerta was named interim president until the congress can name a replacement. Fortunately for Puerta there is a 48 hour limit to his administration which means he may escape defaulting on the debt that comes due on Monday. (now do you see why we need a national bankruptcy provision to allow countries time to negotiate).
http://news.bbc.co.uk/hi/english/world/americas/newsid_1723000/1723066.stm

The other big fear is that the economic problems will spread to neighboring countries. Given the weak global economy, this crisis may spread more than the 1997 Asian Crisis. This is especially true since Argentine Bonds make up more than 20% of the JP Morgan emerging markets bond index. While this is a possibility, the likelihood of this happening has been out there for so long that many institutions have already written down their exposure.
http://news.bbc.co.uk/hi/english/business/newsid_1703000/1703997.stm
http://biz.scmp.com/ZZZTB1TYAVC.html
http://biz.yahoo.com/rf/011220/n20490912_1.html
http://www.dallasnews.com/business/stories/STORY.eae757414c.b0.af.0.a4.4add5.html

It is troubling that like the Asian countries before them, Argentina actually did quite a bit right. So will other countries be less willing to listen to the IMF and World Bank’s (and US) advice? Probably but if they want the money, they may not have much choice.
http://www.theglobalist.com/nor/readlips/2001/12-14-01.shtml

So what can Argentina do now? There really are no easy answers, but hopefully the citizens realize that it will take some time to correct the problems. My advice would be to follow the road map provided by Mexico and float the peso and try to swap the debt to extend the payment schedule, and then work like mad to prevent inflation. In this way, confidence can be maintained and hopefully the disastrous consequences of the peg will be alleviated.

If they do not devalue, a second-best alternative may be to dollarize their currency, which is to say they would adopt the US dollar as the official currency. This would halt the devaluation fear and except for a lack of flexibility really would not have much of a downside since the currency is currently pegged to the dollar. Of course, a default is still likely and it does not solve the problem of an overvalued currency if the exchange is made on a one for one basis which it probably would not. My guess is 1.75-2.00 pesos per dollar which is what I have heard the unofficial rate is approaching.

In this environment of much uncertainty, both the IMF and the US have been reluctant to make any definitive plans for aid. Treasury Secretary Paul O'Neill is on record as saying he would like to see less US and World Bank intervention. So this could be interesting.
http://breakingnews.scmp.com/Reuters/Business/fulltext.asp?ArticleID=Asia-79861

There is an important lesson to be learned from this crisis however. It is that no one prescription solves all problems. In 1991 when Chavallo pegged the peso to the dollar the move was seen as a bold stroke that would cut inflation and lead Argentina back to its former economic grandeur. While the peg was largely successful in cutting inflation, the economy suffered. Many Argentineans are blaming this unemployment on that as part of Chavallo's plans, many firms were privatized. This has led to layoffs since the government had not run the firms efficiently. Economic theory would suggest that with the increase in unemployment would come international investment (due to cheap labor) which in turn would improve the economy. But the peg, previously hailed as a savior, now became a burden as the peso was overvalued and few firms wanted to invest in Argentina. If there is a single prescription, it would be a floating rate with fiscal and monetary discipline. A pegged rate gives more discipline, a floating rate more flexibility. Each is needed at times, which would explain some of the ambiguous research that finds both fixed and floating rates to be beneficial.

For an argentine perspective
http://www.buenosairesherald.com/0_home/2_editorial/3_editorial/0112/01-12-17.html
http://dailynews.yahoo.com/fc/World/Argentina/
http://buenosairesherald.com/
http://buenosairesherald.com/1_business/business.html

Sources:
http://news.bbc.co.uk/hi/english/world/americas/newsid_1721000/1721201.stm
http://news.bbc.co.uk/hi/english/world/americas/newsid_1720000/1720265.stm
http://news.bbc.co.uk/hi/english/world/americas/newsid_1719000/1719785.stm
http://news.bbc.co.uk/hi/english/business/newsid_1719000/1719246.stm
http://dailynews.yahoo.com/h/nm/20011220/ts/argentina_dc_17.html
http://www.chron.com/cs/CDA/story.hts/business/1178406
http://news.bbc.co.uk/hi/english/business/newsid_1721000/1721498.stm
http://dailynews.yahoo.com/h/nm/20011219/ts/argentina_dc_8.html

on the events that lead to this crisis:
http://news.bbc.co.uk/hi/english/business/newsid_1721000/1721103.stm

a good Q&A on the crisis
http://news.bbc.co.uk/hi/english/business/newsid_1721000/1721061.stm

http://www.msnbc.com/news/674372.asp

other sources
http://biz.yahoo.com/rf/011220/n20320878_1.html
http://biz.yahoo.com/rf/011220/n20126355_2.html
http://www.washingtonpost.com/wp-dyn/articles/A9675-2001Dec20.html
http://news.bbc.co.uk/hi/english/business/newsid_1701000/1701134.stm
http://dailynews.yahoo.com/h/nm/20011212/bs/economy_argentina_dc_26.html

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Top Story II : Enron
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I had originally put all of these stories into the various categories, but decided that with so much overlap, it was worth just making it a second lead story:

What has happened?
Yes Enron is still in business. That may surprise some of you. However, their firm is a small shell of its former self. Thousands of employees have been let go and those who still have jobs are looking elsewhere. The mood sober and from the emails I have received no one (which is obviously a bit of exaggeration) wants to be there.

Most of the news over the past two weeks has been on the economic fall-out from the collapse. Fortunately, and somewhat surprisingly, there have been no other large after shocks. In spite of large losses (JP Morgan has now twice upped its estimate, now about $2.6 billion!), no other firm has yet to be sucked under in Enron’s wake.
http://www.msnbc.com/news/675290.asp
http://www.chron.com/cs/CDA/story.hts/special/enron/1180683
http://www.nytimes.com/reuters/business/business-utiliies-enron-jpmorgan-suit.html
http://dailynews.yahoo.com/h/nm/20011211/bs/utiliies_enron_jpmorgan_suit_dc_1.html
http://www.nytimes.com/2001/12/21/business/21ENRO.html

The collapse has set off the anticipated Congressional investigations and “cry sessions” (oh sorry these are fact-finding meetings) complete with subpoenas to assure that company officials testified.
http://biz.yahoo.com/rf/011220/n20236135_1.html

The overriding theme through out all of this is that the company was not very up front with their accounting practices. By hiding liabilities off of the balance sheet in subsidiaries, the company looked much healthier than it was. Few (and some say even few at the company) actually knew the true health (or lack there of) of the company. It appears a case of the firm successfully pulling the wool over investors eyes but in the process blinding themselves as well.

Who is to blame?
Of course company officials, but they are not alone. It is troubling that the auditors (Arthur Andersen) did not dive deeper and find at least some of these problems. Predictably be Andersen officials are blaming the company and trying to sell a fraud case.
http://www.nytimes.com/2001/12/14/business/14NORR.html -HIGHLY recommended!
http://www.nytimes.com/2001/12/16/business/yourmoney/16WATC.html

So what is next?
A break up. Most of the firm’s assets will be put up for auction in January. State courts still have to decide whether Enron’ 16,500 mile pipeline (possibly their most valuable asset) is included in that auction or not. Dynegy wants it and claims to have a right to it even though the rest of the deal is off. (In not so many words what the argument is about is whether Dynegy can buy the pipeline subsidiary (Northern Natural Gas Co.) even though they are no longer interested in the parent firm. Enron maintains the original deal was for the entire firm, and Dynegy can not buy a la carte.
http://www.chron.com/cs/CDA/story.hts/business/1180150

Citigroup appears to be the most interested bidder for the energy trading operations of Enron. But even here there are problems. What are energy trading operations but intangible assets (i.e. people!). So the price any bidder will pay is going to be significantly less than

One worry from all of this is that the problems at Enron will lead to further regulation and less free markets. While stressing that it did nothing wrong itself, the SEC is investigating ways to ensure that this does not happen again.
http://biz.yahoo.com/rf/011211/n11137597_1.html
http://biz.yahoo.com/rf/011211/n11369789_1.html

A troubling aspect of this is the impression that it has given some in other nations. For example Dawn.com, Pakistan’s English language paper, ran an article saying that Enron was the downside of free markets. To quote: “the sudden demise of one of America's top ten multinationals explains how power, greed, cover-ups, lust for profit and lack of transparency define the transition of corporate America from old economy to the 'New Economy'.” This is sad. With freedom comes responsibility and like it or not US firms are role models for others. Don’t abuse the power/freedom.
http://www.dawn.com/2001/12/20/ebr5.htm

and finally
How bad has it gotten for Enron employees? Some Houston area stores are now offering special discounts for former employees! So if you worked for Enron, your Christmas shopping got a bit cheaper.
http://www.chron.com/cs/CDA/story.hts/business/1178271

for a complete look at the Enron case, check the Houston Chronicle’s index:
http://www.chron.com/content/chronicle/special/01/enron/index.html

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Corporate Finance
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Guess what? Core and Larker have found that mandatory stock ownership plans actually work. They look firms that adopt mandatory stock ownership plans and find that in the two years following the adoption of the plan, accounting performance increases and for the first 6 months at least there is a statistically significant abnormal stock return as well. M concern is that there is a selection bias here. The firms that adopted the plans had very low ownership to begin off with and previous literature has already found a non linear relationship. Secondly, these firms adopted the plans voluntarily and thus timing may be an issue (i.e. we will adopt now since the stock is undervalued and we would be buying anyway). That said I did like it and more importantly the editors at the JFE liked it!
http://jfe.rochester.edu/01108.pdf

As promised I tracked down a copy of the Carter, Simkins, and Simpson paper on diversity of corporate boards of directors. (remember this was after we saw that the UK has very few women on their boards while the US has more bit still not as many females as males). They find that for Fortune 1000 firms, more board diversity (women, blacks, Asians, and Hispanics on the board) results in higher firm values (as measure by Tobin’s Q). An interesting result. I am surprised. I would have guessed there was no difference.
(Unfortunately the paper was mailed to me and I can not find a link on line. I am sure that any off the authors would send you a copy (they are all at Oklahoma State or just email me and I will ask them for you.)
http://www2.bus.okstate.edu/

There were so many takeovers and takeover battles this week that the news took on a feel of the mid 1980s.
Spotlight mergers:
Gee if this is not a text book example of Singal’s 1996 Journal of Business article, I do not know what is. If you remember, he found that airline mergers tended to both increase both efficiency and market power. This week Hawaiian airlines and Aloha Airgroup merged and I am sure they are hoping he is right!
http://www.msnbc.com/news/675513.asp
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=7207

AT&T’s sold its cable assets to Comcast for $72 million. The deal makes the nations largest cable provider. Microsoft, an owner of Comcast, reportedly pushed hard for the deal to prevent AOL from winning because AOL would then presumably have an advantage over Microsoft for DSL connections. The deal itself is pretty interesting as it appears to be more of a merger of equals. For example the new 12 person Board of Directors will be made up of 5 from each firm and 2 outsiders. AT&T shareholder will still own the majority of the stock (66% of voting rights, 56% of cash flows). http://cbs.marketwatch.com/news/story.asp?guid=%7BDF99AB69%2D1BDE%2D4457%2DAC31%2DB3614CF5DE27%7D&siteid=mktw
http://www.washingtonpost.com/wp-dyn/articles/A3657-2001Dec19.html
http://www.washingtonpost.com/wp-dyn/articles/A6229-2001Dec20.html
http://www.msnbc.com/news/675504.asp
http://www.nytimes.com/2001/12/20/business/mutual/20ASSE.html
http://www.washingtonpost.com/wp-dyn/articles/A9733-2001Dec20.html
http://news.bbc.co.uk/hi/english/business/newsid_1702000/1702241.stm

There really were so many deals I will just list some of them:

1. Amgen agreed to buy Immunex in a $16 billion deal.
http://www.washingtonpost.com/wp-dyn/articles/A52998-2001Dec17.html
2. Royal and P&O cruise lines’ battle has Turned hostile and may end in an auction/bidding war.
http://biz.yahoo.com/rf/011217/l16444040_4.html
http://news.bbc.co.uk/hi/english/business/newsid_1719000/1719371.stm
3. The Nestle-Ralston deal won governmental approval.
http://biz.yahoo.com/rf/011211/l11327926_1.html
4. Vivendi received approval to buy Seagrams
http://biz.yahoo.com/rf/011219/n19217970_1.html
5. After a long battle it looks like Weyerhaeuser may get Willamette after all. It just took a third party to show some interest.
http://biz.yahoo.com/rf/011211/n1145770_2.html
http://dailynews.yahoo.com/h/nm/20011219/bs/timber_willamette_stocks_dc_1.html

While it may look like every deal gets done. in fact some announced deals never make it to the altar. For example, Lonestar said they could not get the financing for their purchase of Cargill’s steel unit and the time on the initial agreement ran out. The firms can renegotiate a new deal if both sides agree, but for now no deal.
http://biz.yahoo.com/rf/011217/n17215758_1.html

The Compaq-HP deal remains in trouble. Depending on whom you believe management may have threatened to quit if the deal were not done, but it does not look good right now. Things have gotten so bad that the firms are running ads in newspapers to try to convince shareholders that the deal is a good one. Stay tuned.
http://news.bbc.co.uk/hi/english/business/newsid_1704000/1704830.stm
http://www.nytimes.com/2001/12/10/technology/ebusiness/10CARL.html
http://dailynews.yahoo.com/h/nm/20011211/bs/tech_compaq_dc_4.html
http://www.chron.com/cs/CDA/story.hts/business/1178424
http://www.chron.com/cs/CDA/story.hts/business/1179972

One complaint of firms doing business internationally is the lack of a single standard to follow for takeovers in various countries. If the EU is successful that may change in the near future as a single set of laws would govern takeovers in the European Union.
http://news.bbc.co.uk/hi/english/business/newsid_1704000/1704481.stm
http://news.bbc.co.uk/hi/english/business/newsid_1703000/1703399.stm
http://marketplace.org/redirect/economist4.html
http://www.economist.com/printedition/displayStory.cfm?Story_ID=905116
http://news.bbc.co.uk/hi/english/business/newsid_1702000/1702241.stm

Corporate focus still is a hot topic (or at least hot again) as Xerox announced plans to turn its PARC-Research subsidiary into a separate company and that was quickly followed by Citigroup’s announcement that they would carve out up to 20% of Travelers and then spin-off the rest. The 20% number is important since a spin-off can only be considered tax-free if 80% or more is spun-off (that is given) to shareholders.
http://biz.yahoo.com/rf/011211/n11328902_1.html
http://dailynews.yahoo.com/h/ap/20011219/bs/citigroup_travelers_4.html
http://www.nytimes.com/2001/12/20/business/20CITI.html

In the aftermath if the Enron bankruptcy other energy firms rushed to improve their balance sheets. Dynegy issued equity after it was downgraded in sympathy to Enron and Calpine was rumored to be doing likewise. But instead the energy provide privately place convertible debt.
http://biz.yahoo.com/apf/011219/calpine_concerns_3.html
http://biz.yahoo.com/rf/011211/n11155545_1.html
http://biz.yahoo.com/rf/011217/n17201967_1.html

The slow economy took its toll on credit ratings as Kmart, Dynegy, and LTV were downgraded. Of the firms, only LTV appears to be in serious trouble. They will likely end up going out of business. They have publicly stated their stock is worthless and seemingly exited the steel making industry. http://www.dallasnews.com/business/stories/STORY.eaddcacfc9.b0.af.0.a4.1b4af.html
http://biz.yahoo.com/apf/011218/ltv_bankruptcy_1.html
http://biz.yahoo.com/rf/011219/n19150297_1.html

One complaint of firms doing business internationally is the lack of a single standard to follow for takeovers in various countries. If the EU is successful that may change in the near future as a single set of laws would govern takeovers in the European Union.
http://news.bbc.co.uk/hi/english/business/newsid_1704000/1704481.stm
http://news.bbc.co.uk/hi/english/business/newsid_1703000/1703399.stm
http://marketplace.org/redirect/economist4.html
http://www.economist.com/printedition/displayStory.cfm?Story_ID=905116
http://news.bbc.co.uk/hi/english/business/newsid_1702000/1702241.stm

Wow, a tech IPO. Yes, PAYPAL.COM is going public! Look for it in early 2002.
http://biz.yahoo.com/rf/011217/n17219316_2.html

Speaking of IPOs, CSFB settled with the SEC probe. This settlement surprised many and is close to an admission of guilt. If you remember they were accused of taking extra commissions in return for giving their “better customers” more shares for hot IPOs.
http://dailynews.yahoo.com/h/nm/20011211/bs/financial_csfb_settlement_dc_2.html
http://news.bbc.co.uk/hi/english/business/newsid_1703000/1703389.stm

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Investments
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As if a 2-11 record weren't bad enough, Antoine Winfield of the Buffalo Bills reportedly lost over $1 million by investing through a fraudulent broker who rather than investing the money, used it for his own credit card bills and other loans. The broker Dunyasha Yetts is accused of taking nearly $1.8 million from 14 investors. Gee, the Bills should have taken me up on my offer to speak to them in return for GM Tom Donahoe speaking to my class.
http://biz.yahoo.com/rf/011220/n20301387_1.html

Warren Buffett thinks the market will return between 7-8% annually over the next ten years. This is obviously less than in the past 10 years and more in line with a lower equity premium that we have spoken of several time sin recent months.
http://cbs.marketwatch.com/news/story.asp?siteid=mktw&dist=mktwsnap&guid=%7B1BA5EE42%2D22FB%2D4E7D%2DBDA1%2DB6F27AAC030D%7D

DIVERSIFY! Yes I am YELLING! Your heart just goes out to the people who lost the majority of their wealth through the Enron debacle. It is sad. Again the lesson #1 we have to take from it is to diversify!!!
http://www.dallasnews.com/business/stories/STORY.eadd5ceeda.b0.af.0.a4.78bc.html
http://www.chron.com/cs/CDA/story.hts/business/1178373

The makeup of the NASDAQ 100 is being changed on Christmas Eve. 13 new firms, including 8 health care, however 92% of weight is still on tech stocks.
http://biz.yahoo.com/rf/011217/n14256695_2.html

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Financial Institutions and Markets
(also Money and Banking)
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President Bush nominated two accountants to be commissioners for the SEC.
http://biz.yahoo.com/rf/011220/wat025513_1.html

Exactly how much some insurance companies have to pay in terrorist-related claims will be settled in court.
http://globalarchive.ft.com/globalarchive/article.html?id=011218006691

$100,000 is not what it used to be but for now it is what the FDIC insures up to, so be careful. Best advice? Why take a chance? Open an account at another bank.
http://www.marketwatch.com/news/story.asp?siteid=yhoo&dist=yhoosnap&guid=%7B4FB222B2%2D669E%2D47B8%2D80BA%2D1BE5E8982B43%7D&

A consequence of issuing a new currency is that many people who have been hoarding cash to avoid taxes (or to get around regulations), are faced with a giant dilemma: turn in the cash (and face getting caught) or led it grow useless.
http://news.bbc.co.uk/hi/english/business/newsid_1720000/1720943.stm

How do you get bad debt off your balance sheet? You sell it. Just like the Bank of New York. Of course the sale takes place at a discount.
http://biz.yahoo.com/rf/011220/n20254061_1.html

Was it coincidence that there was a surge in credit card bills from the WTC just prior to the attacks?
http://dailynews.yahoo.com/h/nm/20011216/ts/attack_wtc_germany_dc.html

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International Finance
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In a forthcoming JFE (Journal of Financial Economics) Bris and Koshinen look at leverage and currency crises. Given the events in Argentina, it seemed like a good time to read the article and it was! The basic idea is simple enough, firms will not invest if the currency is overvalued. But allowing the currency to drop will result in debt problems. (gee, sound familiar?). The solution? Devalue and let the companies get into trouble, but then bail them out so that they still have incentives to invest again in positive NPV projects. (Basically so that the benefits of the projects to do accrue solely to bond holders).
http://jfe.rochester.edu/01049.pdf

Is there hope for Argentina? YES! Consider the Mexican peso. Through a sound monetary policy and less corruption, the Mexican Peso is rising and the economy strong again.
http://www.dallasnews.com/business/stories/STORY.eadd93e010.b0.af.0.a4.b1b62.html

FINALLY!!!! Let’s hope they mean it. Japan’s troubles continue to get worse. Now the country is being forced to curtail government spending due to the escalating government debt. While these cuts are being considered., the economy continues to slow as bank woes continue to pile up. But there is light at the end of the tunnel. First there was a report on a rumor that the US is not opposed to letting the Yen weaken. Good. But then the great news: a miracle happened and on Thursday the Bank of Japan said they were aggressively buying back debt. This of course will increase the money supply by putting cash back in the hands of those that sold the bonds. If they actually mean it, this is the best news in months for the Japanese economy.
http://www.nytimes.com/2001/12/20/business/worldbusiness/20YEN.html
http://biz.scmp.com/ZZZTB1TYAVC.html
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3GT1K0EVC&live=true&tagid=ZZZZV1CYA0C&Collid=ZZZ563ECC0C
http://news.bbc.co.uk/hi/english/business/newsid_1705000/1705015.stm
http://news.bbc.co.uk/hi/english/business/newsid_1702000/1702929.stm
http://news.bbc.co.uk/hi/english/business/newsid_1718000/1718792.stm
http://biz.yahoo.com/rf/011220/n20333474_1.html

Only weeks after WTO admission, China used the threat of a lawsuit to settle their trade dispute with Japan. (Remember the best battles are sometimes those not fought!) The conflict has arisen over import duties stemming from Japanese protection of their agriculture.
http://biz.scmp.com/ZZZOB1TYAVC.html
http://news.bbc.co.uk/hi/english/business/newsid_1723000/1723007.stm

Following China’s lead, Russia moves closer to WTO inclusion
http://news.bbc.co.uk/hi/english/business/newsid_1704000/1704243.stm

Is he bluffing? Eddie George, the governor of the Bank of England, not the Tennessee Titan, said that the Euro may not be right for the UK,
http://news.bbc.co.uk/hi/english/business/newsid_1722000/1722940.stm

Risks are one reason why people do not like to do business internationally. Of these risks, one of the least hedgeable has been political risk. That may be changing as more insurance companies offer political risk insurance. For example in Africa “the African Trade Insurance agency (ATI), backed by the World Bank, provides cover against political risk in Kenya, Rwanda, Burundi, Malawi, Tanzania, Zambia and Uganda, and plans to expand to other countries soon.”
http://news.bbc.co.uk/hi/english/business/newsid_1703000/1703817.stm

Speaking of Africa, the common currency may come into effect after all. They even have a name. It will be called the Eco. A large step is to somehow link the economies more closely and to lower inflation. If those things are not done, a common currency may be destined for failure.
http://news.bbc.co.uk/hi/english/business/newsid_1723000/1723943.stm

The BBC provides a look at the German view of the Euro as the time for conversion approaches. In a word…ZZZZZ….. http://news.bbc.co.uk/hi/english/business/newsid_1701000/1701489.stm

In another story that just will not go away, the US is maintaining its stance that Mexican trucks should not be allowed on US roads without inspections. Of course it is not to protect US truckers (well maybe indirectly-pun?) but because of safety and environmental concerns. Mexicans are obviously upset and have sued. My advice to Mexico (like they want my advice) is to adopt the US laws and then if they (we) don’t let you in, you have a real case.
http://www.chron.com/cs/CDA/story.hts/business/1178352

If you scratch my back, I’ll scratch yours. In return for their help, Pakistan is in line for much money from the US, the World Bank, and just about everyone else.
http://www.dawn.com/2001/12/20/ebr7.htm

What is good for the goose is good for the gander. Right? so why can the US subsidize farmers. Brazil does not like it and is threatening to hold up the Western Hemisphere Free trade zone.
http://news.bbc.co.uk/hi/english/business/newsid_1718000/1718983.stm
http://www.nytimes.com/2001/12/19/business/worldbusiness/19BRAZ.html

In a related article which will definitely be used in class! Globalization is a difficult issue. The upside is well known. Only through free trade can specialization develop. This makes everyone better off and through trading the world is made a better and probably safer place. Unfortunately, that is not the view that much of the world has of free trade. Why? Globalization leads to changes and changes are difficult and take time. In fact maybe we should say in the long run globalization is good for all nations. In the short run it is not necessarily so. Why? Because many less developed nations are at a competitive disadvantage. To make matters worse they see developed countries subsidizing their industries (including agriculture-for example through large state sponsored Agriculture programs) but when the LDC places tariffs on products to combat these subsidies, the poorer nation gets harshly criticized.
http://www.dawn.com/2001/12/20/ebr15.htm

The timing of this article is perfect. In the week of the argentine crisis many Argentineans are blaming their troubles on the privatizations that occurred over the past 10 years. What they fail to see however, is that while the privatized firms laid off many workers, it was because the firms had become inefficient. Dawm.com provides a look at the same problem in Pakistan’s financial sector. Privatization will result in lay-offs but it is the medicine that is needed to allow them to compete internationally.
http://www.dawn.com/2001/12/20/ebr12.htm

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Economics
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First the good news: the economy gave more signs that it was picking up again this week. The Conference Board’s Leading Economic Indicators rose by a larger than expected .5%, and consumer confidence climbed for the third week. Moreover the Philadelphia Fed’s survey of economic forecasts said things should improve, and a survey of Merrill Lynch portfolio investors showed that at least some investors are turning decidedly more upbeat on the economy. Not convinced yet? Housing starts were up, and initial jobless claims were down again.
http://www.msnbc.com/news/675138.asp
http://www.washingtonpost.com/wp-dyn/articles/A6229-2001Dec20.html
http://biz.yahoo.com/rf/011221/n21335664_1.html
http://dailynews.yahoo.com/h/nm/20011221/bs/economy_consumers_dc_2.html
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3W5Z6WDVC&live=true&tagid=ZZZZV1CYA0C&Collid=ZZZ563ECC0C
http://news.bbc.co.uk/hi/english/business/newsid_1704000/1704753.stm
http://dailynews.yahoo.com/h/fo/20011220/bs/first-time_jobless_claims_down_1.html
http://www.chron.com/cs/CDA/story.hts/business/1182001

But not all news was good. The US GDP was revised downward further to -1.3% for the third quarter. Additionally income and consumer spending shrunk in November. Add to it many thousands of layoffs and while the tea leaves suggest a turn around, it is far from certain.
http://www.washingtonpost.com/wp-dyn/articles/A12066-2001Dec21.html
http://news.bbc.co.uk/hi/english/business/newsid_1723000/1723686.stm
http://dailynews.yahoo.com/h/nm/20011221/bs/economy_spending_dc_2.html

The Fed is not convinced the economy is strong enough and last week cut rates yet again. The new Fed Funds target is 1.75%. It should be noted that while many loans did readjust, most credit card loans did not and as consumers are carrying more debt on their cards, some are questioning the benefits of the cut. That said, I disagree with the view and believe the Fed’s cuts still do matter, but concede that they probably had more of an impact before.
http://www.nytimes.com/2001/12/11/business/11CND-FED.html
http://news.bbc.co.uk/hi/english/business/newsid_1704000/1704172.stm

The IMF is likewise not convinced of the economy’s strength and lowered their estimates for both the US and the world at large.
http://www.dallasnews.com/business/stories/STORY.eadd5ceeda.b0.af.0.a4.f61.html
http://news.bbc.co.uk/hi/english/business/newsid_1717000/1717780.stm

Why are interest rates so low? One big reason is that inflation is so low, in fact many are now suggesting that deflation may be a greater risk in the US than inflation. Inflation in other countries is also low with the UK setting a record low and across most of Europe prices are barely rising due to a slow global economy and falling energy prices. http://news.bbc.co.uk/hi/english/business/newsid_1703000/1703515.stm
http://news.bbc.co.uk/hi/english/business/newsid_1703000/1703397.stm
http://news.bbc.co.uk/hi/english/business/newsid_1719000/1719376.stm
http://news.bbc.co.uk/hi/english/business/newsid_1717000/1717407.stm
http://www.dallasnews.com/business/columnists/robertdodge/STORY.ead3998d25.b0.af.0.a4.8f362.html

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Personal Finance
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Is social security you main retirement plan? If so you are not alone. It is unfortunate but many have come to rely greatly on Social Security for their retirement. It should be noted that when it started, social security was only supposed to be a supplement to existing retirement plans not as the sole provider. The thrust of the article is on why people save so little. While there is no real answer one reason the obvious answer is that people give in to temptation too much. (well, yeah) By Hal Varian!
http://www.nytimes.com/2001/12/20/business/20SCEN.html

What are the odds you will be laid off due to the poor economy? If you believe Dismal.com a whole lot higher than I would have imagined. They estimate 1 in 20. Best advice? Pay down debts if possible and work hard. (by the way, if you have noticed I no longer link to Dismal.com. The reason is they switched to a pay site.)
http://marketplace.org/features/layoffs/

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Energy Markets
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Norway, a non-OPEC nation, agreed to further production cuts as the price of oil stays low. Like the other non-OPEC countries, Norway’s cuts are contingent on OPEC cutting. Look for that to happen in the December 28th OPEC meetings.
http://www.washingtonpost.com/wp-dyn/articles/A54341-2001Dec17.html

The electric power grid is the infrastructure that transports electric energy around. It is the infrastructure upon which all deregulation is based. That is why the Federal Energy Regulatory Commission recent report was so anticipated. It found that there are bottle necks (wow, a shocking finding! –pun intended) that slow the flow of energy and cost consumers. FERC reports that to fix these bottlenecks would cost over $12 billion and would have only saved consumers about $1 billion OVER THE PAST TWO YEARS! Surely a negative NPV project And yet, many are advocating doing the upgrade. The only rationale that makes this economically justified is if the savings will be much greater in the future which does make sense but is not mentioned in the article. (BTW an interesting point of this is who would pay for it. Suppose a bottleneck is in West Virginia (as the story suggests), thus electricity can not flow through WVA easily but WVA has enough of it for its own needs. Should WVA pay for it even though the others need the power?)
http://www.msnbc.com/news/675679.asp

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Money and Politics
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Well, its politics as usual again. After a period of agreement following the 9-11 attacks, this week the bickering returned and with it came the likely demise of any large economic stimulus plan. The Republican House and Democratically controlled Senate can not agree on what the package should include. Ultimately some bill will likely be passed, but for now more bickering, and the end result will be a watered-down bill that will satisfy few. And who knows, even Bush is now saying we may not need it as the economy may be healing itself (oh wait, heaven forbid we say the Fed’s cuts are working!)
http://www.washingtonpost.com/wp-dyn/articles/A3657-2001Dec19.html
http://www.washingtonpost.com/wp-dyn/articles/A57164-2001Dec17.html
http://biz.yahoo.com/rf/011220/n20283477_1.html
http://biz.yahoo.com/rf/011221/n21360320_2.html

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Financial Service Industry
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It was a bad year for insurance companies who had to pay out nearly 3 times the amount they paid out in 2001. Biggest reason? The Terrorist attacks which make up roughly half of all of the payments.
http://www.msnbc.com/news/675699.asp

After a long dry spell there were some big winners in the AT&T Comcast deal. It is estimated that the deal brought Wall Street Investment Bankers between $200-$300 million.
http://biz.yahoo.com/rf/011220/n20243712_2.html

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Derivatives
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One puzzle that for a long time has been tossed around is the finding that implied volatilities tend to be higher than the realized volatility. Mikhail Chernov has one explanation of this bias. It is because options :contain a risk premium non only on the asset itself, but also on it’s volatility.” That is you are getting an option on volatility as well. This would suggest that the bias is greater the more uncertain the volatility is. (BTW for those of you at SBU, Jeff Peterson has been saying this for quite a while, now he has another source :-) ) (also Mike has his PHD from PSU which is always worth mentioning!)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=292979

OK, we preach against it in class, but firms still “selectively hedge.” What is that? a fancy way of saying they hedge when they think things are going to go bad for them but do not hedge when they think things will move in their favor. Obviously this will not be successful unless they have superior information. Brown, Crabb, and Haushalter looked at this and found that firms do change their hedging strategies over time and at least for gold firms, appear to know when to hedge more and when to not hedge as much. That said, I am not going to change my teaching notes--Hedge, do not speculate! Indeed this may be used to support the view: managers did not appear to have a comparative advantage in forecasting milk or durable good prices but only in gold.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=286623

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Real Estate
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For now at least home builders seem unhurt by slow economy. New home starts jumped a staggering 8.1% for the month of November.
http://biz.yahoo.com/rf/011221/n21369447_3.html

Real Estate makes up a greater percentage of net worth for smaller investors. No, go figure. Financial asset ownership is much more concentrated. Short view: financial assets are more volatile but worth more. Interesting factoid: the worth of financial assets passed real estate as in 1993.
http://www.dallasnews.com/business/columnists/scottburns/STORY.eae230e486.b0.af.0.a4.3e64b.html

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Accounting News
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It seems like more and more firms are doing everything they can to not say anything is wrong. There is a thin line between putting a positive spin on the news and outright lying.
http://www.washingtonpost.com/wp-dyn/articles/A52058-2001Dec16.html

Egads, In what is certain to make waves in accounting classes, the IRS is now allowing more firms to switch from accrual accounting (where items are recognized when earned or when used, to cash basis accounting (where items are recognized when paid for. Service firms with less than 10 million in revenue can now make the change. While I do not really agree with him, Dan Donner offers a great quote in the article: “The accrual method of accounting is so confusing that it makes college football's Bowl Championship Series formula look like simple, logical first-grade arithmetic.”
http://www.washingtonpost.com/wp-dyn/articles/A52486-2001Dec16.html

Beginning in the spring, the SEC is requiring firms to make fuller disclosure of all employee option plans. The aim of the new provision is to prevent what the Washington Post calls “dilution in the dark”. This is when investors do not know the number of options that are outstanding and that could be exercised.
http://www.washingtonpost.com/wp-dyn/articles/A3392-2001Dec19.html

At least two of the big five have reported earnings and things were better than expected!. PWC and KPMG each reported better than expected earnings for 2000.
http://biz.yahoo.com/rf/011220/n20267905_1.html
http://biz.yahoo.com/rf/011220/n20191720_1.html

There are few reporters that I like more than Floyd Norris of the NY Times. This week he attacks the pension plan accounting that allows firms to record what they think they will make and not actually what they make.
http://www.nytimes.com/2001/12/07/business/07NORR.html

The corporate alternative minimum tax (AMT) will not be ended anytime soon. If you remember the cutting the AMT was proposed by the Bush administration in the aftermath of the WTC disasters.
http://biz.yahoo.com/rf/011211/wat025454_1.html

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Recaps and Summaries
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Well it is almost the end of the year and that means look-backs at some of the main newstories of 2001. CBS Marketwatch offers us a first look back.
http://cbs.marketwatch.com/news/story.asp?dist=dhtml&siteid=mktw&guid=%7B58F213EE%2DD2C9%2D49D4%2D888F%2D5606E0F9462C%7D

ERISK also gives their list now. I took great strides to not read it as I was getting the link for you. I want to do my list before I am biased by any of these other lists.
http://www.erisk.com/news/weekly/news_weekly2001-12-21_01.asp

What do you think the top 5 stories were this year? Email me. Next week I will give you my list. JimMahar@FinanceProfessor.com

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Teaching Ideas
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Well it is time to look back on the past semester and see what worked and what didn’t work. This can be a very valuable way to improve one’s teaching.

Things that worked: allowing cheat sheets, cumulative finals, mixing web and blackboard notes, three tests, tying in current events, review sessions prior to tests, anti-plagiarism software

Things that did not work as well as expected/hoped: online office hours (via instant messaging), afternoon downloads (too slow), tests during class time, going to two conferences in a semester.

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What I am reading
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It is funny, just before I left for the AFAA conference in New Orleans I was asked how do I always find such good books. The reason I think it twofold. One I really like to learn and see what the author/subject things about the topic (be it fiction or nonfiction), but the second thing is that I do try many books and some I do not like, I just do not put them here. The reason that it is funny is that I had just such o book on the plane on the way back from New Orleans. But that said, trying so many different books leads me to find quite a bunch of really good ones.

Still enjoying In a Sun Burned Country by Bill Bryson. It is remarkable how he mixes humor and learning. On minute he will be telling the story of the settlement of Australia and the next making fun of it with unerring good nature.
http://www.amazon.com/exec/obidos/ASIN/0684863650/finpapers/104-9378365-5272442

I started and finished “It’s not about the Bike” by Lance Armstrong. A very good and very quick read. I read much of it on the plane and the rest in New Orleans. To comeback from what he went through is nothing short of amazing. What is more telling is how cancer changed him: he learned to appreciate and help others, to enjoys what he is doing, and to be patient. Cancer is a high price to learn those lessons. Hopefully his words can help others learn the same lesson at a much lower cost. Good book! It even has me riding again (albeit indoors).
http://www.amazon.com/exec/obidos/ASIN/0671026682/finpapers/104-9378365-5272442

Writing as Craft and Magic by Carl Sessions Stepp. A friend Rob lent me this. It was his text book for a class he was taking this year. After reading several of my newsletters, he guaranteed I would like it. Well that is what he said, maybe he just thought I needed the writing help!. In any event he was right on both accounts. Good, funny in parts, and educational throughout. High praise for a text book!
http://www.amazon.com/exec/obidos/ASIN/0844220531/finpapers/104-9378365-5272442

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Quotes of the week:
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A good name is rather to be chosen over great riches--Proverbs 22:1

Ho-ho-ho, Merry Christmas!--Santa (and me!)

God Bless us Everyone--Tiny Tim (in Dickens’ A Christmas Carol)

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College Basketball news
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OK, OK, so this is a Finance newsletter. It is free, so don’t complain too much! :-)

I had to point out the big game earlier this week as JMU beat PSU. I did not know who to root for but was not surprised as to the outcome. PSU is having a tough year. Hang in there.

On a much brighter note, St. Bonaventure is off to a great start and is now 7-2. This is with a new coach, new style, and with no one over 6-6 getting any playing time. As their ad campaign says, FAST and FURIOUS. If you get a chance, watch one of their games, you will be entertained if nothing else! They press everywhere (indeed opponents have been quoted as saying they practiced against 7 men to get ready for the game!)
http://www.financeprofessor.com/funlinks/funlinks.html
http://www.gobonnies.com/

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Well, that is it. Sorry it was so long, but there really were some great stories.

Merry Christmas!!! I guess I better go do my part for the economy and do some Christmas shopping. I hate shopping. oh well.

Thanks for reading! I hope you liked it and learned something (or even many things) from it! And why not forward this to someone? Of course FinanceProfessor newsletters make great presents! They are free and appreciated. What more could you want?

If you have any ideas for the site or the newsletter please let me know. I may even have some time to make improvements over break. (fingers crossed)

Jim

JimMahar@FinanceProfessor.com

in Western New York where winter finally arrived. If I hear one more person say “I am so happy we’ll have a white Christmas” I may scream!

who is impressed with all of the Mets’ moves. While I hate to see some of the players go, I think they have improved the team this off season. Now get Gonzalez.

who highly highly recommends the D-Day museum in New Orleans. It is EXCELLENT. Indeed it was probably my high point of the whole trip. Either that or running in City Park.

who has been trying to bike every other day. We’ll see. It is not as fun as running but as a second, or third workout, not bad. I have also been doing yoga in the AM. Definitely increases flexibility. Hopefully it will translate to faster runs.

did I mention last week we now have two cats? Bob and Fraidy. We have found them both. Fraidy is very aptly named.

Not to make light of the Argentine crisis, but on Thursday there was at least some joy in Argentina. St. Bonaventure small forward Patricio Prato who is from Argentina scored a career high of 26 points. Patricio was one of the first people I met on my return to SBU and is a really nice guy. Way to go Pat!

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Oh and a final favor…pass this on to someone you think would like it….a fellow student, a past teacher, your current teacher, your parents, anyone who it might help. Thanks!

Thanks for forwarding this so much. That is the only way I know this newsletter is growing so fast. :-)

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copyright 2001 FinanceProfessor.com

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