Thanks to jean poole for permission to use this Photo.
I’d like to discuss the challenges of accounting for stock options used as compensation. Stock options are very popular with start-ups and firms expecting high growth. The reasoning is simple. Both types of firms have huge cash flow needs today. If they had to rely on salaries to attract employees, they most likely would not be able to afford the talent they really need to grow the business. By awarding their employees stock options, the right to buy stock in the future, they delay part of their compensation expense. Stock options give their holders the right to buy stock in the future at a specified exercise price. Typically, the exercise price is higher than the current market price of the stock. This gives employees incentives to take actions that will raise stock prices, including actions that favorably distort earnings.
The problem with stock options is that the company records no compensation expense for them. When an employee exercises an option, the firm must have a share to sell to the employee at the exercise price. Usually employees do not exercise their options until they are “in the money,” meaning the market price is higher than the exercise price. At this point, the company has to buy back stock at the higher market price to sell to employees at the lower exercise price or issue new shares or issue shares from treasury stock. In any event, this is a real cost to the firm. Currently, this expense does not appear on the income statement. It has only recently become a requirement to disclose the expense in the footnotes to the financial statements. For a company like Microsoft that makes extensive use of stock options, this severely overstates reported earnings.
I discuss a couple of increasingly popular tricks used by struggling companies to boost reported earnings in your lesson reading assignments. The first is stock buybacks for the purpose of reducing the number of shares outstanding. By reducing the shares, the EPS rises. This causes the stock price to rise. The important point is that no value is created in this transaction. The same earnings are now concentrated in fewer hands, so price per share will go up even though total market value is constant.
Another troubling development is the creation of earnings definitions other than net income. In order to distract attention from earnings reported according to GAAP, companies will often present alternative definitions of earnings such as pro forma earnings, core earnings, or EBIDTA. Their argument is that GAAP earnings are not representative and the firm is trying to present a more accurate figure for its true earnings potential. The problem with this is twofold. There are no accepted definitions for any of these alternative earnings measures. Second, in practice, the items excluded from these earnings calculations tend to be ones that lower the firm’s earnings in that accounting period. Beware of the firm that presents “pro forma” earnings. The correct use of that term means forecasted earnings in the future. Firms today are increasingly using the term to mean, “This is what our earnings would have been if all these bad, non recurring things had not happened to us.” Often these things include depreciation and interest—I certainly don’t think these are non-recurring expenses!
Consumer confidence (the term used by the Conference Board) and consumer sentiment (the label used by the University of Michigan) are not quite at their all-time lows, but they are very close to them.
This seems a little odd because two of the biggest elements of consumer attitudes, unemployment and inflation, are quite benign.
Unemployment, at 5.5 percent, is a hair below its long-run average (5.6 percent). Inflation (all items) is 4.1 percent, only a little above its long-run average of 3.7 percent.
The insights of cultural/media theorist Douglas Rushkoff are always contemporary and often prescient. He was deciphering the social codes of the virtual psyche, lifestyle, and marketplace before such concepts were formally identified by the so-called “machine.” TheMerchants Of Cool is a brilliant analysis of the incorporation of youth pop-culture that Ruskhoff created while working as a correspondent for PBS Frontline. This is a very entertaining documentary. You’ll learn a lot too. Let me know what you think in the comments section.
Thanks to Rob West for permission to use this Photo.
Our new Ashworth University Discussion Forum has been sparking some lively debate. If you haven’t checked out the forum yet, what are you waiting for?—get engaged with your student community!
Ashworth University Business Student, Frederick F, states:
I recently completed the Macroeconomics course, and all the negative things about Keynes were wrong!
I do agree with government intervention to get the economy out of recession and depression as a better solution by lowering interest rates and major government projects to get people employed and spending money.
However… I wrote projects, not programs. Programs that are started to help people don’t usually work, just enough to keep people employed and create more red tape.
As for supply and demand side economics, I side with Jean-Baptiste Say whom said “Demand creates it’s own supply”
Keynes basically said that excessive saving can lead to recession or depression, True, but today we are experiencing excessive greed which is causing our current recession. (High gas prices and the mortgage crisis.)
Ashworth University Technical Services Supervisor And Resident Economist, John Ash, responds:
Well, Keynes’ ideas look dynamite on paper, but they suffer from the minute flaw of not actually holding up in the real world. I know, I know, we should ignore that and just let the beauty of his carefully constructed theories suffer no detractors, but those of us who are actually studying economics to understand the world better and use that knowledge to improve our own lives (i.e., make more money) can’t allow such intricate economic fallacies to remain unmolested.
Keynes’ theories were gospel for the economic advisors of the 60s and 70s, and it is generally believed (among economists anyway) that strict adherence to his policy recommendations led to the stagflation of those decades (stagflation is when the economy is in a recession but inflation is increasing, two things which are supposed to be mutually exclusive by Keynesian standards). Keynes is a good starting point for understanding economics, but modern post-industrial economies are far too complex to be modeled with it. Don’t fall into the trap of trying to find one unifying principle which will explain everything; it’s never going to happen. There are a lot of variables, and usually no single one is going to accurately predict the movement of the economy. (more…)
While the “experts” continue to debate whether our economy is in a recession, the rest of us working in the real world have already determined that the semantic definition of this crisis is the least of our concerns. In the following podcast interview, Dale Collie, a former corporate executive and elite U.S. Army Ranger shares the lessons he has learned throughout his life on how to cope with the stress caused by difficult circumstances. Although focusing primarily on how the business manager of today can effectively lead, inspire, and provide stability to workers during times of economic hardship; this podcast also offers some “big picture” perspectives that anyone can apply in their personal lives as well. I think you’ll enjoy this podcast. Please share your thoughts in the comments section of this post. I’d also like to thank Bill Conerly for conducting this outstanding interview. Thanks…
Thanks to J. Parks for permission to use this Photo.
The most important phase of property valuation is also the most controversial and least known. This procedure is called the rate of capitalization. It is used to determine a market rate of capitalization. Through this rate, estimated future net income can be converted into a sum of present value. The rate of capitalization acts as a lever which pushes income into a height of value. Here is how the lever works. The lower the rate of capitalization is, the higher the value per dollar of income is. Thus, the value of a particular property will also be higher. The opposite is true if the rate is higher. The higher the rate of capitalization is, the lower the value per dollar of income is. Thus, the value of a particular property will also be lower.
If speculation or motives other than investment buying are prime reasons for purchase, the sale price of the property in relation to its income is of little aid to an appraiser in search of applicable market rates of capitalization. In fact, such sales may prove highly misleading as indicators of prevailing yields on real estate investments. You can see why I stated earlier that the rate of capitalization procedure is very controversial. This procedure has the potential to yield misleading results.
Most appraisers would find themselves at a loss if the application of the income approach and the selection of a rate of capitalization had to be sustained solely by analysis of investment sales in their community. You may wonder why this is true. Well, real estate transactions are traditionally private in nature and factual income data is often difficult to obtain. Thus, it is very difficult to select sales which could be usefully employed for statistical income analysis.
Although real estate as a commodity is local in character, the financing and purchase of real estate, both for investment and speculative purposes, have the distinct characteristics of a national market. The mobility of credit and the flexibility of investment buying with income reserves and surpluses have channeled funds into community areas where the investment returns in relation to capital markets are the highest. The existence of a national real estate investment market makes national income and rates of return statistics, compiled by investment firms and real estate analysts, available for real properties. These national indices of investment yields, when adjusted for community and regional risks for given classes of real properties, can be used as effective guides in judging the reasonability of rates of capitalization secured from market analyses of comparable sales.
Thanks to Len Peralta for permission to use this Photo.
As the deadline for completing 2007 tax returns approaches, more and more people are filing returns each and every day. Once the headaches of making sure all your information is accurate and all your paperwork has been submitted, you should know in advance if you can expect a tax refund this year. As with any income, it’s a good idea to think about what you’re going to do in advance and make a plan for how you will use it. We always quote the saying that “no plan is a plan to fail,” and it seems true that many of the worst financial decisions are those made compulsively. Since tax refunds are getting turned around more quickly than ever these days, take the time in between when you file and when you receive your refund to really think about what you’ll do with the money you get back.
Here are seven ideas we at 22Dollars brainstormed to help get the wheels turning when it comes to your 2007 tax refund:
* Deposit it in your savings account to help you meet your savings goals.
* Spend it on something you’ve needed to buy for a while and that will help save you money in the long run – like a fuel efficient car for example.
* Invest it in your retirement fund or in stocks you’ve researched.
* Pay it toward debts you have such as school loans or credit card debt to help yourself avoid spending additional money on interest payments. (more…)
I just came across this troubling report about dramatic job losses in February. Now, I consider myself a pretty optimistic person, but I must admit that it’s becoming more and more difficult for me to believe that our economy is not in a recession. The politicians tell us different stories every day and I’ve basically stopped listening. What’s the point? The numbers don’t seem to lie in this case. By the third paragraph of this article, I knew where the latest Department of Labor report was headed: down!
From The Associated Press:
WASHINGTON - Employers slashed 63,000 jobs in February, the most in five years and the starkest sign yet that the country is heading dangerously toward recession or is in one already.
The Labor Department’s report, released Friday, also indicated that the nation’s unemployment rate dipped to 4.8 percent as hundreds of thousands of people — perhaps discouraged by their prospects — left the civilian labor force. The jobless rate was 4.9 percent in January.
Job losses were widespread, with hefty cuts coming from construction, manufacturing, retailing, financial services and a variety of professional and business services. Those losses swamped gains elsewhere, including education and health care, leisure and hospitality and the government.
Not exactly inspiring stuff, right? However; I meant what I said earlier about being an optimist and I can still see some silver lining on a personal level. The fact that I just earned my college degree, an Associate’s degree in Business Management, gives me the confidence to do what I need to do in order to compete in this job market. With just a high school diploma, I feel like I’ve always been forced to accept jobs that seem to pay a lot less than they used to? I’m not an economist, but I can tell when something just isn’t adding up. I was working longer hours for less money. Something had to give. I actually landed my first “good job” before I even graduated. No one would call me rich, but I feel comfortable with the fact that I can support myself and my family no matter what happens with my current employer (knock on wood). Even if this job didn’t work out for whatever reason, I know I’ve got marketable skills that will land me on my feet somewhere.
I don’t mean to sound like I’m preaching to anyone, but based on the little bit I’ve seen of the good life since graduating, I can tell you that the only way to get ahead and stay ahead is through hard work and education. Don’t wait around for the economy to rebound. No one realistically even knows how long this recession is going to last. And what if the economy does improve? Will it really make a big difference in your life? The job market is still going to be more competitive than ever. I encourage you to take control of your own situation and future. Otherwise, you’re just going to be waiting around for an opportunity to appear out of the blue. The chances of that happening are honestly not that good, but that doesn’t make me worry anymore. I’d rather make that opportunity happen for myself. I hope I can inspire a few of my fellow students out there with this message. I hope to meet some of you at the graduation ceremony!
Thanks to Luis Ramirez for permission to use this Photo.
It isn’t adequate to say ‘I am a long-term investor’ and I don’t need to pay attention to the impending financial turbulence.
But how do we deal with this? How do we respond to as well as anticipate market action? How do we preserve our capital during market corrections while being able to maximize our exposure to equities during market bull runs?
After many years of investing (I actually purchased my first stock as a 13 year old back in 1967), I have come to believe that a strategy is possible to accomplish this if you are willing to be disciplined and observant of your own stocks and of the market overall.
First of all, try to identify a universe of stocks that you believe are ‘investable’. I have my own criteria of consistent revenue growth, earnings growth, free cash flow, stable shares, and a solid balance sheet. But my criteria may not be yours. You might develop a list of stocks that exhibit good value, that exercise responsible stewardship of the earth, or whatever your particular preference might be. It doesn’t really matter. But stay consistent.
Next of all, decide what the size of portfolio would be ideal for you. I initially settled on 25 different stocks. Currently I have switched to a 20 position portfolio as a maximum number of stocks I wish to own. It doesn’t matter what the size will be. But pick your maximum and stick to it.
Now bear with me as I go through this strategy. It makes sense to me and I think you will understand my thinking as we review this.
Let us assume that our investment posture will vary with our ‘exposure’ to stocks. That being fully invested is ideal in a strong market (20 positions). And being minimally invested is best in a weak investment environment (5 positions). And I vary my investment exposure based on the market’s effects on my own holdings. That is when my own portfolio is acting ‘healthy’ I am moving from cash towards equities and when my own portfolio is acting ‘ill’ I shift from equities towards cash. (more…)
Thanks to Mattia for permission to use this Photo.
We’ve been fortunate enough to share the insightful perspectives of economist and entrepreneur Bill Conerly with our student community since this blog first launched in 2007. Mr. Conerly is not only a contributing blogger, but someone we consider a friend of the greater Ashworth University community as well. He was recently interviewed on the Small Business Advocate Radio Show on the topic of business planning after the recession. The issues covered are of vital importance to anyone one with small business aspirations, so I highly recommend listening to this very informative podcast interview. You can also visit Bill’s Businomics Blog to show your appreciation for his efforts on behalf of our Ashworth Blogspot readers. Thanks everyone.
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