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The study, “Earnings Momentum and Earnings Management,” appeared in the spring 2007 issue of the Journal of Accounting, Auditing and Finance. Its authors are James and Linda Myers, a husband-and-wife team who are accounting professors at Texas A&M, and Douglas Skinner, a professor of accounting at the University of Chicago. As long ago as the 1980s, academic researchers came across evidence that raised suspicions that many companies might be manipulating their earnings. Some companies appeared to be smoothing out their earnings streams, making them look more consistent than they really were. Various researchers contended that this was surprisingly easy to do, since accounting rules gave companies wide latitude in calculating their earnings. For example, they could transfer some of their discretionary income from one quarter with particularly good earnings to a subsequent quarter in which they might otherwise have had to report a loss. Other ways included deferring expenses, or timing the sale of assets to burnish the bottom line when regular operations were losing money. Despite these suspicions, researchers have found it hard to actually prove that earnings manipulation was in fact widespread among publicly traded companies. It remains a controversial subject. The authors of this new study pursued an entirely different approach. In effect, they asked this question: If no companies manipulated their earnings, how many would report increases in earnings per share for at least 20 consecutive quarters? They focused on publicly traded companies in the United States from the beginning of 1962 through the first quarter of 2004, a period of more than 42 years. Though the professors’ question appears simple enough, answering it was quite complex. They had to take into account the overall growth of the economy over the last four decades, which could make a company more likely to report profits than losses in any given quarter. They also had to deal with the tendency of certain industries to have long periods of above-average economic growth; in recent years, oil and oil services companies have been two good examples. After dealing with these and other issues and assuming that no companies manipulated their earnings, the professors calculated that no more than 46 companies during that 42-year period should have had earnings-per-share growth for 20 consecutive quarters. But 587 companies actually reported such strings of growth, so the professors conclude that their findings constitute “prima facie evidence of earnings management.” In an interview, Professor Skinner emphasized that he had no evidence of specific acts of earnings manipulation at any given company. Furthermore, he said, not all companies with 20 consecutive quarters of increased earnings will have necessarily engaged in such manipulation. But, based on his analysis, he is confident that a vast majority of them will have done so. He also stressed that earnings manipulation does not have to involve outright fraud. It could involve something as innocuous as postponing spending on research and development in order to avoid reporting a loss in the current quarter. eTo gain perspective on the pressures that would lead corporate managers to manipulate earnings, the professors focused on another set of companies whose earnings history would appear just as impressive as those with 20 consecutive quarters of earnings increases: companies whose profits grew just as much over a five-year period, but whose earnings growth rates were slightly more volatile. Each company in this second group reported earnings-per-share growth in each of five consecutive years, but had at least one quarter along the way in which earnings per share declined. The professors calculated that the average stock in the first group appreciated nearly six percentage points more, annualized, than the average stock in the second group. The researchers also found that when the average company with 20 consecutive quarterly increases finally experienced a declining quarter, its stock price fell by an abnormally large amount. Indeed, they found, the plunge was steeper the longer the string of quarterly gains that preceded the earnings decline. Together, these various findings paint a picture of extraordinary pressure on corporate management to sustain strings of consecutive earnings increases for as long as possible, Professor Skinner said. He speculated that many of the managers who eventually engaged in earnings manipulation didn’t take their jobs with the explicit intention of doing so. But as the earnings increased for several quarters in a row, these managers became victims of their own success, unwilling to bear the decline in their companies’ stock price that would almost surely follow if they were to report a profit decline. The clear investment implication is that we shouldn’t bet too heavily on companies that have reported long strings of increases in quarterly earnings per share. Such companies’ stocks will most likely have already been bid up to too-lofty a level, and will therefore be especially vulnerable to a big decline once the string of earnings gains comes to an end.
In past decades, stocks have often performed well after the Fed starts cutting rates -- but investors should remember that that hasn't always been the case. Lower rates can help accelerate the economy, since they make it easier for consumers and companies to borrow and spend, which is good for corporate earnings and stocks. But the simple fact that the Fed is forced to act means the economy is in trouble -- bad for stocks. The Fed has embarked on rate-cutting programs 11 times since World War II. In the six months after the first rate cut of those 11 periods, the Standard & Poor's 500-stock index gained an average 12.3% -- better than the 9% average calendar-year increase since 1945. But the S&P 500 fell in four of those 11 times. In the latest rate-cutting cycle, which began in January 2001, the S&P 500 fell 3.6% in the six months after the first move. Looking one year out from initial rate cuts, stocks have an even better record, gaining 10 of 11 times, with an average 19% climb. The single exception was 2001, when stocks tumbled following the Enron and WorldCom scandals, the dot-com meltdown and the Sept. 11, 2001, terrorist attacks. A bear market lasted until October 2002. Which stocks perform best after rate cuts? "Growth" companies with strong earnings growth, such as technology companies, have tended to do better than "value" stocks that appear cheap based on their price/earnings valuations. Looking at the seven rate-cutting periods since 1974 (before which S&P doesn't have a growth vs. value breakdown), growth stocks in the S&P 500 have gained an average 14.8% in the initial six months, while value stocks have gained 8.8%. To be sure, every cycle is different. This time around, some analysts think financial stocks such as banks -- which are typically seen as value stocks -- may be a good bet if the Fed lowers rates. Financials have taken their lumps lately amid worries about the impact on their earnings of the subprime-mortgage meltdown and the slowdown in the corporate buyout market. Their fortunes could turn with lower rates, which will make it easier for banks to make loans. "Financials are the sector that could get the most pop from rate cuts," says Jeffrey Kleintop, chief market strategist at LPL Financial Services. Mr. Kleintop doesn't recommend specific stocks, but he says he likes money-center banks that have lots of cash on their balance sheets that can help them take advantage of buying opportunities as the economy recovers. Examples of giant banks are Citigroup and J.P. Morgan Chase. Rate cuts may also cause the dollar to weaken further against other currencies, since lower rates make the greenback less attractive. Last week, the dollar hit its lowest mark on record against the euro, largely due to expectations for rate cuts. If the dollar continues to weaken, that should boost the earnings of companies with large overseas operations, since they'll get more pop from the currency translation. That's one reason why Marc Pado, a market strategist at Cantor Fitzgerald, likes big technology stocks. Not only are most tech stocks growth stocks, but they sell many of their wares outside the U.S. Mr. Pado also thinks currency trends should help multinational corporations such as Caterpillar and General Electric, which get roughly half their revenue outside North America. What about commodities? While a slowing U.S. economy is bad for commodities such as oil or steel as a rule, since it crimps demand, solid growth overseas in countries such as China and India has kept commodity prices elevated. Indeed, last week, crude oil rose to an all-time high. Gold prices have also been marching higher. A weak dollar could also push up prices of certain commodities, including oil and gold, that are often priced in dollar terms. Investors who don't want to invest directly in commodities might consider an oil company such as Exxon Mobil or a gold miner like Barrick Gold.
The default rate is expected to climb from 1.4% in 2007 to 4.5% in 2008 and 5.6% in 2009, according to Moody's projections. Default rates would likely climb even higher if the economy were to go into recession, Gates said. A 4% default rate is in line with historical averages. During the most recent downturn in the cycle, default rates reached 11% in January 2002. Investor appetite for speculative-grade debt has all but disappeared in the past two months. The troubles began as delinquencies and defaults among subprime mortgages -- loans given to customers with poor credit history -- rose rapidly. People became worried bonds backed by those loans would fail, and the problems would spread beyond that market. Now, buyers are avoiding nearly all low-grade investments for fear of default. That stands in contrast to a period of 'easy market access' in 2006 and the first half of 2007, which helped speculative-grade companies refinance or issue new debt at low rates and with looser standards than in the past, Gates said. 'The earlier period of easy market standards may have only postponed the day of reckoning for companies that have persistent negative cash flow or flawed business models,' Gates said. Companies with little cash flow and that are highly leveraged are likely to fare the worst, he added. Many of the defaults in the coming year may be triggered by companies simply running out of cash to sustain their business, because most took advantage of the relaxed financial covenants on their bank credit facilities, Gates said. During the recent boom, some deals did not even include covenants that, in the past, would often trigger defaults. Such covenants often require specific levels of financial performance from the debt issuer. Aside from receiving better rates, companies refinancing or issuing debt in 2006 and early 2007 were also able to lock in longer terms, meaning relatively little speculative-grade debt will mature soon. Only $26 billion of speculative-grade debt -- about 2% of the outstanding volume -- is scheduled to mature before the end of 2008. Historically, peak defaults rates come three to four years after an issuance boom, meaning default rates are most likely to peak around 2010. But they are unlikely to reach the heights of 2001 and 2002, Gates said, because historically low interest rates since then allowed companies to improve profitability and operating cash flow, giving them some flexibility to handle tightening standards.
In the first instance of collective industry action since investors globally went cold on buying the type of commercial paper issued by bank conduits and structure investment vehicles, those on the call will be asked to consider what changes in the sector might succeed in bringing back the buyers who have effectively gone on strike in recent weeks. As the size of the ABCP market has burgeoned to $1,200bn, and the paper typically having a duration of just three months, to motivate them is the prospect of a giant wave of short-term paper maturing and needing to be rolled over, or refinanced, before November.For those trying to catch up, here’s the FT’s primer on the intricacies of the commercial paper world: What is asset-backed commercial paper (ABCP)? Commercial paper is privately sold, short-term debt that has a maturity of no more than nine months and generally less than 45 days. It was traditionally issued by blue-chip corporates or financial institutions to cover their immediate cash needs. ABCP is similar paper issued by vehicles that invest in other kinds of debt, but with the crucial difference that it is secured against the assets the vehicles hold. ABCP has accounted for most of the growth in commercial paper markets in recent years. Who issues ABCP? The vehicles that issue ABCP are mainly conduits and structured investment vehicles (SIVs). Both types of vehicle use low-cost ABCP to fund investment in longer-term, higher-yielding assets or lending. Conduits hold roughly $1,400bn of assets worldwide, while SIVs hold about $400bn and their near cousins SIV-lites hold about $12bn. Not all of this is financed by short-term ABCP; some is financed by medium-term notes (MTN) and some by other, longer-term debt. How much ABCP is there? The market was growing strongly until the beginning of August, with total ABCP outstanding rising towards almost $1,200bn, according to industry estimates. In the past four weeks, the market has shrunk $216bn to $967bn, according to the Federal Reserve, as many investors, particularly so-called money-market funds, have simply stopped buying. Why does this matter? For some of these vehicles — and particularly for SIVs and SIV-lites — this can cause huge problems and mean they have to begin selling assets to repay their short-term debt, unless they can find other sources of funding as some conduits and SIV-lites have done. Is the situation worsening? Anecdotal evidence suggests investors are increasingly buying ABCP with shorter maturities. Analysts say between 70 and 90 per cent of the US ABCP market is funding only on an overnight basis, but that in Europe, it is too soon to tell by how much maturities are shrinking. However, the pressure is rising now, as there is a spike in the funding calendar each month, around the 17th, when a large amount of paper expires. Since commercial paper settles two days after it is issued, this means funding for September 17th (next Monday) will probably be concentrated this Thursday. Dealogic estimates that in Europe just over $50bn of ABCP matures over the next week, while $109bn-worth of paper matures during September. In the sterling market, about £14.7bn of ABCP is due to expire in September, while in the dollar market about $21.4bn of ABCP is due to expire this month.
Which is precisely why this current market is so daunting. Consider the unknowns still in play: The choked market for short-term corporate funding. The impossible-to-value mounds of LBO debt and equity. The daisy-chain effect between liquidating hedge funds and the broader market. It's a far different situation than the market drop of 2001, when the downturn was spurred by the relatively simple concept that technology stocks were broadly overvalued. What's the best way to handle all of this lingering fear? Some inspiration comes from a group of researchers who have been applying new techniques to get an answer. The researchers have begun studying professional traders as if they were chimps, even using MRI machines to divine how fear affects the brain. "We are responding from a different part of the brain when we are in the midst of calm, clear thought," says Brett Steenbarger, a psychiatry professor at the State University of New York's Upstate Medical University, who also trains traders and hedge-fund managers. That area is the prefrontal cortex, what he calls the "executive" node of the brain that plans and reasons. When we are fearful, blood flows away from the area toward the motor areas of the brain -- the ones that produce a flight-or-fight sensation. This is great if you're confronting a saber-toothed tiger, but not so great if you're mulling your daughter's college fund. "You end up making decisions rashly without engaging in research and planning that you might otherwise do," he explains. Dr. Steenbarger has found that the most important steps is to get back to basics: [1] methodically check whether the hypothesis that got you into an investment still applies or not. [2] eliminate as much borrowing as possible. Leverage magnifies financial results and therefore emotional swings. During times of high volatility, this can become an especially dangerous trap for bad decision making. Andrew Lo, a professor at MIT, has observed professional traders in their natural habitats. He's found that there is some truth to the idea of the Cool Hand Luke. Palms of veteran traders get less sweaty than novice ones. After especially stressful moments, these traders return to a standard physiological baseline. The novices "are all over the map," Dr. Lo says. He recommends two other means of coping with financial fear. The first sounds simple but is essential -- [3] train yourself to recognize fear in the first place. For example, your habit may be to avoid the markets altogether by shunning the newspaper or online stock quotes. And [4] prepare for a busted or volatile market, much like an astronaut rehearsing emergency procedures. This helps neutralize the fear in your decision making, especially in those moments when it seems so easy to succumb. That's why it might make sense to decide ahead of time your range of responses if your portfolio loses, say, 10% to 20% of its value. Research has shown that, unsurprisingly, retail investors are usually the worst at this, adds Dr. Lo.
Generally, he’s correct — but the equation goes both ways, as better-than-expected releases have resulted in sharp market rallies. On August 24, the Dow rose 142 points after a surprising 2.8% increase in sales of new homes in July, data that appeared mostly useless at the time, and even more so now. A month earlier, on July 26, the Commerce Department said sales of new homes fell 6.6% in June, contributing to a selling frenzy that left the Dow down more than 300 points. Two days before that, news of Countrywide Financial’s losses on loans to certain borrowers helped knock stocks down, with the Dow losing 226 points. To Mr. Birinyi, the volatile reactions pinpoint a market of “large mood shifts, of indecisiveness where every data point became a trend,” and today’s data furthers that notion. Now, there is of course the notion that today’s index is all the more disturbing because it represents July figures on pending sales of existing homes (which make up 85% of all home sales, according to MFR), and so it doesn’t even account for the August figures, when the credit panic erupted. As Ian Shepherdson of High Frequency Economics said regarding today’s data, “this is disastrous.” And that’s not an invalid point. But optimists could always point — as Ben Bernanke is doing — to the more timely indicators, the weekly retail sales reports released today for the final week of August, both of which were better than expected. “So far, there’s not much evidence that the turmoil on Wall Street is having much effect on Main Street,” note economists at Nomura.
The study is part of an emerging area of financial research that delves into the lives and personalities of executives in search of links to stock prices and corporate performance. The trend is an outgrowth of the tendency to lionize CEOs as critical to the businesses they lead. If their performance is so vital, the researchers say, investors should want to know anything that could affect it. "When you go to the track, you study the horse," says David Yermack, a New York University finance professor. "Investing is not that different. You want to know as much as you can about the jockey." A study he co-wrote looked at executives' home purchases. It found that on average, the stocks of companies run by leaders who buy or build megamansions sharply underperform the market. The researchers theorize that some of these executives might be focused more on enjoying their wealth and less on working hard. Other academics have found underperformance, in both profits and stock prices, at companies led by executives who received awards such as best-manager kudos from the business press. The theory: Once they become stars, some CEOs may pay more attention to writing memoirs and sitting on outside boards and a little less to running their companies. Two Penn State professors recently attempted to rate CEOs of technology companies on their degree of narcissism. They looked at things like the size of executives' photos in annual reports and how often they use the first person singular in press interviews. The authors concluded that narcissistic executives tended to take greater risks, leading to bigger swings in profitability of their companies. The study, called "It's All About Me," is to be published in Administrative Science Quarterly. The new research is part of a more nuanced approach to studying management. Instead of assuming all CEOs are devoted to maximizing wealth for themselves or shareholders, researchers posit that executives can have other aims, like building a legacy or showing off wealth through a mammoth house. These may be perfectly rational behaviors, but hardly ones that are in shareholders' interest. The Internet, of course, has made research into homes, marriages and deaths far easier. Thanks to commercial and government databases, this no longer means haunting dusty courthouse record rooms. Prof. Yermack and Crocker Liu of Arizona State University set out to find real-estate records on the CEOs who were running all of the S&P 500 companies at the end of 2004. They scoured electronic records of taxes and deed transfers. When they couldn't find a home address, they turned to databases on voter registration rolls and campaign contributions. Eventually they found the addresses of 488 of the 500 executives. The median size of their principal homes was a little over 5,600 square feet. Some were far bigger. A key finding was that stock performance tended to deteriorate after a CEO bought or built an extremely large or costly estate, which they defined as over 10,000 square feet or sited on more than 10 acres. On average, these companies' stocks underperformed the S&P 500 index by about 25 percentage points over the three years after the purchase. Another speculation: In a few cases, costly real-estate purchases might provide cover that enables CEOs who are dubious about their companies' prospects to sell a lot of stock without arousing suspicion. Prof. Yermack says he has received numerous requests from investors for copies of the paper, titled "Where are the Shareholders' Mansions?" In contrast to real estate, studying the effects of family deaths on performance might seem unusually intrusive. Three professors who did so were trying to figure out how much chief executives matter to their companies' performance, versus the many other factors. "The idea of this was to find a random event that hits a CEO and evaluate the performance of the firm before and after this shock," says co-author Daniel Wolfenzon, an associate finance professor at New York University's Stern School of Business. "You have exactly the same CEO and the same firm. The only difference is that there is a shock." Denmark's government collects large amounts of personal information on citizens, from job status to death records. It also requires every company, even private ones, to make some financial data public. After years of lobbying, the researchers gained access to Danish data, and identified CEOs who had faced a death in the family. They wondered if grief or distraction might have affected companies' subsequent profitability. The greatest change followed a death of a CEO's child. On average, profitability, as measured by operating return on assets, was roughly 21% lower in the two years after such an event than in the two years before it. The drop was sharper when the child was under 18, and greater still if it was the death of an only child. In the study, a CEO's parent's death also was followed by a decline in the company's return on assets, though a smaller drop than after the death of a spouse or child. Overall, the profitability drops were sharper at companies headed by female CEOs. The researchers say they're not clear why. It isn't clear how applicable the study is to big public companies in the U.S. or elsewhere, the authors acknowledge. Most of those studied were small, family-controlled ones where a shock to the CEO might have more impact, though Prof. Wolfenzon said the effects appeared similar across all sizes of Danish companies. "Do CEOs Matter?" can be found at http://www.mccombs.utexas.edu/faculty/Francisco.Perez-Gonzalez/valueceo.pdf From the report: "CEO effects are larger (lower) for longer-tenured (older) CEOs and for those managers with large investment fixed effects. CEO shocks are relevant across the size distribution of firms but are concentrated on those firms that invested heavily in the past. Lastly, we find that CEO shocks tend to be larger in rapid growth, high investment and R&D intensive industries. Overall, our findings demonstrate managers are a key determinant of firm performance."
The ETF industry has launched dozens of new bond ETFs this year -- and it hasn't stuck with the safest fare. Many funds that are new or are now in the works are focused on riskier areas like emerging-market debt and high-yield or "junk" bonds, which are generally issued by companies with questionable credit. Many advisers are urging clients to stick with short-term, high-quality bonds. A number of new ETFs fit the bill, including SPDR Lehman 1-3 Month T-Bill (BIL) and Ameristock/Ryan 1 Year Treasury (GKA). The new offerings also include longer-term Treasury funds, like the SPDR Lehman Long Term Treasury (TLO), but advisers are more cautious on these bonds. A 30-year Treasury yields about 4.8%, which is lower than the rate on many bank money-market accounts and certificates of deposit. What's more, rates could easily rise in the coming years, which would push down the prices of existing longer-term bonds. For investors who want a diversified mix of ultra-safe bonds, a useful innovation is on the horizon. According to a recent regulatory filing, PowerShares Capital Management plans to launch "laddered" Treasury ETFs, which let investors spread their bets over a number of bonds with different maturities. But given the risk in longer-term bonds, investors should stick with bond ladders ranging only up to 10 years or so, advisers say. Several fund firms, including Barclays Global Investors and State Street Global Advisors, are vying to launch the first municipal-bond ETF, according to regulatory filings. Municipal bonds are typically exempt from federal tax and from state income tax in the state where they are issued. Right now, their yields are "really pretty compelling," says Randy Carver, president of Carver Financial Services. Investors considering muni vs. taxable bonds need to consider factors like their own tax bracket and state income tax, Mr. Carver says. While new funds like iShares iBoxx $ High Yield Corporate Bond (HYG) give investors easy access to a more exotic slice of the bond market, advisers urge caution. "The smartest thing is still to be in quality," says Lew Altfest, president of New York investment advisory firm L.J. Altfest & Co. While the "spread" between junk-bond yields and Treasury yields has widened a bit recently, "you're not getting enough of a premium" to take on the additional risk, Mr. Altfest says.
There have been 10 official bear markets [a drop in equities of at least 20%] since 1946, based on the S&P500 index [and 23 bear markets over the last 80 years]. Those last ten plunges, on average, have erased nearly a third of the market’s value over 490 calendar days, according to S&P. Even worse, the market has needed an additional 669 days, on average, to make up those losses. But what if the market sell-off doesn’t go that far? Since 1928, there have been 87 corrections [a loss of 10% or more], according to a recent tally by Ned Davis Research. That works out to slightly more than one a year, though since the end of World War II, there have been significantly fewer such downturns. More important, corrections are far less destructive. For instance, since 1946, corrections in the S&P500 have driven down stock prices by about 14%, on average. Given that equities are already off by about 5% since July 19 — and have fallen as much as 11.9% if you count intraday highs and lows for the S&P500 — the market may have already sustained a good percentage of its potential losses. (Again, this is if we’re headed for a correction and not a bear market.) Historically, corrections have lasted only about a third as long as bear markets. In fact, the 16 corrections in the S&P500 since 1946 have lasted an average of only 148 calendar days. And several recent corrections have been far shorter. For example, the three corrections in the late ’90s — in 1997, 1998, and 1999 — lasted only 51 days, on average. By comparison, the sell-off that began on July 19 is already 45 days old. Since 1946, it has taken the market just 111 days, on average, to rise to pre-correction levels. “So it’s about eight and a half months total on the way down and then back up,” said Sam Stovall, S&P’s chief investment strategist. Investors should take some comfort in that, given that they are supposed to be in equities for the long term. At the very least, Mr. Stovall said, the speed at which markets historically recover should give investors confidence “not to react so hastily to the current troubles.” To be sure, no one is wishing a correction on this market. But corrections “are a healthy means of relieving the excesses in the market and of restoring a healthy respect for risk,” said James B. Stack, editor of the InvesTech Market Analyst. That has already happened in this sell-off. Over the last month, shares of high-quality blue-chip domestic stocks have held up better than small-cap stocks. And mutual funds that invest in the stable developed markets of Western Europe have lost less than funds that invest in emerging-market stocks. Whether or not we’re technically in a correction, a sell-off of this magnitude was long overdue. It’s been about four and a half years since the last correction. The last official correction was from Nov. 27, 2002, to March 11, 2003. Over that short period, the S&P500 slumped 14.7%. But that correction, in particular, offers investors a good lesson. Even though you may be scared to stay the course amid rising volatility and falling stock prices, keep in mind that corrections can shift back into bull markets just as quickly as bulls slip into corrections. Monthly Employment Stats
Job gains continued in health care and in food services and drinking places. Manufacturing employment declined by 46,000 in August. This industry has lost 215,000 jobs over the past year. In August, declines were widespread among component industries. Within durable goods, there were job losses in motor vehicles and parts (-11,000), machinery (-7,000), wood products (-7,000), furniture and related products (-4,000), and semiconductors and electronic components (-4,000). In nondurable goods manufacturing, job losses continued in apparel (-4,000) and in textile mills (-2,000). Construction employment declined in August (-22,000), with most of the loss occurring among residential specialty trade contractors. Since its most recent peak in September 2006, construction employment has fallen by 96,000. Employment in local government education fell by 32,000 in August, as seasonal hiring was less than usual. Health care employment continued to grow in August (+35,000); the industry added 396,000 jobs over the year. In August, employment continued to grow in all the components of health care: ambulatory care services (+18,000), hospitals (+11,000), and nursing and residential care (+6,000). Employment in social assistance rose by 14,000 and was 83,000 above its year-ago level. Within leisure and hospitality, food services and drinking places employment continued to expand in August (+24,000). The industry has added 350,000 jobs over the year. Employment in the accommodations industry has trended down over the past 3 months. Employment in retail trade was little changed in August. A job gain in building material and garden supply stores was partially offset by a decline in general merchandise stores. Wholesale trade employment changed little in August. Employment in financial activities was flat in August, following a large increase in July. Within the industry, employment in credit intermediation edged down over the month and is 19,000 below its most recent peak in February 2007. In professional and business services, management and technical consulting services added 7,000 jobs in August, and temporary help employment continued to trend down. Temporary help has lost 72,000 jobs thus far in 2007. The average workweek for production and nonsupervisory workers on private nonfarm payrolls, at 33.8 hours, and the manufacturing workweek, at 41.3 hours, were unchanged in August. Factory overtime fell by 0.1 hour to 4.1 hours. Average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls increased by 5 cents, or 0.3%, in August to $17.50, seasonally adjusted. Average weekly earnings grew by 0.3% over the month to $591.50.
Quick Facts, Stats & Opinions CEO's Sell when their Companies are Buying PRNewswire 9-10 If actions speak louder than words, some big-company CEOs are telling their shareholders-and the world-that their companies' stock buybacks aren't worth very much. Or they're worth taking advantage of. That's because, according to a Financial Week analysis of the 50 largest buybacks, at several of these companies, chief executives sold sizable chunks of stock while the buybacks were ongoing. What's more, the size of those sales exceeded, and in most cases dwarfed, their stock sales in the 12 months before the buybacks were announced. In the past, as part of settlements in shareholder lawsuits, companies have agreed to prohibit executives from selling stock during a buyback, noted Mr. Robbins. One instance occurred in 2003, when Sprint reached a settlement related to two class-action lawsuits stemming from its derailed merger with WorldCom. And CEOs who profit from stock sales may also benefit a second way: from the boost to earnings per share that buybacks provide. Many executive compensation plans are tied to earnings goals, so lowering the number of shares outstanding through a buyback can be easy, risk-free way of getting an earnings boost. Paul Hodgson, senior research associate at the Corporate Library, found that the use of earnings per share as a compensation incentive was much more common among companies that were conducting buybacks. "If you buy back shares, you're reducing the denominator, and earnings increase, even though they haven't increased, as it were," said Mr. Hodgson. "Some buybacks are perfectly legitimate and sensible uses of spare cash. Others appear to be less well designed strategically." New CFO Survey Indicates More Feel Credit Squeeze David Reilly, WSJ 9-11 The crisis in credit markets has singed investors and a few companies involved in big buyouts. Now here's a sign the problem might be widening out more broadly across the corporate landscape. More than a quarter of the chief financial officers responding to a survey due out today from Duke's Fuqua School of Business and CFO magazine said their companies were being affected by the crisis spreading through credit markets. Many of the 154 CFOs who said they were affected also said they were taking action in response. Some 30.5% of CFOs feeling squeezed by credit markets were delaying or reducing capital spending, 16.2% were delaying or reducing hiring, and 5.8% were putting off share repurchases. "The slowing economy and the credit-market turmoil are working together to affect companies across the board," says Duke professor John Graham, who oversees the survey. CFOs tend to be pessimistic. Still, the responses about the credit crunch suggest the risks to the economy are real. As much as the Federal Reserve might want to see investors who made reckless credit-market bets take their lumps, the economic case for cutting rates is getting stronger. While the cost of living may rise with inflation, the general standard of living rises somewhat faster, as a growing economy drives up salaries, wages and other sources of personal income. Typically, incomes climb roughly two percentage points a year faster than inflation, so that if inflation runs at 3%, the general standard of living might rise 5%. If you are retired and you feel like you aren't keeping up with the Joneses, there's a reason: You probably aren't. Even if your income is increasing with inflation, you are still falling behind most other folks. This slippage likely won't seem like a big deal, except for those who take early retirement. If you quit the work force in your 50s, you might spend four decades in retirement -- and your standard of living could start to seem distinctly inferior. (Jonathan Clements, WSJ 9-23) Over the past three decades, prosperity and a demand for space to accommodate home theaters, offices, gyms and palatial kitchens has pushed up the average size of newly constructed single-family homes by nearly 45% even as the size of the average family has declined. Last year, according to the Census Bureau, the median size of a newly completed single-family home reached 2,248 square feet, up from 1,560 square feet in 1974. The expansion continued into the first quarter of this year, with the median home size inching up to a near-record 2,302 square feet. But it slipped to 2,241 square feet in the second quarter, and many analysts think a broader decline may be in the offing. (Kelly Evans, WSJ 9-12) The 20 stocks in the S&P 500 with the highest hedge-fund ownership concentration have tumbled 16% since June 30, compared with a loss of just 3% for the S&P 500 as a whole, according to Goldman Sachs. (Gregory Zuckerman, WSJ 9-11) The volatility is unsettling to some, but Glenmede Trust’s chief investment officer Gordon Fowler notes that when the Chicago Board Options Exchange VIX spikes to a level greater than 30, it tends to be a harbinger of good performance to come, on average returning 16% over the next 12 months. (David Gaffen, WSJ 9-04) Brian Belski, U.S. sector strategist at Merrill Lynch, notes that volatility has increased in the summer months in recent years, and that the “myth of a Summer slowdown, let alone the over-used doldrum moniker, is not supported by performance numbers.” On average, the intra-month spread in the S&P 500, for most of the 1990s, averaged about 4% in July and 6% in August. In 1999 and 2000, both months saw intra-month spreads of 6%, and the pattern persisted from 2001 to 2006, in which both July and August were notably more volatile than the September-October period. The new pattern held true in 2007, and Mr. Belski says that “if current trends persist, September and October will not likely provide any rest for investors.” (David Gaffen, WSJ 9-04) Hedge Fund / Private Equity News Briefs
The researchers found a “strong positive relation” between a hedge fund’s performance and the average SAT score at its manager’s school. To put the relationship into context, the researchers offer this illustration: “Everything else being the same, a manager from an undergraduate institution with a 200-point higher SAT — for instance, from Yale University, with an SAT of 1480 at the end of our study period, instead of from George Washington University, with an SAT of 1280 — can expect to earn 0.73% more per year.” This higher return might not be all that noteworthy had it been produced with markedly higher risk. But the researchers were able to dismiss this possibility: the average hedge fund managed by someone who went to an institution with higher SAT scores incurred significantly less risk than one whose lead manager attended an institution with lower average scores. So, on a risk-adjusted basis, the manager who went to the school with higher scores is even further out front. What accounts for the researchers’ findings? In an interview, Professor Zhang said it was possible that managers who attended more-elite institutions had better contacts in the business and investment arenas, giving them access to particularly promising opportunities. But, though she and her fellow researchers could not measure the effect of such better networking, she said she suspects that it plays only a minor overall role. “The dominant force,” she contended, “will be the superior talents and higher intelligence levels of the average student at higher-SAT institutions.” One potential objection to the findings is that similar studies of mutual fund managers have found little correlation between their performance and their colleges’ SAT scores. But this difference between mutual funds and hedge funds makes sense, according to Professor Zhang, because of the ways their managers are compensated. The pay of mutual fund managers is typically based solely on assets under management. So these managers have an incentive to let their funds grow beyond a size that they can manage profitably. This tends to eliminate the better performance that would otherwise be associated with attending a college with higher test scores, she argued. Hedge fund managers, by contrast, typically earn much more from sharing in their funds’ profits than from asset-based fees, according to Professor Zhang, at least when their funds are performing well. As a result, they have a strong incentive not to let their funds grow too big, so the test-score effect is not eliminated. The investment implication of the new research goes well beyond the hedge fund arena to the choice of any investment adviser. As the researchers conclude their study, “a manager’s talents and motivations should be important considerations” in deciding whether to let him or her invest your money. Home Page Previous Factoid Top Sites
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