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Five Things You Need to Know for Friday


What you need to know (and what it means).


Five things you need to know to stay ahead of the pack on Wall Street.

1. Pension Shock!

The Financial Accounting Standards Board (FASB) is proposing a new method of reporting pension obligations.

  • The new method of reporting pension obligations is likely to show that many companies have a lot more debt than was obvious before, according to the New York Times.
  • A widespread complaint about the current pension accounting method is that it exposes shareholders and employees to billions of dollars in risks that they cannot easily see or evaluate.
  • Congress is trying to tighten the rules that govern how much money companies are to set aside in advance to pay for benefits.
  • The new method of reporting would require companies to take certain pension values now embedded deep in the footnotes of their financial statements and move the information onto their balance sheets where all their assets and liabilities are reflected.
  • Uh, what was that? The New York Times uses Ford's 2005 financial statements as an example:
    - Ford now reports a net worth of $14 billion.
    - Under the new rule, Ford's balance sheet would show about $20 billion more in obligations than it now does.
    - Therefore, bye bye $14 billion net worth.
  • According to Bear Stearns among the companies with the biggest balance-sheet changes are General Motors, Ford, Verizon, BellSouth and General Electric.

2. U.S., EU vs. China for WTO Championship

On Thursday, in an unusual joint action, the United States and the European Union filed a complaint against China with the World Trade Organization (WTO) regarding Chinese tariff policies intended to promote the local production of auto parts.

  • The case is about China's import tariffs for auto parts.
  • The tariffs vary depending on what percentage of the value of a completed vehicle is taken up by the parts.
  • The basic rate for importing auto parts into China is 10-14%, while the completed-vehicles tariff is far higher, at 28%.
  • The original intention of this differential was to encourage foreign companies to build cars in China.
  • According to US Trade Representative Robert Portman, the US has negotiated with China on the issue for more than a year.
  • The auto-parts action is only the second taken against China since the country joined the WTO in 2001.
  • The first example was a US-initiated case in 2004 regarding China's tax treatment of domestic and imported semiconductors, with the US alleging that China had a preferential tax policy favoring domestic manufacturers.
  • The U.S. won that case, and China ended the policy.
  • China has 10 days to respond.
  • Hu Jintao, China's president, is scheduled to visit the U.S. about a week later.

3. If They're Selling When We're Buying, They'll be Laughing When We're Crying... Or Something Like That.

Stock buybacks by Standard & Poor's 500 companies surged 77 percent last year to a record $349 billion.

  • A stock buyback as essentially a company investing in itself, or using its cash to buy its own shares.
  • Corporations on currently sitting on a mound of cash. While most investors consider buybacks a good thing... to an extent, after all a buyback generally increases shareholder value, the buybacks recently have been cited by some as evidence that corporations are too risk-averse to invest the cash elsewhere.
  • Of course, share buybacks can also be used to simply improve the company's financial ratios. Buybacks reduce the assets on the balance sheet, increasing return on assets and return on equity.
  • As Professor Succo noted on the Buzz & Banter this morning, corporate profit growth has been decent, but almost all of it has come through cost cutting and share buybacks.
  • So, back to the record $349 billion buybacks. In the fourth quarter alone, buybacks increased at a $416 billion annual rate.
  • The two sectors seeing the most buybacks were Tech and Financials. Woo hoo, right?
  • D'oh! Turns out that Tech and Financials are also the two sectors topping the list of insider selling!
  • Thomson Financial recently said insider selling reached a total of $6.1billion in February, the highest since the $9.1 billion record set in February 2000. Hmmmm.
  • So, here's the plot, and you decide whether it is bullish or bearish:
    CEOs publicly say, "there is no better investment right now than in our own companies, so we're using our excess cash to buy our own stock." CEOs confer with private personal advisers who recommend CEOs unload stock.

4. Google and All That Cash

Late Wednesday Google (GOOG) announced it was raising up to $2 billion through a new public offering.

  • The offering would raise GOOG's shares outstanding figure to more than 212 million.
  • In a statement, the company said it planned to use the shares mostly to meet increased demand from index funds in light of the company's recent inclusion into the S&P 500 index.
  • Analysts are beginning to question the company's real motives, however.
  • Robert Peck of Bear Stearns said the company may target "Asian Internet companies."
  • Meanwhile, Rob Sanderson at American Technology Research, wonders if GOOG may be eyeing an investment in network providers given the recent debate over "net neutrality," referring to whether large traffickers in bandwidth should be charged for their usage.
  • Yesterday afternoon, an interesting report from Thomson Financial Research noted that the additional cash, given short-term rates exceeding 4.5%, would result in significant EPS increases as long as GOOG's PE ratio is above 33.

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5. Contradictanyms

Before you bolt for the door, a contradictanym is a word that has opposite meanings depending on the context.

  • Take the word "bolt" for example. One can bolt for the door to catch the market open unless we bolt the door to make sure no one gets out.
  • I prefer to garnish my dish, adding a bright green sprig of parsley, while the IRS prefers to garnish my wages making the parsley impossible to afford.
  • Toddo has lately been critical of Chachi's and Pepe's wardrobes, while making critical errors in his own fashion judgments.
  • Giving the SEC additional oversight over hedge funds would be a regulatory oversight.
  • Meehan is at Aqueduct this morning trying to fix the starting gate before the first race, in order to fix the results of the first race.


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