WHD Problem 3.6b

Find the most general solution of the Black-Scholes equation that has the special form V=A(t)B(S).

(∂V/∂t) + ½ σ² S² (∂²V/∂S²) + r S (∂V/∂S) - rV = 0

V = A(t) B(s)

(∂V/∂t) = B (dA/dt)

(∂V/∂S) = A (dB/dS)

(∂²V/∂S²) = A (d²B/dS²)

B (dA/dt) + ½ σ² S² A (d²B/dS²) + r S A (dB/dS) - r A B = 0

(1/A) (dA/dt) + ½ σ² S² (1/B) (d²B/dS²) + r S (1/B) (dB/dS) - r = 0

½ σ² S² (1/B) (d²B/dS²) + r S (1/B) (dB/dS) - r = - (1/A) (dA/dt)

Since the left-hand side depends only on S and the right-hand side depends only on t, the only way the equality can hold is if both sides are equal to a constant K.

- (1/A) (dA/dt) = K

A(t) = c e^-Kt

½ σ² S² (1/B) (d²B/dS²) + r S (1/B) (dB/dS) - r = K

½ σ² S² (d²B/dS²) + r S (dB/dS) - (r + K) B = 0

S² (d²B/dS²) + (2r/σ²) S (dB/dS) - (2/σ²) (r+K) B = 0

This equation proceeds as in the previous exercise.

λ² + (2r/σ² -1)λ + (-2/σ²)(r+K) = 0

λ = { (1 - 2r/σ²) ± [ (2r/σ² - 1)² + (8/σ²)(r+K) ]^½ } / 2

λ = { (1 - 2r/σ²) ± [ (2r/σ² - 1)² + (8/σ²)(r+K) ]^½ } / 2

λ = { (1 - 2r/σ²) ± [ (2r/σ² + 1)² + (8K/σ²) ]^½ } / 2

There are three cases depending on the roots: two real roots, one real root, two complex roots. And to be explicit, we should note that the case of two real roots can come about either with a real value of K (which leaves the form of A(t) above unchanged) or with a complex value of K (which would require rewriting A as we'll see in a minute).

Case 1: λ₁ and λ₂ are distinct real roots.

B(S) = c₁ S^λ₁ + c₂ S^λ₂

V(S,t) = (c₁ S^λ₁ + c₂ S^λ₂) e^-Kt

Case 1A: K = 0
(Special scenario under case 1)

This reduces to the special case where there is no time dependence V = B(S)

V = c₁ S + c₂ S ^(-2r/σ2)

Case 2: λ₁ = λ₂ = λ is the only real root.

B(S) = S^λ (c₁ + c₂ ln S)

V(S,t) = S^λ (c₁ + c₂ ln S) e^-Kt

Case 3: λ₁ = a+ib and λ₂ = a-ib are complex roots (with K real).

B(S) = S^a [ c₁ cos (b ln S) + c₂ sin (b ln S) ]

V(S,t) = S^a [ c₁ cos (b ln S) + c₂ sin (b ln S) ] e^-Kt

Case 3A: λ₁ = a+ib and λ₂ = a-ib are complex roots (with complex K = c + id).
(This is not strictly separate from case 3; it's simply a matter of expanding e^-Kt for complex K.)

B(S) = S^a [ c₁ cos (b ln S) + c₂ sin (b ln S) ]

V(S,t) = S^a [ c₁ cos (b ln S) + c₂ sin (b ln S) ] e^-ct (cos dt - i sin dt)

Note that all of these solutions (except Case 1A) have too many degrees of freedom, due to the freedom of choice in choosing K. Normally boundary conditions would restrict the universe of valid values for K, but the problem as stated did not provide any such conditions.

WHD Problem 3.6a

Find the most general solution of the Black-Scholes equation that has the special form V=V(S).

(∂V/∂t) + ½ σ² S² (∂²V/∂S²) + r S (∂V/∂S) - rV = 0

Substituting V=V(S) reduces the partial differential equation to an ordinary differential equation.

S² (d²V/dS²) + (2r/σ²) S (dV/dS) - (2r/σ²) V = 0

This is an Euler differential equation x²y'' + axy' - by = 0, the solutions of which can be found with the aid of the characteristic equation.

λ² + (a-1)λ + b = 0

λ² + (2r/σ² -1)λ + (-2r/σ²) = 0

Applying the quadratic equation, one obtains (after a bit of algebra) two roots

λ = 1 and λ = (-2r/σ²)

Using these roots, we determine that the most general solution of the Euler equation is
V(S) = c₁ S + c₂ S ^(-2r/σ2)

WHD Problem 2.5

There are n assets S_i,...,S_n satisfying the following stochastic differential equations dS_i = σ_i S_i dX_i + μ_i S_i dt, for i = 1, ..., n

The Wiener processes dX _i satisfy E[dX_i] = 0 and E[dX_i²] = dt, as usual, but the asset price changes are correlated with E[dX_idX_j] = ρ_ijdt where -1 ≤ ρ_ij ≤ 1.

Derive Ito's Lemma for a function f(S_i,...,S_n) of the n assets.

Actually, I already know most or all of the content of The Mathematics of Financial Derivatives; I am reading it as a review in preparation for more advanced materials I am hoping to get to in the near future.

This exercise is pretty trivial, mostly a matter of keeping track of all the variables.

The Taylor series expansion is
df = (∂f/∂t)dt + Σ(∂f/∂S_i)dS_i + ½Σ(∂²f/∂S_i∂S_j)dS_idS_j

dS_idS_j = (σ_i S_i dX_i + μ_i S_i dt)(σ_j Sj dXj + μj Sj dt) = σ_i σ_j S_i Sj dX_i dXj = ρ_ij σ_i σ_j S_i Sj dt
dropping all higher order terms and then substituting in the correlation assumption.

So finally we obtain
df = [ (∂f/∂t) + Σ μ_i S_i (∂f/∂S_i) + ½ Σ ρ_ij σ_i σ_j S_i Sj (∂²f/∂S_i∂S_j) ] dt + Σ σ_i S_i (∂f/∂S_i) dX_i

Here we go...

Senator Charles Schumer and other members of the Senate Banking Committee said the federal government should spend "hundreds of millions of dollars'' to bail out subprime mortgage borrowers facing foreclosure. Non-profit groups would distribute the money to help homeowners refinance loans they can't repay, Democratic Senators Schumer of New York, Robert Menendez of New Jersey and Sherrod Brown of Ohio.

So, let me get this straight those of us who did the RESPONSIBLE thing and did not buy more house than we could afford (while watching prices skyrocket out of our reach due to these irresponsible buyers) are now being asked to bend over and take it once more as our tax money goes to subsidize those who did buy more house than they could afford? Why?

And I'm tired of hearing that folks didn't understand what they were getting as a mortgage. Everyone understands adjustable interest. And everyone understands whether or not a payment is more than they can afford. And last of all everyone should understand the consequences of lying about his/her income on a mortgage application. I don't have any sympathy.

These folks took a risk. If it had worked out for them, the profit was all for them. They weren't planning to share it with me. It didn't work out, so I have to share the loss? WTF?

Job Cuts at Citigroup

Citigroup will eliminate about 17,000 jobs as part of a companywide restructuring to reduce costs and improve profit. Overall, the cuts amount to about 5% of the bank's 327,000-strong work force. Citigroup said its plans include "shrinking the size of corporate centers," several of which are in New York. It also expects to move some 9,500 jobs to lower-cost locations. Still, the elimination of the jobs won't reduce the bank's work force, but merely slow its growth, Citi executives said.

Ravings Brands Selling Moe's Southwestern Grill

Moe's Southwest Grill, the crown jewel of Atlanta-based parent Raving Brands, is being sold to Focus Brands, the Atlanta-based owner of Carvel Ice Cream, Schlotzsky's, Cinnabon and international stores of Seattle's Best Coffee. The announcement Wednesday comes on the heels of a lawsuit by franchisees, who among other things said the chain's management was secretly considering a sale. Raving Brands founder Martin Sprock denied that claim as recently as last week.

BearingPoint

The Company's continuing failure to timely file certain required periodic reports with the SEC imposes significant risks to the Company's business, including the possible loss of business, delisting from the New York Stock Exchange and defaults under the Company's credit facility. The Company has identified material weaknesses in its internal control over financial reporting, which could materially and adversely affect its business and financial condition. The Company's current cash resources might not be sufficient to meet its expected near-term cash needs, especially to fund intra-quarter operating cash requirements and non-recurring cash requirements (e.g., to settle lawsuits).

Apparently, BearingPoint didn't file its annual reports for fiscal 2004 and 2005 on time, nor will it file its 2006 report on time. It also has failed to file quarterly reports on time for the past six quarters in a row.

MBA Salaries

Came across the following in the WSJ...

The following business schools reported the highest average annual base salaries for full-time graduates, according to "The Wall Street Journal Guide to the Top Business Schools 2006".

Stanford University: $100,400

Harvard University: $99,848

Massachusetts Institute of Technology: $94,131

University of Pennsylvania: $92,986

Dartmouth College: $91,900

Northwestern University: $91,390

New Century Cuts Over Half Its Workforce

New Century Financial will immediately cut 3200 jobs (54% percent of its workforce) as part of its Chapter 11 bankruptcy reorganization. The company also said it agreed to sell its servicing assets and platform to Carrington Capital Management for $139 million, subject to bankruptcy approval. Separately, New Century said CIT Group and Greenwich Capital Financial Products have agreed to provide up to $150 million of debtor-in-possession financing to keep the company in business as it reorganizes.

LSI Swallowed Agere Today

Agere (a spin-off from Lucent) was acquired by LSI, effective today. The purchase price was 2.16 shares of LCI ($22.55) for each Agere share.

The Mebert Hoax

I've always been fascinated by this ultimate example of Dilbert-ism in the real world, but the story due to age (it happened back in 1997) has been getting more difficult to find on the internet. So I've taken a minute to document the story here for posterity.

Here's the story as originall written in the San Jose Mercury News...

My goal is to see if a group of executives will allow somebody who has very few credentials, except for good hair, to come into their meeting and get them to write a mission statement which is so impossibly complicated that it has no real content.--Scott Adams, Oct. 8, 1997, 9:30 a.m.

Two hours later, management consultant Ray Mébert strides through the doors of Logitech International's headquarters in Fremont. Few employees give a second glance at the short, mustached man in a gray suit as he weaves through a maze of cubicles to a conference room in which almost a dozen senior executives have been assembled.

In a memo distributed to a selected group of Logitech's vice presidents and senior managers, Pierluigi Zappacosta, the company's co-founder and vice chairman, described Mébert as a man with ''special talents as a facilitator'' and ''a very original thinker'' who has collaborated with big-name consultants.

It's not as if Logitech, the world's largest manufacturer of computer mice and related devices, is in a slump. In Silicon Valley, the 3,000-employee company is considered a strong innovator. But in this fast-paced industry, survival depends in large part on aggressively finding new business opportunities, which is why the gifted Mébert has been summoned. His charge, in the words of Zappacosta's memo, is to help ''crisply define the goals'' of the New Ventures Group. Translation: It's time for that most dreaded of corporate exercises, rewriting the mission statement.

Mébert (the French pronunciation, please!) carries nothing but a thin manila folder with documents summarizing Logitech's business goals--which he has studiously avoided reading. ''I try not to become too familiar with the companies I'm consulting for,'' Mébert explains. ''I find that, otherwise, generic solutions might not fit as well.''

If the size of his entourage is a yardstick, Mébert clearly is a success. Does Michael Porter, the celebrated authority on competitive business strategy, arrive with a photographer, a videotaping crew and a personal assistant named Sheena Diamond? Noting all the electronic gear, one exec is heard to mutter, ''Wow, he's got to be expensive.''

Mébert quickly confirms his stature in the management consulting universe. ''I did the Harvard MBA thing, and then I went to Procter & Gamble where I worked on the Taste Bright Project,'' Mébert says. Taste Bright, he explains, was a top-secret effort his team worked on for years, to boost soap sales by cashing in on not only the olfactory but also the gustatory sense.

"There actually are some people who admitted in focus groups that they would sometimes taste soap. We found that to get repeat business it was necessary to actually improve the smell as well as the taste of the soap,'' Mébert says. Zappacosta nods empathetically at such a difficult assignment. There follow serious nods--and a few chuckles--around the table.

Mébert continues with his credentials: He did a stint at Fortune Computer (one of the valley's legendary business failures), then founded Ray Mébert Associates. Apple immediately recruited him to strategize on its much ballyhooed--now beleaguered--handheld computer, the Newton.

These less-than-proud consulting experiences do not raise an eyebrow. Then again, as any loyal reader of ''Dilbert'' can tell you, consultants play by their own rules. To quote that management guru Dogbert, ''Consultants don't need much experience in an industry in order to be experts. They learn quickly. If your 26-year-old consultant drives past the Egghead software outlet on the way to an assignment, that would qualify as experience in the software industry.'' Mébert, it seems, adheres strictly to the Dogbert doctrine.

If the Logitech execs were to look closely, they would notice a few signs that Mébert is not exactly who he says. Strands of sandy blond hair peek from under his thick brown locks. His mustache is a little too symmetrical. Not bad, though, given the hasty transformation Mébert underwent two hours earlier at his home in Danville. It's also home to Mébert's alter ego, ''Dilbert'' creator Scott Adams.

And here's a couple of interviews Scott Adams gave about the incident shortly afterwards.

I got a call from Tia O'Brien [an independent reporter on assignment] for the San Jose Mercury News. She wanted to do a story that was going to be interesting and different. We brainstormed and came up with the idea that I'd put on a disguise, go to a corporation as a consultant, and see if I could fool people into thinking that I was a high-paid consultant when, in fact, I was just full of crap. Zappacosta thought it would be a fun idea. So we set up the scam. Tia acted as my assistant, and Pierluigi was the only one who was in on it in a room full of business executives at Logitech. For over one hour I took them through an exercise on how to rebuild their mission statement. I actually convinced them that the one they had was woefully inadequate. That's part of the humor of it - all mission statements are quite useless. So to tell them the one they had wasn't doing the job should have raised a red flag to begin with. But people in corporations are so used to two things: First, absurdity - so nothing seems too unusual. And second, there is not enough payoff to rock the boat. It was much easier for everyone to listen to what I had to say than to jump on me at the first sight of absurdity. Certainly everyone in the room had at least a moment where they said, "Man, I'm wasting my time!" But I made sure I always skated just below the level at which somebody would call my bluff and would think it was worth taking the chance of calling me a fraud. I had them thinking, "What if it just turns out that he's just eccentric but the best consultant in the world?"

See that picture to the left there, by the light switch? Where I'm peering from behind Dilbert? I have a big mustache and fake brown hair on? I was outfitted by a makeup artist and I went into Logitech as a famous consultant. I was brought in by the founder of the company, who was in on it, and he was in on the joke, and a reporter for the San Jose Mercury News, a freelancer who was working there, set it up with me. They had their senior management there and I gave a whole presentation and reworked their mission statement with them. They thought I was there to give them a better mission statement. But, my stated goal was to give them the worst mission statement ever written, convince them it was good, and get them to agree to put it to music. I succeeded in all that. They agreed to put it to music and I didn't actually have them put it to music. But I got volunteers, and people volunteered. It was the worst mission statement ever written. Every person in that meeting was way above average in intelligence and not one bit more gullible than anybody else on Earth. Completely normal gullibility.

Private Equity Firm To Go Public

Blackstone Group is preparing to become the first major private equity firm to go public. The $4 billion IPO values Blackstone at $40 billion. But investors can only buy into Blackstone's management company, not the companies it owns, and they'll have limited voting rights. Blackstone's partners will remain in control, said Martin Mayer at the Brookings Institution.

[Thanks to CP for bringing this to my attention.]

45% of first-time buyers put $0 down

According to the National Association of Realtors 45% of first-time buyers nationwide put no money down.

That's up from 42% the last time I posted the statistic back in March 2005.

Federal Reserve advisory group warns foreclosures to get worse

Members of a Federal Reserve advisory panel on Thursday warned of a rising tide of US mortgage foreclosures in the coming year, as subprime borrowers in particular are expected to feel the sting. Members of the Fed's Consumer Advisory Council said the number of foreclosures in 2007 is expected to exceed the roughly 1.2 million from 2006. "Foreclosures are at a historic high, and they're going to get higher," said Alan White, a supervisory attorney with Community Legal Services, adding that subprime loans represented about 50% of last year's foreclosures. "It's getting to a point where it's no longer an anecdotal problem, but it relates to the nature of the product," White said, referring to the proliferation of subprime mortgage products.

Collapse of Arthur Andersen LLP

To those who think that the destruction of Arthur Andersen was an over-reaction, keep in mind that we are not just talking about Enron. Arthur Andersen over its last few years also signed off on the extremely dirty books of Sunbeam, Waste Management, Global Crossing, Qwest, and (most appaling of all) WorldCom. This was clearly not just a few bad apples but a systemic cancer within a company that not that long ago was held up as the paragon of auditing ethics.

Staff:

Of course, the jewel of the crown was Arthur Andersen's tax practice, with its approximately 500 US partners, which was won by Deloitte Touche Tohmatsu in April 2002.

The other big ticket item in the collapse of Arthur Andersen LLP was that Robert Half International established the firm Protiviti by hiring more than 700 professionals from the risk consulting practice including more than 50 partners.

The rest of the firm was carved up like a Thanksgiving turkey...

Ernst & Young Acquires Arthur Andersen's Chesapeake Office - 350 employees including 39 partners.

Ernst & Young Acquires Pittsburgh Offce - 87 employees including 8 partners.

Ernst & Young Acquires Louisville Office - 45 employees including 3 partners.

Ernst & Young acquired the Financial and Commodities Risk Consulting and Financial Services practices of Arthur Andersen's Chicago office - 65 employees including 12 partners

Ernst & Young hired 78 Andersen staffers in Miami, Fort Lauderdale and West Palm Beach.

Ernst & Young acquired Ann Arbor, Grand Rapids and Toledo offices - 159 employees including 14 partners

Ernst & Young hires approximately 100 Arthur Andersen professionals including 6 partners from Andersen's Los Angeles, Denver, Phoenix, and San Diego practices.

Deloitte & Touche acquired about 950 staffers from the Chicago office, far more than any other Big Four firm.

Deloitte & Touche acquired 225 employees from the Milwaukee office

Deloitte & Touche acquired 50 employees from the Las Vegas office

Deloitte & Touche acquired the Minneapolis office - 229 employees including 16 partners

From the Atlanta office, Deloitte & Touche hired 359 employees including 39 partners, and Ernst & Young hired 51 employees including 5 partners

The Boston office was divided up between the Big Four - Ernst & Young signed up 15 partners, PricewaterhouseCoopers 5 partners, Deloitte & Touche 11 partners and KPMG 4 partners

KPMG picked up more than 200 employees and partners from the Seattle office

Grant Thornton picked up 50 employees including 6 partners from the New York office

Grant Thornton got 161 employees including 19 partners in Charlotte, Greensboro and Columbia

Grant Thornton buys Tulsa office with 35 employees

Huron Consulting Group was formed by 35 Andersen professionals, mostly from the financial consulting practice, in Chicago.

Keep in mind that this entire process was started in April and was completed by July. I did not think a company with 28,000 US employees (85,000 globally) could collapse in four months. If anybody has information on offices that are not listed here, I'd like to hear from you. In particular, I am interested in learning what happened to the rest of the NYC office.

Clients:

This list is entirely too long to reproduce in this blog since Arthur Andersen had almost 2500 clients. In this case, I will rely on internet links and hope they do not die on me.

http://www.accountingweb.com/cgi-bin/item.cgi?id=74745
http://www.forbes.com/2002/03/13/0313andersen.html
http://www.forbes.com/2002/06/28/0627andersen.html

Collapse of Andersen Worldwide

Defections of Andersen's global affiliates
I would normally provide this information via a link, but I wanted the actual text documented here in case the link dies because this information is becoming increasingly difficult to find on the web.

Argentina 4/16/02 Plans to merge with Ernst & Young
Australia 3/28/02 Announces plans to merge with Ernst & Young
Baltic States 4/15/02 Announces plans to merge with Ernst & Young
Belgium 4/23/02 Announces plans to merge with Deloitte Touche Tohmatsu
Brazil 4/9/02 Announces plans to merge with Deloitte Touche Tohmatsu
Bulgaria 4/24/02 Announces plans to merge with Ernst & Young
Canada 4/12/02 Announces deal to merge with Deloitte Touche Tohmatsu
Chile 4/9/02 Announces plans to merge with Ernst & Young
China 3/22/02 Announces plans to merge with PricewaterhouseCoopers
Colombia 4/23/02 Announces plans to merge with Deloitte Touche Tohmatsu
Croatia 4/24/02 Announces plans to merge with Ernst & Young
Czech Republic 4/24/02 Announces plans to merge with Ernst & Young
France 4/16/02 Plans to merge with Ernst & Young
Germany 4/24/02 Plans to merge with Ernst & Young
Holland 4/24/02 Announces plans to merge with Deloitte Touche Tohmatsu
Hong Kong 3/22/02 Announces plans to merge with PricewaterhouseCoopers
Hungary 4/24/02 Announces plans to merge with Ernst & Young
India 5/4/02 Announces plans to merge with Ernst & Young
Indonesia 4/14/02 Announces plans to merge with Ernst & Young
Italy 4/23/02 Announces plans to merge with Deloitte Touche Tohmatsu
Japan 3/28/02 Announces plans to merge with KPMG
Mexico 4/9/02 Announces plans to merge with Deloitte Touche Tohmatsu
Middle East 4/22/02 Announces plans to merge with PricewaterhouseCoopers
Netherlands 4/22/02 Announces plans to merge with Deloitte Touche Tohmatsu
New Zealand 3/28/02 Announces plans to merge with Ernst & Young
Norway 4/9/02 Announces plans to merge with Ernst & Young
Phillipines 4/24/02 Announces plans to merge with Ernst & Young
Poland 4/9/02 Announces plans to merge with Ernst & Young
Portugal 4/9/02 Announces plans to merge with Deloitte Touche Tohmatsu
Romania 4/24/02 Announces plans to merge with Ernst & Young
Russia 3/22/02 Announces plans to merge with Ernst & Young
Singapore 4/3/02 Announces plans to merge with Ernst & Young
Slovakia 4/24/02 Announces plans to merge with Ernst & Young
Slovenia 4/24/02 Announces plans to merge with Ernst & Young
South Africa 4/11/02 Announces plans to merge with KPMG
Spain 4/3/02 Announces plans to merge with Deloitte Touche Tohmatsu
Sweden 4/22/02 Announces plans to merge with Deloitte Touche Tohmatsu
Switzerland 4/17/02 Announces plans to merge with Ernst & Young
Taiwan 4/11/02 Plans to merge with Deloitte,Touche Tohmatsu
Thailand 4/3/02 Reaffirms plans to merge with KPMG
United Kingdom 4/10/02 Announces plans to merge with Deloitte Touche Tohmatsu
Vietnam 5/10/02 In discussions to merge with KPMG

http://www.accountingweb.com/cgi-bin/item.cgi?id=76820

What it would take to bring down another big accounting firm

The key to survival [of a Big Four firm] lies in the willingness of the partners to stay committed and at their desks — something that the Andersen partners did not possess, as proved by the two-week period in 2002 during which they bailed out en masse and thus smashed the firm beyond recovery.

A study done for McCreevy calculates that the partners of a European firm would bolt in numbers large enough to be destabilizing rather than be forced to finance a litigation payment that extracted a profit reduction of 15% to 20% over three to four years. Applying those assumptions to the Big Four's latest reported US revenues of $4.7 billion to $8.7 billion, the US firms would confront partner flight and possible failure at liability levels as small as $450 million to $1.8 billion. Those amounts are modest to the point of insignificance against the size of this decade's financial debacles — examples ranging from the $20 billion hole in the balance sheet of Parmalat to Enron's $67 billion bankruptcy.

Response to Comment

Any comments on how Unions caused problems in high costs? Japanese companies who have factories in America with no Unions seem to have a very good profit margin. I think Chrysler's workers did themselves and the company in. Any thoughts on comparing this to some airlines troubles? (Eastern, PanAm)

No question that the problems of GM, Ford and Chrysler are due to overly high compensation and benefits demanded by the union. For example, in 2005, GM’s US other postretirement employee benefits expense, consisting of retiree health care and life insurance, increased to $5.3 billion (that's HALF of GM's $10.6 billion loss right there).

However, it is too easy just to blame the unions. Past management (and here I mean as far back as the 50s) is also to blame in that it was far too easy to promise benefits that would be paid years later rather than wages that would have to be paid on the spot.

I agree that Japanese companies that have factories in the US with no unions indeed have a very good profit margin. Furthermore, it's worth noting that GM and Ford operations abroad are also much more profitable than their US operations. I've previously commented that if Ford could just make their US segment disappear they'd be in top-notch financial shape. This is the reason why I don't think GM would ever buy Chrysler. Folks who know a lot more about cars than me observe that the two companies' vehicle portfolios don't mesh well. And they are right. However, from a financial point of view it just wouldn't work out. GM has more than its fair share of "Detroit troubles" and has no business trying to take on Chrysler's very similar problems.

Your comment in comparing the automakers to airlines is quite insightful. Heavily unionized industries are all collapsing due to the unsustainable wage/benefit promises extracted from management by the unions. Steel, airlines, automakers. They're all going down for the same reasons.

GM rumored to be in talks to buy Chrysler

I have of course been following the many reports of problems at the Chrysler unit of DaimlerChrysler including all the discussion about how the "merger of equals" was falling apart and Daimler was looking at "strategic opportunities" (translation: divestiture) for Chrysler. However, this story BLEW ME AWAY:

General Motors is in talks to buy the Chrysler Group in its entirety, Automotive News reported Friday, citing unnamed sources in Germany and the United States.

MMC selling Putnam

Power Financial, the owner of the biggest mutual fund company in Canada, agreed yesterday to buy Putnam Investments, based in Boston, from Marsh & McLennan for $3.9 billion in cash. Power Financial is buying Putnam, which managed $192 billion as of December 31, through its Great-West Lifeco insurance unit. Marsh, which has owned Putnam since 1970, put the company up for sale in September after assets fell 60% in five years because of below- average returns and fallout from a fund-trading scandal.

Bad News for Venezuela

Venezuelan President Hugo Chavez moves yesterday toward creating what he calls "21st Century Socialism" by vowing to nationalize Venezuela's biggest telecommunications and electricity companies, throw out its commercial code and strip its central bank of all remaining traces of its autonomy take his country straight towards communism.

Chavez vowed to nationalize both the country's largest publicly traded private company, Compania Nacional de Telefonos de Venezuela (CANTV) - owned by US-based Verizon Communications - and Electricidad de Caracas - owned by US-based AES. The choice of two US-owned companies won't be missed elsewhere in Latin America, where Chavez has struggled to persuade nations to follow his lead and not Washington's.

Consolidating his power politically, he also unveiled plans to join his coalition of center and leftist parties into a single party controlled by him called the United Venezuelan Socialist Party, a move seen as leading the country down the road to a single-party state.

[Source: WSJ]

Regulator Seeks Legal Action Against Fannie Mae Ex-Officials

The Office of Federal Housing Enterprise Oversight yesterday filed suit against three former Fannie Mae top executives to recover more than $115 million in pay they received because the company's earnings were misstated. The complaint alleges the three executives "improperly manipulated earnings to maximize their bonuses." The three executives maintain they have done nothing wrong and plan to fight. (In 2003, OFHEO filed similar charges against former top officials of Freddie Mac.)

Milton Friedman, R.I.P.

http://www.ajc.com/business/content/shared-gen/ap/Finance_General/Obit_Friedman.html

Home prices plunge by most in 35 years

The Commerce Department reported that the median price for a new home sold in September was $217,100, a decline of 9.7% from September 2005.

New Ford CEO

CNN Money...

Ford Motor Company surprised the auto industry by tapping senior Boeing executive Alan Mulally as its new CEO, succeeding current CEO Bill Ford, who will stay on as chairman.

ABC News...

When Bill Ford decided that his family's company needed more leadership than he could offer, he started looking for someone who had successfully fixed a large but troubled manufacturing company. He wasn't sure there was such a person, but as he asked around in and out of the auto industry, one name kept popping up: Alan Mulally, EVP of The Boeing Company [and President and CEO of Boeing Commercial Airplanes]. [...] Mulally was widely praised for being a key architect of the resurgence of Boeing's commercial airplanes unit over the past couple of years.

Ford - August was a bad month

Toyota Surpasses Ford

Toyota Motor surpassed struggling Ford Motor in July to rank as the second-biggest-selling auto company in the United States, behind General Motors, sales figures showed. Toyota's victory over Ford was slim, just 487 vehicles. Toyota sold 241,826, up 16.2%, while Ford's sales dropped 32% to 241,339. Three months ago, Toyota passed DaimlerChrysler to rank as the third-biggest company in terms of American sales.

Note: The story has a huge error. It says that Toyota's sales in July gave it 16.2% of the American market compared with 15.9% for Ford. That is absolutely not correct; the margin of 487 vehicles represents a gap of 0.03% not 0.3%.

Ford Cuts Production

If you’re a major automobile manufacturer and you are struggling to sell all the cars you make, what do you do? Do you try new incentives, aggressive marketing, or actually making cars people want? If you’re Ford, you don’t do any of that. Instead, you just make fewer cars. Ford has cut production levels of their vehicles in the fourth quarter of this year by 21% compared to last year. It means that Ford will make 3.048 million vehicles in North America in 2006, that represents a drop of 9% from last year.

Rubin Resigns Board

Robert Rubin has resigned from the board of Ford Motor Company, citing a potential conflict of interest with his duties as a member of the chairman’s office at Citigroup. One analyst said the move may be a sign that the Ford family will need financing for an alliance with another company or to take the struggling automaker private. Another said Citigroup may also advise Ford or a buyer on the sale of the company’s credit arm. In a letter dated Thursday to Ford Chairman and Chief Executive William Ford, Rubin said he needed to step down as the board begins a review of the automaker’s strategic options.

Haven't we already been down this path?

AT&T Launches Its Cable Foray With TV Service

The new AT&T made its new television service available to thousands of San Antonio consumers, kicking off a battle against cable rivals that could result in lower prices for TV, Internet and phone services.

With prices starting at $59 a month, AT&T's initial packages are roughly on par with those of cable, but the phone company says it offers more services for that price, including faster channel surfing, three set-top boxes, an interactive program guide and digital video recorder. Until this week AT&T offered its TV service to only a few hundred consumers in San Antonio. The wider rollout in that area is the precursor to offering the service in 15 to 20 markets by year's end. Eventually the service will be available to 19 million homes. For consumers, increased competition could mean better TV deals, especially if they buy the service packaged with phone or Internet service. Time Warner, AT&T's main cable competitor in San Antonio, says it has no plans to change its prices.

Analysts predict cable companies will lower the cost of their service if they see AT&T begin to win over their customers. Still, other experts say AT&T's television service may consistently be priced a bit higher than cable TV because the very few customers for the nascent service drive up its programming costs. "It'll hasten the advent of bundling as the way to get the best price for a consumer, but is it going to be transformative to your cable bill? Probably not," said Craig Moffett, an analyst with Sanford Bernstein. AT&T's pricing for San Antonio is similar to that of its main cable competitor for the most part but cable offers more general channels and more features such as high-definition television.

AT&T's midrange plan for its TV service, which it calls U-Verse, offers 150 channels plus 31 premium movie channels such as Starz, Showtime and Encore for $79 a month. AT&T's marketing materials promote TV bundled with high-speed Internet, and customers who sign up for both are eligible to receive both services for $10 to $25 a month for the first three months of service, depending on which package they choose. Next month AT&T plans to launch Homezone, which will combine satellite TV from EchoStar with videos and movies from the Internet, according to people familiar with the new offering.

Foreclosure rates up

The foreclosure rate national average is 1.1%, with the following states having above average rates.

Georgia 3.1%
Colorado 2.9%
Indiana 2.4%
Nevada 2.3%
Michigan 2.2%
Texas 2.0%
Ohio 1.9%
Tennessee 1.9%
Utah 1.9%
Florida 1.6%
New Jersey 1.3%
Oklahoma 1.3%
Arkansas 1.3%
Arizona 1.1%
Illinois 1.1%

Delinquency rates up

The national average is 4.41%, so states in white have delinquency rates at or below the national average.

Laborers International Union leaving AFL-CIO

The Laborers International Union of North America announced that it will be leaving the AFL-CIO as of June 1. The union represents about 700,000 workers in the construction industry and is already part of the Change to Win coalition, which has attracted a number of breakaway unions that cite the AFL-CIO's heavy emphasis on electoral politics and not enough emphasis on attracting more people to the labor movement.

Burger King IPO

Burger King's long-awaited IPO (there's a 2000 BusinessWeek story talking about it) has finally arrived. Today's IPO consisted of 25 million shares priced at $17, which represents a 19% stake in the company.

Wachovia to acquire Golden West

Wachovia (#4 commercial bank in terms of assets, #5 in terms of revenue) agreed to buy California thrift Golden West Financial (the #2 Savings & Loan) for $25.5 billion, a 15% premium. Wachovia says the purchase will help the bank expand in affluent, fast-growing markets in the West. Golden West is an adjustable-rate mortgage specialist but will also give Wachovia 285 new branches, including 123 in California and 26 in Texas.

Shares of Wachovia fell fell 6.7%, the biggest decline since October 2002. Investors worried that Wachovia may have overpaid for Golden West, amid signs of weakness in the mortgage industry as interest rates rise. Wachovia also said the purchase will cut earnings per share by 11 cents in 2007 and seven cents in 2008.

Stories:
Wachovia CEO defends surprise Golden West deal
Wachovia to Acquire Golden West Bank for $26 Billion
Wachovia sees deal as fortification
Wachovia acquires Golden West

GM to sell Isuzu stake

GM said it will sell its 7.9% stake in Isuzu Motors for $300 million, unraveling a 35-year equity alliance to raise much-needed cash to revive its ailing business. In the widely expected move, Japanese trading houses Mitsubishi and Itochu will each take a 3.5% stake and Mizuho Corporate Bank (a unit of Mizuho Financial Group) will buy the remaining 0.9%.

Burger King CEO Resigns

Burger King Chairman and CEO Greg Brenneman resigned today.

John Chidsey, the company's president and CFO, will immediately take over as Burger King's CEO. He's the company's ninth CEO in 11 years.

Brian Swette, a current independent director, will serve as non-executive chairman. SVP and Treasurer Ben Wells will fill Chidsey's spot as CFO.

More Bad News from GM and Delphi

Delphi
Officials of Delphi's two largest unions (UAW and IUE-CWA) rejected the company's latest proposed wage and benefit cuts. Officials of both unions said there was nothing in the proposal to even warrant taking it to union members for a vote. The proposal included a pay cut from $27 to $22 an hour in July 2006 and to $16.50 an hour in September 2007. The proposal also included new, larger health care premiums. As a result of the rejection, Delphi is likely to file Friday in bankruptcy court to void labor agreements covering over 33,000 union members.

GM
General Motors laid off 500 salaried employees at facilities across the country. The layoffs are the first wave of job eliminations in a program aimed at reducing the number of salaried and contract workers 7%.

Housing Banks May Be Forced To Cut Dividends

The Federal Housing Finance Board proposed rules this month that would require the banks to retain more of their earnings as capital to build up a bigger cushion against potential losses. The move comes in the wake of embarrassing stumbles by some of the 12 regional home-loan banks. The proposed rule probably will force most of the home-loan banks to slash their dividends, a big source of income for many of the more than 8100 commercial banks, thrifts, credit unions and insurers that own the banks. The proposal may also discourage the home-loan banks from purchasing mortgage loans made by their members, drying up a small but important source of housing finance and marginally increasing mortgage costs for consumers.

Source: WSJ

Lucent and Alcatel Merging

Lucent and Alcatel announced that they were in talks to effect a "merger of equals."

Here are some financial publications' take on the merger:
http://www.businessweek.com/technology/content/mar2006/tc20060324_429614.htm
http://www.forbes.com/2006/03/24/lucent-alcatel-merger-0324markets03.html

Google Settles Suit

Google agreed to pay $90 million in legal fees and advertising credits to settle a lawsuit filed against it and other Internet companies last year alleging that the companies knowingly overcharged for online advertisements and conspired to continue doing so.

As of this writing, the stock is at $347.76, down 1.73%.

Source: Wall Street Journal

GOOG

Google had a couple of good days Thursday and Friday of last week, but it's been beat up pretty bad this week. After a 2.9% drop today, it is trading at $353.88, down over 25% from its high of $475.11 in January.

AT&T-BellSouth Merger

Two of my four predictions in February 2005 (#1, #2) after the SBC-ATT merger was announced has already come true, as MCI was swallowed up by Verizon.

Now, it looks like a third one is being confirmed as BellSouth gets swallowed up too, by the new AT&T.

The short story:

• AT&T is offering 1.325 shares for each share of BellSouth, which amounts to a 17.9% premium, $37.09 a share at Friday's AT&T closing price, or $67 billion for all outstanding shares. AT&T will also take on BellSouth's debt of $22 billion, putting the total price of the deal at $89 billion. (Compare that with the paltry $16 billion SBC paid for the old AT&T.)
• Current BellSouth shareholders will own 38% of the new company.
• AT&T will own all of Cingular Wireless after the deal. (Will they change the name of the company to AT&T Wireless?)
• About 10,000 jobs will be eliminated after the merger. This is in addition to the job cuts already announced after the SBC-AT&T deal.
• Although the boards of both companies have already approved the deal, there could be regulatory hurdles due to the size of the combined company. (It would constitute a very large portion of the Ma Bell of olden days.)

Google sell-off

Google CFO George Reyes today said advertising revenue growth is bound to slow, sparking a sell-off in their stock. Google shares dropped as much 13%, or more than $50 in heavy trading, before recovering to close down $27.76 at around $362.62, a decline of 7.1%.

Wait a second. Google points out the obvious fact that a $6 billion dollar company is not going to grow 90% this year, and this causes a 7% plunge in the stock price. Sounds like a case of inflated expectations to me.

Burger King IPO

Number-two fast-food chain Burger King filed documents for an initial public offering. Its stock-market debut is likely within six months. Shooting for maximum proceeds of $400 million, the IPO - which touts the fast-food chain's turnaround tale - would top the $391 million raised by Domino's Pizza in 2004. Burger King, which owns or franchises 11,141 restaurants in 67 countries, holds a 12% share of the fast-food-restaurant category, which is expected to grow by 4.2% over the next five years. Burger King's share is less than half of #1 McDonald's and just microscopically ahead of #3 Wendy's, which has been making steady progress to overtake Burger King in the last few years.

Founded in 1954, Burger King has amazingly enough never been a public company. It was sold by its founders to Pillsbury in 1967. Pillsbury was then acquired by Grand Met PLC in 1988, which in turn merged with Guiness in 1991 to form Diageo. "As a result, Burger King Corporation became a small, non-core subsidiary of a large conglomerate, making it difficult for the brand to prosper," the company said in an IPO document.

From 1989 to 2002, the company ran through eight CEOs before being acquired by private-equity firms Texas Pacific and Bain Capital Partners for about $1.5 billion. Since then, the company says, it's been "focused on turning a great brand into a great business." It boasts of its seven consecutive quarters of same-store-sales growth and a rise of 11% in average per-restaurant sales over the past two fiscal years. In the six months ended December 31, Burger King reported net income of $49 million on revenue of $1.02 billion(*).

In its third fiscal quarter, now underway, Burger King said it'll record an expense of $367 million for a cash dividend paid to shareholders, prominently including Texas Pacific and Bain. The company also agreed to pay a one-time $30 million fee to terminate its management agreement with the private-equity firms upon completion of the IPO. Meanwhile, the strong stock-market debut of Chipotle - a spinoff of Burger King archrival McDonald's - and the hefty $2.43 billion price fetched by the private sale of Dunkin' Donuts provide evidence of strong investor interest in fast-food-chain operators.

Source: CBS MarketWatch, Chicago Tribune

(*) Note: I have seen many websites (including WikiPedia) that advertise Burger King's revenue as $11 billion a year. That figure is not correct. That is the total sales at Burger King restaurants whether company owned or franchised, not the revenues of Burger King Corporation.

More Trouble at the AFL-CIO

Two of the nation's biggest construction unions - the Laborers International Union of North America and the International Union of Operating Engineers - announced they are leaving the Building and Construction Trades Department of the AFL-CIO and may soon leave the AFL-CIO altogether. The two unions plan to create a rival building trades group, the National Construction Alliance. Joining the alliance will be the bricklayers, iron workers, and the Teamsters. Together, the alliance will have 1.5 million members. Leaders of the Laborers and Operating Engineers called the AFL-CIO Building Trade Department bureaucratic and out of touch with the new realities of the labor market.

Source: The Wall Street Journal

More on Google

A follow-up on my previous post...

Google has a superb balance sheet:

• $10.3 billion in assets, with an incredible $8 billion of that in cash and marketable securities, and very little in bogus goodwill
• almost no debt, resulting in stockholder equity of $9.4 billion

They also had a very good income statement in 2005:

• Revenue of $6.14 billion, an increase of 92.5% over last year's $3.19 billion
• Net income of $1.47 billion even with coming in under expectations

However, it is trading at $381.50 (down a further 3.7% from yesterday's price as of the time I'm posting this). That's 76x earnings. Does anyone really expect that Google is going to double in revenue and income again next year as it did from 03 to 04 to 05? Price seems a little bit high to me, although let me stress that I am NOT expecting a dotcom-like meltdown since this is a company with a clearly proven business model.

Google's Problems not all tax-related

Taxes were a problem for Google's fourth-quarter earnings, but not as much as investors may have been led to believe. Google's fourth-quarter net income of $1.54 a share, excluding items, missed expectations by 22 cents. (In response, Google shares dropped 12% in after-hours trading Tuesday, 7% Wednesday and 1.4% yesterday.) Google executives stressed that most of the earnings shortfall was attributable to the company having a higher U.S. tax bill than anticipated.

But a closer look at Google's results show that only half of the earnings shortfall - 11 cents a share - may be related to taxes. Google had to record more taxes than expected in the fourth quarter because more of its expenses were allocated to its international operations than it had expected, compared with its U.S. operations. That, in turn, raised U.S. pretax profit as a proportion of Google's total, and a greater percentage of Google's profit was taxed at a higher domestic tax rate. The company's effective tax rate for the fourth quarter was 41.8%; the rate for the full year was 31.6%, compared with Google's projection of about 30%.

Google recorded about $2.14 billion in pretax profit for the year. Applying Google's prior estimate of a 30% effective tax rate to that gets a tax bill of $642.6 million. Google had an actual tax of $676.3 million, the upshot being that the company paid $33.7 million more in taxes than it expected, a figure all attributable to the fourth quarter. However, this equates to only 11 cents a share, using Google's diluted share count of about 304 million. Scott Devitt, an analyst with Stifel Nicolaus, uses different numbers to arrive at a similar conclusion and says the company is off base in blaming most or all of its shortfall on the tax issue. The analyst, who has a "sell" rating on Google shares, stresses that whatever the particular reason for the shortfall, the stock is vulnerable to the market's ever-rising expectations.

Source: Wall Street Journal

Response to Comment

The problem is, that everyone has been saying the end of real estate boom is near for 3 or so years from now. Eventually the predictors of doom will be proven right.

Yes, but there's one additional thing to consider. In 1996 the "predictors of doom" were saying that the market was overvalued and prices would crash. They were not proven correct until 2000, but when the market did hit bottom in 2002 prices were in fact lower than in 1996. So it's not just a matter of time, but an actual price consideration.

Note that the real-estate bubble will not burst a-la the dot com stock bubble.

I agree it will never be as bad as the dot com stock bubble. The reason for the difference is clear - unlike stocks, homes are physical assets.

I think prices will only stagnate or wane slowly over the years...

Here I disagree. Current prices are sustainable only because of very low interest rates and absurdly generous financing options. I see prices dropping as much as 20% in a relatively short period.

Chipotle IPO

Investors piled into the initial public offering of Chipotle Mexican Grill today. After the 7.9-million-share offering priced at $22 a share, Chipotle shares doubled to close at $44, after reaching as high as $48.28. Chipotle sold 6.1 million shares in the deal, raising about $134 million, while its parent, McDonald's, sold 1.8 million shares. After the offering, McDonald's will have an 88% voting interest in Chipotle and a 69% economic interest.

Chipotle debut marked the biggest opening-day gain for a U.S. IPO since late 2000 and the biggest opening-day percentage gain on the New York Stock Exchange since Martha Stewart Living Omnimedia went public in 1999. Investors are excited about the chain's growth potential as its CEO, Steven Ells, said he plans to use the bulk of the proceeds from the IPO to open 80 to 90 stores this year. Part will be used to pay down a $30 million line of credit with Chipotle's parent.

At $44, shares of Chipotle are trading at roughly 80 times earnings.

Disney acquiring Pixar

Disney agreed today to buy Pixar in a stock deal valued at $7.5 billion based on Disney's closing price of $26. They expect the deal to close this summer.

Disney is offering 2.3 shares of its stock for each Pixar share. That's a 3.8% premium on Pixar's closing price of $57.57, which already is up 8% since January 3 on investor anticipation of a deal. There's no collar on the agreement, which means the value will rise or fall with Disney's stock price. Disney is issuing new stock but says it will buy back shares to return to the current float in 2007.

This deal will make Jobs, who owns about half of Pixar, Disney's #1 shareholder with 6.6%. He will join the Disney board.

Chipotle IPO

Chipotle Mexican Grill, a fast-growing 489-store U.S. restaurant chain and pioneer in the "fast- casual" dining segment, is being spun off by parent corporation McDonald's. In a filing with the SEC, Chipotle raised its forecast price range to $18 to $20. That raises the expected value of the 7.9-million-share offer to $150.1 million, based on the midpoint of the forecast. The shares are expected to price on Wednesday evening and make their market debut on the New York Stock Exchange under the symbol "CMG" on Thursday. Chipotle aims to use the proceeds of the offering to drive an aggressive growth plan to fund restaurant openings and to pay back debt to McDonald's. It plans to open 80 to 90 new stores this year.

Happy New Year?

One of the most important lessons you can ever learn about markets is also one of the easiest to forget: Just because prices are more reasonable than they were doesn't mean they're reasonable.

[...]

No one wants to hear that. It's almost irresistible to believe that after all we investors have endured--the hellish bear market, the recession, the scandals--we've emerged from the crucible sadder but wiser, finally willing to face the truth about stock values. But it isn't so. The amazing reality is that we haven't learned our lesson even yet.

Two Books on AT&T

End of the Line: The Rise and Fall of AT&T by Leslie Cauley
Grade: C

I managed to finish this book because the story is captivating, but the book definitely is not. The analysis is superficial, and Cauley clearly runs out of new things to say so she ends up repeating the same things over and over and over again. As one example, she mentions AT&T strong balance sheet (pre-Armstrong) a half dozen times, and even gets it wrong - on one page, she says AT&T long-term debt was $126 billion; elsewhere she says $12 billion. Her description of the personalities involved is likewise superficial and repetitive. She mentions Armstrongs "Big Blue way of looking at things" at least a dozen times (I am not exaggerating). There's even a entire discussion (regarding negotiations with Time Warner Cable) that is given in its entirety twice (pp. 189 and 190).

Another serious complaint is that the language of the book is inappropriately informal for the subject matter, even downright vulgar in a couple of places. Her very poor writing style just adds to the book's generally sloppy impression. This impression is not aided by the careless errors that pepper the book (e.g., referring to Microsoft as a cable giant). Didn't anybody edit this thing before it hit the shelves?

Most annoying of all is the approach of following parallel lines to that fateful summer of 2000, then backing up to follow another line of thought. It seems to be an attempt to highten the drama, but it fails miserably. A chronological order would have made the story much more interesting as well as making it much easier for the reader to figure out what went wrong with AT&T and maybe learn something from the book. But perhpas this is just as well since Cauley's research would not have been up to this task.

I bought this book expecting some new insights, but there was nothing in here one wouldn't already know from reading the Wall Street Journal as the collapse was happening. Cauley simply did not do any homework or dig beneath the surface in the least. Overall, a very weak effort.


Tough Calls: AT&T and the Hard Lessons Learned from the Telecom Wars by Dick Martin
Grade: D-

The back cover says that this book is "an up-front seat for the roller coaster ride" and a "look at how a great company tumbled" that will give us a "tour of AT&T's wild ride" and "chart the dissolution of an American icon." Not one of those comments is even remotely warranted.

I was expecting to find interesting insider discussions of important questions like:

• Did AT&T make any mistakes during the "trivestiture" in January 1996 (akin to giving away the wireless licenses to the RBOCs in the 1984 breakup)? Martin doesn't say, beyond talking about the PR fallout of the layoffs. These layoffs were only a side issue of the broader business strategy; communication mistakes surrounding them hardly merits mentioning at all.
• Was pursuing cable the right strategy for Armstrong to implement? Probably, but Martin doesn't weigh in on this.
• Did AT&T overpay for MediaOne? Of course, but again Martin is silent.
• Did AT&T further compound its cable problem by putting poor executives (first Hindery and then Somers) in charge of broadband? Not a peep.
• How should AT&T have handled the $2 billion @Home acquisition? Silence.
• Were all these problems unavoidable due to AT&T's pre-1996 succession planning problems? The only aspect of this question that Martin bothers to discuss is the PR fiasco surrounding Walter's departure. As if that were the most important aspect of AT&T's succession problems. He strikes me as having an exaggerated sense of his importance to the organization.

AT&T was a corporate icon for 130 years and had 4 million stockholders. Surely there were "hard lessons learned" as the subtitle claims, lessons that are valuable in the broader context of the modern corporation. However, from reading this book you would get the impression that AT&T's only mistakes were in communications. Martin gives us an incredibly myopic view of just the PR efforts related to AT&T's various missteps. Outside the PR business, who cares? Nobody! This could (indeed should) have been the business book with the broadest appeal in a decade. Instead we got a book that only PR people could stomach. It was so monumentally boring it literally put me to sleep more than once. I bought this book to read about AT&T; if I cared about Martin's actions I would have bought his biography instead.

Despite naming the first chapter "Don't dance to the music of your own buzz" it seems that Martin has done exactly that. His book is the ultimate example of form over substance, confusing the need to address important business questions facing AT&T with the buzz surrounding him and the mostly irrelevant matter of how the answers were communicated. Whether the answers were the right ones or not, Martin is unwilling (or more likely, unable) to say. If this book is an example of the caliber of executive thinking at the level of Executive Vice President at AT&T no wonder the company sank so far so fast.

Google Buys 5% of AOL

Google will invest $1 billion for a 5% stake in Time Warner's America Online unit. Google will become the only shareholder in AOL other than Time Warner. Google also will have "certain customary minority shareholder rights, including those associated with any future sale or public offering of AOL," the companies said in a statement.

Two thoughts come to mind:

(1) The writing is on the wall. Time Warner is slowly laying the groundword for a spin-off of AOL. It looks like it's 5% down, 95% to go.

(2) This values the whole of AOL at $20 billion. Interesting, very interesting! At its peak in December 1999, AOL had a market cap of $210 billion. Ouch!

Pepsico Market Cap Exceeds Coca-Cola's

Today, for the first time in history PepsiCo's market cap ($98.4 billion) closed above Coca-Cola's market cap ($97.9 billion). Symbolic? Yes. Meaningful? That depends on whom you ask.

Source: AJC

Nikkei breaks 15,000

The Nikkei finished up 258.35 points at 15,130.50, its highest close since Dec. 13, 2000. Yesterday ir briefly rose to 15,013.24, climbing above 15,000 for the first time since Dec. 14, 2000.

I ran across the most interesting graph of the Nikkei (see page 1). It overlays the period 1982-1992 for the Nikkei against the period 1992-2002 for the S&P500. The similarity is uncanny. However, there seems to have been a divergence after 2002 with the S&P recovering after 2002 while the Nikkei remained in a 12-year funk in the period 1992-2004.

While I don't think we will return to the returns that people came to expect from the S&P, I also don't think we are headed for a prolonged slump like the Nikkei experienced. A big reason for the Nikkei's decline was the Japanese practice of cross-holding where two companies doing business together would cement the relationship by buying large chunks of each other's stock. At the peak in 1990 more than half of the Nikkei's market cap was cross-held. As the slump began, companies began dumping their cross-holdings exacerbating the market decline. By the time the market hit bottom, less than 20% of the Nikkei's market cap was cross-held. This much healthier number is probably part of the reason that the Nikkei has been able to stabilize and start climbing again.

More on Real Estate

I was waiting for my rental car at the counter this afternoon when I overheard one of the clerks talking to another about how she had bought a 6 bedroom / 4.5 bath house for $600,000 because she could turn around and sell it for $800,000.

The end (of the real estate boom) is near!

When people start thinking that they can make a guaranteed 33% profit (I don't know what timeframe she was thinking about, but I'm sure it was as ridiculously short as the gain was ridiculously large), it is time for sensible investors to stay clear of real estate. This is definitely starting to sound too much like the irrational exhuberance regarding stocks in 1999-2000 for my comfort.

Most Successful Business Leaders?

Lessons from the Top: The 50 Most Successful Business Leaders in America by Thomas Neff and James Citrin

This book includes two convicted felons and one accused felon - Bernie Ebbers, Dennis Kozlowski and Ken Lay - as well as Hank Greenberg (who resigned from AIG in disgrace and may yet become the fourth felon in the book), Michael Eisner (who was recently ousted from Disney) and Mike Armstrong (who pretty much single-handedly managed the sinking of AT&T).

Now I know that hindsight is 20/20, but six stinkers (and some other questionable choices) in a list of 50?

A great read, highly recommended ... for the IRONY!

SBC Acquisition of AT&T Closed

SBC Communications announced today that it has closed the books on its $16.9 billion acquisition of AT&T immediately following its receipt of final regulatory approval.

It is worth noting that the new company going forward will use the AT&T name, iconic blue and white logo, and NYSE stock symbol (T).

Cisco buys Scientific-Atlanta in $6.9 billion deal

Source: Yahoo

Koch Industries buys Georgia-Pacific in $21 billion deal

Georgia-Pacific stock rose more than 36% to $47.28 in trading yesterday — close to the price offered by Koch.

Source: AJC

MCI-Verizon Merger Approved

MCI today announced the certified results of its shareholder vote that approved its merger with Verizon. The company said that the results show 64.6% of outstanding shares and 88.2% of votes cast were in favor of the merger. Also today MCI's Board of Directors declared a special dividend of $5.60 per share in accordance with the merger agreement. The special dividend will be paid on October 27 to shareholders of record at the close of business on October 17.

"Little evidence of a housing bubble"

A paper in this quarter's Journal of Economic Perspectives by Himmelberg (the Fed of NY), Mayer (Columbia) & Sinai (Wharton) says that their "analysis reveals little evidence of a housing bubble." We'll see if they know what they are talking about. Myself, I am skeptical myself since part of their analysis involves constructing new measures for evaluating the cost of home ownership because existing measures (which seem to indicate prices are exuberant) are not adequate. Whatever.

Ameriprise

American Express Company completed the distribution to its shareholders of all of the outstanding shares of Ameriprise Financial (the former American Express Financial Advisors).

Delta files for bankruptcy

Northwest too

Federated-May merger complete

Transaction closed today.

Third Union Is Leaving AFL-CIO

The United Food and Commercial Workers just became the third union to quit the AFL-CIO. The 1.3 million member union said it was committing itself to the new Change to Win Coalition, following in the footsteps of the Teamsters and the Service Employees International Union.

In addition to the UFCW, Teamsters and SEIU, the new labor coalition includes three AFL-CIO member unions (the United Farm Workers, Laborers' International and Unite Here) and the United Brotherhood of Carpenters and Joiners.

Source: Wall Street Journal

Who would fall for this?!

I have been getting these stupid flyers that claim "Buy stock XXXX, which is poised to skyrocket." It's a well-known variation on the scam; the only thing that has impressed me is the increasing quality of the production. One even posed as a 32-page investment magazine with a variety of articles, but if you actually looked through it, it was only pushing one particular stock.

Got another one today and actually took a minute to read through it. A footnote reads, "[The producer of the flyer] may hold positions in the company mentioned." Even more ridiculous, it discloses that, "The profile of XXXX is a paid advertisement by a third party shareholder to XXXX in the amount of 250,000 shares of stock that need to be sold to pay for the cost of this advertising." And most farcical of all we are treated to "The target price was determined arbitrarily."

Who would fall for this?!

Obviously, this scam works or they would have stopped sending me the flyers. But I am amazed to learn that there are enough people dumb enough to fall for this pitch to keep it alive.

What is even more unbelievable is that they obtained my name due to my Financial Planning Association membership. I have cancelled my membership not just for the obvious reason that I believe they violated their duty to take reasonable care with my information, but even more so because the FPA apparently has enough members who might fall for this scam to make them worth targetting.

Ford and GM Hurting

After a disappointing performance in the first half of the year, Ford Motor Company is considering cutting more salaried workers, a company spokesman said Friday. Ford spokesman Oscar Suris wouldn't confirm a report in The Wall Street Journal that said Ford may lay off up to 30% of its white-collar work force - about 10,500 of its 35,000 salaried workers - in North America over the next few years. But he noted that earlier this week, Ford CFO Don Leclair said "nothing is off the table" when asked about possible cuts during a conference call to discuss second-quarter earnings.

Ford already has announced plans to reduce its salaried work force in North America by 2,700 people by the end of this year. It also has said it will reduce the use of agency workers and other purchased services by 10%. But Suris said the company is considering even more aggressive measures. "We have operating challenges that include our cost structure and excessive production capacity, and we have plans to address that," Suris said.

Ford said it earned $946 million in the April-June period versus a profit of $1.17 billion in the year-earlier period. It lost $907 million in North America, down $1.4 billion from a year ago. Ford's U.S. sales were down nearly 4% in the first six months of this year.

So Ford made $1.853 billion on sales outside the US? Man, if they could somehow wipe their US operations off the face of the Earth, they would be on easy street!

Ford CFO Don Leclair said the automaker would no longer issue quarterly earnings forecasts. GM withdrew its earnings outlook for 2005 after reporting a stunning $1.1 billion first-quarter loss in April. Both GM and Ford have been hurt by a dramatic slowdown in sales of profitable mid- and large-size sport utility vehicles amid high gasoline prices. They are also struggling with higher borrowing costs following cuts in their debt ratings to "junk" status by the Standard & Poor's rating agency in May.

Yuan to fluctuate

China ended the yuan's peg of about 8.3 per dollar that had been in place since 1995 and will allow it to fluctuate versus an unspecified basket of currencies, the central bank said on its Web site. The new yuan rate strengthens the currency to 8.11 per dollar.

To Rein In CEO Pay, Why Not Consider Outsourcing The Post?

Outsourcing is the rage. It is possible to find qualified and cheaper workers to write software and perform other tasks in India, China, Taiwan, Turkey, etc. It makes competitive sense to outsource. Which leads to the following statement. Maybe it's time for American CEO's to include themselves in the outsourcing strategy. Certainly from a compensation standpoint it could be a great deal. US executives are by far the highest paid in the world, and their pay seldom has anything to do with performance. Directors give executives a boatload of money before they have done a lick of work. And when they fail, they are given another boatload of money so it doesn't hurt too much when the door hits them on their way out. If outsourcing the CEO's job isn't appealing, then what is the solution? Directors have to put a price tag on every single form of compensation so shareholders truly know what is going on. And directors have to stop rewarding incompetence. If a CEO is fired for screwing up, no more exorbitant severance packages.

(The Wall Street Journal, 19-Jul-2005, Midwest ed., p. B1)

Real Estate

Built on the assumption that home prices will continue to rise, interest-only mortgages represent a gamble that many home owners accustomed to conventional fixed-rate loans would never take. Unlike conventional 30-year mortgages, interest-only loans typically don't require payments toward the principal for three to seven years, substantially lowering the costs of entry and making it easier to qualify for the loan. [1]

But the financial firepower of interest-only mortgages is affecting all home owners. They are further elevating already lofty housing prices, a trend that's raising fears of crash that could plunge the economy into a recession. "When this market adjusts, it's going to be painful," said UCLA economics professor Edward Leamer, who has been warning of a California housing bubble for three years. "Borrowers are getting in over their heads, and lenders are too."

The growth of interest-only mortgages reflects a fundamental shift in the way many Americans think of their homes. Rather than places to grow old in, they see homes as part of their investment portfolios — in fact, a much better bet than the stock market in recent years. In California alone, homeowner equity has grown by a whopping $1 trillion since 2000, according to the California Building Industry Association. Even borrowers who can afford the higher payments of a conventional mortgage are opting for interest-only loans, so they can free up more cash to invest in retirement plans, college education funds or other home purchases, [2] said Mark Carrington, director of information products for LoanPerformance, a mortgage research firm.

[1] Yes, interest-only loans typically don't require payments toward the principal for 3-7 years, but at the end of this period eventually you *will* have to start paying down principal and/or re-finance your loan (either of which will result in a higher payment). Furthermore, we are in a period of historically low rates, and interest-only loans are generally variable-rate. So at the end of the interest-only period, rates will almost certainly be higher, causing payments to be even higher still. People are jumping into these loans under the assumption that their income will be substantially higher in 3-7 years; in most cases that assumption is unwarranted.

[2] Retirement investments or college funds would not be an altogether bad reason to do this. However, this statement is inaccurate. In most cases, the only reason people get into these loans is to buy a lot more house than they could otherwise be approved for (and often a lot more house than they can actually afford). Their payment is still a stretch, and any savings are used to finance current consumption not investing.

SCOTUS: Sorry, Andersen, Our Bad

The Supreme Court Tuesday unanimously threw out the conviction of accounting firm Arthur Andersen, a symbolic victory for a nearly defunct company torn apart in a document-shredding case involving the fallen energy giant Enron. In a 9-0 opinion, the justices concluded that "jury instructions at issue simply failed to convey the requisite consciousness of wrongdoing." Chief Justice William Rehnquist wrote the opinion, saying, "Indeed, it is striking how little culpability the instructions required."

The conviction had essentially forced Arthur Andersen out of business. The company, which is down to a couple of hundred employees handling the remaining legal issues facing it, said it was pleased by the decision even if it did nothing to bring the former Big Five accounting firm back to life.

"We are very pleased with the Supreme Court's decision, which acknowledges the fundamental injustice that has been done to Arthur Andersen and its former personnel and retirees," the firm said in a statement. "We pursued an appeal of this case not because we believed Arthur Andersen could be restored to its previous position, but because we had an obligation to set the record straight and clear the good name of the 28,000 innocent people who lost their jobs at the time of the indictment" and protect the firm against a flood of civil lawsuits.

There's a reason people talk about "liberal media bias"

While I'm not given to idiotic conspiracy theories about this, it's a well-known fact that most reporters vote Democrat. This clearly results in a kind of group-think, where the "obviousness" of certain "facts" is uncritically accepted.

Today's the headline at the top of the AJC's business page blares out at me, "GDP report fans stagflation talk." Well, if you read the story, you learn that the economy in 2005Q1 grew 3.1% (less than the expected 3.5%). This (pretty good) rate is the weakest growth pace in two years, when growth has ranged from this quarter's 3.1% to a high of 7.4% (in 2003Q3) and averaged a very healthy 4.3%. Yet one not-blistering quarter (but still over the magic 3%) and out comes the "stagflation" talk.

During Clinton's tenure as President, 13 of the 32 quarters had less than 3.1% GDP growth, and I don't recall any "stagflation" "talk" being "fanned." Something to think about...

More Trouble for Krispy Kreme

Krispy Kreme Doughnuts announced that Canadian franchisee KremeKo has filed in the Ontario Superior Court of Justice to restructure under bankruptcy protection. Krispy Kreme owns 40.6% of KremeKo.

Krispy Kreme Doughnuts is trading at $5.93, down 82.7% from their all-time high of $34.33 (on 4/29/2004, exactly one year ago tomorrow).

Response to Comment on Google

Google shares on Friday leapt by 7% on Friday after reporting blow-out quarterly earnings for the third time since becoming a public company last year, powered by the continuing boom in advertising linked to search engine results.

IPO = 95.96, Stock value as of this posting = 216.80. God, I wish I had gotten in on the ground floor for this.

Getting in on the ground floor is great, as long as you are able to recognize when the elevator has gotten to the top and don't ride it all the way back to the basement. There is just no way that Google is worth $216.88 a share, which is 151x 12-month earnings which are widely described as "blow-out." Consider what will happen once earnings are no longer "blow-out." The multiple and stock price is going to come crashing down. As well it should ...

Keep in mind this is a company with rapidly shrinking margins. In 2002 it was 22.7% ($100M/$440M); it 2004 it was 12.5% ($399M/$3.19B). Yes, revenue is growing at an incredibly fast pace, but is this real? (let's remember Enron, WorldCom, Global Crossing and to a lesser extent AOL with their revenue "growth") And is it sustainable? Revenue from 2003 to 2004 may have doubled from $1.5B to $3.2B, but it is not going to double again in 2005.

Can anyone seriously believe that Google with $3.2B of revenue and $400M of earnings is worth $60 BILLION??? Let's compare it to the companies immediately above and below it on the market cap list - Hewlett-Packard and 3M. HP has $82B in revenue and $3.5B in income; 3M has $20B in revenue and $3.1B in income. Not only are both of these companies' INCOME approximately the same size as Google's REVENUE, but 3M has a healthier profit margin (15.5%) than Google. There's just no way that Google is fairly valued at its current price.

More on the Verizon/MCI/Qwest saga

Curioser and curioser...

Verizon Communications said yesterday it is paying $1.1 billion ($25.72 a share) to acquire a 13.7% stake in MCI directly from its largest single stockholder [Mexican investor Carlos Slim Helu]. The transaction removes a major wild card in Verizon's bid to fend off a higher-priced offer to acquire MCI by Qwest Communications.

42% of first-time home buyers put 0% down

Today, the typical first-time home buyer might finance the entire cost of the house and pay only the interest owed on the loan for the first several years. The latest option? A monthly "minimum payment" that doesn't even cover the interest. [...] buyers have been experimenting with more aggressive financing in the best of all times, when interest rates remain low and home prices continue to appreciate.

Source: Money

Buick and Pontiac strive to avoid Oldsmobile's fate

More bad GM news...

At an analysts' conference last week, GM Vice Chairman Bob Lutz said both lines are "damaged" and that dropping one of the venerable names - both date back more than a century - was possible unless there's a turnaround. Lutz said closing a brand, as it did with Oldsmobile after the 2003 model year, was something that GM hoped to avoid. But he said that, if the carmaker's brands don't hit sales targets, "then we would have to take a look at a phase-out. I hope we wouldn't have to do that. What we've got to do is keep the brands we've got." GM officials have tried to backtrack somewhat on Lutz's comment, saying there are no plans to drop a brand and that he was only answering a question about a hypothetical. They say they're confident the brands will get the investment needed to grow.

But auto experts look at GM's continued slide in market share along with the financial problems caused by its current cost structure, and say the possible end of another GM brand isn't as much a surprise as the fact that a top GM executive would raise the possibility. "It's a signal to folks that it's going to happen," said Walter McManus, director of the Office for the Study of Automotive Transportation. "They're very careful not to speculate about things that aren't going to happen." Buick had 1.8% of the U.S. market in 2004, just ahead of the 1.7% share that Oldsmobile had in 2000, when GM announced the end of that line. Pontiac had a 2.8% share.

SunGard Acquired by group of private firms

A consortium of seven private investment firms is paying $10.8 billion to acquire financial data powerhouse SunGard Data Systems in the nation's second-largest leveraged buyout ever. Under the terms of the agreement, SunGard stockholders will receive $36 in cash for each share of SunGard common stock they hold. Also $500 million in bonds will remain outstanding, so the total transaction is valued at $11.3 billion.

The deal would be exceeded in size among takeovers of public companies by private investors only by the Kohlberg Kravis Roberts $29.4 billion purchase of RJR Nabisco in 1989.

SunGard creates a variety of financial software, including products that manage complex stock trades, insurance holdings, mutual funds and corporate finances.

(SunGard purchased an employer of mine back in 1999.)

Most people "above average" financially

According to a Money poll conducted February 11-15, when asked "How do you rate your financial status?" Americans answered:

• 53.7% feel they are better off than other people of the same age and education level
• 36.3% say they are on par
• 9.9% believe they have fallen behind

54-10. Wow! How can people's perception be this far off from reality?

The "Please don't hurt me" Defense?

Scott Sullivan, the former CFO chief of WorldCom testified Tuesday that CEO Bernard Ebbers repeatedly ignored evidence that company finances were deteriorating and simply said, "We have to hit our numbers." Scott Sullivan said he told Ebbers the only way to meet Wall Street estimates for the third quarter of 2000 would be to book improper accounting entries to boost revenue and cover up expenses. "He looked at the information, and he didn't say a lot," Sullivan said. "He looked up and said, 'We have to hit our numbers."' Sullivan said he interpreted the remark as an instruction to go ahead with the improper entries.

I don't buy this defense, which has been / will be used by other CFOs and CAOs in the recent spate of fraud trials. If you are the CFO or CAO and the boss tells you to cook numbers, you grow a pair and refuse. That's all there is to it. Take away all the fancy business-speak, and it really is THAT simple. I mean, c'mon now, this defense boils down to, "He told me to to commit a crime, so I did." If a mugger tried that defense, we'd throw his butt in jail, right? Same for these guys, as far as I'm concerned.

The Parade of Shame

In addition to the Ebbers trial which ended yesterday with a guilty verdict, other C-level executives currently or soon-to-be on trial:

• Richard Scrushy, former CEO of HealthSouth
• Dennis Koslowski and Mark Swartz, former CEO and CFO of Tyco
• Ken Lay and Jeffrey Skilling, two former CEOs of Enron
• Richard Causey, former Chief Accounting Officer of Enron
• Joseph Nacchio, former CEO of Qwest

IAM Local 709: "Never mind!"

One for the "D'OH!" files . . .

Striking Lockheed Martin machinists began going back to work at midnight, just hours after they had overwhelmingly approved a new contract, just one week after launching a walkout. By a vote of 1532 to 537, IAM Local 709 ratified the contract. Union members rejected the same basic terms February 27, although the deal was approved at Lockheed facilities elsewhere. Opponents in Marietta said they objected to rising health care and retirement insurance costs. But those concerns seem to have diminished during a week on picket lines in which workers had no insurance coverage at all. The company said it made no significant changes to its offer before Tuesday's second vote. "There were some minor modifications that were specific to Marietta," corporate spokesman Tom Greer said. "But the economics were exactly the same." Stevens [president of IAM Local 709] attributed the change of heart to more information. "People have a better overall understanding of the contract than they did the first time they voted," he said Tuesday. "The company didn't move on the economic terms." Outside the Cobb Galleria Centre, where Tuesday's balloting took place, it was hard to find Local 709 members who said they voted to ratify the contract, even though it passed by a 3-to-1 ratio. "This is the same thing we turned down two weeks ago," said Jerry Worley, a 23-year Lockheed employee who works on the F/A-22 assembly line. "I don't know why they even brought us back." In 2002, the union's walkout also ended with no major changes in the deal that was initially turned down.

Source: Atlanta Journal-Constitution

Ebbers guilty over $11bn WorldCom fraud

A jury had found Bernie Ebbers, the former head of WorldCom, guilty of the biggest accounting fraud in history over his role in the firm's $11 billion collapse. After deliberating for eight days, the New York jury found Ebbers guilty on nine counts, one each of conspiracy and securities fraud and seven of false regulatory filings. He faces a possible 85 years in jail when sentenced on June 13. Ebbers had claimed that he knew nothing of the fraud going on in his company and had little knowledge of financial matters, something Assistant US Attorney William F Johnson called the "aw shucks" defense.

GM slashes earnings estimate

General Motors warned its 2005 earnings will be as much as 80% [and at least 50%] below its prior forecast due to slumping North American auto sales, sending its shares down 12% to a 13-year low. GM said it now sees full-year earnings of about $1 to $2 per share, excluding special items, down from its previous target of $4 to $5 a share.

GM said its previous outlook was based on North American vehicle-production volume of 1.25 million vehicles, but since then production schedules have been reduced by about 70,000 vehicles and pricing competition has been tougher than expected in North America. "One of the issues we've had for North America is the increasing drag of health-care costs on North American profitability," said GM CFO John Devine.

[Possibly more important that the earnings is...] The company said it also expects negative operating cash flow in 2005 of about $2 billion, before its settlement with Italian automaker Fiat and its GM Europe restructuring, versus the previous target of positive $2 billion.

S&P affirmed its long-term ratings on GM and GMAC at BBB-, one step above junk status, and their short-term [commercial paper] A-3 ratings. But it said in a statement, "We now view the rating as tenuous. The rating could be lowered at any point if we came to doubt that GM was on a trajectory to improving its financial performance to more satisfactory levels in 2006 and beyond."

[Thanks to DVD for the link.]

Iger to succeed Eisner as Disney CEO

The Walt Disney Co. announced today that its president, Robert Iger, will succeed Michael Eisner as Chief Executive Office and that Eisner will leave his post one year earlier than previously announced.

Jetsgo, Canada's third-largest airline, ceases operations

Jetsgo grounded its fleet after jet-fuel prices rose by two-thirds in the past year and the company became the target of safety investigations from federal regulators. The shutdown stranded 17,000 customers. "Passengers are advised to make alternative travel arrangements prior to going to the airport as there will be no Jetsgo staff or aircraft available," Jetsgo said in a statement released at two minutes after midnight.

Jetsgo, which employed 1350, will seek permission from a Quebec court to consider options for reorganizing. Jetsgo, led by President Michel Leblanc, spent "big" on ads and expanded too quickly beyond its flight bases in Montreal and Toronto, Raymond James analysts said in January. Leblanc, who started Jetsgo in June 2002, is the former head of Royal Aviation, which he sold for C$84 million in 2001 to Canada 3000 before it went out of business after the 9/11 attacks in New York and Washington.

WestJet [Canada's second-largest airline] stock climbed C$4.33 to C$15.50 after earlier touching C$16.90 [at which peak the shares had risen 51%]. Shares of ACE Aviation [parent company of Air Canada, the nation's largest airline] climbed C$3.26, or 10%, to C$35.50.

Source: Bloomberg

[Thanks to DVD for the link]

Unhappy Fifth Anniversary

Today is the fifth anniversary of the top of the bull market, at least as indicated by the Nasdaq composite index (the DJIA had peaked a couple of months earlier).

On 3/10/2000 the Nasdaq stood at 5049. By the time the bear market saw its worst day (10/9/2002), the index had dropped to 1114 (a gut-wrenching 78% plunge). Today it closed at 2060 (up 85% from its low, but still down 59% from its high).

Yup

Strike at Lockheed. Forget finance; what really ticks me off is the darned rubber-neckers who added 10-15 minutes to my commute this morning.

More on the Real Estate Bubble

Pop! That is the sound of the real estate bubble bursting. [...] One piece of evidence is the Dinner Party Index. The boom is over when more people are bored by real estate anecdotes ("My next-door neighbor got three times her asking price before she even put it on the market.") than have got new ones. Another reason the value of your house is about to plunge is that the Los Angeles Times, The New York Times and The Washington Post all say that it isn't.

Possible Strike at Lockheed Plant

Story 1: Machinists at Lockheed Martin's aircraft plant in Marietta GA are preparing to strike next week after rejecting a tentative contract agreement that was backed by union leaders. It would be the second walkout in three years if the union follows through on its threat. Machinists shut down production for 49 days before signing their current contract in 2002. Union members voted 1240-602 on Sunday to reject a tentative deal that had been endorsed by union leaders, and about 70% cast strike ballots. IAM locals at Lockheed facilities in California, Mississippi and West Virginia ratified agreements with virtually identical terms. Local 709 members are 54 years old on average, which makes retirement issues critical in negotiations.

The elements of the deal in question:

• 10% wage increase over three years.
• $1,500 signing bonus.
• 17.8% increase in company's pension contributions.
• Increase in amount of 401(k) contributions company will match.
• Company pays 87% of employee medical plans, down from 100%.
• Company caps payments to retirees' Medicare Supplemental Insurance.
• New hires not eligible for retiree medical plan.

Story 2: Machinists gave Lockheed Martin formal notice Tuesday that they intend to strike next week at the Marietta plant. "I personally hand-carried a letter" to plant management, said Cornell Stevens, president of IAM Local 709. Lee Rhyant, the Lockheed executive vice president who oversees the plant, wasn't there at the time, but the two men later spoke by phone. "We had a good conversation, and there were no hard feelings at all," Stevens said. The union's letter starts a countdown to a strike that could begin Tuesday at the earliest [since five days notice is required].

Story 3: Federal mediators are trying to avert a machinists strike at Lockheed Martin's Marietta plant that could begin as soon as Tuesday. "Anytime there's a possibility of a work stoppage that could have this much impact on the economy and national defense, it's on our radar screen," said Jack Buettner, regional director for the Federal Conciliation and Mediation Service.

(I drive past the Lockheed plant on my way to work.)

Housing

New home sales fell 9.2% nationwide in January from the month before. Sales ran at a rate of 1.1 million units a year, 4% below the same month a year earlier, and the lowest rate since July.

German economy in worse shape than previously stated

More than 5.2 million Germans were out of work in February, new figures show. The figure of 5,216,000 people, or 12.6% of the working-age population, is the highest jobless rate in Europe's biggest economy since the 1930s. The news comes as the head of Germany's panel of government economic advisers predicted growth would again stagnate. Speaking on German TV, Bert Ruerup said the panel's earlier forecast of 1.4% was too optimistic and warned growth would be just 1% in 2005.

[Thanks to DVD for the link]