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The Stingy News Quarterly (Q1 2003)

The Best of Stingy Links

Stingy Links: Accounting

4 warning signs of funny numbers
"Accounting issues still run deep, as Royal Ahold's revelations proved last week. You still can't trust the numbers -- but you can guess where scandal might pop up next."

Do accountants have a future?
"The last thing the Big Four needed was yet another scandal. But they've got one--this time over tax shelters."

EBITDA's foggy bottom line
"Critics say the accounting method can obscure grim financial realities -- and some see AOL Time Warner as the classic example."

The Ebitda folly
"If you want to avoid being sucked in by the next Vivendi, disregard this contorted method of figuring earnings. Look at the bottom line and free cash flow."

SEC faults pension reporting
"If actual pension liabilities had been counted in financial statements, aggregate earnings for the S&P 500 would have been 69 percent lower than the companies reported for 2001, or $68.7 billion rather than $219 billion, CSFB found in a research study on pension accounting published in September."

Stingy Links: Bonds

Pension threat to blue chip credit ratings
"Ten of Europe's biggest companies have been threatened with credit rating downgrades because of shortfalls in their pension funds"

The bankruptcy run isn't slowing
"Don't expect 2003 to be any better. With the economy still waiting for a lift, analysts at credit-rating outfits predict that roughly 1 in every 13 companies with noninvestment-grade debt, or 8%, will default and declare bankruptcy in the next 12 months. While that's about the same ratio as in 2002, it's double the average over the past 20 years."

The dire state of the States
"For a couple of weeks late last year and early in 2003, investors were able to look past all the signs of economic weakness and see a light at the end of the tunnel. Sure, consumers were flagging and corporations retrenching. But once Iraq was over with (assuming a quick and not-too-dirty fight), the theory was that federal stimulus would kick in, chief executives would dust off their capital-spending plans, and Corporate America as well as individuals would suddenly feel better about investing in the future. That was the idea, anyway."

Stingy Links: Warren Buffett

Warren's 2002 Report
"We've yet to see a pro-forma presentation disclosing that audited earnings were somewhat high. So let's make a little history: Last year, on a pro-forma basis, Berkshire had lower earnings than those we actually reported."

Building a company Warren Buffett would buy
"The Pampered Chef has great numbers, strong management, and a secret recipe. Why wouldn't he love it?"

Buffett on investing in stocks today
"The aversion to equities that Charlie and I exhibit today is far from congenital. We love owning common stocks--if they can be purchased at attractive prices. In my 61 years of investing, 50 or so years have offered that kind of opportunity. There will be years like that again. Unless, however, we see a very high probability of at least 10% pretax returns (which translate to 6% to 7% after corporate tax), we will sit on the sidelines. With short-term money returning less than 1% after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity."

Words from the Wise
"Cover Article in the Inaugural Issue of CFA, a new publication of the Association of Investment Management & Research"

Matty Moroun beat Buffett in bridge deal
"The battle, which began in 1977, had all the makings of a mismatch. On one side were two famed investors: Berkshire Hathaway Inc. Chairman Warren Buffett and his partner Charles Munger. Squaring off against them was Manuel Moroun, the Lebanese- American chief executive of a Michigan trucking company. At stake was control of the Ambassador Bridge, a privately owned span linking the Detroit metropolitan area with Windsor, Ontario, in Canada. "

Avoiding a 'Mega-Catastrophe'
"Charlie and I believe Berkshire should be a fortress of financial strength--for the sake of our owners, creditors, policyholders, and employees. We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

Invest like Warren Buffett
"If you're looking for a guide to help you navigate this brutal bear market, can we suggest a candidate? He's folksy and a bit old fashioned, the type of person who likes nothing better than relaxing over a Cherry Coke and a Dairy Queen hamburger. He's also hopeless when it comes to technology and he insists on living in the middle of nowhere (Omaha, Neb. to be precise). Still, we think he's got potential. For one thing, he's already made a few billion dollars in the stock market. Better yet, he's survived and even thrived during previous market downturns."

Buffett now worth about $32.8 billion
"Warren Buffett may be ranked by Forbes magazine as the world's second-richest man, but he has received the same $100,000 annual salary since 1980."

Buffett targets CEO pay as culprit
"Buffett said it was not realistic to expect CEOs to cut their own pay, but that lower executive compensation had better show up in company reports a year from now."

Comeback Crusader
"Investing legend Warren Buffett has regained his golden touch, and his call for reform has CEOs running scared - or taking notes."

Stingy Links: Derivatives

Why J.P. Morgan Chase has the market panicked
"The complex instruments known as derivatives are meant to hedge risk. But they may raise the odds of a collapse at the storied bank -- and, say many, for the market as a whole."

Some derivatives are scary
"It's the huge financial transactions that you don't see that worry a lot of people. Poor disclosure and lots of destructive capacity is a lethal combination."

Stingy Links: Economics

Six myths of the crash
"Two and a half years into one of the most severe Bear Markets in History, the most striking feature of the typical economic discussion is the persistent state of denial about how parlous our situation truly is. Also notable is the unthinking promulgation of a species of economic fallacies which, though long since discredited, keep springing up like weeds to choke our reasoning about where we might go from here and, therefore, of how we should be preparing to act."

The economics of a fatter America
"While larded with calories, fast food is cheap, tasty, ubiquitous, and time-saving. No wonder obesity is on the rise."

Debt levels could leave us with hangover
"When central banks have attempted to regulate the supply of money, they have all too often failed."

This tunnel has an end
"There's no denying it: Bad stuff could happen. But just as a blithe disregard for risk characterized the late 1990s, obsession with it seems to have taken hold in the early 2000s. That's too bad, because despite the scary talk, the most plausible economic scenario for the year ahead is one that should inspire not trepidation but modest optimism."

Stingy Links: Fun

The idiot's guide to derivatives
"Ismail is a successful mule trader in Peshawar. Every year Ismail delivers 30 mules to the Kabul Mule Market and gets $40 per mule. This year however, the Khyber Pass is full of warlord militias, so Ismail is not sure he can drive his mules to market without losing a mule here and there. Also, the demand for mules in Kabul seems to be dropping. Maybe he'll only be able to sell 20 mules, or, God forbid, 15, and then be forced to feed and water the rest of them on a money-losing trek back home. In other words, it's a scary market and Ismail is worried about feeding his family. What Ismail needs is to limit his risk with an Enron derivatives package."

Global Century Investments
"Thank you. At Global Century, we like to be completely upfront with our clients. That's why, in our prospectus, we clearly state that our investment advice is often self-interested or deceitful, and may work to our client's disadvantage. We think.. you deserve to know that."

Getting to the bottom of 2002
"We were also wary of the stock market. One day it was up; the next day it was down; the next day it was way down. And as we watched our 401K plans decline from a retirement villa in France to a refrigerator carton in an alley, we heard the unceasing babble of the financial ''experts,'' the ones who have never yet failed to be wrong, speculating endlessly on whether the market had bottomed out"

Econ 101: supply, demand and prayer
"The U.S. economy is in trouble, as evidenced by the new Merrill Lynch slogan: 'Please Buy Stocks Or Our Children Will Starve.'"

Fellowship of the Zing
"The SEC's new accounting board would never cut it in Middle Earth."

Stingy Links: James Grant

Battling the fog of finance
"But it isn't the fog of war that has shortened the vision of our monetary policymakers. It's rather the fog of finance, particularly the long legacy of America's greatest stock-market bubble. The truth about the three-year decline in stock prices and the hot-and-cold-running economy is that they have their roots in prosperity, not in war."

Perils of prophecy
"I have only one forecast concerning the future: It will unfold. I am not prepared to be more specific. Of all the bad months in which to try to predict the unpredictable, January is the worst. People are still eating Thanksgiving leftovers when the usual experts are rounded up to be asked the standard end-of-year questions. Where will the stock market be one year hence? The bond market? The CPI? A barrel of West Texas intermediate? Knowledgeable as they are, the experts are deficient in one point of information. They don't know anything more about the future than we do."

Stingy Links: Bill Gross

Inflation fighter's Pimco champ
"In the coming years, Gross thinks the inflationary pressures will only intensify as Alan Greenspan and the Fed, and President Bush and his Treasury, make good on their promise to avoid a Japanese-style recession by whatever means necessary, including turning on the government printing presses and flooding the economy with money. Such a move could be devastating for savers, with foreigners scrambling to make sure they're not the last one out of the U.S. market. The upshot would be ugly, since a good chunk of the invested savings in the United States comes from foreigners."

The bond market is at risk
"PIMCO bond guru Bill Gross on the confluence of events that bode ill for the future and on how he's adjusting his strategy."

Stingy Links: Law

Spitzer and the myth of independent analysis
"The Spitzer settlement is a travesty of justice. If it is true that certain individuals in the securities industry perpetrated fraud in order to garner investment banking fees, they should be criminally prosecuted and punished. Only a corrupt politician would ignore possible crimes in return for an industry's support in future political campaigns. The liberal New York democrat helped himself, not investors."

Is fat the next tobacco?
"For at least one industry, though, the new spotlight on fat may be a glimmer of unaccustomed good news. Anecdotally, we've heard that smoking has helped a lot of people lose weight."

Stingy Links: Management

How insiders can unload stocks in secret
"A lot of investors get nervous when company insiders start dumping stocks. But insiders increasingly are using hedged transactions to pocket cash in a way investors won't detect."

The new global job shift
"The truth is, the rise of the global knowledge industry is so recent that most economists haven't begun to fathom the implications. For developing nations, the big beneficiaries will be those offering the speediest and cheapest telecom links, investor-friendly policies, and ample college grads. In the West, it's far less clear who will be the big winners and losers. But we'll soon find out."

Can we trust them now?
"This earnings season, CEOs have put some bad habits behind them. Funny, though, how they keep hitting their numbers."

No way out
"Competition to make products for Western companies has revived an old form of abuse: debt bondage."

The best & worst managers of the year
"Chief executives seemed startled by the ridicule, distrust, and outright contempt they faced. At the same time, they had to contend with an economy that edged ever-so-slowly toward a recovery but kept falling short. If ever there was a year to examine the many ways in which managers succeed--and fail--this was it."

Grandpa? He's busy at the office
"These days older, experienced workers are more often avoiding the ax. Plus, many have no choice but to keep working for financial reasons."

Jim Kilts is an old-school curmudgeon
"When he took over Gillette in February 2001, Kilts inherited one of the biggest headaches in consumer products. The once highflying company, the maker of Mach3 razors, Duracell batteries, and Oral-B toothbrushes, had missed its earnings for 14 consecutive quarters. Neither sales nor earnings had grown in five years. Two-thirds of Gillette's products were losing share. Once a hot stock, the Boston company had become a pariah, seeing a 30% drop in its value between 1997 and 2000."

More pain for CEOs
"The top 15 chief executive earners netted an average of $35.8 million in 2002. That's down from the $135 million average in 2001."

Good riddance to guidance?
"What do Coca-Cola, McDonald's, AT&T and Sun Microsystems have in common...besides being well-known brand names that have recently fallen on hard times? The four companies all recently told investors they are no longer going to provide earnings guidance. And that's created a maelstrom of controversy on Wall Street."

Stingy Links: Markets

Reverse stock splits
"Consolidations are being done by legitimate companies, but there are still people who quote you chapter and verse that "consolidations never work, they are usually companies that were bad companies in the first place"."

Are top investors' brains wired for wealth?
"You've done your market research and listened to the financial experts. But why isn't your portfolio growing? According to some neuroscientists, the brain and its affinity for patterns may reveal how people handle investments more so than other factors."

The Foresight saga, continued
"Whatever happens this year, Felicity will strike lucky again. But sooner or later her run of double-digit returns may come to an end. In a world of near-zero inflation, where stockmarkets in different countries are moving ever closer in step and where risk and uncertainty are on the rise, the returns that Felicity is accustomed to will be elusive. She would be wise to recall 1931, when the best performing asset was cash, offering 1% interest."

The physics of financial catastrophe
"Sornette's fractal model suggests that the current rally will stall shortly and that prices will subsequently retreat much lower over the next 12 months to 18 months, punctuated from time to time by strong countertrend rallies. After the S&P 500 Index ($INX) reaches the low- to mid-600s from its current perch around 925, his model predicts a multiyear period of convalescence for U.S. stocks before a new bull phase pushes prices back toward and beyond their 2000 highs."

In search of those elusive returns
"Despite this week's stockmarket rally, tumbling equity prices and bond yields have sparked a fierce debate over asset allocation."

Hocus pocus
"Given the strong public demand for predictions, it would be too much to ask financial journalists and brokerage analysts to stop issuing annual forecasts. But they could conceivably fulfill the demand by emphasizing particular stocks, where academic research has uncovered several predictive factors, such as average volume turnover, earnings momentum, valuation ratios, sales growth rates, as well as the level of accruals and capital spending in relation to assets. Otherwise, leave the annual predictions about the general market to the psychics."

Not a pretty picture
"Over time, art underperforms stocks. What's more, contrary to popular belief, the prices of art and stocks usually rise and fall in tandem, so there's no diversification value to holding part of your portfolio in art."

Don't shoot the messenger
"Although it is under fire, short-selling should be encouraged."

Stingy Links: Stocks

Out of options?
"As if tech companies don't have enough problems to contend with as they head into 2003, they're about to face another: It's going to be tougher than ever to dole out stock options to their employees this year. The culprit? Big institutional shareholders, which are sick of seeing employees cash in as stock prices dwindle."

Always a bigger fish
"Investors are forgiven if they feel a strange sense of deja vu these days. With all the hostile takeover activity of late, it seems like the boom-boom days of the mid-'80s when masters of the universe like Michael Milken and T. Boone Pickens ruled Wall Street."

The breaking point
"Worker health costs will rise a staggering 24% this year. Companies can no longer afford to pick up the bill. The battle is here."

The $10 billion pill
"Hold the fries, please. Lipitor, the cholesterol-lowering drug, has become the bestselling pharmaceutical in history. Here's how Pfizer did it."

It's time to clear out the deadwood
"The key to a better market in 2003 will be how fast business can rid itself of too much stuff: unneeded plants, expensive pension plans, even whole companies."

Wanted: Kim Woo Choong
"The former Daewoo chairman disappeared from South Korea three years ago as his company was collapsing under a $65 billion pile of debt. Now, in an exclusive interview, he talks about his rise and fall--and his life in exile."

"Why Britain's big cigarette companies are on a roll."

The cable industry's costly profits
"After borrowing to build their systems, the industry is tantalizingly close to the black. The catch? Massive debts will hobble any stock surge."

Dueling diapers
"Think big companies can't innovate? Look how Kimberly-Clark and P&G are fighting over disposable training pants."

Hay day
"That's good news for Buhler, which has been profitable for much of the past three decades since millionaire John Buhler took over the company in 1969. CNH and Deere are still the giants of tractor manufacturing, but Buhler has plowed ahead by making high-powered, stripped-down tractors that lack bells and whistles (like global positioning systems or heated leather seats). While those snazzy features turn the cranks of some younger farmers, most crop growers just want solid equipment that will stand up to heavy use."

We're buying 8 companies that buy themselves
"We asked David L. Ikenberry, who knows as much or more than anyone about the subject. As an assistant professor at Rice University, he co-authored a widely cited 1995 Journal of Financial Economics study with Joseph Lakonishok and Theo Vermaelen. The study showed that buyback companies outperformed the averages by 3 to 3.5 percentage points a year in the 1980s. An update for the 1990s showed even better results, with a difference of about 4.5 percentage points a year."

Day of the Jaekel
"Look out, Frank Stronach. One of your former Magna executives is now the competition. And he has ambitious plans to beat you at your own game."

A nightmare scenario for banks
"The nation's largest lenders are praying for an economic recovery this year. Otherwise, a scary batch of bad loans could come back to haunt profits."

When you can't sell the goods, sell the shop
"But experience shows that retail mergers are tough to pull off and frequently end up destroying value-partly because local customs and tastes still vary greatly, and partly because global synergies in purchasing and the sharing of best business practice have been slow to materialise. Ahold of the Netherlands, for example, has come spectacularly unstuck after a three-year buying spree, and Carrefour is still licking its wounds after difficulties in integrating Promodes, which it bought in 1999. Strategic deals, like the bid for Safeway, are often the biggest failures of all."

What went wrong in corporate America?
"Tonight, I'd like to talk to you about what went wrong in our capitalistic system, about what's now beginning to go right, and about what you can do as a part-owner of corporate America. Whether you own a common stock or a share in a mutual fund, or participate in a private retirement plan, you have a personal interest in bringing about reform. Both as shareholders and as citizens, each of us must accept the responsibility to build a better corporate world."

The bear facts about pensions
"The three-year bear market has left many companies with big pension shortfalls, which may weigh heavily on share prices for years to come."

The Linux uprising
"How a ragtag band of software geeks is threatening Sun and Microsoft--and turning the computer world upside down."

Time to end "friends-and-family" shares
"IPO shares earmarked for a favored few hurt their issuers and other stockholders. Washington can make sure this doesn't happen."

Buy, sell and hold on!
"If you thought stock research was simple and transparent in the wake of Eliot Spitzer's crusade, you haven't looked closely at Wall Street's new rating systems."

The looting of Kmart
"Some companies never learn. Despite billions in losses, tens of thousands of layoffs, and an internal investigation that turned up evidence of accounting abuses and "grossly derelict" behavior by former managers, top executives at bankrupt Kmart are still enjoying blue-light specials while the company's future grows ever dimmer."

The X factor
"To build a business that dominates, you need to discover an edge that puts your company way ahead of its competitors. Just ask Starbucks, Outback, and other successful entrepreneurial startups."

Bristol-Myers cleans up its mess
"Down 50% after an overdose of bad news and scandal, this drugmaker's stock is healthier than it looks."

Tools of the trade
"There's a wealth of research online for do-it-yourself investors, but as usual, you get what you pay for."

Cisco's juicy margins: too rich?
"Vendors such as Nortel have recently stabilized their businesses, despite gross margins that are less than 40%, nearly half Cisco's. And they've recently come out with new products that work as well -- or better -- than Cisco's but cost a lot less. Most important, thanks to advancements in interoperability, rivals are gearing up to make their products run seamlessly on networks originally built with Cisco parts."

Why is Wrigley so wrapped up?
"Through the years Wrigley Co. built an international gum empire with conservative practices that became known as the Wrigley Way. It focused on its product. It shunned debt. It avoided the press. It resisted talking to Wall Street. It worked."

Stingy Links: Value Investing

A conversation with Marty Whitman
"In the final analysis, value investing means being price conscious rather than outlook conscious. You buy what is cheap and safe. Most everybody else is outlook conscious, or price unconscious. But growth investing is a misnomer. When people talk about growth investing, they mean generally recognized growth. We do real growth investing in value, but we don't pay for it. You can't do generally recognized growth without paying for it. Growth investing entails a willingness to pay up front. If you concentrate on growth investing, you concentrate on the outlook, rather than the price. Most people want to buy a stock that will go up; they don't care if it's cheap or not."

Buying the wrong stock for the right reason
"We explore whether the Wall Street adage, 'Never catch a falling knife' is advice to be followed under all circumstances."

Patient Capital Q4
"What we do advocate is that the practice of providing quarterly earnings forecasts and guidance be stopped. This would eliminate the pressure to match or exceed quarterly estimates. The pressure of meeting expectations can lead to short term business decisions at the expense of important strategic considerations."

The ABC perspective
Buying Toonies for Loonies from Irwin Michael

Stingy Links: Wolrd

Japan's economic chicken littles
"They wail that China's boom will crush their ailing economy. However, this powerhouse neighbor is actually helping Japan."

Horror stories
"If the world economy does stumble, policymakers will have to act quickly. Starting from a position of ample global excess capacity, further sluggish growth, let alone a recession, could raise the risk of deflation in some countries. There is clearly a big chance of further falls in share prices: in its latest quarterly review, the Bank for International Settlements argued that, despite the war premium, America's stockmarket still looks overvalued relative to historical norms. After previous bubbles share prices have always become significantly undervalued before recovering. The economic and financial headlines could get worse before they get better."

Boycott the French?
"Ah, the simplicity of demagogic populism, especially that of Bill O'Reilly and Stephen Moore. They haven't even bothered to notice that Dannon yogurt produces products in three U.S. plants (in Ohio, Texas, and Utah) and distributes them from five U.S. facilities (in Texas, California, Ohio, Florida, and Pennsylvania)."

Stingy News Weekly


Bullishly Yours,
Norm Rothery
ISSN 1499-2787

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