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The Stingy News Quarterly (Q3 2002)

The Best Of Stingy Links

Stingy Links: Acrobatic Accounting

Bamboozling: a field guide 
"I was talking recently with a smart CFO who knows his way around one
of the industries that has been hot with fraud lately. He explained
that no matter how complicated the grift, deceptive transactions can
accomplish only three things: moving earnings, usually from the future
to the present; avoiding tax; or hiding debt. That's it."

Show me the cash flow! 
"The Financial Accounting Standards Board wants to revise the income
statement, that all-important piece of financial reporting that
delivers a company's bottom line. Here's a way to do it that will
allow investors and analysts to see what really drives earnings--and
make it tough for companies to mess with the numbers."

Accounts must be brought to book 
"Bad accounting is an evil. But it's not unique to companies. The
decline in standards has affected government accounts as well. There
are examples both sides of the Atlantic. WorldCom has been lambasted
for reclassifying current expenditure as capital. The same thing has
been done in the national accounts of the US."

Stingy Links: Devilish Debt

The high cost of debt gone wrong 
"Leverage can be a great asset, as long as your assets are great.
Some readers who borrowed to buy stocks in the bull market report
being happy with their results. But others warn leverage newcomers to
be wary if the bear market deepens."

The trouble with debt 
"But should we really be surprised that another poster child of the
boom--especially one whose growth has come through rapid-fire
acquisitions led by a rock-star CEO--has been revealed to be a hotbed
of malpractice?"

The hard consequences of easy loans 
"There's plenty of blame to go around for the New Economy's boom and
bust. But most of the attention has focused on the role of equity
markets. Largely overlooked are debt markets, which also have played a
role in the drama"

Stingy Links: Economic Outlook

Don't listen to the consumer 
"Unfortunately for economic soothsayers, the consumer confidence
indexes are poor forecasters."

Say's law for our time 
"This simple insight was encapsulated by the classical economist
Jean-Baptiste Say, who expressed this to the effect that Supply
creates its own Demand. Or, to put it in colloquial English, "You want
some of these here beans? What you got in yer wagon to trade fer

We're not turning Japanese 
"Today, as every attempt at a stock market rally in the U.S. sputters,
and as every decent economic indicator that comes out seems invariably
followed by a lousy one, the nasty comparison is afoot: The U.S. had a
pretty gaudy bubble of its own in the 1990s, and now that it's
imploded, we are experiencing a hangover that looks familiar to the
long-suffering Japanese."

Shocked and angry 
"This surely is the hour of John Kenneth Galbraith, grand old man of
American economics. But those who travel to the leafy suburbs of
Boston in the expectation of a giant and gloating "I told you so" will
come away disappointed."

Stingy Links: Fraud & Scams

Fraudster broker on parole after 18 months 
"Former Bay Street broker Michael Holoday, the man behind one of the
biggest frauds in Canadian history, walked out of a residential-style
prison yesterday after spending less than 18 months there."

Special report on scams 
"Too Good To Be True: Stratospheric returns touted by promoters
attract investors by the thousands, but along with those big promises
come huge risks and potential for big losses."

Stingy Links: Fun & Frivolity 

One of the boys 
"Stratospheric pay, legal leniency and low expectations-how hard can
becoming a CEO really be?"

My pro forma life 
"On a pro forma basis, I'm having an outstanding year. In calendar
2002 I've gone to the gym on a regular basis and expect this trend to
continue and to have a material impact on my health going
forward. Year-to-date, my health has improved by a solid 15 percent on
an annualized basis."

Stingy Links: Going Global

Telecoms troubles 
"The crash in the value of telecoms companies has produced corporate
scandals in America, raised doubts about the probity of banks and
government policies everywhere, and resulted in a collection of top
executives abruptly losing their jobs. Now the telecoms fallout in
Europe has also entangled the French and German governments into a
growing political and financial mess."

Japanese government bond auction fails 
"Investor confidence in Japan suffered another blow on Friday after a
Y1,800bn auction of 10-year Japanese government bonds was
undersubscribed for the first time in its history."

BoJ takes gamble to avert financial crisis 
"Japan's central bank is trying to shock the government and banks into
action in a last-ditch gamble to avert a crisis in the country's
financial system, a senior Bank of Japan official said on Tuesday."

Can more yen save Japan? 
"Against this background, the latest proposal to revive the economy
through massive monetary pumping can only make things much worse. All
that is now needed in order to save the economy from further collapse
is a cessation of monetary pumping and cutting government involvement
with the economy back to the bone. The removal of the government from
the economy will put an end to the endless support for various
activities which sprang up on the back of loose fiscal and monetary
policies and thereby will allow sound, wealth-producing structures of
production to emerge."

Stingy Links: Greedy Government

The return of big government 
"Soon after Bill Clinton declared, "The era of big government is over"
in 1996, expenditures started to zoom. Such spending is rising so
briskly that, for the first time since the late 1960s, annually
appropriated programs have been growing faster than formula-driven
entitlement programs like Social Security and Medicare."

Beware the embittered investor,0,4897061.column 
"At first I felt disillusion, disenchantment and disgust. Next came
anger. And in the end I came away with renewed resolve to fight the
special interests that for years have ganged up on individual
investors in Washington and on Wall Street."

Socialism and capital stock 
"This principle is seen even better in Canada's national health
system, which many leftists here tout as the way medical care should
be organized in the United States. The government in Canada provides
all medical funding, as private payments are a violation of the
law. Canadians do not have easy access to the kind of medical capital
that is par for the course for Americans. For example, someone needing
an MRI in Canada is likely to have to travel to another city and wait
in a long line, unlike medical consumers here. (Even the small city of
Cumberland, Maryland, where I live, has two MRI facilities.) Other
kinds of medical capital, such as CAT scan machines, are also rare in
the Canadian system and require a near act of God for someone to
actually use them."

Nike: Can we talk? 
"A shocking First Amendment ruling against Nike radically reduces the
rights of corporations to speak their minds. Will the Supreme Court
let it stand?"

The color of money 
"Yes, the Federal Reserve is continuing to experiment with new, more
difficult-to-counterfeit paper money. First it was BIG FACES (along
with the introduction of a variety of other counterfeit-proof
characteristics into our Federal Reserve notes). Next, maybe, it will
be color."

Stingy Links: Indexing

Wealth management in the new era 
"Perhaps it goes without saying that in recent years these three
articles of faith, faith in the stock market, faith in the corporate
executives who run our publicly-held enterprises, and faith in the
trustees who manage our money-have been tested. And found wanting."

Efficient Frontier: Summer 2002 
Including the 2% dilution, the big lie, S.W.I.N.E., and more 

The S&P 500 is a mutual fund - and a bad one 
"One myth that appears to be imploding along with the market is the
notion that investors should "passively" buy the market via the S&P
500 Index rather than buying individual stocks."

Stingy Links: Loopy Law

The war on business 
"Only individuals can be hurt. By forcing the issue into criminal
court, resources that might have been used to give redress to the
victims of fraud are now being used by prosecutors and defense
attorneys, and if the individual charged is found guilty, the
government often seizes that person's property, making it impossible
for the actual victims of fraud to be compensated at all."

The firms that can't stop falling 
"Mr LoPucki looked at the fortunes of firms that emerged from
bankruptcy between 1991 and 1996. Within five years, 29% had gone out
of business, with two-thirds of these liquidated or merged in
distress. In each of those five years, on average, the typical firm in
Mr LoPucki's sample racked up losses equivalent to 2% of its total

Stingy Links: Management Mayhem

The talent myth 
"The management of Enron, in other words, did exactly what the
consultants at McKinsey said that companies ought to do in order to
succeed in the modern economy. It hired and rewarded the very best and
the very brightest-and it is now in bankruptcy. The reasons for its
collapse are complex, needless to say. But what if Enron failed not in
spite of its talent mind-set but because of it? What if smart people
are overrated?"

A little honesty goes a long way 
"You might think investors would punish companies that have decided to
expense stock options. After all, most of corporate America has been
battling for years to avoid such a fate, worried that accounting for
those perks would destroy earnings. And indeed, Merrill Lynch
estimates that if all S&P 500 companies were to expense options,
reported profits would fall 10% this year.  And yet, as a small but
growing band of big-name companies makes the switch, investors have
for the most part showered them with love."

The mystery of the blood red ledger 
"Even before he could tour all the restaurants and shake the hands of
his managers, the California State Board of Equalization froze the
company's bank accounts, seeking $225,000 -- about three months' worth
of overdue sales tax. Unable to write checks to suppliers on the
frozen accounts, Louise's filed for Chapter 11 bankruptcy
protection. It was LeFranc's ninth day on the job."

The good CEO 
"The 1990s gave rise to the celebrity CEO, the larger-than-life hero
who muscles his way to the top of an organization and by sheer force
of will remakes it in his own image. But with that myth shattered by
the likes of Kenneth Lay, Dennis Kozlowski, Bernard Ebbers, and other
disgraced corporate chieftains, it's time to reassess the very nature
of leadership."

Will this customer sink your stock? 
"Who are your unprofitable customers? We recently asked that question
of top executives at one of America's biggest retailers. They
responded defiantly that they had no unprofitable
customers. Understand that this company was in trouble--it wasn't even
earning enough to cover its cost of capital, Wall Street analysts were
beating it up, and its stock was performing worse than the shares of
most competitors. Yet its leaders insisted that through some dark
financial voodoo, millions of profitable customers somehow added up to
an unprofitable company."

The Greedy Bunch 
"Meet the 25 companies with the greediest executives. Of the big
companies whose stocks dropped 75% or more from their boom-time peak,
these are the ones where officers and directors took out the most
money via stock sales from January 1999 through May 2002."

The best & worst boards in Canada 
"Our survey finds 25 boards of directors designed to defend
shareholders' interests, and 25 others that deserve to be asked some
tough questions, like 'Which side are you on?'"

Corporate directors see risks climbing 
"Sitting on a company's board of directors used to sound like a cushy
job - - lavish pay for little time, rides on the corporate jet, rounds
of golf at first-class resorts.  But now it's getting as perilous as
sweeping out a minefield."

Forced ranking: the controversy continues 
"Critics have countered the popularity of forced ranking by suggesting
that it is a system that may help with some problems, but which
creates many others.  They note that while this system may work in a
company like GE, there are few other companies that share GE's
culture.  According to this line of thinking, those businesses that
believe that applying forced ranking to their workforce will bring
them closer to the achievements of GE are in for a rude shock."

Q&A with Good to Great author 
"There have always been villains. The whole history of RJR [as laid
out in the book] Barbarians at the Gate -- that was a truly disgusting
manipulation of our capitalist system. The founder of Columbia
Pictures, it was written that when he died, 2,000 people went to his
funeral to make sure he was dead. GE had the price-fixing scandals in
the 1950s. Monopolistic practices at IBM. The modern corporation is a
perfect vehicle for a small number of people to enrich themselves at
the cost of everyone else."

CEO perks that'll drive you berserk 
"Here are a few of the corporate world's most eye-catching extras." 

It's cleanup time 
"That's why Linda Selbach, manager of corporate governance at Barclays
Global Investors in San Francisco, which manages $770 billion, has
changed her home phone number several times. She's tired of executives
calling her to complain that Barclays opposes their pay
packages. "Some people are polite and gentlemanly," she says, "and
some are surprisingly out of control.""

Stingy Links: Market Madness

Dow 5,000 
"As Warren Buffett has said, in the short run the stock market is a
voting machine but in the long run it's a weighing machine. Despite
being down nearly 50% from its highs, this market remains overweight."

A reply to Bill Gross 
"Bill Gross, the brilliant portfolio manager of PIMCO (Pacific
Investment Management Co.) just put out an investment outlook
entitled, "Dow 5,000" (can be found at In his
commentary, he analyzes major works that have been written in the
field of stock returns, including my Stocks for the Long Run. His
conclusions about stocks are very pessimistic."

Don't blame it all On WorldCom 
"Investors are angry, and crooked CEOs make convenient villains. But
that's not why stock prices are down."

Unfinished business 
"Certainly we are witnessing bubble deflation in the equity markets.
After one of the most incredible equity bull markets in our financial
history, set against the backdrop of possibly the greatest credit boom
this country has ever seen, a period of significant reconciliation is
only to be expected.  Where are we in the process?"

Markets in crisis 
"The Dow Jones industrial average plummeted Friday, losing almost 400
points after component Johnson & Johnson said it is the latest company
being investigated by U.S. regulators for potential improper

Why Japan-style malaise could happen here 
"Not so long ago, Japan was deemed so all-powerful that people
believed it, too, could ward off any problems. Further, it had one big
advantage going for it that we do not: Japan was a nation of savers
and a net creditor, while we are a nation of spenders and a net

Panic of 1819--and 2002 
"The economic cycle of boom and bust is fascinating stuff. Its
essential elements are repeated endlessly throughout the dusty pages
of financial history. All of this makes Murray Rothbard's book, The
Panic of 1819, particularly interesting, timely, and
enlightening. This was Rothbard's doctoral dissertation, published
originally in 1962 but very hard to come by until the new edition made
available online through the Mises Institute."

Anatomy of a bubble 
Skip the text but take a look at the historical P/E charts.

Public Participation 
"The problem now is that public participation in the stock market
through investments in equity mutual funds are at the highest levels
ever, and that participation has actually increased since the market
peak. This solidifies our conviction that the market has not bottomed
and that massive capitulation is still ahead."

Tweedy on the markets 
"The current stream of negative news and declining stock prices will
eventually run its course. In the meantime, a lot of good companies
are getting to be quite cheap. This is presenting opportunities we
have not seen in a long time."

Stingy Links: Restful Retirement

A new personal finance 
"Outlined in a recent working paper, "Life-Cycle Finance in Theory and
in Practice," Bodie proposes that our common measure of personal
welfare -- wealth -- is inadequate. Instead, he suggests we measure
personal welfare by our lifetime access to goods, services and

Up against the pension headwind 
"As corporate earnings attempt to recover in 2002, they face a huge
locked-in obstacle from lower pension returns -- no matter how well
the market performs."

The seamy side of pension funds 
"A consultant is supposed to be a pension manager's best friend. But
just how two-faced is your fund's pal?"

Simple math of wealth creation 
"The Less You Spend, The More You Have.  Write it on the front of your
wallet, your cheque book, your conscience.  That, and the corollary of
The More You Spend, The Less You Have, are elemental economic
observations, and ones that we all begin to make for ourselves at an
early age."

Stingy Links: Stock Stories

This tobacco war could smoke RJR 
"It and Philip Morris are in a costly battle against discount
cigarette brands, but its much bigger rival has lots more firepower."

Detroit's used car blues 
"The price collapse is a headache of major proportions for
automakers. Lower prices on used cars suck buyers out of the new-car
market. Yet marketing initiatives by the Big Three are only
exacerbating their woes. By juicing the market with incentives like
cut-rate leases, automakers encourage customers to trade in cars more
frequently, swelling the supply of used cars. They are also offering
sweet deals that motivate Hertz and Avis to replace rental cars every
nine months or so, effectively creating fleets of nearly new cars that
compete with their factory-fresh ones."

A good time to pick Apple's stock? 
"While several factors are weighing down the company's financial
performance these days, many others could provide a nice lift."

Conseco's colorful crash 
"Devine says that like Hilbert before him, Wendt pressured senior
Salomon executives to muzzle him. (Conseco denies the charge.) But his
bosses didn't cave. Which in this day and age of compromised
analysts--let's not forget that Jack Grubman also worked at SSB--is a
refreshing tale indeed. It's perhaps the only heartening part of the
Conseco story."

Breaking records--for bankruptcies 
"Chapter 11 is the hottest fad in business. But that's not even the
half of it."

Top money losers 
"These 25 companies lost the most money in 2001." 

Rising empire 
"L.A. chef Nancy Silverton sold her ultra-trendy bread-baking business
for millions. So how'd she pull that off without selling out?"

The buy-'em-up boondoggle 
"But as with any addiction, the growth-by-bulk-acquisition approach
necessitates increasing doses of the drug to preserve the high. The
only way to keep revenues growing fast enough for Wall Street is to
buy ever more companies. That requires a bottomless pit of cash, a
high stock price, or both. If the deals stop, the economy hiccups, or
the parts don't mesh exactly as planned--one of which is bound to
happen--the result is usually ugly."

Home wrecker 
"William Aldinger says he built one of the few successful lenders to
bad credit risks by managing smarter. People suckered into his
mortgages cite other tactics: lies and deceit."

The inside story of Level 3 
"It's a saga that brings together Bill Gates, Bernie Ebbers, Bill
Miller--and even Warren Buffett. It travels from the Flaming Gorge Dam
to the very backbone of the Internet, but mostly to downtown
Omaha. And it may just be the most unexpected survival tale of the
telecom era."

Sweet purity: why chaste isn't waste 
"Here's a news flash--companies that abstain from earnings write-offs
outperform those that partake."

An immigrant's tale 
"It's the kind of business nobody wants to run: selling PCs to
price-conscious customers. But Edy Bedoya has spent a lifetime
preparing for it."

The power of WorldCom's puff 
"Internet traffic, went the industry's favourite statistic, doubles
every 100 days. The claim assumed unimpeachable status when it
appeared in a report published by America's Department of Commerce in
April 1998. Unfortunately for the telecoms firms that rushed to build
networks to carry the reported surge in traffic, it wasn't true."

The Adelphia story 
"The sixth-largest cable company might as well have been called John
Rigas & Sons. Its rise and fall was a small-town saga of epic

The long and short of short-selling 
"This isn't a sport for amateurs. The downside is limitless, the
subtleties complex. If you have the time to do the homework, here are
some of the lessons I've learned the hard way."

A poolful of risk 
"Watch out-junior capital pools are headed for Ontario" 

The next biohazard 
"The Johnson & Johnson imbroglio suggests that copying bioengineered
drugs won't be easy. That gives biotechs an edge when competing with
generic drugmakers that Big Pharma never had."

Planet Starbucks 
"The story of how Schultz & Co. transformed a pedestrian commodity
into an upscale consumer accessory has a fairy-tale quality. Starbucks
has grown from 17 coffee shops in Seattle 15 years ago to 5,689
outlets in 28 countries."

Tyco, others face $60B in payments,&s2=ad_right1_topfin&tp=ad_topright_topfin&refer=topfin& 
"Tyco International Ltd., Vivendi Universal SA and more than 50 other
companies around the world may have at least $60 billion in unexpected
cash payments due by the end of next year."

Stingy Links: Value Investing

Are Value Stocks Riskier than Growth Stocks? 
"And so, without mangling syllogistic logic, must it not follow that
because they have higher returns, a portfolio of value stocks must
indeed have higher risk?  The problem is that this risk is not readily

Buffett's emergency quiz 
Before selling your stocks take Warren's quiz.

Get your Buffett fix 
"The rest of the investing world is tiptoeing back into stocks, but
Warren Buffett is on a roll. He's shelled out hundreds of millions of
dollars in recent weeks to invest in half-dead telecom and energy

Fiber optics: beware of Buffett's bet 
"Lots of investors are heartened by his investment in network operator
Level 3. Chances are they'll be highly disappointed."

The Sage seizes on energy's distress 
"When Warren E. Buffett acquired MidAmerican Energy Holdings Co. in
late 1999, Wall Street snickered. At the time, investors were
enthralled with New Economy stars like Enron Corp., which had
glamorized the energy business by reinventing itself as an
"asset-light" deregulated trading company. MidAmerican was the Old
Economy epitomized, a boring electric and gas utility--based in Iowa,
no less. Buffett, the famously technophobic chairman and CEO of
Berkshire Hathaway Inc., (BRK ) just didn't get it, various bull
market savants scoffed. He was history.  What a difference a bear
market makes."

Buffett: 'My elephant gun is loaded';?xml=/money/2002/09/22/ccbuff22.xml&sSheet=/money/2002/09/23/ixcity.html 
"In the financial markets I find it easy to predict what will happen
and very difficult to predict when it will happen. I think that things
were clear during the bubble as to what would happen eventually. I
think that report you refer to went on the internet the same day the
Nasdaq hit its high. I did not know that at the time, you know. I have
no ability to time things."

Buffett the bargain-hunter returns 
"Buffett is back.  Of course, the billionaire Oracle of Omaha,
Nebraska, never went away. But Warren Buffett, the world's second
richest man -- and probably the most successful investor this century
-- is showing a new generation a thing or two about value."

The new Buffett way 
"With so many stocks having plummeted, so many companies beset by
scandal, so much money fleeing the market, and such a crisis of
investor confidence, one might expect that the classic value
situations that are Buffett's hallmark would be everywhere. Buffett
should be grabbing an underpriced company every few days. The fact
that Buffett, who has oodles of cash to put to work, hasn't found
many-and has instead been nibbling on distressed properties-shows just
how overvalued stocks still are."
The ABCs of value 
"For a fund manager with $350 million tied up in one of the worst bear
markets in recent memory, Irwin Michael, president of I.A. Michael
Investment Counsel Ltd., looks remarkably relaxed sitting behind his
desk in the cramped downtown Toronto office space he shares with his
five employees."

What earnings recovery? 
"It doesn't matter who is doing the forecasting--analysts who cover
individual companies or market strategists who look at the economy as
a whole. They're all Pollyannas."

Double whammy 
"The theory goes like this: If the market is dropping, high yielding
stocks at least offer high cash flows to offset any decline in value.
Nice theory, too bad it doesn't work in real life."

The time to buy 
"Bear market or no, there are superb opportunities too enticing to
pass up. While a recovery is likely far off, the current carnage has
left fine stocks undervalued."

Third Avenue's 3rd Quarter Report 
"The title of the Op-Ed article said it all - 'Government Can't Make
The Market Fair.'  I agree.  The solution to this problem for OPMIs is
to buy in at prices far, far lower than is usually available in
negotiated transactions or in purchasing control."

Computer buff follows value 
The Globe's profile of Buffett follower and creator ofThe Toronto
Investment Club website.

Asset allocation is key for retired chemist 
Check out Shakespeare's Globe & Mail profile.

Do-it-yourself style investing 
"The prototypical DIY investor is Lethbridge, Alberta-based Keith
Betty, a retired chemist whose investing approach is outlined on the
Net as Shakespeare's Primer."

Stingy News Weekly Archive


Bullishly Yours,
Norman Rothery
ISSN 1499-2787

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