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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: macavity who wrote (5640)	2/19/2002 11:37:20 AM
From: macavity	Read Replies (1) \| Respond to of 33421

Pension Funds. Here is a 'good' example of financial engineering. thestreet.com Re:IBM After wading through the financial statements of this behemoth one more time, I think that IBM's statement Friday that its "accounting is conservative" is pure fancy. Consider pension income, which contributes 10% of pretax profits. IBM's use of a hefty 10% rate of return assumption -- artificially pumping net income -- is patently aggressive. Here's why: IBM's pension is invested approximately 65% in the bond market, with only about 35% in equities. Anybody familiar with the fixed-income market knows that bonds aren't going to return 10% per year, not with yields of quality bonds in the 6% to 7% range. It means, of course, that the equity portion of the pension will have to make up the difference. Either IBM is foolish enough to believe that the equity portion of the pension will make 16% to 18% annually (so it can meet the 10% rate of return assumption), or it's aggressively managing its earnings. I'd like to see IBM generate earnings-per-share growth the old-fashioned way, through sales and operating improvements, not through financial engineering. -macavity