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

To: Jon Koplik who wrote (6031)	4/28/2002 10:18:19 PM
From: John Pitera	Read Replies (2) \| Respond to of 33421

The Bears on This Message Board Had Enron Pegged By GRETCHEN MORGENSON April 28, 2002 During the stock market mania, Internet message boards earned a reputation as breeding grounds for stock touts. Stock promoters no longer needed to rent offices with banks of phones to profit by manipulating shares. An Internet connection was all the pump-and-dump guys required. But an academic study to be published this fall in The Journal of Investing indicates that chat rooms can also contain valuable morsels for investors. The study, by James Felton, associate professor of finance at Central Michigan University, and Jongchai Kim, an assistant professor there, examined messages posted on the Yahoo board devoted to Enron starting in 1997. They found that anonymous postings on the message board presented a compelling history of the company, described a disturbing corporate culture there and repeatedly warned investors to get out while the getting was good. On April 12, 2001, with the stock at $57.30, one message predicted that Enron would soon be revealed as a house of cards. "The Enron executives have been operating an elaborate con scheme that has fooled even the most sophisticated analysts," the message said. "The first sign of trouble will be an earnings shortfall followed by more warnings. Criminal charges will be brought against ENE executives for their misdeeds. Class action lawsuits will complete the demise of ENE." But messages posted even earlier also indicated trouble ahead. On March 1, 2000, with the stock at $69, a participant wrote: "Dig deep behind the Enron financials and you'll see a growing mountain of off-balance-sheet debt which will eventually swallow this company. There's a reason they layer so many subsidiaries and affiliates. Be careful." In October 1998, a message said that under Kenneth L. Lay, Enron "developed a flashy reputation." It also said: "He has not delivered value. His management team is smoke and mirrors." Happy Enron shareholders posted their views as well. In January 2000, one chatter put a $1,000 target on the stock; it closed at $61.25 that day. But Mr. Felton didn't tally the number of bulls and bears; the task was just too onerous. The most common warnings related to the significant insider sales by Enron executives, but other comments involved suspicions about the company's opaque financial statements. On June 17, 1998, JanisJoplin298 wrote that Enron's financial structure was highly complex. The company "could just as easily bring greater shareholder value by simplifying the capital structure and clearly articulating its deals," the message said. To which came this reply: "If you find ENE's structure too complicated, Janis, then maybe stocks aren't for you. Anybody with even the most rudimentary understanding of accounting shouldn't have a problem with it." Mr. Felton, who edited the messages for clarity, said they prove that the fall of Enron did not come without warning, contrary to claims of the Wall Street crowd. "Here you have these people posting on the message board while all the Wall Street analysts are upgrading the stock," he said. Indeed, on Oct. 28, 1999, this message appeared: "Look at the lease obligations in the footnotes of the 10-K. There are a lot of liabilities that are not included in the balance sheet numbers." Add these liabilities to the balance sheet and "you might think a little differently about the valuation of ENE." It is impossible to say who was behind the postings. But Mr. Felton said message boards pose a problem for regulators and companies as well as an opportunity for investors willing to slog through Internet verbiage. "What's interesting about this is we have inside information that is anonymous but publicly available, and it's not factored into the stock price," he said. "Companies are being very careful about what information they release to the public, but that doesn't mean their employees aren't talking." nytimes.com

To: Jon Koplik who wrote (6031)	4/28/2002 11:24:35 PM
From: John Pitera	Respond to of 33421

IBM-- VZ- Incorrect Assumption of Returns in Pension Plans are creating fictious earnings on the Income Statement.--- Pension Folly: How Losses Become Profits April 26, 2002 FLOYD NORRIS In the land of executive compensation, there is nothing like being paid for profits that you can be sure will be counted, even if they do not exist. Why take chances with real earnings? Last year, Verizon Communications reported net income of $389 million after taking losses for a variety of things, among them investments in Metromedia Fiber Network, a company whose shares have plunged from a peak of more than $50 to less than 5 cents. Top officers' bonuses were reduced but not eliminated. Things could have been even worse for Verizon and its bosses. The net would have been negative, save for $1.8 billion in income the company was able to report from its pension plans. The only trouble is that Verizon's pension plan was really swimming in red ink. Dig through the company's annual report, and you will find that the pension funds had a negative return on investment last year, dropping $3.1 billion. And that is before considering the costs of pension benefits. So how did billions in losses turn into nearly $2 billion in profits? Verizon assumed that its pension plans would earn profits of 9.25 percent last year, and it reported income as if that assumption were true, something it was able to do under the current ridiculous accounting rules. Its earnings would have been even better had it assumed a 9.5 percent return, as General Electric did, or a 10 percent return, as I.B.M. did. In fact, both those companies lost money in their pension plans last year, as did most big companies. A study by Milliman USA, a benefits consulting firm, found that in 2001 the *reported results of 50 large companies included $54.4 billion of profits from pension fund investments. In fact, the pension funds lost $35.8 billion* from investments** last year. The losses are buried in annual report disclosures that few can understand. Harvey L. Pitt, the chairman of the Securities and Exchange Commission, has promised to make annual reports more understandable. This would be a good place to start. Even better would be a new accounting rule requiring actual results to be used. The theory of the current rule is that over time, all this will balance out — that pension income will be understated in the good years, as it was for most companies in the late 1990's, and overstated in the bad ones. But what has resulted is highly misleading. Shareholders have started to become upset, particularly because many companies include the phantom income in determining whether executives qualify for performance bonuses. At Verizon's annual meeting this week, a proposal to bar the consideration of pension income from bonus calculations was supported by 43 percent of the shares. Fred Salerno, Verizon's chief financial officer, says there is no way to know how much the pension income contributed to the bonuses because a different formula would have been used if it had been excluded. He notes that the company knew the approximate pension income it would report last year when it set the formula. Executives might do better in the future if they stopped considering reported pension income when bonuses are calculated, simply because pension income is headed lower. The complicated pension rules will force companies to report poorer results this year because last year's reality was so bad. And John Ehrhardt, a principal at Milliman, says that auditors in the post- Enron era may force companies to reduce their optimistic assumptions. Investors would do well to study the pension disclosures in this year's crop of annual reports. They show that many plans that seemed to be overfinanced a couple of years ago no longer are. Pensions are going to go back to costing companies money — both in reality and, soon, even in their published financial statements. nytimes.com

To: Jon Koplik who wrote (6031)	4/28/2002 11:31:03 PM
From: John Pitera	Respond to of 33421

Hi Jon, Great Article on The FED exploring buying stocks and real estate to ward off a deflationary spiral. I'm confident that they would do this if it were needed and it would result in a bigger expansion of the monetary base and lead to a generalized price inflation. Our economy and The most other major world economies have experienced a generalized significant price inflation at some points over their 30 to 60 Year Macro Economic cycles. It's nothing new, It's been done before. Even in this country. It will not be the end of the world.. Heck I'll probably be able to service your futures account for you if it were to happen -g- Great Passage..... But what if prices are falling? In that case, inflation is, arithmetically speaking, negative. So if the nominal rate was 1 percent and the deflation rate was 1 percent, the real interest rate would be 2 percent. In such a case, the economy could become prone to a deflationary spiral, in which a lack of demand, falling prices and paralysis in nominal interest rates lead to more restrictive financial conditions, weaker demand and further downward pressure on prices.