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Politics : PRESIDENT GEORGE W. BUSH -- Ignore unavailable to you. Want to Upgrade?

To: Techplayer who wrote (383691)	4/1/2003 5:26:52 PM
From: DuckTapeSunroof	Read Replies (1) \| Respond to of 769670

Re: "The rates of return have been coming down (IBM for example)." >>> Yep, you are correct. And some companies are better actors than others. But MANY companies have only reduced their expected rates of return on the assets in their pension plans by very modest amounts. (Say, from 10 1/2%, down to 10%... from 9 1/2% to 9%, etc.) >>> There is quite a good bit more 'asset revaluation' that will be occurring with those defined benefit plans over the next several years (and also, injection of cold hard cash into the plans to bring them back up to spec.) >>> If the world markets somehow ended this 'secular Bull decline' right now... and returned to a historically 'more normal' average real rate of annual return like 5% or so, then it would still take 5 or 6, (maybe up to 8) more years of marking down assets, ratcheting-down pension plan's expected rates of return and injecting cash from current operations into the plans, before the plans would be stabilized. >>> All these years - for those affected companies - reportable earnings would be reduced. Re: When pension accounting and stock option accounting changes are implemented, the PE of the markets is going to skyrocket. >>> You've got that right... only I think the effect will be more gradual: >>> Pension plan changes (forcing companies to be more realistic with their numbers, not play games by inflating reported earnings with fictional pension earnings), will likely be 'phased in'. (The new regulations will take effect by some 'date certain', but the companies will likely be allowed a period to 'adjust' to the new legal framework... my guess is 3 years or so after new regulations are approved and implemented.) >>> On the Nasdaq 'stock option / stock watering' front, the effect will also be more gradual because prior stock watering will be 'grandfathered'. >>> Once the F.A.S.B. and the I.A.S.B. approve their new accounting regulations (by summer of '04?, implemented by Q4 of '04?), which will say 'you can't call the stock options you issue an 'expense' and take an immediate tax deduction for this expense... unless you also declare it as an expense on your annual reports - marking this expense against reported earnings' , once this accounting rule goes into effect in '05 only newly issued stock and options compensation will cause a hit against earnings. >>> Stuff that had previously been issued will be assumed to have already had it's effect... companies will not be required to go backwards and restate old earnings reports. >>> Since the new rules should go into effect in '05 - and only affect options or stock newly issued after the rules change - the effect on Nasdaq P/Es should be more gradual... not the 'doom and gloom' talked about by people like AMD's Sanders. >>> Presumably, since stock options will be a reportable expense like any other compensation paid to employees, companies will use less of them. (This whole area is really a MASSIVE tax loophole that Microsoft has pioneered for years.) >>> Academic studies have recently shown that stock options make very poor motivators to 'incentivize' employee performance, anyway. But they provide a strong lure to trump up phony short-term earnings. >>> This is fo the very simple reason: if stock prices rise quickly, the option grantee (usually upper management) walks away with a quick killing. But if the stock falls, the grantee just walks away from the 'under-water' option (unless management obligingly reprices the options for him... so he is a guaranteed winner). The grantee is not tied to the performance of the company. >>> If one really wants to 'incentivize' an employee... just issue stock to them (restricted 'letter stock' usually) instead of options on stock. That way the employee's compensation is IMMEDIATELY tied to the company's performance... and the employee has a real interest in seeing stable long-term growth for the company. Re: The other issue is that pension funds are apparently under-funded by 100-150 billion. That would have a positive effect on the markets... >>> You've got me on that one... how do you see a 'positive effect'? (Do you mean after the rules are corrected, and people believe the numbers are honest?)