Posts filed under “Corporate Management”
Throughout this entire post-crash bull market, business spending never really materialized in a major way. It rose and fell, with PMI peaking in 2003 at about 64 — but it simply didn’t ramp up the way many of the bulls had promised (especially if you back out military spending).
That’s a curiosity worth exploring.
After the market crash of 2000-03, business execs remained unusually cautious in their spending and hiring plans. Even after rates were slashed, the dollar lowered, and the economy picked up, CEOs remained especially timid in their use of corporate cash for business purposes.
What we saw instead was a growing use of do-re-mi for financial engineering goals. Less R&D, more sharebuybacks, decreased hiring, greater dividends. That continues to this day, even as we have heard from some strategists who have been insisting for 3 years that Business CaspEx is about to increase.
The general capex spending we have seen has been very specific to efficiency improvements. If it doesn’t have an ROI of 100% over three years, no one seems very interested. Hence, Business Intelligence software has become a hot seller, as has CRM and other related, measurable purchases.
Some of the risk aversion to spending can be explained by just-in-time delivery, and better control of inventories. But only some.
Our own theory (back in 2003) was that Shell Shocked CEOs were afraid to spend on anything that might hurt their quarterly numbers; They had become so very short term in nature — more so than usual — as they were still stunned by the carnage of the 2000 crash. The brutal destruction of share prices and the turmoil caused by mass layoffs is not something any CEO or CFO wants to live through twice. Hence, the skittish cautiousness.
Four years later, and the short term fears remain. Today’s WSJ looks at this issue in the corporate sector, and asks "Where Art Thou, Business Spending?"
"Business spending was supposed to save the economy from the housing downturn. That lifeline would come in handy right about now.
In the fourth quarter, business investment in equipment and software registered its largest drop since 2002. And it doesn’t seem to be picking up. The Commerce Department reported last week that orders for capital goods excluding aircraft and defense orders — an important barometer of investment — were lower in February than in December.
Investors, rubbernecking the housing wreck, have paid little attention to this problem. But the Federal Reserve is concerned. Speaking Wednesday before Congress, Fed Chairman Ben Bernanke highlighted the weakness in business spending, and admitted some bafflement about what’s behind it.
Businesses are flush with cash. A lot of investors and economists thought business would use the cash to ramp up equipment spending and that this would help counter a weak housing market."
Why does this matter so much? According to Dallas Fed economist Evan Koenig, "when orders for durable goods — which include capital goods and other long-lasting items — fall, as they have been, it often presages a drop in factory employment." Add to that housing downturn and related Job loss in construction, and you have a formula for a weakening Labor market.
Where Art Thou, Business Spending?
WSJ, April 2, 2007; Page C1
Blame the professors: Just as the option backdating scandal started with academic researchers noting mathematical anomalies, so too might the next brewing scandal: the I/B/E/S Analyst ratings back dating scandal.
According to a Barron’s article by Bill Alpert (buried on page 39), several professors have discovered what they describe as 54,729 non-random, ex-post changes out of 280,463 observations — a little over 19.5% of analyst recs (abstract below):
"The professors found
almost 55,000 changes that had been made in the I/B/E/S database of
stock-analyst recommendations maintained by Thomson, the Stamford,
Conn., firm that is a leading vendor of financial data. The alterations
made Wall Street’s record of recommendations look more conservative –
hiding Strong Buy recommendations and adding Sell recommendations from
1993 to 2002. That is a period for which Wall Street has drawn heat and
government sanctions for touting Internet bubble stocks.
As a result of the changes, the stock picks shown in
the database would have created annual gains that were 15% to 42%
better than the originally recorded recommendations, using a trading
strategy based on analysts’ recommendations."
The firms were the most significant participants in the data backdating were also the firms who had the closest relationship between banking and research and were the hardest hit by the Spitzer enforced settlement.
From page four of the academic working paper notes exactly how significant this was:
"Why do the historical data now look different than they once did? The contents of the database changed at some point between September 2002 and May 2004, a period that not only coincided with close scrutiny of Wall Street research by regulators, Congress, and the courts, but also saw a substantial downsizing of research departments at most major brokerage firms in the U.S.
The paper outlines four types of data changes: 1) non-random removal of analyst names from historic recommendations (anonymizations); 2) the addition of new records not previously part of the database; 3) the removal of records that had been in the data; and 4) alterations to historical recommendation levels.
The net result of this was to make many specific trading strategies appear better in retrospect than they actually were. Buying top rated stocks and shorting lowest rated stocks, based on the changed data, now perform 15.9% to 42.4% better on the 2004 revised data than on the 2002 tape, the professors state.