Posts filed under “Markets”

Read it here first: The Cost of Sarbanes-Oxley

It is a rather annoying tendency of politicians — and their empty-headed acolytes — to use and abuse of data and charts. One of the more egregious recent offenders  was the laughable assertion put forth by an accounting professor Ivy Zhang that Sarbanes-Oxley cost more than $1.4 trillion dollars.

Zhang proves that understanding how to do mathematics does not mean one actually understands what the numerals being added together actually represent. Her incompetent analysis calculated the drop
in stock market capitilization during July 2002 — the period just before the
legislation was passed, and concluded that was the cost of the legislation.

The only explanation for that kind of reasoniong is blunt head trauma. Its is beyond flawed. If we were to use that same method of reckoning, then we would be forced to conclude that Sar-box has created several trillion dollars worth of wealth. Why?  As the chart we showed last Summer "proves," since  the Sar-box was passed, the stock market has gone up significantly.

Market’s Performance Since Sarbanes Oxley (7/02-6/05)

Click for larger chart
Source: The Big Picture

One would hope a professor of accounting would have a little more insight into market capitalization and what actually dirves markets than was exhibted by Ms. Zhang.

Our takedown of her foibles was echoed in a column this week by the NYT’s terrific columnist Floyd Norris, in Trusting Bosses Not to Cheat (it even uses a similar post Sar-box SPX chart).

Mind you, I’m not suggesting plagiarism; rather, I am bragging that we are about 1 year ahead of the Grey Lady in our insight and analysis.

Here’s an excerpt from the column:

"Mr. Feeney, a Florida Republican, is the chief House sponsor of a bill to exempt the vast majority of companies from having their internal controls reviewed by auditors. A witness at the hearing, Mallory Factor, would like to go much further. The Free Enterprise Fund, which he heads, has filed a suit seeking to have the Public Company Accounting Oversight Board, which was created as a result of Sarbanes-Oxley, declared unconstitutional.

"Sarbanes-Oxley had a trillion-dollar negative impact on the U.S. economy," he told the hearing, citing research by Ivy Zhang, an assistant professor of accounting at the University of Minnesota.

Ms. Zhang did estimate that consideration of the law cost shareholders almost that much. But now she has backed down. The latest version of her paper, she told me, indicates a far smaller effect, although she declined to put a number on it . . .

How does she deal with the fact that the market bottomed in the fall of 2002, about the time efforts to enforce Sarbanes-Oxley got under way, and has had a sustained rise since? That is probably irrelevant, she told me, since the market would have already discounted the effects of the law, and whatever happened later was caused by something else.

Explaining market moves is not so easy, and her paper would be unworthy of much attention but for its use by opponents of regulation."

I am unfamiliar with Congressman Tom Feeney, but one can only conclude that he is innumerate (mathematically illiterate), and has very little comprehension of how the stock market actually functions. Is it too much to ask from the men and women we send to Congress for intelligent debate and analysis? Basic understanding about the areas that regulate? Street smarts?

The biggest complaint about SOX is the heavyt burden it exacts on small firms. There is a very simple solution to the more onerous costs of SOX:  Exempt the smallest companies from compliance. Example: Any firm whose market cap is under 250 million for 2 consecutive Qs could have the option to opt out. Their symbol will reflect this decision with an "S" suffix designating non-Sarbox compliance.   For example, ABCD co. becomes "ABCDS."

Of course, investors will recognize this, and some may choose to invest accordingly. But if we really believe in the free market, we will allow the marketplace to work. Hell, if some people are correct in their views, investors may reward the clever cost cutting by management with their investing dollars.

I trust the investing public to use their judgement on this.  Does Washington?


Trusting Bosses Not to Cheat
NYTimes,  June 23, 2006

How Much Does Sarbanes-Oxley Cost?
The Big Picture
Saturday, June 18, 2005

Category: Corporate Management, Data Analysis, Financial Press, Markets, Politics

Call to ARMs

Category: Federal Reserve, Inflation, Markets, Real Estate

Short Selling Surges to Record

Category: Markets, Psychology, Technical Analysis, Trading

Why the Real Estate Slow Down Matters So Much

Category: Economy, Investing, Markets, Real Estate, Retail, RR&A

Old Stars Don’t Lead New Bulls

Category: Corporate Management, Earnings, Investing, Markets, Psychology, Venture Capital

Microsoft is in crisis?

I frequently discuss Microsoft, and for many many reasons: They are a tech bellwether, a huge part of the S&P and Nasdaq 100 (and a smaller part of the Dow). They have also been a thorn in the side of new technology development and innovation, but now that so much of it has moved to the web, its gotten away from them.

This is a good thing.

One of the commenters said some time ago that I was "irrational in my hatred for Microsoft." That’s hardly the case; Microsoft has put a lot of cash in my pocket, so at worst, I should be grateful to them for the windfall.

However, I am still an objective observer, and I believe that Mister Softee is not what most investors think it is: They are hardly innovators; rather, they copy other people’s work relentlessly, until by default they own the standard. Their products are kludgy, bloated and anti-instinctive; They are hardly the elegant, easy to use software first dreampt up by science fiction writers decades ago.

From an investing standpoint, their fastest growth days are behind
them, yet they are hardly a value stock — yet. (Cody and I have disagreed about this for some time). The leaders of the last bull Market are rarely the leaders of the next. Despite this, Wall Street still loves
them, with 28 of  32 analysts rating them a "Buy" or "Strong Buy." (BRThat was 2 months ago; Its now down to 21 "Buy" or "Strong Buy," 10 "Hold," and 2 "Sell" or "Strong Sell." ) They
are widely owned by active mutual fund managers and closet Indexers.

Many people think of them as this well run money machine; In reality, they are very poorly managed by a group of techno-nerds with very little in the way of management skills. Even their vaunted money making abilities are profoundly misunderstood: Its primarily their monopolies in Operating Systems (Windows) and Productivity Software (Office) that generates the vast majority of their revenue and profits. Their Server software and SQL Database make money, but hardly the big bucks of Windows or Office. MSN is a loser, MSNBC is a dud, their Windows CE is hardly a barn burner — even X-Box has cost them billions more than it is likely to generate in profits over the next 5 years.

Lest you think its just me who thinks this way, consider no less an authority than Robert X. Cringely. He is the author of the best-selling book Accidental Empires (How the Boys of Silicon Valley Make Their Millions, Battle Foreign Competition, and Still Can’t Get a Date). He has starred in several PBS specials, including Triumph of the Nerds:  A history of the PC industry.

After Gates resignation, Cringely wrote this:

Pulp"Microsoft is in crisis, and crises sometimes demand bold action. The company is demoralized, and most assuredly HAS seen its best days in terms of market
dominance. In short, being Microsoft isn’t fun anymore, which probably means that being Bill Gates isn’t fun anymore, either. But that, alone, is not reason enough for Gates to leave. Whether he instigated the change or someone else did, Gates had no choice but to take this action to support the value of his own Microsoft shares.

Let me explain through an illustration. Here’s how Jeff Angus described Microsoft in an earlier age in his brilliant business book, Managing by Baseball:

"When I worked for a few years at Microsoft Corporation in the early ’80s, the company had no decision-making rules whatsoever. Almost none of its managers had management training, and few had even a shred of management aptitude. When it came to what looked like less important decisions, most just guessed. When it came to the more important ones, they typically tried to model their choices on powerful people above them in the hierarchy. Almost nothing operational was written down…The tragedy wasn’t that so many poor decisions got made — as a functional monopoly, Microsoft had the cash flow to insulate itself from the most severe consequences — but that no one cared to track and codify past failures as a way to help managers create guidelines of paths to follow and avoid."

Fine, you say, but that was Microsoft more than 20 years ago. How about today?

Nothing has changed except that the company is 10 times bigger, which means it is 10 times more screwed-up.

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Category: Corporate Management, Investing, Markets, Psychology, Technology

Backing and Filling Week?

Category: Markets

A Deceptively Simple Timing System

Category: Apprenticed Investor, Data Analysis, Earnings, Fixed Income/Interest Rates, Markets, Technical Analysis

The Return of Abelson

Bol_logo_top_page_05"AS WE WERE SAYING BEFORE WE WERE SO rudely interrupted by a man dressed in a white smock and wielding a scalpel (thank heavens he left his box-cutter at home), the stock market looks a bit worse for the wear."


So says Barron’s Alan Abelson, usually one of Wall Street’s most visible Bears. Just his luck — or was it the Trading Gods having some fun? — that he managed to be out of service for the most bearish period in 3 years. Traders, being a superstitious lot, will soon be begging Abelson to "let us know the next time you go in for a procedure" – so they can get short.

Regardless, whatever the  man dressed in a white smock removed, it wasn’t his arch sense of humor or acid tinged tongue:

"The impact of the massive disturbance was global in every sense: Not only were its terrible tremors felt far beyond the narrow canyon of capitalism in lower Manhattan, but they commanded notice in quarters much loftier than trading floors or commodity pits. We’ve not the slightest doubt, for example, that what prompted the famed cosmologist Stephen Hawking early last week to urge earthlings to create settlements in space was, pure and simple, fear of the effect of crashing markets on the human race."

But the key to Abelson’s return is his clear eyed take on inflation, which comports squarely with our own views:

"FOR OPENERS, OUR HUNCH IS THAT MR. BERNANKE’S concerns about inflation, despite his mucking up the message with all that rubbish about inflationary expectations, have more than a modicum of merit. And our conviction on this score is only strengthened, of course, by the fact that so many pundits pooh-pooh inflation as a problem. Indeed, if anything, we fault the chairman for his evident sympathy with the argument that the fearsome upward spiral in the price of crude, so far, anyway, hasn’t been exerting all that much impact in the economy at large.

Apparently, Mr. Bernanke, like his critics, needs to get out more. Oil is a very sneaky commodity. Our old friend and revered Barron’s contributor, Abe Briloff, likes to describe certain stealth accounting practices as comparable to a bikini: what they reveal is interesting, what they conceal is vital. Oil is something like that: Its uses are readily manifest, but it plays a far bigger and more critical role in our lives than is easily perceived.

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Category: Federal Reserve, Financial Press, Inflation, Investing, Markets, Psychology

Chart of the Week: Sell in May

Category: Markets, Technical Analysis, Trading