Q-13. An analyst has been writing research reports on a firm for many years. As part of the analyst’s continuing research efforts, the analyst allowed the firm to fly him to the firm’s headquarters 500 miles away and put him up in the guest quarters the firm had for all corporate visitors. In the current year, the firm is planning a secondary share offering that coincides with the tenth anniversary of the firm going public. When the analyst arrived at the headquarters, he found a new set of high-quality golf clubs as a gift to him. On the golf clubs was the firm’s logo, and the firm was giving the clubs to all visitors this year in honor of the anniversary and the IPO. Based upon this information, Standard I (B), Independence and Objectivity, has: A. Been broken because of the value of the golf clubs and the value of the trip to the headquarters. B. Been broken because of the value of the golf clubs. C. Not been broken because the trip is allowed and the firm is giving the clubs to all visitors. Solution: B. Modest gifts and entertainment are acceptable. Should commercial transportation be unavailable, modestly arranged travel may be accepted to participate in appropriate information gathering events. Q-14. Romar Brockman, CFA, is a sell-side analyst. Approximately half of Brockman’s compensation comes from his firm’s Investment-banking division. Brockman was asked to write a report about Anacortes Concrete (AC), an Investment-banking client. Despite concerns about the slowdown in concrete demand, Brockman issued a very positive report on AC. When issuing his report, Brockman least likely violates the CFA Institute Standard relating to: A. Loyalty to Employer. B. Loyalty, Prudence, and Care. C. Independence and Objectivity. Solution: A. The Standards require members to put client interests ahead of member and employer interests. As Brockman’s compensation is dependent upon investment banking revenues, Brockman may not be objective. When issuing the report, he is in jeopardy of violating Standards relating to Independence and Objectivity; Loyalty, Prudence, and Care; and Disclosure of Conflicts. Q-15. Kavily Poven recently left his job as a research analyst for a large investment adviser. While looking for a new position, he was hired by an investor-relations firm to write a research report on one of its clients, a small educational software company. The investor-relations firm hopes to generate investor interest in the technology company. The firm will pay Poven a flat fee plus a bonus if any new investors buy stock in the company as a result of Poven’s report. If Poven accepts this payment arrangement, he most likely violates the Code and Standards with respect to: A. Disclosure of Conflicts. B. Misconduct. C. Independence and Objectivity. Solution: C . If Poven accepts this payment arrangement, he will be in violation of Standard I(B) because the compensation arrangement can reasonably be expected to compromise his independence and objectivity. The agent option granted by Poven may compromise his objectivity.
The New Tapering Normal Optimism In Charts Submitted by Tyler Durden on 05/28/2013 08:27 -0400 Lehman Morgan Stanley POMO POMO Reality recovery Renaissance Yen That all the increase in risk assets has been on the back of multiple expansion for the past year is by now not news to anyone. What may come as a surprise to some who have not been paying attention, as Morgan Stanley conveniently reminds us, is that corporate profits have been declining not for one or two quarters, but for two full years now. " For net margins, March 2013 quarter-end results showed the top 1500 US equities at 7.15%, below the peak achieved in the June quarter of 2011. In fact, net margins have declined for the top 1500 companies every quarter since June 2011 ." This is to be expected in a world in which underlying fundamentals continue to deteriorate and where the bulk of corporate activity focuses not on growth and expansion but on masking earning declines through the use of stock buybacks and levered dividends. Yet what has remained the same throughout this Fed-driven recovery (of the stock market, if not the economy), is the optimism surrounding the future. After all, if the the present is ugly, one has to at least project confidence and hope. So how does the future look? The following several charts should summarize it quickly and painlessly. First: the consensus forward EPS for the SP - down, down, down. But the constant "tapering" of optimism when it comes to fundamentals is only half the story. The other half is that these numbers would be even worse if the impact of stock buybacks was eliminated. From JPM: The Divisor of the SP500 Index is shown in Figure 5. This Divisor experienced a massive increase in the 1990s but started falling in 2004 due to strong buyback activity. Between 2004 and 2008 it fell by 7% or almost 2% per annual decline pace. It rose after Lehman due to large share issuance especially by financials and a drying up of share buyback activity. It started declining again in 2011 as share buybacks picked up. Since September 2011 the SP500 Index Divisor is down by more than 2%. The fall in the SP500 Index Divisor has helped the earnings picture in the US. Had the Divisor remained constant since Q3 2011 , the 4-quarter rolling SP500 Operating Earnings-Per-Share would have only risen by $1.50 instead of the reported $3.70 increase . The SP500 Operating EPS has risen from $94.60 in Q3 2011 to $98.30 in Q1 2013. Indeed studies have found that managers tend to increase share buybacks in periods of slow earnings growth to boost EPS via shrinking the denominator, i.e. the number of shares. In other words, applying a 16x multiple to the $2.20 EPS boost from buybacks alone, means 35 SP points comes from balance sheet jiggering alone. But while optimism when it comes to corporate profitability has tapered to say the least, it remains just as buyoant in other areas. Such as profit margins where there is hope the recent two year reversal will finally, well, reverse again. So a wholesale margin renaissance according to Wall Street desperate to justify bubble valuations: nothing new there either. Ok we'll bite - how do companies feel about the future. Apparently, not so hot: Confused? Don't be: negative guidance preannouncements are at post Lehman highs . But why listen to companies when sellside research is always right. But maybe we are missing something, and it is really a top-line growth story, with revenues poised to surprise to the upside. Well, no. Sadly, there is no hope of a pick up in revenues either, which is perfectly logical: when companies don't invest in capital spending and future growth, this is the direct result. Morgan Stanley admits as much: " If companies don’t invest in capital spending and research and development, they may maintain higher margins, but this lack of spending will not be a good catalyst for economic growth ." Alas, there is no economic growth, and in fact when stripping away buybacks, there would have been no EPS growth in Q1 either. Which means that the only deus ex will have to be multiple expansion. The same forward multiple, by the way, which as we noted, is now higher than it was at the market's last all time highs back in 2007 . But why worry: it's Tuesday, there is a POMO, the Yen is getting crushed again, and central bankers have everything under control. Just like they did back in 2007 when subprime and everything else was also "contained." So best to just ignore reality and BTFD: because the Chairpriest said so. Average: 4.666665 Your rating: None Average: 4.7 ( 6 votes) Tweet - advertisements - Login or register to post comments 7414 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Overnight Sentiment: Greek Euphoria Taibbi: "Goldman Raped The Taxpayer, And Raped Their Clients" Ted Kaufman's Friday Hearing Explains Everything That Is Broken With The US Financial System This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied - The Sequel This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied
What The Income Statement Of The Entire Market Looks Like Submitted by Tyler Durden on 05/26/2013 16:57 -0400 Ben Bernanke Bond Morgan Stanley New Normal In the New Normal, where fundamentals ceased to matter some time around March 2009 when Bernanke decided to nationalize first the bond, then the stock market, and soon, every other "market", stuff like "data" is largely meaningless. However, for those who are still curious how the cash flow in the biggest corporate market - that of America - looks like, instead of merely chasing the latest trend or looking for a heatmap break out, here it is. Using Factset data for the 1500 largest stocks (ex fins), Morgan Stanley has broken down the world's biggest Income Statement by line item (and by sector). The results are as follows. Some observations: Of the $12 trillion in total revenue, nearly $6 trillion each year is the cost of goods sold for consumer companies (discretionary plus staples), energy, and industrials. Gross profit (net of COGS and DA) is just 27% of revenue, or a little over $3 trillion. Consolidated income tax is a tiny 2.5% of revenue. Of all sectors, Energy companies paid the most taxes in FY 2012: $89 billion. Interest expense was a tiny $215 billion. It is here that the bulk of EPS "generation" has taken place in the past two years now that companies have fired the bulk of the "fat", courtesy of constant refinancing into an ever cheaper cost of debt. A historical analysis of the interest expense line item shows a constant decline. At some point, this number will start rising again, especially if indeed the Fed wishes to see rates rise. At that point, there will be only downside for the market's Net Income, despite what paid financial-humor pundits say to the contrary on TV. The same chart as above broken down by industry: Source: Morgan Stanely Average: 4.77778 Your rating: None Average: 4.8 ( 9 votes)
Some Taxing Questions About (Not So) Record Corporate Profits Submitted by Tyler Durden on 02/13/2013 12:03 -0500 Apple David Einhorn GAAP Gross Domestic Product Housing Bubble Ireland Netherlands Recession Tax Revenue Treasury Borrowing Advisory Committee One of the recurring memes of the now nearly 4 years old "bull market" (assuming the recession ended in June 2009 as the NBER has opined), is that corporate profits are soaring, and that despite recent weakness in Q4 earnings (profiled most recently here ), have now surpassed 2007 highs on an " actual" basis. For purely optical, sell-side research purposes that is fine: after all one has to sell the myth that the US private sector has never been healthier which is why it has to immediately respond to demands that it not only repatriate the $1+ trillion in cash held overseas, but to hand it over to shareholders post-haste (see recent "sideshow" between David Einhorn and Apple). However, a problem emerges when trying to back this number into the inverse: or how much money the US government is receiving as a result of taxes levied on these supposedly record profits. The problem is that while back in the summer 2007, or when the last secular peak in corporate profitability hit, corporate taxes peaked at well over $30 billion per month based, the most recent such number shows corporate taxes barely scraping $20 billion per month! Does this mean that when one excludes all the usual non-cash exclusions, and all the endlessly recurring non-recurring items, all of which which feed the EPS line from a GAAP, and non-GAAP basis, and focuses solely on actual earnings generated by US companies, which form the basis for tax accounting purposes, that the real profitability of the US private sector, and by implication, the SP, is at best two thirds of where it was at its peak in 2007, and if so does this mean that the actual earnings multiple applied to true recurring earnings is some 50% higher than where the sellside brigade wants to retail investor to believe it is? We don't know, but we do know that while Individual Income taxes have returned to their 2007 peak as per the latest quarterly Treasury Borrowing Advisory Committee presentation (blue line chart below), Corporate Taxes still have some 50% to go before the prior peak is regained (green line). There is also another explanation. US Companies have built up their massive cash hoards over the past 5 years due to an even more aggressive pursuit of tax shelter and loophole strategies, as well as an even more aggressive use of deferred tax assets and NOL carryforwards, meaning that all the cash that they have not paid to the US government, has ended up on their balance sheet, and which cash shareholders are now demanding be dividended or used to fund buybacks (preferably with leverage). While the first explanation is relevant from a valuation standpoint, implying that corporate profitability is far lower than conventional wisdom believes to be the case and thus the market is widely overvalued, the second explanation goes straight to the most sensitive issue facing the administration currently: namely deficit reduction. Because while the administration does everything to "close the spending hole" by hiking income taxes on the wealthiest, what happened to any discussion about corporate taxes especially on those megacorps who pay zero domestic taxes and barely any tax in offshore shelters like Ireland, the Netherlands or the Caymans? Because something tells us if indeed Corporations are rolling in record profits, they should at least be paying the same amount of taxes as they did during the last credit and housing bubble, instead of 66% of it. Finally: if corporations were to simply catch up to where tax payments were in the summer of 2007, this would imply an annualized government tax revenue difference of some $120 billion. While hardly a massive sum in the context of the US $1+ trillion deficits, it would take some pressure off the US consumers, be they rich or poor, and actually stimulate the one driver that at last check still accounted for some 70% of US GDP: consumption. Average: 5 Your rating: None Average: 5 ( 4 votes) Tweet - advertisements - Login or register to post comments 5521 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: 2012 Year In Review - Free Markets, Rule of Law, And Other Urban Legends Taibbi: "Goldman Raped The Taxpayer, And Raped Their Clients" iTax Avoidance - Why In America There Is No Representation Without "Double Irish With A Dutch Sandwich" Taxation No Record Profits For Old Assets: Jim Montier On Unsustainable Parabolic Margin Expansion For Dummies Is JPMorgan About To Take Over America, Again?
What If Corporate Earnings Have Topped Out? Submitted by Tyler Durden on 01/08/2013 10:13 -0500 Bear Market CPI ETC Gross Domestic Product Guest Post Medicare Unemployment Via Charles Hugh-Smith of OfTwoMinds blog , The market may have reached cyclical highs in corporate earnings. That does not bode well for additional stock market advances. If corporate earnings have topped out, what will push the stock market higher? The usual answer is "central bank intervention," but history suggests that in the long run, the market eventually correlates to corporate earnings. Earnings up, market up; earnings down, market down. Frequent contributor B.C. recently shared some insightful charts of SP 500 (SPX) earnings. Here are B.C.'s comments on the first chart: Note that real earnings (CPI adjusted) in '09 fell to the levels of the 1920s-30s, 1890s, and 1870s, and to the levels of the 1970s in nominal terms. A "typical" cyclical decline would take earnings back to the long-term trend from 1932 and the log trend line at $40s-$50s from $87 today. Also, recall that the Fortune 300 firms have revenues equivalent to 50% to 100% of private GDP at $425,000/employee, so they are the economy. A decline of 50% for profits would be the equivalent of 10% of private GDP, which would match or exceed the decline in '08-'09, risking an increase in the Unemployment rate of 50-100% and a fiscal deficit exceeding 100% of tax receipts after Social Security and Medicare receipts. The next two charts track long-term historic trends: here is B.C.'s commentary: Reported earnings of the SP 500 (SPX) are highly cyclical with a periodicity of ~51 months. Earnings are contracting year-over-year (yoy) as occurred in late '07 and early '08, early '01, etc. Profits as a percentage of GDP at 10-11% are 65-70% above the historical average and 130% above the historical average during recessions and bear market troughs, implying the risk of up to a 55-60% decline in profits and profits as a percentage of GDP, i.e., a roughly $1 trillion decline or an equivalent of 10% of private GDP. The 10-yr. average P/E and 16- and 20-year real changes and real total returns to date for the secular bear market imply the risk of a crash at some point in the next 1/2 to 4 years and no real change to the SP 500 for 20 years, indicating just how grossly overvalued stock prices are historically. Thank you, B.C. for the charts and incisive commentary. Is it mere coincidence that the SPX has doubled over the past four years as corporate profits soared? If we haven't yet reached the 51-month cycle peak, we are certainly close. What happens to the post-QE market if earnings decline? 4th Quarter Earnings Will be an Unmitigated Disaster (EconMatters) Average: 4.5 Your rating: None Average: 4.5 ( 4 votes)
Guest Post: China 'Addicted To Credit' Submitted by Tyler Durden on 11/03/2012 17:55 -0500 Auto Sales China Crude Guest Post Natural Gas recovery Shadow Banking Authored by James Parker via The Diplomat , Whilst the economic data shows at least some signs of an anaemic turnaround, China’s corporate results are demonstrating just how difficult things have been. China’s companies are busy reporting their 3 rd quarter 2012 results and there have already been some disappointing results – pretty much explained by the general slowdown. Connected to this however, a worrying trend is developing on many companies’ balance sheets. Some big names have already seen disappointing profit growth. State owned-Sinopec, China’s (and Asia’s) largest oil refiner , saw its 3 rd quarter profit fall 9.4% and January-September profits slump by 30%. Sinopec is trapped between high crude costs and government mandated price ceilings on sales to consumers. Oil giant PetroChina also suffered, with its 3 rd quarter net profit down 33% compared to last year , driven in part by a $6 billion refining loss over the year-to-date (YTD), and part by a similar squeeze on its natural gas import business (in which its YTD profits have fallen 93% compared to 2011). China Southern Airlines saw third quarter (3Q) net profit fall 29%, whilst China Life, the largest Chinese insurer measured by premiums, swung to an outright loss in the July-Sept. period. Meanwhile Sany Heavy Industry Co. Ltd, China’s largest maker of heavy machinery and construction equipment, was hit by 59% fall in 3Q net profit. Baosteel, one of the largest producers of the metal, saw net profit down 4.88% from a year earlier. The auto industry in China is undergoing stresses too. Compounded by the fallout affecting Japanese automakers over the island dispute, data shows that overall national auto sales at the end of September fell 1.8% compared to the end of September 2011. BYD, the Chinese company famously backed by Warren Buffet, reported its 3Q 2012 profit sliding 94% compared to 3Q 2011. Indeed the auto making sector was put on notice by the Ministry of Industry and Information Technology last week when the latter warned in a statement that the industry required some serious downsizing or consolidation . The statement contained the shocking news that nearly a quarter of China’s nearly 1,300 automobile makers are on the verge of bankruptcy, and hinted that involuntary bankruptcy may be forced onto some of the smaller players. Most worrying is a drastic rise in the amount of “accounts receivable” (A/R) on the balance sheets of Chinese companies. Accounts receivable is an item of money owed to the company (from customers) which has not yet been paid. Many transactions are done on credit, and it is normal for companies to have these items on their accounts. However, Chinese firms’ accounts receivable are estimated to have risen by 45% year-on-year (YOY) according to reports filed so far, whilst sales have climbed by less than half that rate. During a slowdown, it is common for payments to be delayed as everyone hangs on to cash. Some companies, though, can be tempted to avoid curtailing production by offering reluctant customers much easier credit to encourage sales , the hope being that the slump will soon end and “natural” demand will pick up again. The trouble of course is that if the slowdown is prolonged, or the recovery weaker than expected, these accounts receivable might turn “un-receivable”, and thus have to be written down as losses. An increase in A/R is expected, but such a large increase suggests that some companies have been staying in operations through this vendor financing. In the struggling coal sector, at the end of June, accounts receivable had jumped 52.8 % for the 90 biggest coal firms. YOY Sany’s tally increased 83% over the first nine months of this year, outpacing a still worrying general trend in the heavy machinery sector. The steel sector is also under stress, as are some parts of the country’s export industry. China’s economy, as explored previously, is addicted to credit . These large rises in accounts receivable show that it is not only financial institutions and the shadow banking sector which are involved in credit creation. A payment delay or failure by one company can resonate through an entire supply chain, as each entity feeling the cash pressure then delays payments of its own. The need for a stronger turnaround is becoming more and more urgent. Average: 4.25 Your rating: None Average: 4.3 ( 8 votes) Tweet Login or register to post comments 12185 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Chinese CAT-Equivalent, Sany, Finds Itself In Liquidity Crunch, Seeks Covenant Waiver Did The Great Financial Crisis Start With The End Of The Gold Standard? White House Hypocrisy And Trade Sanctions Against China 'Shadow Banking' In China Frontrunning: July 5
Last week, we published a chart-essay that illustrates the extreme inequality that has developed in the US economy over the past 30 years. The charts explain what the Wall Street protesters are angry about. They also explain why the protesters' message is resonating with the country at large. Here are the four key points: 1. Unemployment is at the highest level since the Great Depression (with the exception of a brief blip in the early 1980s). 2. At the same time, corporate profits are at an all-time high , both in absolute dollars and as a share of the economy. Image: St. Louis Fed Image: St. Louis Fed 3. Wages as a percent of the economy are at an all-time low. In other words, corporate profits are at an all-time high, in part, because corporations are paying less of their revenue to employees than they ever have. There are lots of reasons for this, many of which are not the fault of the corporations. (It's a global economy now, and 2-3 billion new low-cost employees in China, India, et al, have recently entered the global workforce. This is putting pressure on wages the world over.) Image: St. Louis Fed 4. Income and wealth inequality in the US economy is near an all-time high: The owners of the country's assets (capital) are winning, everyone else (labor) is losing. Three charts illustrate this: The top earners are capturing a higher share of the national income than they have anytime since the 1920s: CEO pay and corporate profits have skyrocketed in the past 20 years, "production worker" pay has risen 4%. After adjusting for inflation, average earnings haven't increased in 50 years. It's worth noting that the US has been in a similar situation before: At the end of the "Roaring '20s," just before the start of the Great Depression. (See some of the charts above). It took the country 15-20 years to pull out of that slump and fix the imbalances. But by the mid-1950s, employment, corporate profits, wages, and inequality had all returned to more normal levels. And the country enjoyed a couple of decades of relatively well-balanced prosperity. But now, everything's out of whack again.
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