Wall St. Endures a Painful Quarter

”It was a difficult quarter,” said Robert S. Salomon, director of stock research with Salomon Brothers Inc. ”If people didn’t realize it before, higher oil prices made many people realize that there is a recession on the way. And interests rates have not fallen as you would expect in a period of economic weakness.” ”The energy service stocks have done well in the quarter,” said Jerry M. Brooks, Chiles’s vice president and chief financial officer. ”Of course, the events in the Middle East have had some impact. But there is the perception that prices will be on the upturn and that there will be more demand for services. That perception is what is causing energy-related stocks to rise.” ”Every penny increase in the price of fuel translates into another $1 million a year in operating expense,” Mr. [Stephen Thompkins] said. ”For smaller airlines like ours the impact is much more severe than for the larger carriers.”
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HICKS, JONATHAN P.

Full text: [New York Times] Oct 1, 1990

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Tokyo Stocks Fall Sharply

”The selling is causing selling now,” said Masahiko Tsuyuzaki, chief trader at the Tachibana Securities Company. ”Let alone the external factors, the selling has in itself become a negative internal factor.”
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Reuters

Full text: [New York Times] Oct 1, 1990

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THE MEDIA BUSINESS; Lampoon Deal Altered

J2 Communications has changed its offer for National Lampoon Inc. to keep the deal’s value at $4.7 million in stock and warrants. The adjustment was made to reflect changes in the companies’ stock price since the deal was announced in March, said [James P. Jimirro], J2′s chairman and chief executive.
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AP

Full text: [New York Times] Oct 1, 1990

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Market Place; Insurance Stocks: Confidence Dims

In their eagerness to shed stocks of insurance companies from their portfolios last week, investors sold some issues almost without regard to the price, traders said. ”There is clearly a concern about asset quality,” Mr. [Myron M. Picoult] added. ”But there has been no effort to differentiate among companies.” ”They’ve got to put the money up at some point,” he said. ”They can get it from operations or from liquidating their portfolios.” In this weak market, though, selling financial assets like real estate, stocks or bonds would be difficult. Despite Friday’s improvement in stock prices, Mr. [Michael Frinquelli] of Salomon said he believed that the stocks of property and casualty companies are not likely to recover over the next few months or years. Premiums have been climbing at a slower pace than loss claims, and these companies’ earnings are sensitive to any increase in interest rates. ”It’s too early to buy these stocks now,” he said.
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Wallace, Anise C.

Full text: [New York Times] Oct 1, 1990

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Japan’s Ambiguous Economic News

The latest economic news from Japan seems completely incongruous: the financial markets are reeling as stock prices plunge and interest rates soar to their highest levels in nearly a decade. In the meantime, the economy is so vigorous the policy makers’ biggest worry is how to rein it in.
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Sterngold, James

Full text: [New York Times] Oct 1, 1990

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INTERNATIONAL REPORT; Japan’s Ambiguous Economic News

Japanese business leaders and bureaucrats have long harbored a deep mistrust of the financial markets as a home for unproductive speculators or, worse, politicians. But rarely has that attitude been more clearly manifested than during the current malaise in the markets, a divergence from the apparently robust health of what is almost always referred to here as the ”real economy.” ”Money will get even tighter, and that will hurt the markets even more,” said Akio Mikuni, president of his own credit rating company. ”But demand in the economy will remain strong for some time, at least until next year because of the position of corporations.” ”Japan responds to the same economic signals that everyone else does,” said Robert Alan Feldman, an economist with Salomon Brothers Asia. ”But corporations here spent the past few years getting themselves ready for these conditions.”
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JAMES STERNGOLD, Special to The New York Times

Full text: [New York Times] Oct 1, 1990

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INTERNATIONAL REPORT; World’s Markets Post Hefty Losses in Quarter

Rising energy prices and stagnating economic activity have many analysts saying they are pessimistic about the next few months and reluctant to recommend stock purchases. ”What we’re saying now to investors is not to try to catch a falling knife,” said Jeffrey M. Weingarten, the director of international equity research in the London office of Goldman, Sachs & Company. The Japanese market sank 33.18 percent, measured by the yen and 26.42 percent in dollars. Robert A. Brusca, senior vice president and chief economist of Nikko Securities International Inc., said the drop reflected not only alarm about the Iraqi invasion of Kuwait on Aug. 2 but also ”the dissipation of a speculative bubble” and ”less hand holding by the Government to support the market.” Sentiment in the Paris Bourse is very pessimistic, Mr. Zavala said, adding, ”People get burned and burned again, and you find it quite difficult to find any buying interest.”
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BRADSHER, KEITH

Full text: [New York Times] Oct 1, 1990

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BUSINESS DIGEST

Tokyo’s latest economic news is completely incongruous: the markets are reeling as stock prices continue to plunge and interest rates soar. In the meantime, the economy is so vigorous that policy makers’ biggest worry is how to rein it in. Economic analysis. [D6.] MCA is expected to open talks with Matsushita next Sunday about a merger. Some argue it is a ”done deal.” [D9.[ Ross Roy Advertising has created a public service campaign that urges employers of the nearly 50,000 reservists who have been called into active service to ''Be a hero - give your employees the freedom to protect ours.'' Kim Foltz: Advertising. [D11.]
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Full text: [New York Times] Oct 1, 1990

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The Biggest Blue Chips

Despite the Mideast situation, stock market analysts are positive about the 6 largest US companies. Many analysts believe that these giants will suffer less and recover sooner than smaller counterparts. Exxon is the only one that does not rate a buy recommendation. Higher oil prices and liability problems from the Alaskan oil spill are deterrents. Investors who want oil company profits should consider other companies like Texaco. A new generation of powerful mainframe computers will boost IBM’s profits by about 10% in 1991. Its stock could move from a recent $104 a share to $140 within 3 years, a 35% increase. With its wide range of businesses, General Electric is globally well-positioned to survive a US recession. Well-diversified Philip Morris is a leader in 3 sectors that are usually unaffected by economic slowdowns: tobacco, food, and beer. Its stock is considered a good long-term buy. AT&T and Wal-Mart also show promise for the 1990s.
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Full text: [Money] Oct 1990

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ESOPs and Corporate Control

The effects of employee stock ownership plans (ESOP) on shareholder wealth are examined. ESOPs established in the presence of takeover activity reduce share values by approximately 4% on average. ESOPs also reduce share values if they are structured to transfer control away from outside shareholders by creating a new ownership block with veto power over takeover bids. Large ESOPs established with nonvoting stock, so as to preclude any immediate control transfers, result in a significant increase in share values. The wealth effect of any given ESOP thus depends upon both its incentive and control effects on the corporation. The results provide a perspective on the potential damage done to corporate control and shareholder rights by the gradual shift to restrictive supermajority rules, rather than simple majority rules, for corporate decisions.
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Gordon, Lilli A.
Pound, John

Full text: [Journal of Financial Economics] Oct 1990

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Seasonal Aspects of Anomaly Explanatory Power

Anomaly seasonality is documented for the firm size, price-earnings (P/E) ratio, and Value Line Timeliness rankings within a sample controlling for the potentially confounding effects of firm neglect and information deficiency. Firm size is found to be significant at the 0.01 level of significance during the first calendar quarter. During the April through December period, firm size’s explanatory power erodes, while the P/E and Ranking variables’ correlation with returns becomes significant at the 0.01 level of confidence. Timeliness rankings are most valuable in the April-June and October-December quarters. Only the P/E ratio is significantly related to portfolio returns during the July-September quarter. A discussion of investment theory in the light of these seasonal relationships is presented.
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Krueger, Thomas M.

Full text: [Journal of Business Finance & Accounting] Autumn 1990

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Seasonal Aspects of Anomaly Explanatory Power

Anomaly seasonality is documented for the firm size, price-earnings (P/E) ratio, and Value Line Timeliness rankings within a sample controlling for the potentially confounding effects of firm neglect and information deficiency. Firm size is found to be significant at the 0.01 level of significance during the first calendar quarter. During the April through December period, firm size’s explanatory power erodes, while the P/E and Ranking variables’ correlation with returns becomes significant at the 0.01 level of confidence. Timeliness rankings are most valuable in the April-June and October-December quarters. Only the P/E ratio is significantly related to portfolio returns during the July-September quarter. A discussion of investment theory in the light of these seasonal relationships is presented.
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Krueger, Thomas M.

Full text: [Journal of Business Finance & Accounting] Autumn 1990

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Decomposition of Stock Returns

A market valuation model of the foreign subsidiaries of 49 UK multinationals is developed and tested empirically. The model disaggregates the shares of stock of the firms into those of their subsidiaries and, by extension, infers the relative returns of the regions of investment location. Although the information used – annual reports – was far from ideal, overall results tend to indicate the utility and validity of the model. The amount of detail that can be gleaned from market prices depends on company disclosure and reporting rules and conventions that presently leave much to be desired. Enhancing the value of market feedback can be a strong reason for providing an adequate geographic and industrial breakdown of activities, the realization of which will imply changes in the present rules and standards governing disclosure.
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Kellow, Ahmed

Full text: [Journal of Business Finance & Accounting] Autumn 1990

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Decomposition of Stock Returns

A market valuation model of the foreign subsidiaries of 49 UK multinationals is developed and tested empirically. The model disaggregates the shares of stock of the firms into those of their subsidiaries and, by extension, infers the relative returns of the regions of investment location. Although the information used – annual reports – was far from ideal, overall results tend to indicate the utility and validity of the model. The amount of detail that can be gleaned from market prices depends on company disclosure and reporting rules and conventions that presently leave much to be desired. Enhancing the value of market feedback can be a strong reason for providing an adequate geographic and industrial breakdown of activities, the realization of which will imply changes in the present rules and standards governing disclosure.
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Kellow, Ahmed

Full text: [Journal of Business Finance & Accounting] Autumn 1990

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Option Listing and Stock Returns: An Empirical Analysis

The effect of option introductions on the underlying stocks is examined. In addition to the price increase and volatility decrease that take place when new options are listed, the following empirical results are obtained and explained: 1. an increase in the value of the market in the 2 weeks surrounding the listing dates of new options, 2. an increase in the value of an industry index that excludes the optioned stocks, 3. the dissipation of the price and volatility effects in recent periods, and 4. the existence of an announcement effect in one subperiod of the sample and its dissipation in the last subperiod of the sample. Important and neglected interactions between the option and stock markets are suggested that cannot be explained by traditional option models.
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Detemple, Jerome
Jorion, Philippe

Full text: [Journal of Banking & Finance] Oct 1990

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Valuation of Earnings, Cash Flows and Their Components: An Empirical Investigation; Professional Adaptation

Security valuation has been in the forefront of accounting and finance literature for many years. Although there is a consensus that stock prices are related to future cash flows of the firm, there is controversy about the usefulness of ex post earnings and cash flow measures in signaling stock prices. A cross-sectional equity valuation model is used to examine the incremental valuation content of earnings and cash flows in the marketplace. A sample of retail firms is used for the 4-year period 1980-1983. The results, which were unequivocal, indicate that: 1. operating earnings have valuation content beyond operating cash flows, 2. operating cash flows do not have valuation content beyond operating earnings, and 3. the components of earnings, such as operating cash flows and accruals, provide the same information to the market about future expected cash flows. These results will add to the understanding of how the stock market reacts to accounting disclosures.
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Charitou, Andreas
Ketz, J. Edward

Full text: [Journal of Accounting, Auditing & Finance] Fall 1990

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Valuation of Earnings, Cash Flows and Their Components: An Empirical Investigation; Professional Adaptation

Security valuation has been in the forefront of accounting and finance literature for many years. Although there is a consensus that stock prices are related to future cash flows of the firm, there is controversy about the usefulness of ex post earnings and cash flow measures in signaling stock prices. A cross-sectional equity valuation model is used to examine the incremental valuation content of earnings and cash flows in the marketplace. A sample of retail firms is used for the 4-year period 1980-1983. The results, which were unequivocal, indicate that: 1. operating earnings have valuation content beyond operating cash flows, 2. operating cash flows do not have valuation content beyond operating earnings, and 3. the components of earnings, such as operating cash flows and accruals, provide the same information to the market about future expected cash flows. These results will add to the understanding of how the stock market reacts to accounting disclosures.
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Charitou, Andreas
Ketz, J. Edward

Full text: [Journal of Accounting, Auditing & Finance] Fall 1990

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Theories of Earnings-Announcement Timing

Empirical research has indicated that, when a firm releases its earnings report earlier than expected, its stock price, on average, rises. If the report is late, its stock price declines. Two alternative explanations for these findings are analyzed, each based on the premise that some firms with unfavorable earnings increase their reported income through earnings management. In one case, earnings management necessitates a reporting delay; in the other case, a delay is caused by the manager’s desire to observe other firms’ earnings first. Both cases lead to market reactions consistent with the empirical findings. Two avenues of research have the potential of resolving the disparity between the documented empirical findings and the existing theories of earnings-announcement timing: 1. a repetition of the tests of Kross and Schroeder (1984), and 2. an exploration of other explanations for the empirical findings.
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Trueman, Brett

Full text: [Journal of Accounting & Economics] Oct 1990

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Options Markets and the Information Content of Accounting Earnings Releases

Evidence is presented showing that the information content of firms’ accounting earnings releases is lower, on average, after exchange-traded options are listed on their stocks. The sample comprised 214 firms listed on the Chicago Board Options Exchange and American Stock Exchange options exchange from the period April 1973 through December 1986. The results are consistent with the following predictions: 1. Options provide investors with a more cost-effective tool for trading on information. 2. More private information is produced about these firms after options listing. 3. The information in earnings releases is preempted to a greater extent after options listing. Because options listing is endogenous, it is difficult to infer from the evidence that options listing causes these informational changes.
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Buy Gas, not Stocks?

The Dow Jones Transportation Average (DJTA) has suffered more than a 40% decline since September 1989. Research advises people to save money to buy gas, not stocks. According to R. N. Elliott’s Wave Principle, crowd behavior moves from excessive pessimism to excessive optimism in recognizable patterns that appear in the price movements of freely traded markets. Five waves in the direction of the main trend are followed by a 3-wave countertrend. In the summer of 1989, the DJTA was nearing the end of the 5th wave of a long-term advance. Analysis supports the case that a grand supercycle peak has been registered in the stock market. The wave count evidence is sufficient to substantiate that far more than a cyclical or temporary peak occurred in 1989 in the DJTA. Current patterns and oversold extremes suggest that a rally is imminent. However, as long as the DJTA continues to trace out 5-wave declines, indicating the main trend is down, any rally by the DJTA will only amount to a partial retracement.
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Allman, Dave

Full text: [Futures] Oct 1990

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