Wall Street; Stubbing a Toe on Primerica

Firoz Tarapore, assistant treasurer of both Primerica and Commercial Credit, said the company was the beneficiary of ”fortunate timing,” selling the notes early in the week, before unrest in the Middle East caused spreads in the bond market to widen. As for the rate, he deemed it to be ”right in with the pack” of similar issues. ”The stock has clearly broken down, and investor confidence has been shaken,” he said. ”We would continue to avoid the stock and believe that there is still some downside risk.” Primerica’s fans among Wall Street analysts say the A. L. Williams issue is an ”aberration” and ”an irrelevancy.” But Mr. [Myron Picoult] points out that Primerica’s promising plan to use Mr. [Williams]‘s aggressive disciples to sell the products and services of other subsidiaries, including Commercial Credit, could be derailed by the current turmoil.
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Henriques, Diana B.

Full text: [New York Times] Sep 30, 1990

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MARKET WATCH; A Whiff Of Deflation In the Air

LEAD: Around the world, something very close to a debt panic has begun. After years of expansion, credit now appears to be contracting. The great fear, as Nancy Reagan might say, is that borrowers will ”just say no” when it comes time to repay. Jim Grant, the editor of Grant’s Interest Rate Observer and the Cassandra of financial markets in the late 1980′s, notes that the plunging Japanese stock market is slashing bank capital in Tokyo, since banks have been allowed to count unrealized stock market gains as equity. ”If the marginal lender to the world was formerly a Japanese bank, it isn’t now,” says Mr. Grant. ”The world’s liquidity is at ebb tide.” ”The surprise might be that we have a Treasury bond rally rather suddenly,” argues Mr. [Chuck Clough], adding that if the wave of private defaults does grow, ”quality income streams will be extremely limited.” The safest high dividend stocks now would seem to be the utilities, which have been doing much better than most other stocks.
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Full text: [New York Times] Sep 30, 1990

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In Bear Country, Look Out and Be Logical

By definition, a bear market culminates in a collapse of confidence, when nobody can see a reason for holding stocks. That point, when all hope is gone, is when the bear market ends. Good economic news isn’t necessary to reinvigorate the market. In August, 1982, for instance, stock prices began to move up while the U.S. economy was still in recession-and they continued moving up, many trebling in value, until the Crash of October, 1987. Take the present. Predictions for the U.S. economy are almost unrelievedly gloomy. Many economists say recession is here; one who doesn’t, Edward Hyman of the C. J. Lawrence Morgan Grenfell investment firm, nonetheless foresees no economic growth for all of next year. Negotiations over the budget deficit in Washington reflect only futility in government. Faced with all that, an investor should look ahead and think logically. The U.S. economy won’t be in recession three years from now, a year after the next Presidential election. America’s own savings will fund the budget deficit, as they have begun to do now, and the trade deficit could vanish thanks to business with Eastern Europe and the Soviet Union as well as Mexico and Latin America.
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JAMES FLANIGAN

Full text: [Los Angeles Times (pre-1997 Fulltext)] Sep 30, 1990

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Staples: Competing for Profits

In Montgomery Securities’ recent report on the office products superstore industry, the San Francisco investment concern reduced its 1991 earnings estimates on four companies. The reason: “Increasingly competitive environment.” That brings us to Newton-based Staples, one of those companies. The $300 million-plus chain (fiscal 1991), cofounded by supermarket veteran Thomas Stemberg, pretty much had the business to itself at one time. Now Stemberg faces stiff competition and that includes his new Southern California territory. By the end of the year, about 75 percent of the chain’s stores will face competition compared with only 34 percent last year, says Dean Witter analyst Linda Kristiansen. (excerpt)
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Gilman, Hank

Full text: [Boston Globe] Sep 30, 1990

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Case Against Saul Offspring Stalls in Court

Four months after the Securities and Exchange Commission first filed suit against the son of B.F. Saul for breach of fiduciary duty in an insider trading case, the question of whether Frank Saul broke securities laws remains unanswered. The lawyers for Saul so far have successfully stymied any discovery in the case, effectively saving him from giving testimony. Peter D. Garvy, Saul’s friend and former roommate who is also a defendant in the suit, has taken a similar tactic in the civil case being litigated in federal court in Chicago. (excerpt)
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O’Hara, Terrence H.

Full text: [Washington Business Journal] Oct 01, 1990

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Leading Index Of the Economy Fell in August — Indicators Declined by 1.2%, Steepest Decrease Since Market Crashed in 1987

The government’s main yardstick for economic forecasting registered its gloomiest reading in August since the month after the 1987 stock-market crash. The index of leading indicators slid 1.2% in August, the month Iraq invaded Kuwait. It was the steepest decline since a 1.4% dive in November 1987. In July the index showed no change, and in June it rose 0.5%. The index is composed of 11 sets of economic statistics that economists believe tend to foreshadow overall movements of the economy. Seven of those statistics contributed to the index’s decline in August, pointing to weakness across the economy. Consumer confidence, stock prices, capital equipment orders, building permits, unfilled factory orders and the money supply all fell, and claims for unemployment benefits rose.
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By Hilary Stout

Full text: [Wall Street Journal] Oct 1, 1990

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Hazards await Wall St.

The Middle East crisis continues to be the one thing that affects stock prices most. But Wall Street has plenty of other things to worry about, including economic and earnings reports and a Treasury auction. Finally, Wall Street will keep a close eye on the Treasury’s quarterly bond auction, tentatively set for mid-November. If foreign investors – normally big buyers of U.S. debt – don’t buy, interest rates could jump.
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Gary Strauss

Full text: [USA TODAY (pre-1997 Fulltext)] Oct 1, 1990

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To Make Matters Worse, Now It’s (Ugh) October

Sep 1990 stock prices closed at their lowest level in 14 months and experts predict a gloomy Oct 1990 since historically October is one of the worst months for stocks.
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Strauss, Gary

Full text: [USA TODAY] Oct 1, 1990

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Hazards Await Wall St.

The Middle East crisis continues to be the one thing that affects stock prices the most. But Wall Street is also being affected by economic and earnings reports and a Treasury auction.
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Strauss, Gary

Full text: [USA TODAY] Oct 1, 1990

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It’s official: Recession is here Leading indicators fall for sixth month in a row, StatcCan says

OTTAWA – If there was any doubt about whether a recession is under way, an important indicator of future economic activity pointed down for the sixth month in a row. The composite leading indicator, measuring 10 signs in the economy ranging from furniture sales to stock prices, fell 0.2 per cent in July, following declines of 0.3 per cent in June and 0.4 per cent in May. The smoothed version of the composite leading indicator, averaged to iron out statistical wrinkles, fell 0.2 per cent to 143.4 points in July from 143.7 points in June.
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Larry Welsh Canadian Press

Full text: [Toronto Star] Oct 1, 1990

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Life Insurers Shifting Asset Management Policy

In Japan, life insurance companies are shifting asset management policy and are demanding more investment efficiency. There are rumors that life insurance majors will not try to boost holdings in bank shares. A change in thinking is seen in foreign bond investment, where the new approach is rooted in “total returns.” Changes also are taking place in the strategy of long-term stock investment; for life insurance companies, the scale of latent stock profits is an indicator of management stability. A shift toward making latent profits is already under way. Portfolios will be selected with greater scrutiny. The long-term investment stance of life insurers has consisted of “buying into the Japanese economy.” Accordingly, stock portfolios closely resemble the overall market value. Portfolio replacement will now be focused on issues for which satisfactory price growth is not anticipated and for which shareholder returns are lagging.
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Saito, Yu

Full text: [Tokyo Business Today] Oct 1990

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Stocks surge in New York

New York stock prices surged today after U.S. federal budget negotiators agreed on a deficit reduction package, but the Vancouver Stock Exchange continued its downward trend. The TSE oil and gas index fell one per cent as the November contract for light, sweet crude fell $1.56 to $38.05 a barrel in New York Mercantile Exchange trading.
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Full text: [The Vancouver Sun] Oct 1, 1990

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Economic performance guide declines for 6th month in row

The composite leading indicator, measuring 10 signs in the economy ranging from furniture sales to stock prices, fell 0.2 per cent in July following declines of 0.3 per cent in June and 0.4 per cent in May. Seven of the 10 signs measured by the composite leading indicator fell, with spending on housing leading the declines. The smoothed version of the composite leading indicator, averaged to iron out statistical wrinkles, fell 0.2 per cent to 143.4 points in July from 143.7 points in June.
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Full text: [The Vancouver Sun] Oct 1, 1990

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The Stop-Loss Start-Gain Paradox and Option Valuation: A New Decomposition into Intrinsic and Time Value

The downside risk in a leveraged stock position can be eliminated by using stop-loss orders. The upside potential of such a position can be captured using contingent buy orders. The terminal payoff to this stop-loss start-gain strategy is identical to that of a call option, but the strategy costs less initially. This article resolves this paradox by showing that the strategy is not self-financing for continuous stock-price processes of unbounded variation. The resolution of the paradox leads to a new decomposition of an option’s price into its intrinsic and time value. When the stock price follows geometric Brownian motion, this decomposition is proven to be mathematically equivalent to the Black-Scholes (1973) formula.
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Peter P Carr
Robert A Jarrow

Full text: [The Review of Financial Studies (1986-1998)] Fall 1990

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Simple Binomial Processes as Diffusion Approximations in Financial Models

A binomial approximation to a diffusion is defined as “computationally simple” if the number of nodes grows at most linearty in the number of time intervals. It is shown how to construct computationally simple binomial processes that converge weakly to commonly employed diffusions in financial models. The convergence of the sequence of bond and European option prices from these processes to the corresponding values in the diffusion limit is also demonstrated. Numerical examples from the constant elasticity of variance stock price and the Cox, Ingersoll, and Ross (1985) discount bond price are provided.
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Daniel B Nelson
Krishna Ramaswamy

Full text: [The Review of Financial Studies (1986-1998)] Fall 1990

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Shareholder-Value Maximization and Product-Market Competition

We investigate product-market competition when managers maximize shareholder value rather than their expected discounted value of profits. If shareholders are imperfectly informed about future profitability, shareholder-value maximization can lead to either more or less aggressive product-market strategies. Lower rivals’ profits lead investors to believe that the firm’s costs are low relative to those of its rivals and that the industry’s prospects are poor. If the former (latter) inference dominates, each firm tries to lower (raise) its rivals’ profits to increase its own stock price. We also consider implications for corporate, financial structure.
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Julio J Rotemberg
David S Scharfstein

Full text: [The Review of Financial Studies (1986-1998)] Fall 1990

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Auditor Reputation: The Impact of Critical Reports Issued by Government Inspectors

In recent years, UK Department of Trade (DOT) investigations into the affairs of a specific company have sometimes been critical of the work done by its auditors and reporting accountants. The impact of this criticism on the auditor’s reputation is assessed, and the stock price performance of the auditor’s listed clients is examined. Results show a small wealth loss for the audit clients. The impact of the DOT criticism on an audit firm’s number of listed clients and its future audit fees is also examined. Compared to a control group, the criticized auditors appear to suffer a small loss in market share based on a number of listed clients and on audit fees. The evidence suggests that criticized auditors incurred economic losses from the damage to their reputations. This is consistent with models of reputation advanced in the industrial organization literature.
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Firth, Michael

Full text: [The Rand Journal of Economics] Autumn 1990

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Growing International Co-Movement in Stock Price Indexes

The interrelationships among stock prices in major world stock exchanges have been investigated by applying the vector autoregression (VAR) approach to daily stock price indexes in Tokyo, Frankfurt, London, and New York for the period of January 1986 through November 1988. Evidence of a significant structural change with regard to the correlation structure and leadership was found in the major world stock markets since the stock market crash of October 1987. The impulse response function analysis showed that the degree of international comovements in stock price indexes has increased significantly since the crash. The role of the immediately preceding market in the determination of stock prices was also greatly enhanced after the crash.
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Jeon, Bang Nam
von Furstenberg, George M.

Full text: [The Quarterly review of economics and business.] Autumn 1990

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Indicator points to recession

The composite leading indicator, measuring 10 signs in the economy ranging from furniture sales to stock prices, fell 0.2 per cent in July following declines of 0.3 per cent in June and 0.4 per cent in May. House construction and furniture and appliance sales posted large declines reminiscent of the 1981-82 recession. The smoothed version of the composite leading indicator, averaged to iron out statistical wrinkles, fell 0.2 per cent to 143.4 points in July from 143.7 points in June.
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Full text: [The Ottawa Citizen] Oct 1, 1990

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For Boom the Bell Tolls

The 26% plunge in stock prices in mid-October 1987 leads many forecasters to believe that the US is experiencing its 9th postwar recession. The economic downturn might be worse than average because, for the first time since the 1930s, both fiscal and monetary policies are not easing to cushion the downturn. Gramm-Rudman, the Federal Reserve, and the prevailing view in the economics profession all say that Washington’s deficit must be reduced in order to relieve pressures on the financial markets so that interest rates might come down. However, a sliding scale of deficit cuts once the economy strengthens would seem to be a more effective way of reaching the president’s goal of cutting $500 billion over 5 years than simply taking the same amount out of each year. One positive factor is that consumers’ attitudes may brighten when they see that their worst fears may not be realized. In addition, the jump in petroleum prices is likely to spur business growth in energy conservation.
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Kellner, Irwin L.

Full text: [The Manufacturers Hanover Economic Report] Oct 1990

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