Mafia Buzz Issue 3

Finance Week

It is estimated that almost 70% of retirement funds in SA are now DC funds and many members are not aware that they are in charge of their own investments. Lorette du Toit has the following advice for such members:

1. 
   Contribute as much as possible. (Got to be kidding! See this fund as a lost cause. DIY.)
   
2. 
   Preserve your retirement assets by never withdrawing benefits. (Take your money and run!)
   
3. 
   Lobby for costs to be kept low.
   
4. 
   Choose the right option.
   
5. 
   Save as soon as possible to all the power of compound interest to kick in. (I agree, but DIY!)
   

(I was stupid enough to invest for about 20 years in a RAF. Every year it cost me a day to get a certificate for tax purposes – without the certificate, no deduction – they never sent me one so I had to go into town to get it. One year I went to get my certificate only to find that the company had disappeared. At least this investment loss I made was tax deductible!) (9^th, page 38)

Draw a vertical line. Call the top “Active” and the bottom “Passive”. Cross the vertical line with a horizontal line. Call the left “Positive” and the right “Negative”). Leaders can be described by these characteristics, e.g. Jimmy Carter was active/negative, Lyndon Johnson and Richard Nixon were negative/passive, Ronald Reagan was positive/passive and George Bush is active/positive. (16^th, page 16)

Vic de Klerk tries to explain how a FRA (forward rate agreement) works. He gives an example where for one year you can earn 11% p.a. and for two years 10% p.a. He says that the effective second year rate is 9% ((11% + 9%)/2). This is not correct. The second rate is actually 8,11% p.a. (1,11x1,0811 = 1,20). (16^th, Page 41)

Bayer and GlaxoSmithKline were fined $258 million by the US Attorney’s office for allegedly defrauding the US healthcare provider Medicaid. (23^rd, page 6)

The top six firms world wide by revenue are PwC, D&T, KPMG, E&Y, Grant Thornton and BDO, in that order. PwC’s revenue was R1,6 billion and BDO’s R125 million. (23^rd, page 11)

Shaun Harris believes that investors should start nibbling at equities as he feels that the market is under-valued at present. He suggests phasing money in slowly “until the outcome for equities is more clear”. (When is the outcome ever clear?) (23^rd, page 42)

Fortune

Prof. Paul Miller, accounting professor at University of Colorado: “Management believed the market was valuing companies based on a multiple of their revenues so they thought ‘Aha’ all we have to do is to get our reported revenue up and we will have a higher stock price. It worked for a while but eventually the market caught on.” (How the market fell for this in the first place is a wonder!) (14^th, page 86)

In 2002 AOL Time Warner announced write-offs totalling $98,7 billion, beating the record of $56,1 billion set by JDS Uniphase in 2001. Other goodwill and intangible asset write-offs in 2002 were $40 billion (Quest), $11 billion (Clear Channel) and $6 billion (SFX Entertainment). (14^th, page 86)

The top companies in the US based on revenue for 2002 were Wal-Mart Stores, General Motors, Exxon Mobile, Ford Motor, General Electric, Citigroup, Chevrontexaco, IBM, American International Group and Verizon Communications. The top ten when ranked by market capitalisation are Microsoft, General Electric, Exxon Mobil, Wal-Mart Stores, Pfizer, Citigroup, Johnson & Johnson, IBM, American International Group and Merck. (14^th)

CEOs give themselves piggy pay packages. An example is Honeywell’s CEO who received a base salary of $1,5 million, a bonus of $1,9 million, make-whole payments of $2,7 million, other payments of 0,9 million and restricted stock and options of $61,5 million. (Now you understand the push for accounting for share based payments!). (28^th, page 25)

When Congress legislated against CEO pay abused, the Law of Unintended Compensation kicked in, e.g.:

• 
  They imposed an excise tax on payments above 2,99 times the base salary – companies made 2,99 the new minimum and covered any excise tax.
  
• 
  They tried to shame CEOs by requiring better disclosure of their pay – CEOs could now see how much others were earning so they tried to beat the other guy.
  
• 
  They declared salaries of over $1 million to be non-tax deductible – salaries were increased to $1 million and huge stock option grants were given.
  

With reference to pay packages: “The more troughs a pig feeds from, the fatter it gets!” (28^th, page 25)

Managers, who after all are just hired hands, start behaving as if they own the place. Owners, mostly unit trusts and pension funds, behave as if they do not own the place – in fact they vote in accordance with the directions given by the managers of the companies they own! Until the owners start taking control, the pigs will be running the farm. (28^th, page 27)

Retirement pay in the form of SERPs is stealth-compensation - hardly anyone knows about it. This compensation takes the form of a percentage of an employee’s pay every year to produce a guaranteed payout on retirement. It is offered by half of public companies to their top dozen or so officers. Due to collapsing stock markets and low interest rates, about 40% of companies are seriously considering cutting pension benefits to ordinary staff. However, SERP give-aways are actually on the increase. This compensation applies even if the executives are fired. (28^th, page 31)

AOL Time Warner’s CEO certified the company’s financial statements except for $49 million in revenue. After investigation, this figure has now climbed to $190 million with another $400 million suspect. This, of course, impacts on the bottom line as well. The company has acknowledged that further re-statements might become necessary. (28^th, page 57)