The Price Sales Ratio Revisited
March 11, 2010
The Price/Sales Ratio (PSR as commonly understood, is simply the subject company’s market capitalization divided by its most recent twelve months sales. The PSR was first popularized in Super Stocks in 1984 by Kenneth Fisher, the son of legendary investor Phillip Fisher. In subsequent years, studies have demonstrated the superiority of price/sales over price/earnings.
To be sure, Fisher never advocated the use of price/sales as a stand alone indicator of value. It is just one tool to use when in conjunction with other tools to estimate a company’s value. The PSR is particularly useful when looking at a company without earnings as the more commonly used P/E ratio is meaningless.
Financial Well-Being and Regulation: the Obama Effort
March 8, 2010
Financial well-being is, in many ways, analogous to our physical well-being. We need periodic check ups and doctoral oversight, but in general true health is dependent upon the discipline and persistence and care that we bring to our own daily lives. However in other ways financial well-being in not the same. Our physical existence is limited to our natural selves: there are limits to how humans can grow and change. This is not true of the financial system.
In the world of finance we can innovate and change and find ways to get around regulation. This has been the modus operandi of the financial system during my entire professional career. Consequently, the financial system of today in substantially different than the financial world that existed in the 1960s. I have called the last fifty years or so the age of financial innovation. Regulation and oversight of the financial system does have to change. But, we need to be careful about the change in regulation and oversight that results and not just give in to populist calls to “put a stop to the greed on Wall Street”.
Be Careful What Bandwagon You Jump Onto
March 3, 2010
The Financial Times printed excerpts of an interview with Duncan Niederauer, the Chief Executive of NYSE Euronext. (See “NYSE chief cautious over March rally”, http://www.ft.com/cms/s/0/ae73a390-29e6-11de-9e56-00144feabdc0.html.) In the interview he stated that the recent rally in the stock market was being driven by short-term traders trying to take advantage of the high volatility that currently existed in the financial markets. He continued that the high trading volumes achieved where concentrated in a “handful of stocks.”
Is Treasury’s TARP Debt Already Monetized? Part III
March 1, 2010
The discussion continues for one more post. I ended the last post with these words:
“The hope is that as the banking system works through its problems, TARP funds will be returned and the mortgage-backed securities will mature or be sold back into the market allowing the balance sheet of the Federal Reserve to contract back to where it was in the summer of 2008. The banking system is apparently holding onto reserves to protect itself and that is why they are really not lending. The idea is that if they don’t need these excess reserves they will return them. This is what the Federal Reserve is planning to happen. Let’s hope that they are correct!”
Securitization Accounting Rules Are Changing
June 1, 2009
Accountants are changing the rules governing most of the shadow banking system and almost no one is noticing. About 10 days ago the Financial Accounting Standards Board confirmed that by year end “securitization accounting” will be different and the changes are likely to have a bigger effect on financial institutions than mark to market accounting. The new accounting rules will make it much harder for financial institutions to count securitizations as “off balance sheet” transactions and will reconsolidate, i.e., put onto the balance sheet, a large number of transactions that are currently accounted for as off balance sheet. Read more
Goodbye GAAP, Hello IFRS. Will You Be Ready?
May 26, 2009
It’s become clear throughout the past five years that GAAP and financial reporting in the United States is on a clear path toward change in the form of a convergence with the International Financial Reporting Standards (IFRS). World events, most notably the London G-20 Summit, have been calling for a single, high quality set of accounting standards that all companies will use to file. The SEC has recently made definitive steps toward this change, enough to make me believe that IFRS will be here before we know it, so it’s time to get ready. Read more
FASB’s Mark-to-Market Changes: Effective or Not?
April 14, 2009
With Wall Street responding favorably to FASB’s mark-to-market accounting rule changes, the question becomes: what will the long term effects be? After much speculation and debate, FASB decided to loosen the mark to market accounting rules in FASB 157, allowing balance sheets to stray away from the strict fair value accounting that is believed to have intensified the market turmoil. Critics of fair value felt, in a quick summary, that with toxic assets like the mortgage backed securities having to be written down to next to nothing, the banks’ reserves were to be hit dramatically. This destroyed the ability of banks to lend, causing companies to not be able to borrow, which caused the economy to down-spiral into a global recession. Instead, banks now have the freedom to value assets using their own valuation models, at what they feel they would be worth under “normal” market standards.
