Globes Online reported that three investment houses downgraded their recommendations for Amdocs due to the company’s reported results and forecast for continued difficulties. The investment houses, Oppenheimer, Cantor Fitzgerald and Wedbush Morgan all expect second quarter rwesults to lag.

Oppenheimer changed their recommendation from “Buy” to “Hold” and reduced their target price to $34. Cantor Fitzgerald also cut its recommendation to “Hold” from “Buy” and slashed its target price to $16 from $16. Wedbush Morgan had previously changed its recommendation from “Strong Buy” to “Buy.” The latest change brings the recommendation to “Hold”.

Amdoc’s shares rose yesterday 1.8% to $17.35.

Good Article? Pull it from here:
Amdocs Downgraded

Sales for the most recent quarter (MRQ) vs the quarter one ago are down from $9,831 billion to $9,089 billion or 7.5%. Sales, on a trailing twelve month (TTM) basis, are up about 5.2%. Standard and Poors projects a sales decrease of 9% in FY 09 reflecting the weak global economy.

Similarly, EPS for the quarter ending January 09 were down to $0.25 from $0.33 a year ealier. This represents a 23% decline. EPS (TTM) vs TTM one year ago are down 2.9%. S&P forecasts FY 09 EPS of $1.15. First Call reports consensus estimates of $1.25 for FY 09 with a range of $1.18 to $1.33.

Of greater concern to us, is margin contraction. Gross margins have been contracting since 2004 when GM stood at 68.6%. S&P forecasts FY 09 gross margins of 64%. Operating profit margins have also contracted. Reported FY 04 operating profit margins were 28.5%. For the TTM, operating profit margins contracted to 22.3%. On the plus side, net margins have held fairly steady at 20%.

Cisco’s balance sheet is strong. It has about $5.04 in cash per share on hand and generates $2.03 in free cash flow. Long term debt to equity is about 0.17 and total debt to equity is about 0.19. The current ratio is a healthy 2.79.
Return on equity is a respectable 23.8% and ROA is 14%. These are very solid numbers and compare very favorably with industry averages.

Standard and Poors has given CSCO a twelve month price target of $16.00. First Call reports a mean price target of $19.20 with a range of $13 to $33. Price targets were lowered 14 times in the past four weeks.

Value staocks are most often defined in terms of low P/E or low P/BV ratios. Cisco is trading at 13X trailing earnings and in-line with the S&P 500. Its P/BV is 2.55; not low. In a recent post, I wrote about the use of the Price/Sales ratio. In this case, the PSR is no bargain at 2.4X.

Our preference is to use a less common measure to determine value; the Price/Free Cash Flow ratio. We think FCF is a better metric to use than earnings. Free cash flow can be used to fund growth (organic and through acquisition), reduce debt, pay a dividend or repurchase debt. Free cash provides value to the shareholder, if it is wisely invested.

Cisco has a current P/FCF ratio of 10X. A year ago, it was 16X. The five year average P/FCF for CSCO is 19X. Going back a few more years, the seven year average is 22X.

Cisco reported $1.72 in free cash flow for the TTM ending January 09. Over the next twelve months, we project CSCO to generate $1.96 in free cash. At current prices, the forward P/FCF is about 8.25X. Our target value for CSCO is $28.96, representing a forward P/FCF of about 14.8X. This is less than year-ago levels and reflects continuing weakness in the global economy.

Disclosure: I hold a long position in CSCO.

Good Article? Pull it from here:
The Bargin Bin: Cisco Systems

It seems that every piece of information currently being released carries with it the claim that “this decline was less than expected” or ‘the decline was smaller than the last information released.” These are taken as signs of hope.

Even the results of the Treasury’s “stress tests” on the banks are accompanied by the assessment that the major banks that have just been examined are better off than was thought. Therefore, the banking system is not in as bad a condition as feared, and, stock prices can now continue moving upwards.

Fed Chairman Bernanke is still the leading spokesperson and “cheer-leader” in the administration and he stated this week that the economy will begin to expand later this year. So we must be at or near the bottom if the administration thinks so. Right?

We still have the nay-sayers out there claiming that things remain in terribly bad shape. Nicolas Taleb, of Black Swan fame, is saying that the economic situation is worse than it was in the 1930s because world markets are much more integrated now than it was then. And, Nouriel Roubini continues to sound alarms about how bad things could get. Part of his argument rests on the fact that the worst case scenario used in the Treasury’s “stress test” is out-of-date due to the recently released estimates issued by the International Monetary Fund that financial sector losses have doubled in the last six months. Yet are their claims sounding awfully shrill these days amidst the hope others are seeing?

Where are we?

To me, the uncertainties still outweigh any real sense of which direction the economy might take. I would tend to lean on the side that we have not seen the bottom yet, but what odds would I place on this possibility? Maybe I would give odds of 2-to-1 that the economy still will decline further. Maybe they should be 3-to-1. Maybe they should be 3-to-2. Somewhere in there.

First off, I am not convinced that the banks are coming out-of-the woods yet. Even if they are able to obtain more capital, I don’t see their lending picking up in any major way. Personal and business bankruptcies are still on the rise and there are still several major “black clouds” on the horizon that threaten that the storm that has hit bank balance sheets is not over. There are still large companies that are going out-of-business on a regular basis, in retail, in commercial real estate, in some areas of manufacturing, and we are waiting for the full ramifications of the collapses in the auto industry. Car dealerships are being closed, parts supply companies are on the edge, and the spread of these closures are affecting many other organizations and geographic regions. If unemployment is going to continue to rise, since it is a lagging economic indicator, then there still are houses that are going to need to be sold if not foreclosed upon and some credit card debt and auto loans that will need repayment.

And, speaking of cars. Last time I looked the price of a barrel of oil was approaching $60. Where is the price of oil going? And, the price of other commodities? The Financial Times has had several articles recently about why the price of commodities, including oil, might be going higher if a trough or bottom has been reached. What would higher commodity prices do to any recovery?

Then there is the level of interest rates. The government held an auction today for $14 billion of 30-year Treasury securities. The result? The yield of the new issue came out at 4.288% higher than the expected 4.192%. This caused a decline in bond prices with the 10-year Treasury note trading around 3.30% up from 3.14% late last week which was above the 3.00% level, reached earlier last week a level that had not been crossed since November 24, 2008.

How high are these interest rates going to go and what impact will these higher rates have on mortgage rates and corporate rates? We are already seeing spreads between Treasuries and corporates reach levels since last October and November. And the interest rate spreads on lesser credits have also been increasing. And, there is still much more Treasury debt to come.

Furthermore, the economic structure of the United States (and the world) has changed. The manufacturing base is going to be different in upcoming years and everything is going to be more connected technologically than before. And, what if the personal savings rate in the United States reverts back to 8% or so as it was before 1992? We are not going to be able to force employment, human or otherwise, back into the same industrial and financial structure with the same employment intensity as existed before this economic collapse.

I am not intentionally trying to stay on the “dark side”. It would be great if things were bottoming out and the economy were about to start on an upward path once again. But, there still seem to be too many “unknowns” out there, unknowns that relate to serious problems, for us to get our hopes up too high at this point. Managements must still re-focus their businesses and must deleverage their balance sheets. Boards of Directors still must make sure they have the right executives in the right places, and if the Boards don’t do this then the shareholders must become more aggressive. Many executives that managed in the pre-2007 period, I believe, are not the executives to lead our companies in the post-2009 period.

Are we at a tipping point? Are we at or near the bottom of the downturn?

The most important questions are still going unanswered: even with the results of the Treasury stress tests. Will a major bank fail? How many regional banks might fail? So far there have been 32 bank failures this year, up from 25 last year and 8 the year before. How will a General Motors bankruptcy impact the economy? What other possibilities are out there?

Other company failures? Bloomberg reports today “Moody’s is forecasting the default rate among high-yield companies globally to soar to 14.8 percent by year-end from 8.3percent in April as companies that financed a record amount of high-yield, high-risk debt leading up to the credit crisis struggle to refinance.”

And, I haven’t mentioned the debt overload that exists throughout the country. The list goes on.

It seems to me that what we are seeing a lot of these days is wishful thinking. I really haven’t seen anything yet that one could argue was a “hard” fact pointing to a bottom of the downturn. I really don’t think we are going to see any “hard” facts in the near future, so the stock market and other areas of the economy will just to continue to live off of wishful thinking. This is a situation made for traders. Uncertainty creates volatility and traders feast off of volatility. I guess it is good to know that at least some people profit from this environment.

- John Mason

Disclosure: This article was taken from Mase: Economics and Finance with the permission of the original author.  All disclosure questions should be refferred to the original author.

- John Mason

Disclosure: This article was taken from Mase: Economics and Finance with the permission of the original author.  All disclosure questions should be refferred to the original author.

Credit is given to quantitative easing for the drop in the dollar LIBOR rate. The three month LIBOR now ranges between 50 and 60 basis points over the target Federal Funds rate chosen by the Federal Reserve. This is the lowest this spread has been in a long time. For the five years previous to September 2008, the time the financial markets collapsed, this spread averaged between 20 and 30 basis points.

This move reflects the efforts of the Bank of England and the European Central Bank to push short term interest rates lower and to engage in monetary actions that pump more liquidity into the banking systems even though the interest rates do not show a proportional response. The drop is given as evidence that perhaps interbank lending is increasing in these nations and that this is possible evidence of a thaw in credit extension.

In the United States the Federal Reserve was particularly active in April although the total factors supplying bank reserves has increased only modestly in the last four banking weeks, rising just $21.2 billion. All of the action has happened within the balance sheet.

The interesting movement has come in excess reserves in the banking system, a series that is not seasonally adjusted. Excess reserves showed a huge rise, $100.0 billion, in April 2009 from March. I reported earlier that excess reserves in the banking system in April averaged $824.4 billion, almost the entire size of the Federal Reserve’s balance sheet one year earlier.

The combination of these two factors, basically the small increase in Federal Reserve sources funding the monetary base and the huge increase in excess reserves in the banking system, indicates that much of the activity was internal to the Fed’s balance sheet and not a source of monetary expansion. Let me highlight the major changes.

Within the banking system itself, excess reserves averaged $771.3 billion in the two weeks ending March 25. This figure jumped to $804.8 billion in the two weeks ending April 8 and then rose to $862.4 billion in the two weeks ending April 22. This was tax time when funds flow into government accounts in the banking system but there were apparently other things going on as well in government accounts. In the two weeks ending May 6, excess reserves dropped back to $777.5 billion, roughly equal to the level they were at in the two weeks ending March 25.

One could argue that the April bulge was just “temporary”. However, a $100.0 billion increase in the excess reserves in the banking system is “eye-catching” when this measure only averaged around $2.0 billion for the eight months of 2008 before September of that year.

What was going on in the Federal Reserve? I can only describe the Fed’s activity as part of its efforts to provide liquidity to different sectors of the financial markets and this is a part of the plan to provide quantitative easing to the financial system. Specifically, the amount of securities that the Fed holds outright jumped by $166.1 billion between the banking week ending April 15 and the banking week ending May 13. United States Treasury securities increased by $54.8 billion during this time, the largest increase in these holdings since the Term Auction Facility (TAF) was established in December 2007.

TAF was introduced to help allocate reserves into the banking system faster and more directly to the banks that needed the reserves at the time. It was an effort to increase liquidity in the banking system to facilitate bank portfolio adjustments in the face of the “liquidity crisis” that occurred in December 2007. The Fed continued to use Term Auction Credit over the next 15 months or so to facilitate bank portfolio adjustment.

The “new” liquidity problem, however, seems to be connected with the Treasury bond market. Now, the Fed has entered into a program to supply funds to the Treasury market to help keep long term interest rates down, a goal it has not yet achieved. However, we see this shift in the quantitative easing strategy as the Fed is increasing its holdings of United States Treasury securities while at the same time letting the amount of funds allocated to the banking system through Term Auction Credit decline by $27.0 billion, the first substantial decrease in this total since the program began.

There is another sign of quantitative easing and this is in terms of the amount of Mortgage Backed Securities the Federal Reserve holds. During the four weeks ending May 13, 2009, the Fed’s holdings of these securities increased by $96.9 billion to $384.1 billion. Obviously, the policy makers at the Fed believed that there was serious liquidity problems in this segment of the capital market that needed their attention.

This huge increase brings the holdings of Mortgage Backed Securities up to two-thirds, 67%, of the Fed’s holdings of United States Treasury securities. Who would have ever imagined that this would happen?

Again, reflecting the shift taking place in where the quantitative easing is being applied, the Commercial Paper funding facility at the Federal Reserve fell by $83.3 billion from the banking week of April 15 to the banking week of May 13. This decline can be interpreted as an indication that some easing is taking place in short term money markets, allowing the Fed to focus more upon the long term. The Fed, at its peak, had supplied over $250.0 billion to the financial system through this facility.

Furthermore, there was a drop in Central Bank Liquidity Swaps during this time period of $47.0 billion. Currency markets were apparently stable enough during this time so that these borrowings could be reduced. However, there are still about $250.0 billion in swaps still outstanding to other central banks.

This last month gives us a good picture of how quantitative easing seems to work. There was very little change in the total amount of funds that the Federal Reserve supplied the banking system, but there was substantial Federal Reserve activity within its balance sheet as it readjusted its focus upon which markets it believed needed the greatest amount of assistance with regards to the supply of liquidity. The crucial factor in this exercise seems to be that once the liquidity needs of a market are satisfied by the market itself, then the market participants that used the Fed’s facility pay back the funds that they have used. This allows the Fed to address other segments of the financial markets to, hopefully, satisfy the liquidity needs in these other areas.

Overall, the dream is that all the funds will be paid back to the Fed as the financial system and the economy turn around and begin to function effectively again. Not only will this allow the Fed to cease being the “fireman” that must run from fire-to-fire putting out the latest blaze, but will also allow it to get out of the “fire-fighting” business itself and allow its balance sheet to shrink back to an appropriate size. We are not there yet, but it does provide some comfort to see that the Fed can move from one current fire to another without another massive expansion of its balance sheet. However, whether this can really be accomplished remains to be seen.

- John Mason

Disclosure: This article was taken from Mase: Economics and Finance with the permission of the original author.  All disclosure questions should be refferred to the original author.

The fund will invest in options tied to commodities and Treasury bonds, among other things. The strategy is a “Black Swan” strategy aimed at taking advantage of wide swings in the prices of these assets.

Of course, the fund is connected with Nassim Nicholas Taleb, the infamous author of the best sellers “The Black Swan” and “Fooled by Randomness.” To Taleb, the probability that high rates of inflation might result from the stimulus efforts of governments around the world has substantially increased. This means that the possibility of a “fat tail” event happening, the chance that hyperinflation might occur, is a reasonable wager.

Mr. Taleb, in an interview, argued that, “We think these things are going to see massive volatility.” These things being the price of corn, crude oil, copper, the stocks of oil drillers and gold miners, and the price of Treasury bonds, and the value of the United States dollar. (For a more information see, “Black Swan Fund Makes a Big Bet on Inflation,” http://online.wsj.com/article/SB124380234786770027.html#mod=todays_us_money_and_investing.)

This effort is nothing new. It is just a high profile attempt to do what international investors have done for the last fifty years. (I know, it has been done for longer than that but I am just focusing on the modern era of imprudent government budget management.) And, there has been nothing more successful than betting against large fiscal deficits that put pressure on central banks to monetize the debt. The examples are numerous; see George Soros, the British Pound, in 1992 and Fancios Mitterand, the French Franc, in 1983 and more! The currencies of countries following Keynesian policies in which government budget deficits were used to stimulate economic growth and low levels of unemployment were easy targets for the international investment community.

Of course, inflation is not a problem now. And, many would argue that deflation is the real near term threat. Yet, the United States government, among others, is following a very “Keynesian” stimulus program with deficits that dwarf anything that has been seen in the past. The Federal Reserve System has forced an enormous amount of reserves into the banking and financial systems. For example, the year-over-year rate of increase of total reserves in the banking system was over 1,900% in April. The Fed’s purchase of mortgage-backed securities stood at $428 billion at the close of business on Wednesday May 28.

Chairman Bernanke has stated that the Fed will “reverse out” of these positions once the economy begins to pick up some speed. He may believe this and be very serious about achieving this end, BUT there still are the large government deficits. How is the Fed going to handle them?

Not very easily, as is evident from the behavior in the bond market over the past couple of weeks. In fact, history is on the side of those that believe that the Fed cannot control long term interest rates over the longer run. Central banks all over the world have tried before, but success has only come in the short run and at the expense of monetizing too much of the government debt. This is the worldwide experience of the past 50 years! Governments all over the world have not been able to successfully combat the will of international financial markets if the participants in these markets believe that the fiscal policy of a government is not being conducted in a prudent manner.

The Federal Reserve got the first real taste of this in the last two weeks. There is more to come. The cycle is that the central bank tries to keep down long term rates by buying government securities. This is successful for a while, but the market observes that the central bank is monetizing the debt and so more pressure is put on bond prices forcing long term interest rates higher. Continued central bank efforts to hold down rates only result in the purchase of more government securities which then leads to more market concern about this monetization of debt. Another round of central bank activity can follow. This picture of the dog chasing its tail only ends in frustration for the central bank and finally resignation that its goal cannot be achieved.

And, during this time, the value of the currency of the country falls. Sound familiar?

When does the inflation occur?

That is uncertain. It will occur some time in the future. We know, however, that with large amounts of uncertainty, volatility increases.

In the meantime, you have a good argument for buying options which is what the Universa effort is going to do.

The question then becomes one about whether or not another Black Swan will occur. How are you betting?

From a technical standpoint some important indicators such as breadth, advances versus declines, volume and moving averages are signaling that this rally has a ways to go yet. The markets are shrugging off the GM bankruptcy and other bad news, at least for now.

One of the better technicians that I collaborate with is my friend Richard Wendling who writes the ever-interesting web site The Bear Facts Specialist Report at :

http://www.bearfactsspecialistreport.com/.

I sincerely encourage you to read his May 29th NYSE Dow Jones Market Report http://www.bearfactsspecialistreport.com/. Richard believes that if the DJIA can break above and close above 8,700 that the next real “resistance” isn’t until 9,600. I tend to agree.

Will the DJIA and the S&P 500 go higher than those levels? It is possible. But like Richard, Chris Weber and a number of other uncanny analysts, If the DJIA can make it above 10,000, there is a very high probability that it will be followed by a quick and rather scary 20% retracement back to around 8,000.

The speculators among us will be buying some of the “shorting” inverse ETFs like [SKF: 20.36, 0.00 (0.00%)], [SBB: 35.79, 0.00 (0.00%)], [DOG: 50.77, 0.00 (0.00%)], [SH: 50.42, 0.00 (0.00%)] and [DUG: 12.03, 0.00 (0.00%)] if this “irrational exuberance” gets way ahead of itself.

If you’re itching to invest a little money now, my sources tell me that insiders at the big three US telecom companies, Verizon [VZ: 29.73, 0.00 (0.00%)] AT&T [T: 25.62, 0.00 (0.00%)] and much riskier Sprint-Nextel [S: 3.60, 0.00 (0.00%)] are accumulating their own shares as their stocks has corrected.

Remember, Verizon and AT&T pay rich dividends, between 6.3% and 6.6%, and in this old world that’s nothing to sneeze at. I own some of both and am thinking of buying some more at current prices.

Another idea comes from my colleague Dr. David Eifrig Jr. M.D. the editor of the excellent “Retirement Millionaire” newsletter. In the June 2009 issue he writes about a closed-end fund that is worthy of everyone’s consideration right now:

“The fund I’m recommending holds a portfolio of blue-chip stocks: McDonald’s [MCD: 65.53, 0.00 (0.00%)], Coke [KO: 53.35, 0.00 (0.00%)], Procter & Gamble [PG: 63.32, 0.00 (0.00%)], etc. But the part I like best is it also invests in a unique security called convertible bonds.

“Unlike a regular bond that simply pays interest and then gives back the principal at maturity, a convertible bond allows you to profit from run-ups in the company’s stock. You see, a convertible bond includes an option for the bondholder to “convert” his bond to common stock at an agreed upon price in the future.

“You get paid income from the bond to wait and see if the company does really well. If it does, you get the upside too. It’s the closest thing I know to having your cake and eating it too.

“But that’s not all. To earn even more income, the fund uses a simple option strategy known as call writing against its blue-chip stocks.

“Between the income of the bonds and the premiums from the covered calls plus the dividends of the stock, this fund pays out income at a 9% annual rate. Between the discount to NAV and the income the fund generates we can easily earn 15%-18% per year over the next two years.

“The fund you should consider is the Nicholas Applegate Equity and Convertible Income Fund [NIE: 17.02, 0.00 (0.00%)]. The fund invests in convertible bonds with up to 40% of its assets and the remaining 60% in stocks. It generates extra income with call options on about 70% of its stocks.

“We’re buying a diversified portfolio of bonds and stocks at 84¢ on the dollar. The portfolio is putting out 9% per year in income and dividends.

“No matter what the markets do as the new stimulus package kicks in… we’ll make capital gains of 19% as the discount to NAV disappears and an easy 9% a year in income. Plus, the stock portion gives us added upside should this be the start of a new bull market.”

Dr. Eifrig recommends to his subscribers that they don’t pay more than $13 a share for [NIE: 17.02, 0.00 (0.00%)]. As I write this it is trading at $13.66.

I, Marc Courtenay, personally believe that Dr.Eifrig’s newsletter is one of the best kept secrets in the investment publishing world today.

For a mere $39, I subscribed and not only did I get this terrific investment idea but he had another 10 money-saving ideas and secrets that I hadn’t heard about from any other sources (I’m not compensated for telling you about it).

It is a pleasure for me to tell my readers and subscribers about outstanding services such as these and I hope it adds to your arsenal of ideas.

Whether the bear market rally keeps soaring for awhile longer or stalls and back-tracks, we can keep our heads about us, make some money, and be what I call a “Black Swan Investor”. More about that later.
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! – Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

- Marc Courtenay

Disclosure: The author is long VZ and T. This article was taken with permission from Check the Markets. All other disclosure questions should be referred to the original author.

Background

Since 2005, the convergence to IFRS was apparent with the European Union requiring companies listed on the EU regulated stock exchanges to file consolidated statements using IFRS.  The SEC responded to this in 2007, agreeing to accept these IFRS statements from the foreign issuers without forcing reconciliation to GAAP.  This proved the SEC’s acceptance and belief that the international standards were in fact high quality.  Throughout this time, strong debate evolved regarding the United States adopting IFRS.  FASB and IASB were working together, and in September of last year, they both reaffirmed their commitment to converge all major accounting standards by 2011, the year in which every capital market except the US will be using IFRS as a basis for financial reporting.  The SEC again came into play just recently, proposing a roadmap for IFRS adoption that concludes with a 2011 decision on whether the international standards will become mandatory for all US issuers.

SEC’s proposed roadmap consisted of a timeline towards a mandatory conversion in FY 2014, with companies being able to voluntary convert as soon as this FY 2009.  Regardless of when they choose to make the switch, they must begin their IFRS reporting in the annual 10-k, where they must file audited IFRS statements for the year of adoption and the two preceding years.  For example, a company that decides to wait until the mandatory conversion at the beginning of FY 2014 must file their 2012 and 2013 statements under IFRS as well as 2014.

While there are many similarities, there are also quite distinct differences between US GAAP and IFRS that need to be illustrated.  Of utmost importance, GAAP standards are highly rules-based, consisting of over 17,000 pages of detailed guidance.  IFRS, however, is much more principles-based with its 2,500 pages, requiring the managers to exercise much more judgment in their valuations.  For example, revenue recognition is one of the most complex elements of GAAP accounting due to its comprehensive guidance on industries and different types of contracts.  Under IFRS, revenue recognition is based on a single standard with general principles applicable to different transactions. The reasoning behind this is put forth by Tom Jones, Vice Chairman of the International Accounting Standards Board (IASB) that develops IFRS.  He responds to criticisms on the lack of rules by claiming, “When you write rules, smart people can get around them.”

The debate has been intense regarding whether the SEC will mandate a complete switch to IFRS or a convergence between IFRS and GAAP.  Recent evidence leads to the belief that the adopted IFRS will be more of a convergence.  A few weeks ago FASB changed its GAAP guidelines on fair value measurements and mark-to-market accounting.

As a result, EU banks under IFRS have been expressing concern that the US banks have an advantage.  The IASB is expected to issue guidance on the subject that is very similar to FASB’s, showing agreement between the two boards and a converging of GAAP with IFRS.  Public comments to the proposed roadmap show the agreement among companies that negotiations like these need to happen to lessen the cost of adoption, a prominent concern regarding the switch.  At this point in time, the IFRS still needs development, but once the certain areas the SEC deems weak are taken care of (ex; accounting insurance contracts), the standards will be ready for adoption.

It Will Happen Before You Know It

Although SEC Chair Mary Schapiro has stated that a transition to IFRS in the United States “will take a back burner” due to the overhaul of the regulatory system, the rebound of the global economy needs to bring with it a global accounting standard.  With Brazil, Canada, Chile, India, China, Japan, and Korea all committed to adopting IFRS, as well as the current EU members already under the standards, IASB member John Smith recently told a European audience that “it is in the interest of the United States to adopt IFRS in the next five years,” and that the “cost to the US of failing to adopt will be high.”  This makes sense, considering the fact that if every other country in the world is using the international standards, how would the US maintain credibility in the accounting realm?  With the inevitable trend towards globalization that has been hitting the economy, not adopting IFRS would weaken American companies’ strength in the global capital markets.

Committees and groups are in place to make the convergence happen in the most efficient way possible.  The Financial Crisis Advisory Group (FCAG) was established by FASB and the IASB to give guidance to the two boards about the implications of the global recession and the changes that may need to be made as a result.  Their job is to recognize where reform needs to be made and ensure the proper improvements are enforced.  The FCAG fully supports IFRS, and have written letters to the G-20 summits expressing the urgency.  The topic made it into the G-20 discussions in London, with the world leaders conveying that a global standard needs to happen.

Why It Matters to Investors

Throughout the next few years, companies will be making the steps towards filing their statements under IFRS.  Certain aspects of the statements will change.  Revenue recognition will be different, along with specific standards regarding pensions, leases, loan provisions, and many other items.  To give an example, under US GAAP an operating lease must be expensed through the income statement and cannot be recognized on the balance sheet, thereby reporting lower earnings.  Under IFRS, an operating lease need not be expensed as it may be held by a lessee as an investment property if certain conditions are met.  It is specific differences like these, as well as the extra judgment that comes along with a principles-based system, that has resulted in companies under IFRS often not reporting higher earnings.  Additional expenses, however, will definitely occur.  When the EU companies in 2005 made the switch from local GAAP to IFRS, the Institute of Chartered Accountants in England and Wales estimate that European companies spent about .05% of revenues in the first year on making the switch.  Performance based compensations and dividends will be affected.  The entire education process will need to be changed, all the way from accounting students to senior executives (under Sarbanes-Oxley the CEO and CFO must attest for the accuracy of the statements).  Each statement will be affected, and investors need to stay aware and educated about the implications.

What Investors Need To Do

Stay in tune with FASB and IASB’s agenda to be up to date on what is happening next.  Understand the differences between US GAAP and IFRS and their impacts on financial reporting.  Make sure to read through the full disclosures, as a move from a rules-based system to a principles-based system will result in more detailed footnotes.  By staying educated and knowledgeable of what is happening in the accounting world, when the time comes investors will be able to focus on the company’s operations instead of the change in accounting standards.

-Phillip J. Harper

Disclosure:  None

The bill was passed with an overwhelming majority of a 90-5 vote. President Obama has been behind making more stringent regulations on credit card companies even before he was in office. The White House is likely to continue to support the bill, as the bill will increase disclosure and fight interest rate increases for consumers. According to the Wall Street Journal, Senate Banking Committee Chairman Christopher Dodd stated: “Credit cards are a tremendously valuable and useful tool for consumers, providing them with relief during critical moments… This is a very important industry.… We just want it to work better.”

Among some of the regulations which will be imposed on credit card companies include not allowing issuers to retroactively change the rates on existing balances, setting a date on which bills must be sent by, and eliminating fees for payments with the exception of expedited orders. The biggest regulation is the prevention of retroactive rate increases on a consumer’s balance. Credit card companies have been using this tactic to reduce the risk of their credit exposure frequently throughout this recession. The bill will now prevent them from changing the rate until the account is 60 days delinquent.

The bill will mainly affect large credit card issuers like Bank of America [BAC: 16.85, 0.00 (0.00%)], J.P. Morgan [JPM: 43.15, 0.00 (0.00%)], Wells Fargo, and Citigroup [C: 3.97, 0.00 (0.00%)]. Credit card companies like Discover Financial Services [DFS: 14.97, 0.00 (0.00%)] and American Express [AXP: 40.76, 0.00 (0.00%)] will also be severely impacted by this bill. These players profit from not only fees they charge consumers, but also the rates on the balances. They thrive in times when they can charge high interest rates on consumers who fall behind on their payments or people who are financially uneducated.  The legislation will mean lower profit growth in any economic recovery. In the credit card companies’ defense, many of these rate increases they have been imposing may be justified considering the increases in credit card delinquencies. According to the Federal Reserve, approximately 6.5% of consumer credit-card loans were delinquent in the first quarter. This compares to a delinquency rate for credit-card loans of 4.8% last year. With delinquencies for these loan portfolios to increase, expect many of the issuers to significantly boost their rates on existing balances before this is officially passed by the house.

The bill, if passed, will not directly affect card payment processors like Visa [V: 93.25, 0.00 (0.00%)] and MasterCard [MA: 249.97, 0.00 (0.00%)]. These companies operate as a “pay-as-you-go” service and do not have anything to do with a consumer’s balance or bill payments. These companies profit from transactions which customers make and charge the individual merchants for card usage. Generally they make a profit on every transaction, so the more credit card volume, the more profitable they are. The bill may indirectly affect these companies as card issuers may be more reluctant and wary about who they issue a new card to, which may slow down the transaction and volume growth they have witnessed and are expecting to see over the next 5 years.

This bill has received overwhelming support from politicians, and will likely be passed by the house and signed into law by President Obama very soon. Watch for some activity from the credit card industry, as many of the banks who have the largest number of cards outstanding to either reduce their exposure to the industry or find other tactics to make its division more profitable.

-Steve Murray

Disclosure:  The Fund the author is associated with is long JPM.

The one thing I can tell you about the markets is to do your homework and never base a judgment off one piece of good news.  I imagine that life is probably much better for those that needed to issue high yield debt as signs of relief from both the debt and equity markets is enabling companies to improve (or reinforce) their financial position. Ownership values, as determined by the stock market, are making it easier for companies to issue debt across the board. This link between equity and debt is very important because any increase in share prices signal improving business conditions which should allows sub investment grade entities to service new debt with improved cash flows. Do not get me wrong, things are not what they used to be by any means, but there are signs of improvement from the economy and investors should assuage any concerns of a prolonged extreme bear market.

A large part of this relief comes from a slow down in the macroeconomic downturn we have been experiencing since late 2007. GDP and unemployment are falling at slower rates while consumer confidence is returning. The markets are also more confident in our financial system as the LIBOR has fallen from its highs last year to a little under 100 bps on the 3 month LIBOR. This improvement in liquidity has helped companies finance themselves, although at higher rates, but at terms that satisfy investors while keeping costs within appropriate bounds. No one can deny that the various government facilities have helped bond issues by the large financial institutions as many of them have been backed by the government. This basically gives you the solid AAA credit rating with a yield that is significantly higher than the meager yields on a US Treasury of the same maturity. All of these factors have really improved investor confidence, which is a major driver in the market. If the investor is not confident in a company or a security, they will not bite.  It seems the tides have turned and investors are once again hungry for some risk.

Junk bonds are some of the more riskier securities one could buy. Historically the market has been strong for such issuances, but these issuances were hurt like everything else in the credit crunch. When investors are deciding to return to these riskier securities, the most risky of all debt, it is a sign that confidence is returning.  Last week saw one of the largest junk bond offerings get filled as the paper was bid up, a sign that should really help us feel better about the markets. If these less healthy companies are attractive now, the slow turn in the credit markets and the bull run taking place in equities should be here to stay. The over all sentiment on the economy is improving and with the Fed suggesting a 2010 recovery, it seems that the credit and equity markets will be leading this. It is good to see an increased appetite for risk, after all, high risk leads to a high potential reward.

I am not saying that that you should dip into the risky bonds like many institutional investors are, but to simply understand that this indicates a pretty certain recovery. Although it is still expensive on a historical basis for these corporations, it signals that investors feel that they are being compensated for the risk they assume. The days of cheap debt are long gone as models and risk behaviors are adjusting and corporations meet the high yield expectations of the bond markets. It appears that risk is now back in play and that the capital markets should benefit from it as the economy improves and companies understand the new kind of investor that has surfaced from the credit crisis. Keep an eye on the markets, do not fear, but learn and adapt to the dynamics of post credit crunch investing.

- Santosh Sankar

Disclosure: None.