I came across a very gud article on bloomberg (mentioned hereunder) which states that bonds outshines equities in a 30 year race, this article considers this point as nadir and concludes the culmination of the bear phase indicating a point to buy. Also this has happened since 19th Century, hence marking a note in history. I hope you will find it useful and relevant.
http://www.bloomberg.com/news/2011-10-31/bonds-beating-u-s-stocks-over-30-years-for-first-time-since-19th-century.html
http://www.bloomberg.com/news/2011-10-31/bonds-beating-u-s-stocks-over-30-years-for-first-time-since-19th-century.html
Are ETFs Hurting Your Stock?
A boon to investors, exchange-traded funds may dampen demand for small-cap shares and pose systemic risks.
Investors have poured money into exchange-traded funds by the bucket load in the past decade. But regulators are beginning to question what kinds of systemic risk these investment vehicles - which trade like stocks - harbor. They are also trying to understand how ETFs affect the share prices of the companies whose stocks they index. Both issues should be of concern to CFOs.
Similar to a mutual fund, an ETF tracks a basket of securities, like the Russell 2000. But ETFs are also highly liquid, because they trade like stocks, the price fluctuating throughout the day. ETFs had $1.2 trillion of assets under management as of 2010, up from less than $75 billion 10 years ago, said the Financial Stability Board (FSB) in an April 2011 paper, "Potential Financial Stability Issues Arising from Recent Trends in Exchange-Traded Funds." There were 2,379 ETFs as of 2010, up from 92 in 2000, according to a comprehensive report on ETFs last year by the Ewing Marion Kauffman Foundation.
For the month of September, the trading volume of ETFs and their debt-market cousin, exchange-traded notes, reached $2.1 trillion, about 36% of all U.S. equity-trading volume, according to the National Stock Exchange, an electronic stock market.
The market has exploded. But ETFs may inhibit the proper functioning of the capital markets and rob individual stocks - small-cap ones - of liquidity. The evidence for the first charge: the rising correlation of stock price movements during the decade of the ETF boom. Securities of different companies are more often moving in the same direction at the same percentages - as much as 60% of the time, according to some studies.
A high correlation in common-stock performance, the authors of the Kauffman Foundation paper write, is a signal that the markets are "paying no attention to the performance of individual companies" and are not "properly allocating capital between different assets of financial instruments in such a way as to properly discipline risk and reward success."
ETFs also harm small-cap stocks, the foundation paper says, because hedge funds and other investors have turned to small-cap ETFs to get exposure to the sector. Trading an ETF is cheaper and allows the investor to enter and exit the exposure instantaneously. Meanwhile, many of the small-cap stocks in these indices are illiquid. If there is a massive sell-off in an ETF, the ETF provider may have to unwind the instrument by selling the underlying securities. "Who will buy the underlying instruments when this happens?" the Kauffman Foundation asks.
Consider an analogous situation that could occur with an ETF based on gold. The SPDR Gold Shares ETF holds more than 1,280 tons of bullion, "more than most central banks," says the Kauffman Foundation. The ETF gives investors a way to easily trade gold, but gold is normally not easily tradable. "Once retail investors decide to sell gold, will sovereign funds stand there with outstretched hands saying, 'Let me take this off your hands'?" asks the foundation paper.
Sophia J.W. Hamm, an assistant professor at Ohio State University's Fisher College of Business, says the tendency of less-informed investors to put their money into ETFs rather than individual stocks is hurting liquidity. At the top level - the market for all individual stocks - "we don't really know what the net effect of [ETFs] is," says Hamm, who published a paper on the subject in August. "But on the markets of individual stocks, yes, [ETFs] are a negative. They decrease liquidity."
The systemic-risk issue with ETFs comes from the growth of "synthetic" ETFs. Highly prevalent in Europe, synthetic ETFs don't generate investor returns by holding a basket of stocks. Instead, they enter into an asset swap - an over-the-counter derivative - with a counterparty to replicate some kind of securities index, like the S&P 500.
The ETF provider, often a bank, has to back the ETF with a basket of collateral. That collateral, however, doesn't have to match the assets of the tracked index. Indeed, it usually consists of less-liquid instruments, such as unrated corporate bonds and small-business loans. According to a letter to European regulators from the CFA Institute, an association of investment advisers, "there is an incentive for banks to sell synthetic ETFs through their asset management branches in order to raise funding against illiquid portfolios of securities which could not otherwise be financed in the repo market, or at a significant haircut."
If the performance of a synthetic ETF falters and investors want their money back, the ETF provider could face problems liquidating the collateral, or finding other means of funding it, forcing the provider or bank to suspend investor redemptions, the FSB says. If the ETF provider honors investor redemptions, it could face a liquidity shortfall institutionwide.
A lot of the proposed solutions to the ETF problem focus on transparency for ETF investors - particularly important where the ETF has counterparty and collateral risk. But the Kauffman Foundation paper suggests that issuers of small-cap stocks examine what they get from being indexed in an ETF. Formerly, a company's executive management wanted its stock to be included in broad indices because it was seen as enhancing the company's stock price. But now that the benefits are questionable, according to the Kauffman paper, issuers should reconsider.
The SEC needs to "restore the balance of power relative to ETFs" by allowing companies to "opt in" to inclusion in an ETF, the Kauffman paper suggests. That might slow the indexation of stocks, especially thinly traded ones "for which the unwind risks in the event of a major sell-off are much greater," the paper concludes.
© CFO Publishing Corporation 2009. All rights reserved.
Can IFRS 9 prevent Greek tragedy?
IFRS 9, the global accounting standard on financial instruments, is among the most heavily scrutinised projects of the International Accounting Standards Board.
Recent events in Greece have dragged it further into the spotlight as some claim early adoption will help ease the burden of EU members' sovereign debt, while others insist changing accounting rules is not the answer.
Speaking at a recent conference, new chairman of the IASB Hans Hoogervorst said the standard - which is not yet finished - would "give us a little bit more leeway in terms of Greek government bonds", claiming for this reason, many at the European Commission "think we should adopt it quickly".
IFRS triptych
IFRS 9 Financial Instruments is made up of three parts, of which impairment accounting is most relevant for sovereign debt. During the financial crisis, the current incurred loss model attracted much criticism, as it was felt only recognising losses after the event crippled banks' ability to make provision for bad assets, effectively meaning there was no early warning system in place.
As a result, some called for a move to an expected loss model, a more forward-looking plan that takes into account current financial positions, as well as what can reasonably be expected to happen in the future.
An IASB spokesman said since the crisis, there has been great pressure on the standard setters to resolve the issue, and Hoogervorst's call for adoption of IFRS 9 is one part of their response.
However, some stakeholders have balked at a straight switch to IFRS 9, despite a recent survey by Deloitte indicating the majority of big banks think the global standard is an improvement on its predecessor, IAS 39.
Policymakers in Europe are loathe to officially adopt the standard before it is completed; the hedge accounting and asset/liability offsetting arms have yet to be finalised, and these two issues are in themselves among the knottiest problems in accounting standards.
In late 2009 Charlie McCreevy, then European Commissioner for internal market and services, wrote to the IASB saying "changed financial outlook and market improvements" meant IFRS 9 would not be adopted at that time. With sovereign debt tightening its stranglehold on member states, will politicians reconsider?
Barnier says no. Successor to McCreevy, he told a recent meeting: "I do not believe this will be the first solution to the problems we face in Europe at the moment," insisting that the Commission must see the other components of IFRS 9 before making a decision.
Transparency fears
Investors will be relieved, according to the CFA Institute, which warned Hoogervorst's plan will allow account preparers to avoid recognising losses and is "antithetical to the objective of transparent information".
The proposed IFRS 9 would allow some assets to be held at cost price and some at fair value - known as a mixed model - and proponents say this could support stricken banks that would otherwise see the value of their assets go through the floor.
The CFA Institute wants accounts to be prepared solely under fair value, otherwise known as mark-to-market, which would see assets valued at current market prices. For Greece and similar struggling economies this could be disastrous, as today's asset prices can be significantly lower than cost, leading to a "cliff effect" where balance sheet bottom lines plummet alarmingly.
CFA senior policy analyst Vincent Papa said investors want to see losses when they occur, and the proposed mixed model of impairment accounting "gives preparers too much freedom to present accounts as they see fit - a pure fair value model will take away this freedom".
Papa warned current proposals would present a "false plateau" and undermine investor confidence in the numbers, concluding: "The only way to solve this crisis is to tell it as it is."
Unsurprisingly, the IASB does not agree. Where IAS 39 used fair value measurement, IFRS 9 is based on expected cash flows, meaning if the holder of an asset is confident it will continue to bring in cash over its lifetime, it might not have to be written down to the extreme lows dictated by market prices.
To trade, or not to trade
Here, the purpose of the asset also comes into consideration. If, for example, a bank plans to hold a loan for its full term, it makes more sense to value it at cost, thereby avoiding recording huge losses derived from a current market price that is irrelevant to an asset that will never be sold.
Assets that will be held to full term and never sold are entered into the banking book, while those intended for sale go into the trading book. Under the IASB's mixed model, banking book assets (such as mortgages) would be valued at cost price, while trading book assets would be marked to market, and therefore run the risk of devaluing.
Here, the accounting standards become still more complicated. While banking book assets are recorded at cost price, which does not change, they may nevertheless be marked down (impaired) if the holder suspects they will not achieve the returns they hoped for when buying the asset.
In the case of Greece, this means lenders can value loans to the country at cost price - thereby avoiding the cliff effect of marking them to market - but may still be forced to write their value down if they think the debtor will not be able to repay the full amount.
Recent emergency meetings on sovereign debt indicated that the appropriate credit impairment might only be 21%, meaning lenders could reasonably expect to recover 79% of the value of loans to Greece. Under mark to market, this figure might be closer to 50%, illustrating Hoogervorst's point on IFRS 'easing the pain' of the current crisis.
Impair Vs. market
However, there are some who say the difference between IFRS 9 and IAS 39 is academic, given that the jury is out on the level of Greek debt that will be recoverable. If, for example, markets decide little debt will be recoverable, lenders would be forced to record significant impairment on it, and the cliff edge would still be precipitous.
Kathryn Cearns, technical accountant at Herbert Smith, said banks must remain convinced the debt is recoverable to justify valuing it at or near cost price. If they decide the asset return will be poor, they must write down its value (impair it) accordingly, and set aside provisions to cover expected losses. Additionally, bank regulators can choose to force a full write-down to market value simply for regulatory purposes, again meaning capital could be lost.
Iain Coke, head of financial services at the ICAEW, had similar words of warning. "There is much market uncertainty surrounding sovereign debt and impairment," he said. Many people believe Greek debt is heavily impaired and should be written down. This would hit balance sheets hard and could potentially have a similar effect as marking to market, if the impairment is so great as to wipe 50% off asset value.
Coke said holding assets at cost could in fact create a bigger one-off hit for banks as they would be forced to impair assets in one lump sum, rather than tracking a more gradual decline as market prices fall.
Mixed model
Despite this, the institute supports the IASB's mixed model, as do many other prominent voices in the market. Cearns said accounting under IFRS 9 is "simpler", while Coke described it as "more intuitive" and most respondents to Deloitte's survey think it will improve financial statements.
A dogmatic response to the complexities of sovereign debt has few fans, it would seem. While rushing headlong into adoption of the unfinished IFRS 9 could potentially alleviate sharp shocks, it might do little to stem Greece's freefall if the market has made up its mind that impairment is inevitable. At the same time, sticking with the old fair value-friendly IAS 39 has made it harder for banks to recognise the impact of recent developments in the Eurozone, even though some investors consider it a more truthful representation of market reality.
One thing is for sure - the IASB has a few months left to complete the standard, as no debt crisis seems to be enough to nudge the EU into adopting IFRS 9 in its half-baked state.
© Incisive Media Investments Limited 2011, Published by Incisive Financial Publishing Limited, Haymarket House, 28-29 Haymarket, London SW1Y 4RX, are companies registered in England and Wales with company registration numbers 04252091 & 04252093
LG Electronics (LG) has become the first company to be certified by a recognized authority for its flicker-free 3D notebook display. TUV Rheinland, one of the world's leading technical, safety and certification services and Europe’s highest authority on standards, has recognized the LG A530 notebook as being the first 3D notebook PC to offer a flicker-free viewing experience.
An American woman has refused to return a severance check for more than a half-million dollars she received by mistake from Viagra maker.
And now her former employer, drug giant Pfizer, is whining that she's playing "finders keepers, losers weepers".
Company VP Janet Rodriguez, 54, had worked for Pfizer for 16 years before being let go in December 2009 amid a round of layoffs.
On March 31, 2010, Pfizer issued Rodriguez from Bronx a check for 517,140.24 dollars.
But three and half months later, the manufacturer claimed it was all a big misunderstanding.
The company then fired off four letters and hired a collection agency as they sought to recoup 411,288.49 dollars, the amount it claimed Rodriguez was overpaid.
But she ignored Pfizer - so the company filed a lawsuit in Manhattan Supreme Court last week.
"By virtue of the fact that they bring this claim so late in the game, so long after their alleged mistake, [it] is just a cheap bullying tactic that we expect the court to see right through," New York Post quoted her lawyer, Saul Zabell as saying. (ANI)
