Professor Elam

Accounting & Investing Info for San Antonio A & M

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  • Professor Elam

    Twittering to the White House

    Wed Jan 13, 2010

    THis articles analyses the reasons for Sarah Palin taking a position as analyst at Fox News, now the most watched news station in America. 

    I am not making this post necessarily in support of Sarah, but to point out she is doing the same thing that Barack did in leaving Hillary in the dust. 

    The traditional route to higher office was to endure endless rounds of interviews on Meet the Press type programs and tours of cities making campaign speeches. Now a position as a 'news analyst' or possibly a talk radio host, grants on an instant audience, without the bother of answering questions. Like Barack, she can use Facebook and Twitter to issue statements. These will be covered by the media, but again skirt the necessity for immediate answers, though of course the blogshpere will post question. 

    In other words the social network has allowed politicians a way around the traditional media, no wonder newspaper subscriptions are down. 

  • Professor Elam

    Pressure on Geithner Heating Up

    Wed Jan 13 2010

    The latest revelations about communications between Treasury Secretary Geithner and AIG 

    Now there are calls for his removal from office if not prosecution for securities law violation. 

    We have linked to many articles the last few months about the behind the scenes shenanigans involving the various bailout schemes. But the gist of this is

    Hank Paulson was the Treasury Secretary under Bush and a former Goldman Sachs CEO

    Paulson picked the number of $700 billion out of the air, and got Congress to vote for it

    Geithner had worked with the New York Fed  and was deemed the only person capable of handling the crisis as Obama took office, despite failing to pay income taxes, he was approved

    The bailout money was used to cover Credit Default Swaps, guarantees that Goldman investments in various bonds and derivatives, issued by AIG to Goldman. Indeed more money was funneled to AIG for this purpose that Goldman had at risk but it was pretty much the entire captial structure of Goldman. So if AIG had not stood good for those CDS, Goldman might have gone the way of Lehman. Oh by the way, ex CEO of Goldman Hank Paulson made the decision not to save rival Lehman. This has been cited as precipitating the lock up of the entire commercial paper market. 

    Meanwhile Mish cites letters and other studies showing that the so called stimulus has not created any jobs and that no one can track whether this is in fact happening. 

  • Professor Elam

    SARBOX Any Positive Results

    Sarbanes Oxley created new bureaucracies and made auditors, who were guilty of many things, billions of dollars. And then we had the worst financial crash ever. Swell, that worked didn't it?

    Please read this article about SARBOX.  This will be required reading in the Ethics Class. 

  • Professor Elam

    Early Warning Sign?

    Tuesday Jan 12 2009
    Picture 2

    Many analysts are now tracking the VXX. Note, the VXX is a
    reverse bullish indicator, low VXX readings mean an optimistic stock market.
    High VXX readings mean maximum put buying and pessimism.  Let’s take a look at its early warning
    signs to see if it can help two years in a row.  Last year the VXX dropped below the Bollinger band, two
    standard deviations in May, This is the extreme low and a sign that the market
    has reached some sort of maximum optimism as the VXX is an indication of put
    buying. It quickly reversed in a week, doing the opposite in just two months
    registering a throwover in July. It pulled back and  made a higher low in late August but not a throw under as in
    May. After that, the successful re test of the lower band, it was off to the
    worst crash in decades.

    Looking back, then as now, the VXX made a pretty good low in
    late February but it proved to be another early warning shot…

     

    Picture 3

    The VXX throwunder registered a false signal in May, (hm
    like Feb 2008) well the VXX did then rally but it was not the end of the stock
    market rally. Note we put the SPX at the bottom. There are ample reasons to be
    looking for a top now however. The markets have completed the same 52% or so re
    tracement they completed in 1930. Bullishness is high and some 450 stocks are
    above their 50 day moving averages. If the same scenario plays out we are
    single digit months away from a significant market turn.

     

     

  • Professor Elam

    Intellectuals and Society

    Picture 4  The internet can bring distinguished Speakers right into your computer, here is an example as NRO interviews Prof Tom Sowell on his latest book. Prof Sowell usually avoids tv interviews as he does not like to be boxed in by the questions or later editing. A rare opportunity to hear this well published author speak. 

    Tom Sowell website is here. 

  • Professor Elam

    Blink

    Malcolm Gladwell has become one of our best selling authors. I have read Outliers and just finished Blink. Picture 7 This book is all about first impressions, and that means really fast first impressions. The TSA harasses people at airports. The Israelis are trained to look at people's eyes and determine who is the most likely person to be attempting some covert act. The book traces Ted Williams, a psychologist that could even analyze horses at the track, food tasters, you name it. Somehow Gladwell has the ability to link an idea for a book with a wide net of success examples  that reflects his ideas. And as always he is a master of expressing technical in easily understood jargon, his description of seven years of research on facial muscles to reflect intent is a good example.  

    A couple of years back on this blog I suggested that prior to a job interview, students would do well to read some Sherlock Holmes. Holmes used deductive reasoning, then a popular crime solving technique popularized by Scotland Yard. My point was that in an interview, the interviewer will make a thin sliced decision (Gladwell's term) in five minutes about whether to pursue the interviewee further. So the person being interviewed probably has no more than two or three minutes to

    size up the interviewer

    make note of what details about the person are available, observe their office, what photos are on the desk, how are they dressed, is there is diploma on the wall, from what school, etc

    and then make a decision on what approach will work best, what will interest the interviewer in you?

    Hmm, along the way be sure to read Carnegie's How to Win Friends and Influence People. 

    Gladwell uses baseball player Ted Williams to illustrate the impossible, Williams says he see the ball hit the bat but time still photos show this is simply impossible, yet Wiliams clearly had an ability to sense that intersection of ball and bat that eluded other players. 

    Good reading to further your education I would say…

  • Professor Elam

    The Gathering Storm, in College Tuition

    Picture 6
    A good rule of thumb is that tuition rates will increase at about twice the general inflation rate. During any 17-year period from 1958 to 2001, the average annual tuition inflation rate was between 6% and 9%, ranging from 1.2 times general inflation to 2.1 times general inflation. On average, tuition tends to increase about 8% per year. An 8% college inflation rate means that the cost of college doubles every nine years. For a baby born today, this means that college costs will be more than three times current rates when the child matriculates in college.

    http://www.finaid.org/savings/tuition-inflation.phtml

    How many times has the government or worse, various up start private 'schools' promised to re train laid off workers, usually in reaction to an economic slowdown?  Answer, every time there is an economic slowdown. Reports indicate that diploma mills are now being sued, and with increasing frequency.  But, the idea that we will some how re train laid off construction workers to have green jobs  or manufacturing employees, hello Chrysler, to become information professionals lives on. 

    As the table shows, colleges have routinely increased tuition far above the economic benefit over time of obtaining a college degree. Administrators endlessly trot out numbers that obtaining a college degree will increase one's lifetime earnings. Well as business and government has decided that running say a dormitory is a diploma required job, yes but this masks the lack of jobs for oh so many that choose feel good programs which do not necessarily lead careers in which there are employment shortages. I watched a distinguished college president lament over the decline in the quality of anthropology degrees recently. Who other than Margaret Mead ever made a living as an anthropologist?  It is an interesting field of study, I grant that, but not one in great demand. If one wants a degree in say anthropology fine, but if one wants a job and now, that is a rather different matter. Yet education industry has blurred that distinction. 

    Prior to the GI bill, the sheer difficulty of stopping work for four years kept the number of college grads in synch with demand. Since the GI BIll, Pell Grants, Student Loans, colleges like home builders have responded to credit availability with lots of product, much of questionable outcome value in my opinion. 

    Our point is that education is a bubble. There are still jobs for folks that can re build jet engines and others that pass technical certifications whether it be in plumbing or accounting. But the idea that one can pay thousands of dollars for a multi month class that will promote one to a career is a bubble going to burst. 

  • Professor Elam

    1930 All Over Again?

    In Prechter's report this month: "this week's closing high brings the index to a 53% retracement of wave 1, which is nearly the same percentage as the 52.3% registered by the countertrend rally following the crash of 1929. The Dow fell 85% over the next 27 months." 

    Elliotwave.com 

    Here is what this means in chart form.


    Picture 1
    I had to re configure this to an arithmetic instead of a log scale so that Prechter's point would be clear. We are now at about the same point we were in 1930. The waterfall drop is clear. Also note how much higher are now than then, ie, the potential for another drop that far is now arithmetically possible. 

    Picture 3
     

     Then the market collapsed from its 294 recovery high to yes 41 by 1932.Could that happen again, well look at CITI symbol C. 

    Picture 4
    Let's see, 3.50 divided by 50 is, yep as Gary Cooper would say, 7%. So CITI has collapsed 93% from its high  a mere two years ago. The important point to note is that this is the result AFTER TARP funds, bailouts, fictional balance sheets, mortgage re purchases, etc. As the nursery rhyme goes


    All the King's Horses and All the King's Men could not put Humpty Dumpty back together again.

    In this case the King's man was Robert Rubin and the rest of the near universally admired graduates of Harvard, Yale et al. Overlay that with the fact that CITI is still one of the four largest banks in the country which collectively hold some 60% of all bank deposits and one can see the potential for trouble. 

    But you say, the stock market is up and that must be a prediction of better times ahead. Well, we have a Wave 2 or B up from March 9 or however one wants to label it. Wave one down to 666 in the first graph called for correction and we now have it. We also have 24 straight months of declining employment despite TARP, unemployment , etc. As Mish   and just about every other blogger in the universe are noting, all the governments are conducting one giant Ponzi scheme. This weekend Governorator Arnold asked for more money from Washington to prop up California. 

    We have detailed the horror story unfolding across America in states and cities. They are scrambling to make good on promises to both employees and retirees. The promises cannot be kept, liabilities dwarf present discounted cash flows, period. 

    Businesses are laying off employees and or slashing payrolls by lowering salaries. Governments are not, an eighth grader can see where this is going. 

    The stock market is up as the money the government has printed has simply been speculating on stocks instead of employing someone. And so stocks are up with an ever slowing rate of increase as the supply of money to do this winds down. Indeed we are up but a couple of hundred Dow points since September. 

    Picture 5
    Robert McHugh  reports that 80% of the gains since March 9, 2009 have been on Mondays. Gee could this mean the banks and brokers are betting long on calls on Friday and then cashing out on Monday. Take a look at the last four Mondays above, including today, gee amazing. And now the banks and brokers are paying record bonuses let's see,for investing our TARP money by gambling in the markets. 

    Meanwhile the US just missed another terrorist attack which would have spread a plane and its passengers across Detroit. What would the reaction in the markets have been if that had happened? We have had an increase in real terrorism, Fort Hood, Afghanistan, other arrested in New York, and so it goes. 

    Caution is warranted in the markets. 


     

  • Professor Elam

    Gilbert Arenas

    Gilbert Arenas was suspended by the NBA for bringing a gun into the locker room. 

    Fox News Sunday reports that just four years ago, Arenas was their Person of the Week!  Arenas was then distinguishing himself by taking care of a young boy who was the only family survivor of a fire. 

    Socionomics holds that public opinion is not nearly as tolerant of bad behavior in a bear market. This is what has happened to Arenas. In addition there was so much bad behavior by NBA players (google NBA arrests to see what I mean, one book alleges that half the NBA has been convicted of a crime) that he has been arguably made an example. 

  • Professor Elam

    The Future of CPAs

    First, remember that CPAs lost their ability to regulate themselves withe the passage of Sarbanes Oxley. 

    The Board making the rules now has a majority of non  CPAs. And the PCAOB's budget is determined by the SEC, and as we know, he who makes the budget makes the rules. 

    Now the IRS will register all tax preparers who are not already Attorneys or CPAs. 

    My recollection is that there were considerable regulations passed with the 1986 Tax Act. But like everything else the Administration is doing, I suspect there is an ulterior motive, particularly for CPAs. Like that famous frog in the boiling water who fails to jump from the pot, do CPAs not see what is coming?

    CPAs basically perform three functions. 

    1. Prepare tax returns

    2. Prepare forward looking statements to assist in obtaining bank loans.

    3. Prepare audits, reviews, compilations, agreed upon procedures. 

    Okay here goes. The new announcement specifically states that tax preparer numbers will be used to 'track down' (as though one were hiding out in Somalia) the ones who make large numbers of errors, fraudulently or innocently   The 'or' is important. The Federal Government could care less why or how the error was made. I suspect they will take the view that any error is an affront which will quickly grow to an illegal act against the government. Any tax preparation that results in less tax than might have been collected is illegal. Such a preparer will be guilty of at least civil if not criminal activity. 

    Bank reliance on Financial Statements which result in loan losses will be contrary to the public interest. The reason is that the FDIC insures the banks. If enough losses occur, the Feds have to stand good for the deposits. Well then, submitting a statement that results in a loan loss is contrary to the public interest and it is not a stretch that, yes, this is civil or criminal activity. 

    Finally, the number and scope of audits gone bad, not to mention the other procedures, has led to the destruction of companies which has led to bailouts, again the Feds were the ultimate insurer for the public interest. So once again, production of reports leading to failures is adverse to the public interest. 

    So the Federal view, in my opinion, is that CPAs are basically faux Federal Contractors. It is their job to help collect taxes, not advocate tax avoidance. After all the reason that CPAs were exempted from registration is that, handily, they are already registered and regulated. 

    Now couple that with the new Federal salary guidelines. The Administration has already picked a number, $250,000. And yes friends, that is where I think this is going. While there are not many CPAs that make over $250,000, expect there to be even fewer in the future.