Pleae read this excellent column by George Will about American Airlines.    AMR is burdened with many of the same legacy costs at GM and Ford. But AMR is up from $3 a share to $37 in the last few years.  This is a good example of the problems of the union contracts and their costs I have discussed in class.  And it illustrates the cost reductions forced by the transparency of rates on the internet.

DLE

In honor of Milton Friedman (see recent posts)  You Tube is sponsoring a
Challenge the Status Quo Contest.   Click on the link to the left to learn more about it.  Economist Friedman championed challenging the status quo, now you can too.  There are cash prizes and the video has to be between one and ten minutes.

Read more about Friedman and the forthcoming video on him Monday Jan 29 on PBS in John  Stossel’s article.

What to challenge, read Stossell’s article, Milton challenged just about everything, or   how about

Mexico’s refusal to reform its economy , this is the only country in the world whose economic plan of its poorest consits of one word-leave!

Our failed war on drugs-Chicago gangsters of the 1930s could only dream of the money narco drug lords have made

Getting serious about energy consumption

Getting serious about education-cost, should everybody go to college, what’s important

Social issues?

How about simpler cell phones and computers – see previous posts – instead of a whole new complex version of Windows and Office that none of us wants to learn anyway

Okay, start your digital cameras, remember, Steven Speilberg began with the tv movie Duel, Steve McQueen starred in the  Blob, think, American Idol Director!

DLE

Business Week reports that  Tata and Fiat   are planning on building a $2,200 car.  The design is finished but Tata asked Fiat to fine tune the final design.  So why is this important?  Because the greatest growth in auto sales will be in countries that are not driving cars now, they will be moving from motorbikes and such to cars.  Other ventures are planned for a pickup to be exported to developing countries.

Indeed, check out their website, the Tata Indigo is touted as ‘go ahead spoil yourself’  It is a sedan, not a hatchback, a sedan is seen as a sign of economic success!  Conclusion, the fact that there is a market for a ‘sing of success’ speaks legions about progress in India. More globalization on the march.

Meanwhile Hugo Chavez is threatening to nationalize all the television stations and thereby control the media in Venezuela.  Ecuador has been downgraded to CCC on its debt, so a default on its bonds is expected.  Will nationalizing industries help these S American countries compete with India and China?  Hint, did it help Cuba?  And remember Venezuela is propped up soley by oil prices, there really is not manufactured export.  So what if oil prices drop or we finally actually get serious about an energy policy?

DLE

Either try this WSJ STudent Link  ( I tried it and it works after you click OK for encrypted link)

go to http://www.wsj.com

then scroll down the left side to Dow Jones sites and click on college journal

then  scroll down the left side till you encounter, subscribe and succeed,  students sucscribe now and save 60%, click there and you will be on the correct page.

DLE

Bond markets are referred to as fixed income markets, why?  Because the bond promises to pay a certain coupon rate when it is issued.  The amount of money the bond pays, or coupon, is fixed and does not change over the life of the bond.  Interest rates however change daily or even hourly as bonds are traded around the world. So even though they are fixed income, they are not fixed principal, since the coupon dollar amount cannot change, the value of the bond changes in response to interest rates. This is why bond prices move inversely, or opposite, of interest rates. 

If rates are 10% and a bond is issued at par, if rates then move to 5% what is the value of the bond? The answer is that  the value of the bond has to adjust so that the bond is yielding the same rate of interest as just issued bonds.  So if the bond is paying $100 per year, 5% = $100/x, so x = $2,000.

Now look at page C10 of the Wed Jan 24, 2007 WSJ.  The article says that Brazil’s Global bond is hailed amid Latin American Jitters, but isn’t everyone always jittery about  Latin America?

Anyway, the bond is priced at 106.3385 to yield 6.635%. This is 1.73 percentage points or 173 basis points over the 30 yr Treasury.  A basis point is 1/10 of one percent.  Hence 100 basis points equal one percent.

Why would investors be willing to accept an increase in yield of only 1.73 % over AAA paper from Brazil when just down the road, Ecuador is rated CCC, ie default is near?

IN the next column Affinion Loan is going to pay in kind interest payments instead of cash.  Is this a good deal.  You buy debt and you get more debt?  The yield is 625 basis points over the LIBOR, London Interbank Overseas rate of 5.36%. So they are paying a whopping 11%.  Want to buy some, why or why not?

Okay let’s see some posts on this one!  We will be exploring this issue more in  Intermed II class on monday

DLE

The year has begun with the usual round of great economic expectations, but one writer at Bloomberg  takes issue with the ‘Rosie Scenario.’  She says that unit sales, like plasma tvs, went up because prices went down, no real growth there.  And there has not been a ‘signature event’ like the collapse of a major lender, to really get folks worried.

Garry Schilling in Forbes and Jim  Rogers both think the economy is now in or headed for recession.

Ah, but as Harry Truman used to say, give me a one armed economist so I don’t have to listen to him say, on the other hand…

And so Larry Kudlow  paints a much brighter picture.  The question, as Truman noted, which arm of the economist is correct?  There is no end of economic statistics. And things always look great, right up to the point they don’t, witness the dot.com bust which of course happened from a new high in the stock market. 

I will note that this past week, oil and gold hit lows and rebounded sharply. That if reflective of what class?  A weaker dollar which hit resistance at 85 versus the Euro.  So what’s next?  What statistics or graphs would you cite to make your case for what will happen next?  If you are a retailer, do you order more or less inventory?  Does that depend on whether you are in a cyclical business?

My point is that there is a lot more to business than just management theory or debits and credits.  Reading about business and learning some indicators to watch is a basic part of economic readiness.
So who are you reading, what indicators are you watching, OK, now, what is going to happen?

There are always gloom and doomers and there are always perpetual pollyanas, the truth is usually somewhere in between, everything does not go up or fall off the cliff at the same time. 

CPAs become consultants and CFAs become analysts by learning everything there is know about an industry-retail, autos, semiconductors, whatever.  What is your interest?  I will mention in class today that DeLoitte is hiring more grads to become consultants.  Trust me, the stuff Kudlow and Baum are discussing is the daily fabric of consulting.

DLE

PS, by the way, does anyone know who Larry Kudlow is?  Bloomberg, that name sounds familiar?

Milton Friedman, Nobel Winner for Economics, father of the monetarist school in Chicago, and author of many books  died Nov. 16, 2006.  In contrast to the near socialist Keynsian school of thought, Friedman was a champion of limited government and maximum economic freedom.  Read his last interview with the WSJ  here.

Contrast his thinking with the interventionist policies you hear from most of Washington DC.  To get an idea of the breadth and importance of his ideas, he lived to age 94, go to amazon.com and put in milton friedman to see how many hits you get.  Amazing eh?
  Will
My two favorite economists today are Tom Sowell  and Walter Williams.  The latter features several articles and interviews with Friedman. 

Now, here is another point of the blog, if I had asked you to name your favorite economists as well as your reasons for the choice, would you have had an answer?

DLE

Professor Cathy Scott at Navarro brought this article in Strategic Finance  to my attention. Those innovators at Kansas State have adopted a program for accounting that is not so focused on producing CPAs for external financial reporting and audit. Instead the graduate program offers different tracks reflecting that in deed there are different career paths within accounting.  Please read this one and let me know what you think.

I logged onto the K State Acct Site expecting to see them make a big to do about this.  They did not so I e mailed and expressed surprise. To my surprise they replied and sent the memo to the Dept Chair who is apparently going to implement just such remarks on their site.

DLE

I will put a 6e edition of Hilton on reserve in the library.  The text material has not appreciably changed but the problems have.  I will put copies of the problems from 7e on reserve also.

I will get this done tomorrow Monday Jan 22 2007

Dennis Elam

I am convinced that accounting for derivatives ranges somewhere between astrology and alchemy.  We worry about pension funds getting in over their heads with hedge funds.  There could be regulation.
Barney Frank, Incoming Chief of the House Financial Services Committee

In Chapter 12 of the Intermed book we examine how to account for investments.  Generally that has meant stocks and bonds for which there are usually reliable quotes.  What about a derivative?  to get an idea of how much activity is going on here log on to the Chicago Mercantile  or derivatives.com.
If I were going to write a fiction financial thriller, I believe my topic would be how terrorists working thru legit govts contrived to force a derivative trade that could not be met, in the process driving down the value of the dollar with simultaneous announcements that OPEC has switched to the EURO and also taken on huge option positions (puts) against the US Dollar financed thru derivatives  that would further drive the value down if exercised.

Now mind you the Chicago Merc which just merged with the Chicago Board of Trade deals in listed derivatives.  What worries Frank, and rightly so, are all the trillions of dollars of ‘off exchange’ derivatives.  Remember Long Term Capital Management?  Greenspan felt he had to rescue that firm or face untold calamity in the markets.   IN his latest interview with Maria Bartiromo in B/W, the newTsy Secy Richard Paulson stated that hedging risks with derivatives was probably why we had avoided a financial calamity for the last several years.  Maybe…

Interstingly Chairman Frank agreed with me that having a Tsy Secy from Wall Street was a better idea.  I never understood why Bush appointed the CEO of Alcoa and then the CEO of a railroad to such a post-jeez.  Another example that you don’t learn near as much in  Harvard MBA as most folks think.

DLE