@GSElevator – #1: People who get engaged on Valentine’s Day don’t need prenups. She can keep the Jared ring and he can keep his Xbox.
1. Quote Of The Week / 2. Kyle Bass Letter On China / 3. Don't Believe Everything You Read / 4. Interesting Links / 5. Joke Of The Week
1. QUOTE OF THE WEEK
A surprising answer from Mohammen El-erian when asked what he wished he knew 30 years ago during a must listen interview with Barry Ritholtz:
I wish I had questioned the conventional wisdom that cash has no role to play in asset allocation… when you enter into artificial world where central banks are not just referees but also on the field, cash gives you three things that are valuable: (1) resilience – you can afford to make mistakes elsewhere; (2) optionality – you can change your mind and with liquidity diminishing that becomes really important; and (3) it gives you agility – when you get volatility there is price contagion and overshoots.
2. KYLE BASS LETTER ON CHINA
ISSUE 49 included Kyle Bass’ thoughts on the Chinese currency and banking system, which included:
“The IMF says they [China] need $2.7 trillion in FX reserves to operate the economy. They’ll hit that number in the next five months. Those who think they can burn it to zero and they have a few years ahead of them, they really only have a few months ahead of them … If 4% of the population takes out their $50,000 quota, the FX reserves are gone. We lose ourselves in the numbers. $3.3 trillion is a big number, but the reserves to bank assets number is one of the worst in the world [….and] when they lose money in their banks they’re going to have to recapitalise. They’ll have to expand the PBOC balance sheet by trillions and trillions of dollars.” Concluding that ”… a Chinese devaluation of 10% is a pipe dream. It will be 30-40% by the end.”
This week he shared his thesis in detail in a letter to his investors.
3. DON’T BELIEVE EVERYTHING YOU READ
Four business school professors surveyed nearly 400 chief financial officers on earnings quality. Their findings, published in the current edition of Financial Analysts Journal, are stark: on average, the CFOs believe 20% of public companies “intentionally misrepresent” earnings using discretion allowed under generally accepted accounting principles. Private company CFOs, on average, pegged the number even higher, at 30%.
Areas highlighted by the survey that provide the opportunity for earnings management include acquisition accounting, pension accounting, and the use of subsidiaries and off-balance sheet-entities.
It’s important to note accounting standards do allow management teams discretion and flexibility in reporting results. And while common motivations cited for those overstating earnings include juicing the stock price, companies that take liberties with accounting choices aren’t necessarily flattering their earnings profile. The survey found that as much as one third of earnings misrepresentation could be to revise numbers lower, perhaps to gain leverage in negotiations with stakeholders such as employees.
Still, this should give investors pause. The study doesn’t even contemplate so-called pro-forma financial reporting, which doesn’t conform to GAAP. The Wall Street Journal found in December that roughly one fourth of public companies used pro-forma results in securities filings last year.
And the study found the magnitude of the misrepresentation within GAAP could be as high as ten cents on the dollar. That could easily be the difference between meeting analyst expectations and missing them; between reporting growth or decline.
Better, then, to not skip over the financial-statement footnotes.
4. INTERESTING LINKS
Oil too cheap for pirates [Bloomberg]; Winning the war on global poverty [CSMonitor]; Analysts flock to cover outperforming companies [papers.ssrn]; Security in SEA after Jakarta [The Economist]; The brain processes music and speech differently [NY Times]; Do we still need handwriting [Freakonomics]; Apple TV is changing television [computer world]; Why people feel entitles to cheap airline tickets; [strategy business]; how to give constructive feedback [hbr]; The cost of a romantic weekend [The Economist]; China’s giant radio telescope [FT]; How millennials are changing wine [WSJ].
5. JOKE OF THE WEEK
