Archive for March, 2010

Footnotes

Thursday, March 4th, 2010

A company’s balance sheet, income statement, and statement of cashflows can reveal a wealth of information about a company, but it’s in the footnotes where the best information is.  That’s not an original thought, nor is what follows of my own concocting.

We get a daily e-mail from Hedgeye Risk Management, and it’s usually interesting, often unconventional.  Here is an excerpt from today’s.  My contribution to it is the emphasis.

As a financial analyst, I have learned that all of the real juicy stuff can be found in a company’s footnotes. I’m not claiming to have read all of the 2009 Financial Report of the U.S. Government, but the footnotes and the statement of the comptroller general of the United States are alarming. Anybody reading them would come to the conclusion that the US government is a short.

Consider the report’s covering Statement of the Comptroller of the United States, the overseeing accounting authority, where “material” questions are raised in terms of the valuation of the bailout liabilities and assets. According to, Gene L. Dodaro, Acting Comptroller General:

“The economic recession and the federal government’s unprecedented actions intended to stabilize the financial markets and to promote economic recovery have significantly affected the federal government’s financial condition. The resulting substantial investments and increases in liabilities, net operating cost, the unified budget deficit, and debt held by the public are reported in the U.S. government’s consolidated financial statements for fiscal year 2009. Because the valuation of these assets and liabilities is based on assumptions and estimates that are inherently subject to substantial uncertainty arising from the uniqueness of certain transactions and the likelihood of future changes in general economic, regulatory, and market conditions, actual results may be materially different from the reported amounts. Further, the ultimate cost of these actions and their impact on the federal government’s financial condition will not be known for some time.”

Or how about this one….

Certain material weaknesses in internal control over financial reporting and other limitations on the scope of our work resulted in conditions that prevented us from expressing an opinion on the fiscal year 2009 and 2008 financial statements other than the Statements of Social Insurance. ”

The internal controls of the US Government are so bad the books can’t have an official opinion from the Comptroller of the United States.

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Sovereign Credit Default Swaps – what are they?

Tuesday, March 2nd, 2010

I came across another blog that posted a Q & A on sovereign credit default swaps, the spreads of which I’ve featured in several recent Weekly Recap & Outlook postings.  Clicking on the graphic below will take you to the Bond Vigilantes website, where you can view this primer on sovereign CDS.

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Another Gauge of Sentiment

Tuesday, March 2nd, 2010

Sentiment of investors is an important consideration in developing a view of investment markets.  This post takes a closer look at a survey that isn’t usually considered a contrary indicator of investment sentiment. (more…)

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Outlook for Tax Rates

Monday, March 1st, 2010

As usual, this isn’t a terribly unique insight, but we do think that tax rates are headed higher.  In economics courses, a common Latin phrase was ceteris parabis, or all else equal, which it never is.  Still, ceteris parabis, that should make municipal bonds a great investment for those in the higher marginal tax brackets.

One concern I have is that the government, in an effort to increase tax revenues–aside from raising taxes–might make tax-exempt bonds less tax exempt.  In other words, Uncle Sam could pull the rug out from under municipal bond investors by saying–PRESTO–your bonds are 50% tax exempt, for example.  I think, though, that they might be doing it another way, and that’s by drying up the supply of municipal bonds by helping municipalities achieve a lower net interest cost another way, by supporting Build America Bonds (BAB), taxable municipal bonds that have been hugely popular.  Still, so long as tax-exempt munis aren’t made less tax exempt, the BAB phenomenon should only make existing bonds more valuable and lower the rates of new issues.

All that aside, and back to the original sentence, here’s a cool chart that puts some history behind the idea that tax rates could head higher.  This chart, from dshort.com, shows the history of marginal tax brackets, their number and tax rate, going back to the beginning of the 20th century.  It shows that there’s a lot of room to the upside for tax brackets.

This is from the excellent website dshort.com.

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