Comments on: Pensions: $400 billion hole to reduce U.S. corporate earnings http://www.creditwritedowns.com/2009/01/pensions-400-billion-hole-to-reduce-us-corporate-earnings.html a finance news and opinion site Sat, 20 Mar 2010 23:59:54 +0000 hourly 1 By: Edward Harrisonhttp://www.creditwritedowns.com/2009/01/pensions-400-billion-hole-to-reduce-us-corporate-earnings.html#comment-2442 Edward Harrison Fri, 09 Jan 2009 12:58:41 +0000 http://www.creditwritedowns.com/?p=3380#comment-2442 I think we are on the same page then; it is an investment analyst's job to take all available information in assessing a company. I now this is the common habit on Wall Street, especially when you are talking about industries with large amounts of CAPEX. In order to get a sense of real value one needs to look at the cash flow and subtract the maintenance CAPEX in order to come up with the free cash flow. Doing so is standard practice.But that does not diminish from the fact that management is not incentivized by free cash flow. Their pay is usually connected to net income. And most equity analysts publish net income estimates that are tracked as baselines for whether a company 'beat" estimates. that is a problem because it leads to fudging the numbers to make earnings.And just so you know, there is actually considerable leeway in even how the cash flow statement is presented. I think we are on the same page then; it is an investment analyst’s job to take all available information in assessing a company. I now this is the common habit on Wall Street, especially when you are talking about industries with large amounts of CAPEX. In order to get a sense of real value one needs to look at the cash flow and subtract the maintenance CAPEX in order to come up with the free cash flow. Doing so is standard practice.

But that does not diminish from the fact that management is not incentivized by free cash flow. Their pay is usually connected to net income. And most equity analysts publish net income estimates that are tracked as baselines for whether a company ‘beat” estimates. that is a problem because it leads to fudging the numbers to make earnings.

And just so you know, there is actually considerable leeway in even how the cash flow statement is presented.

]]> By: Dudley Heerhttp://www.creditwritedowns.com/2009/01/pensions-400-billion-hole-to-reduce-us-corporate-earnings.html#comment-2429 Dudley Heer Fri, 09 Jan 2009 05:12:32 +0000 http://www.creditwritedowns.com/?p=3380#comment-2429 Mr. Harrison, I think you missed my point. To do a correct cash flow calculation and the claims on that cash requires the use of both the income statement and the the flow of funds statement are used and making adjustments deemed appropriate, i.e. eliminating nonrecurring items. Obviously, the pension information is in the footnotes and just as obvious managements play games with the assumptions and the accounting. However, that was not my point nor did I have anything to say about compensation which is not germane to whether or not you can determine the extent that pension gains are in earnings and that they should be removed when looking at a company's results. Of course, management wants them included so they can receive higher compensation. But, if the analyst is doing his/her job she will take that into account. The problem is determining the extent or percentage pension gains are a part of income. The best way to look at a company's results is to do a cash flow analysis which removes all the dubious items like pension gains and gives the analyst the clearest picture possible of a company's financial performance. Mr. Harrison, I think you missed my point. To do a correct cash flow calculation and the claims on that cash requires the use of both the income statement and the the flow of funds statement are used and making adjustments deemed appropriate, i.e. eliminating nonrecurring items. Obviously, the pension information is in the footnotes and just as obvious managements play games with the assumptions and the accounting. However, that was not my point nor did I have anything to say about compensation which is not germane to whether or not you can determine the extent that pension gains are in earnings and that they should be removed when looking at a company's results. Of course, management wants them included so they can receive higher compensation. But, if the analyst is doing his/her job she will take that into account. The problem is determining the extent or percentage pension gains are a part of income. The best way to look at a company's results is to do a cash flow analysis which removes all the dubious items like pension gains and gives the analyst the clearest picture possible of a company's financial performance.

]]> By: Financial Blogosphere 1/8/09 | MarketBlurbs.comhttp://www.creditwritedowns.com/2009/01/pensions-400-billion-hole-to-reduce-us-corporate-earnings.html#comment-2419 Financial Blogosphere 1/8/09 | MarketBlurbs.com Thu, 08 Jan 2009 13:59:39 +0000 http://www.creditwritedowns.com/?p=3380#comment-2419 [...] Edward Harrison, Credit Writedowns on pension fund problems:  “An issue that has received scant acknowledgment in the media is the likely hole in pension funds books resulting from the recent out in shares. Pension funds must invest the money they receive today in order to provide pensioners funds tomorrow. The problem is that pension funds have been overestimating the likely returns for years and now that we have hit a rough patch in the economy this poor actuarial accounting is about to catch up with them.” [...] [...] Edward Harrison, Credit Writedowns on pension fund problems:  “An issue that has received scant acknowledgment in the media is the likely hole in pension funds books resulting from the recent out in shares. Pension funds must invest the money they receive today in order to provide pensioners funds tomorrow. The problem is that pension funds have been overestimating the likely returns for years and now that we have hit a rough patch in the economy this poor actuarial accounting is about to catch up with them.” [...]

]]> By: Edward Harrisonhttp://www.creditwritedowns.com/2009/01/pensions-400-billion-hole-to-reduce-us-corporate-earnings.html#comment-2427 Edward Harrison Thu, 08 Jan 2009 09:01:37 +0000 http://www.creditwritedowns.com/?p=3380#comment-2427 Dudley, all public companies produce a cash flow statement. And the pension numbers including investment return assumptions are all on display for everyone to see in the annual report. However, that doesn't mean that compensation plans are matched to cash flow. They are generally based on net income. And when looking at the pension fund return estimates, I remember looking back through annual reports from the early 1990s and comparing them to early this decade during the last bear market. There was a considerable lift in assumptions. Was this another pro-cyclical factor that will come unstuck. it seems so. Dudley, all public companies produce a cash flow statement. And the pension numbers including investment return assumptions are all on display for everyone to see in the annual report. However, that doesn't mean that compensation plans are matched to cash flow. They are generally based on net income. And when looking at the pension fund return estimates, I remember looking back through annual reports from the early 1990s and comparing them to early this decade during the last bear market. There was a considerable lift in assumptions. Was this another pro-cyclical factor that will come unstuck. it seems so.

]]> By: Dudley Heerhttp://www.creditwritedowns.com/2009/01/pensions-400-billion-hole-to-reduce-us-corporate-earnings.html#comment-2426 Dudley Heer Thu, 08 Jan 2009 08:42:56 +0000 http://www.creditwritedowns.com/?p=3380#comment-2426 Re: Pension Accounting. It seems to me that any non-cash income from inckuding pension fund investment gains in a company'y net income should be subtracted out in the flow of funds statement as well as disclosed in the income statement. Thus, a cash flow analysis would make the correct adjustment, cash flow being the only correct way to look at a company's results. If this information is not shown, then the auditor must be questioned as to why not as should management as this would not be full disclosure. Re: Pension Accounting. It seems to me that any non-cash income from inckuding pension fund investment gains in a company'y net income should be subtracted out in the flow of funds statement as well as disclosed in the income statement. Thus, a cash flow analysis would make the correct adjustment, cash flow being the only correct way to look at a company's results. If this information is not shown, then the auditor must be questioned as to why not as should management as this would not be full disclosure.

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