While compliance is clearly a cost center, many companies have been able to reap strong gains from their compliance efforts. According to a new study “Lessons Learned from Compliance Efforts: Executive Summary”, by the 404 Institute of KPMG LLP, some companies implementing Sarbanes-Oxley compliance programs report being able to quickly reduce costs, while achieving lower deficiency rates as well as other benefits.
This report focuses on how they achieved these results, and the tactics companies can use to increase both the effectiveness and efficiency of their programs.
“A majority of companies said that they have seen an overall drop of 20 to 30 percent in the cost of complying with section 404 over the past three years.”
According to KPMG’s survey of more than 900 executives with compliance responsibilities, a successful compliance program includes:
- Higher degree of centralized transaction processing and controls, which are preventive rather than detective in nature
- Automating key activities
- Embeding compliance efforts within the business to reduce testing costs and enhance internal control awareness across the organization
Larry Raff, executive director of the 404 Institute and a KPMG partner, said
“When standards are set enterprise wide and the responsibility is shared throughout the organization, everyone begins to understand the importance of internal controls…compliance becomes part of the fabric of the organization.”
The results of KPMG’s survey are available for free download on their website.
Along with the unprecedented boom in house prices across the developed world, there was also a rise in household debt. A new research report “House Prices and Household Debt – Where are the Risks?” released by Fitch Ratings, examines economies that appear most vulnerable to shocks to interest rates, income and asset prices, due to their overvalued housing and overstretched households.
Fitch ranked a sample of countries by the degree of estimated house price overvaluation and household balance sheet exposure to interest rate risk, compiling an overall index of vulnerability, using a range of financial indicators.
New Zealand, Denmark, the UK and Norway were found to be most at risk from house price adjustment and household balance sheet deterioration, while Japan, Germany and Italy were the least vulnerable to this scenario.
The research report looked at:
- Real house prices over the past decade, including supply side influences and the role of interest rates
- The household balance sheet and the relationship between household borrowing relative to disposable income and house price inflation
- What caused the increase in debt and whether or not households are currently overstretched
- The financial risks and macroeconomic implications of a combination of weakening property prices and rising interest rates
Fitch concludes the report with a detailed description of the methodology used to create this ranking which highlights where the risks of a housing market adjustment are greatest and where the household sector is most vulnerable from a balance sheet perspective.
Helped by a weak dollar, more realtors sold U.S. homes to international clients in 2006 than in past years.
The National Association of Realtors has just published its first ever NAR Profile of International Home Buying Activity.
The study shows that international home buyers tend to spend more than their domestic counterparts, with a median purchase price of $299,500 vs. $221,500. And while only 8% of domestic buyers paid cash for their homes, international buyers did so 28% of the time.
Nearly half the international buyers indicated that their purchase was primarily for vacation purposes, while 22% acquired the home largely as an investment.
While international home purchases were made on a national level, more than half were centered in just three states – Texas, California and Florida.
The full study is available at the National Association of Realtors site.
While the prices of technology keep dropping, American consumers continue to spend approximately 5% of their annual budget on technology products and services.
Wired Magazine has analyzed data from the U.S. Bureau of Labor Statistics to see where our money is going. The $2,194 spent by the average consumer is roughly 50% more than we spent on health insurance and slightly more than is spent on apparel, but less than half of what we spend on food.
While the per-capita percentage remains the same as it has for the past decade, Wired points out that there has been a shift in what we’re spending it on. We are spending less on hardware (PCs and televisions) but more on services (Internet access and Cable).
The visualization below, courtesy of Wired, provides an overview of current spending levels and the directional change of the past decade.
As Starbucks gets ready to announce quarterly earnings on Wednesday, opinion is divided on whether the chain is running out of steam or is ready to perk.
In today’s Wall Street Journal, breakingviews advises investors to be wary despite an expected lift in profit margins as a result of a 9-cent price hike. Before Thursday’s selloff, Starbucks shares already had lost more than 20% of their value this year.
Part of the Starbucks problem has been a profit squeeze. Prices of almost everything needed to run a coffee house — beans, real estate, labor, milk — have been on a tear. As a premium brand, it is only natural for Starbucks to pass some of these expenses on to its customers. Deutsche Bank reckons the price increase could add a penny to Starbucks’s per-share earnings next year. That might not be enough to lift Starbucks’s stock out of its slump. At 26 times estimated earnings, the shares may appear a relative bargain compared with the 50 times earnings or more that it fetched earlier in the decade, breakigvews says. Even with the shares decline, Starbucks’s stock still is pretty rich. To justify the earnings multiple, Starbucks needs to beat the wider market’s earnings growth rate by 10 percentage points or so for the next five years. Its shares may not be as expensive as they once were, but Starbucks’s valuation is too robust to leave room for error.
On the other hand, Business Week reports in its Aug 6 issue that Starbucks may have bottomed in the view of some pros, including Georges Yared of Yared Investment Research. He sees the stock snapping back as management takes steps to regain lost ground. One catalyst is Starbucks’ breakfast sandwiches. Yared figures the breakfast fare will add $70,000 to each store’s annual sales. That’s about $200 million total a year, he says, and it’s not yet reflected in estimates. He sees earnings of 88 cents a share on sales of $9.5 billion in the year ending Sept. 30, 2007, and $1.10 on $11.5 billion in 2008.
Joseph Buckley of Bear Stearns says the market is focused on near-term negatives and ignores Starbucks’ strengths and prospects. “This is a more appropriate time to buy than sell, and we reiterate our outperform’ rating,” he says. Dan Gelman of investment firm McAdams Wright Ragen rates the stock, now at 27.96, a buy, with a 12-month target of 44.
Research from William Blair and Co. in May noted that Starbucks valuation premium relative to other restaurant chains was at an all-time low and offered some further thoughts in late June after meeting with Starbucks management. Piper Jaffray reiterated its Outperform rating earlier this month while in June RBC Capital Markets saw signs that sales were warming up, while ThinkEquity partners reported signs of margin presure. more recently, CIBC World Markets looked at the impact of the July 31 price increase.
The U.S. dollar has fallen to an all time low, and according to a recent Economist article “Soft currency”, it has never been further out of favor in currency markets.
“On July 23rd, the greenback slumped to $2.06 against the pound, its weakest level since 1981…this week the dollar sagged to €1.38, its lowest rate since the euro’s launch in 1999.”
The article attributes part of this slump to America’s weak economy, which is being dragged down by both the housing market and tumultuous subprime-mortgage market. Analysts at Goldman Sachs suggest the uneasiness about mortgage credit in America “may even have chipped away a little at the dollar’s standing as a reserve currency.” In addition, high oil prices are hurting economic growth and thus the dollar.
All of these factors have played a part in weakening the dollar, but more powerful forces may be driving the dollar down. Stephen Jen, currency economist at Morgan Stanley, explores the fear that Asia’s central banks will diversify out of their large holdings of American debt, including pension, insurance and mutual funds with controlling assets worth $20.7 trillion. On one hand this capital outflow may reflect investors beginning to realize the danger of relying excessively on home-country assets, but on the other hand, wariness about the dollar may be part of the motivation to diversify. Stephen Jen argues
“If the dollar has suffered most, it is only because American institutions are the biggest pioneers of financial globalization.”
Taking a closer look at current account deficits, The Economist finds that currency markets are largely unconcerned about trade imbalances. Dollar frailty seems to validate concerns about America’s persistent current-account deficit and the associated build-up of overseas debt, yet countries like Britain, Australia and New Zealand, whose currencies have gained most at the dollar’s expense, have large external deficits and debts too. The article concludes with some hope that if anxiety about global imbalances is not driving currency markets, the dollar might improve once America’s economy is back on its feet.
In this Sunday’s New York Times, Princeton economist Alan Blinder weighed in on the issue of taxation of private equity and hedge funds. At issue is whether “carried interest”, the incentive-based fees which hedge funds receive, should be treated as capital gains or regular earnings. With long-term capital gains tax rates at 15%, while most income is taxed at a 35% top rate, the difference could be substantial for hedge fund managers.
Typical hedge fund fees are 2% of assets managed plus 20% of profits. So, a $1 billion fund with a 20% annual return would receive a fee of $20 million plus carried interest of $40 million, for a total fee of $60 million.
Blinder argues that the full amount should be taxed as regular income, as the invested funds are not those of the fund manager, but rather those of the client. As such, the fund manager is not putting their own funds at risk and should not receive the preferred capital gains treatment. Blinder likens their incentive compensation to an author’s royalties or a golfer’s prize winnings.
A handful of prominent investors have made similar arguments in recent weeks. Warren Buffett, at a recent event, pointed out that he paid only 17.7% effective income tax rate on the $46 million in income he received last year, while his secretary paid an effective rate of 30% on her $60k salary. Buffett argued that the increasing disparity in wealth “hurts the economy by stifling innovation and motivation”.
Taking the opposite tack, Harvard New Keynesian economist Greg Mankiw argues that capital gains of 15% are paid on top of corporate income taxes which have been paid at a rate of 35%. Mankiw also questions how Buffett’s income was only $46 million in 2006, barely 0.1% of his assets of $50 billion. In this case, Mankiw points out, Buffett is not taking capital gains on the bulk of his (Berkshire Hathaway) assets, so a change in the capital gains rate would have little impact on his tax rate.
Meanwhile, in his August Investment Outlook, PIMCO bond maven Bill Gross takes a somewhat jaded look at disparities between the haves and have nots and the impact of the tax code.
Wealth has always gravitated towards those that take risk with other people’s money but especially so when taxes are low.
Asking when enough is enough, Gross questions the argument whether hedge fund managers will be properly incented if their tax rates go up, citing with scorn Citadel Investment Group head Kenneth Griffin, who indicated that if tax rates were to increase “as a matter of principal I would not be working this hard”. Of course, a higher rate would certainly impact Mr. Griffin, who earned $1 billion in 2006.
Citing continuing strong global expansion , the International Monetary Fund has revised upwards its projections for economic growth in both 2007 and 2008 to 5.2 % from 4.9 % at the time of its April 2007 World Economic Outlook.
In the first in a series of World Economic Outlook Updates, to be posted between the full Spring and Fall WEO reports, the IMF made upward revisions for emerging market and developing countries, with growth projections substantially marked up for China, India, and Russia. Growth in the United States is now expected at 2% this year—0.2 percentage point lower than projected in April—although activity should regain momentum through the year and return to potential by mid-2008. Growth projections for the euro area, particularly Germany, and Japan have also been raised.
Risks to this favorable outlook remain modestly tilted to the downside.
Inflation remains generally well contained despite strong global growth, although some emerging market and developing countries have faced rising inflation pressures, especially from energy and food prices, the IMF said. Oil prices have risen back toward record highs against the backdrop of limited spare production capacity, while food prices have been boosted by supply shortages and increased use of biofuels.
With sustained strong growth, supply constraints are tightening and inflation risks have edged up since April, increasing the likelihood that central banks will need to further tighten monetary policy. The risk of an oil price spike remains a concern.
In an accompanying Financial Market Update, the IMF’s Monetary and Capital Markets Department says financial market risks have increased as credit quality has deteriorated in some sectors and market volatility has increased. However, so far, the assessment is that this risk is likely to remain largely contained. Importantly, markets are discriminating on the strength of underlying fundamentals, and recent corrections have been concentrated in subprime, leveraged loan and lower quality corporate bonds. The ongoing adjustments in the structured credit and leveraged finance markets should help bolster credit discipline while the capacity of market participants to discriminate according to fundamentals will be important going forward.
A number of other risks, however, look more balanced. In particular, while the correction in the housing sector is continuing, overall downside risks related to U.S. domestic demand have diminished somewhat.
The U.S. Department of Energy has announced that they will invest up to $375 million in three new bioenergy research centers. The centers are intended to accelerate basic research in the development biofuels. The government hopes that new technology will enable this energy source to eventually become a substitute for gasoline.
An updated and detailed overview of the world’s biofuel market can be found in a new report released by RNCOS, “Biofuel Market Worldwide (2007-2010)”. The report found that world biodiesel production is likely to reach 12 billion liters by the end of 2010.
RNCOS’ report revealed that the U.S. and Brazil are the world’s leading producers of bio-ethanol, making up more than half of the world’s production. Also, in 2005, global production of biofuel (biodiesel and ethanol) had already exceeded 48 billion liters.
Topics covered in this research report include market trends, current cost analysis, factors driving the market, the main industry players, and future opportunities for biofuel in the global market.
RNCOS’ complete report can be purchased on their website.
While the mortgage and housing markets have garnered much recent attention, the lack of easy credit is impacting all markets.
The Wall Street Journal has posted a scorecard, showing how the problems in the credit market have caused more than two-dozen debt offerings to be either delayed or pulled in the last month.
Among the more notable deals that have been impacted is Cerberus Capital’s offering for Chrysler debt and the Alliance Boots deal, both of which failed to price this week.
Meanwhile, Credit Sights projects that this weakness in the CLO market could have an impact on equity markets as well.
One primary driver of the bull run in stocks has been the private equity bid, along with re-leveraging trades by firms in order to avoid an LBO or to mollify increasingly militant shareholders. That the equity market is sensitive to this spillover effect was evident in the sell off earlier in the week as firms like Expedia announced plans to dramatically reduce planned buybacks because of the inability to access financing at an acceptable rate.
It’s been evident in recent weeks that damage would not be limited to the subprime market. This week’s market selloff suggests the spillover has reached equity markets as well.