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April 1, 2004
Markets Await Jobs.  FASB Under Attack

1Q04 may be over, but the fireworks are just about to begin

The Wish List will be released on Monday morning.  A drum roll isn’t required -- Todd and I didn’t manage to uncover any new undervalued selections. Rather, what we did find - along with a couple of new Watch List additions - is that the 30 companies that make up the Dow are overloved. This less than shocking revelation will be covered indepth to begin next week.

Incidentally, what is helping to delay the quarterly Wish List report is tomorrow’s jobs report. Although one jobs report is usually not that important, tomorrows report has the potential to send the financial markets into violent convulsions.  Quite frankly, it is difficult to offer any analysis on what the immediate future might hold without first sneaking a peak.   

To the long-term investor the above statement may seem odd.  After all, if an investor endeavors to hold their positions for many months/years of what relevance is one economic report?  However, the simple fact is that the jobs report moves markets, and in a volatile marketplace the long-term investor must be conscious of short term exit/entry points to try and maximize their returns. For a quick example of this logic consider silver. Perhaps a strong jobs report pushes interest rates higher, provides some support to the US dollar, and takes enthusiasm for reflation/inflation type trades down a notch?  If so, wouldn’t the long-term silver owner be well served to take some money off the table before tomorrow? (this isn’t necessarily a prediction of how silver will perform following the jobs numbers, only the realization that the jobs report could have an immediate impact in US interest rates, currency prices, commodity prices, etc.).

Speculations aside, the fact – reiterated – remains: the US jobs report moves markets. The second quarter of 2004 does not begin with a bang until tomorrow morning at 8:30 AM.
 


FASB’s Relevance at Stake

After more than a decade since its first run in with the stock options issue FASB has finally kicked off round number two. Yes, yesterday FASB published a proposal to expense stock options. The proposal is subject to a 90-day consultation period. In other words, FASB will be repeatedly attacked over the next 90-days, and Congress could potentially act to usurp the boards presumed powers by delaying expensing. 

There is really no watering down of FASB’s proposal. Rather, either FASB proves that it is relevant by pushing through expensed options or it does not.  

Immediately following FASB’s proposal the usual suspects took aim:

“FASB's proposal drives a dagger into the heart of broad based stock option plans and will force many companies to discontinue option programs and employee stock purchase plans for their rank-and-file employees.   If Congress doesn't act, middle class workers throughout our industry will be the victims of FASB's short-sighted efforts”
William T. Archey, AEA president and CEO

“The proposed FASB rule would likely significantly diminish the use of broad based stock option and stock purchase plans and make it more difficult to attract and retain talented employees”
George Scalise, SIA president

“Competitors in regions which do not require expensing of stock options will gain an upper hand in attracting top talent and in leading future technology innovation, creating imbalance in technology leadership and in the flow of the global workforce”
Victoria Hadfield, president of SEMI North America

“With today's action I fear that FASB is beginning to stand for Flatten All Start-up Businesses. There is mounting evidence of the terrible impact this rule would have on our economy at the very time we are fighting through a jobless recovery.”
Richard Baker, the chairman of the House subcommittee on capital markets

“It requires such a complex and dizzying array of assumptions and inputs that it will create an accounting free for all.”
Rick White, chairman of the International Employee Stock Options Coalition


Why is it that when stock options are expensed in the footnotes – which are supposedly essential reading when analyzing the income statement – companies can easily hire and keep employees, but if options are expensed directly in the income statement companies will be forced to stop issuing options altogether?  Hmm...I am not sure.  However, it is bewildering to think that the above opponents to expensing believe that grave damage will be done if what is already expensed in the footnotes moves up to the income statement.

Are the opponents to expensing admitting that investors do not know how to read footnotes? Better yet, are the opponents suggesting that companies – at least those that would stop issuing options if FA