Tuesday, July 19, 2016

My Amazon Review of Baruch Lev and Feng Gu's "The End of Accounting and the Path Forward for Investors and Managers"

Tension is Mounting in Financial Accounting

Accounting Professors Baruch Lev and Feng Gu have written a very important book on the need to update century old accounting practices. They open their book by presenting the financial statements for U.S. Steel in 1902 and 2012. There point is that not much has changed from an accounting standpoint, but from an economic standpoint U.S. Steel’s profitability dramatically declined over the century.

Lev and Gu describe in great detail the accounting and finance literature demonstrating the 50 year decline in importance of traditional accounting data’s influence on stock prices. Although stock prices do move in the very short run in response to earnings announcements, over the intermediate term they respond far more to non-accounting data.

According to Lev and Gu the problem with current financial accounting is that it ignores intangible assets that are developed internally, for example research and development, trademarks and investments designed to improve organizational efficiency. All of those expenses are expensed. The authors would capitalize them, which is exactly what occurs when those assets are acquired in a merger or by individual purchase. Second accounting today is more about estimates rather than hard facts. These estimates would include the provision for bad debts, pension expense, stock option expense, and even revenue recognition. Finally accounting does not take into account such unrecorded events as the receipt of a patent, a new drug approval, the signing of an important contract, and the rise or fall in the number of subscribers. It is this last category that seems to matter the most to investors. For example yesterday Netflix reported better than expected earnings, but far fewer than expected new subscribers. The result the stock dropped 15% in a heartbeat.

To remedy the situation Lev and Gu would like to see corporations present a more fuller “Strategic Resources and Consequences Report.” This is really a very enhanced management discussion and analysis section that would take into account the issues raised above. The problem here is whether accountants are capable of producing such a report and whether or not management would be candid enough to put it in writing. One would hope so, because it goes to the heart of what serious analysts are interested in.

This is not an easy book for the lay reader, but for the professional investor and manager “The End of Accounting” is a most useful book.

The full Amazon URL is:


Thursday, July 14, 2016

Tuesday, July 5, 2016

Hillary Bumper Sticker - Not Indicted,Vote Hillary

F.B.I. Director  James Comey walked right up to the line of recommending a charge of criminal negligence against Hillary Clinton, but he did not cross it. Instead he declared that she was "extremely careless" with the handling of Top Secret  information. There goes all of her prior denials about sending and receiving classified information. He further noted that she "should have known that an unclassified system was no place for that conversation." Indeed Comey noted how lax Hillary's State Department was with the whole process of handling classified information. Hardly the hallmark of a good manager.

Although she was not charged criminally, if she were still Secretary of State it would be grounds for impeachment. Further, if any government employee with a Top Secret clearance were so cavalier in handling such information, at minimum that employee would have had their clearance suspended, more likely would be fired.

As a result, this issue ain't going away.

Tuesday, June 28, 2016

My Amazon Review of Peter B. Doran's "Breaking Rockefeller: The Incredible Story of Ambitious Rivals Who Toppled and Oil Empire"

An Unlikely Oil Baron

Peter Doran tells the story of Marcus Samuel Jr. a Jewish 19th century trader who rises from the hard scrabble neighborhood of Houndsditch, London to the heights of the global oil business and a high peerage in the Court of Saint James. Doran’s book is in the tradition of Daniel Yergin’s “The Prize” and Anthony Sampson’s “The Seven Sisters” and is filled with the high drama of the early years of the oil industry.  The oil business of 1900 was far different than today. Rockefeller’s Standard Oil dominated the industry like no other and kerosene, not gasoline was its main product.

However change was in the wind. The oil production capital was moving from the depleted oilfields of the United States to the booming Baku oil fields of Russia. There the Nobel Brothers and the Rothschild’s were beginning to upset Rockefeller’s hold on the global oil market. Into this milieu comes Marcus Samuel. He has the strategic vision to move Russian oil through the Suez Canal to the Asian markets he knew so well.

The one problem was that the Suez Canal, for safety reasons, refused to allow oil tankers to enter the canal. It here where Samuel has designed and built a double-hulled tanker that convinces the canal officials to allow passage. Of a sudden, Standard Oil was threatened with cheap Russian oil in Asia under the name of Shell Transport and Trading, the Shell Oil name of today.

Competing with Samuel in Asia was Henri Deterding’s Rothschild backed Royal Dutch. Using geological science Deterding discovers a gusher in Sumatra that underprices Shell. After several years of competing with each other Deterding gains the upper hand by forcing a merger with Shell that forms Royal Dutch/Shell Group of today based on a 60/40 split favoring Royal Dutch.

This combination along with the anti-trust beak-up of Standard Oil in 1911 ends Rockefeller’s grip over the global oil business. Doran’s theme throughout is as his title suggests is breaking Rockefeller and the monopoly he represented. He ends his story with the death of Samuel in 1928, but in the same year Royal Dutch/Shell joins up with Standard Oil and other oil majors with Achnacarry and Red Line Agreements which effectively cartelizes the global oil industry, so much for competitive markets.

Doran is a good story teller whose work was handicapped by the burning of most of Samuel’s files at his death. Although he takes a few side trips away from his basic story, he holds the reader’s interest throughout.

The full Amazon URL is:

Saturday, June 25, 2016

Understanding Brexit

British electorate just stuck it to the man. In voting to leave the E.U. British voters said "no" to both global capitalism as represented by the "City" establishment and the left-liberal cognoscenti who supported remaining in the E.U. The left liberals responded with their typical bed-wetting attributing racism to the anti-immigrant stance of the Leave voters and the markets responded with a global sell-off rightly fearing a contraction in both global trade and capital flows.

Over the intermediate term those fears might prove to be justified. As Adam Smith taught us almost a quarter of a millennium ago, "the division of labor is limited by the extent of the market." Britain leaving the E.U. will likely reduce the size of the market causing economic output to decline. Moreover the British example has lit a fire under the E.U. skeptics in France, Italy and the Netherlands. Trust me, the politics ain't gonna be pretty.

However there is a way out, although its chance is small. To be sure the Leave voters were concerned about unchecked immigration and the impact of globalization on their daily lives, there also was the resentment of being under the control of the 40,000 nameless and faceless Eurocrats in Brussels who seem to be running their lives without any electoral accountability. Simply put national sovereignty was being eroded away to the E.U. Hence it was no accident that the Leave voters proclaimed last Thursday as "Independence Day."

Thus the way forward would be to fundamentally reform the E.U. by reducing its bureaucracy and rule making authority by devolving power back to its constituent nation states. This will require a coordinated revolution in thinking from above; otherwise the E.U. will face a very messy revolution from below. What the British people sensed and the elite did not, was that the E.U. wasn't working for the average European. Thus it has to reform if this noble experiment is to survive.

Thursday, June 23, 2016

My Amazon Review of Clara Bingham's "Witness to the Revolution: Radicals, Resisters, Vets, Hippies, and the Year America Lost its Mind and Found its Soul"

The Late 60’s Through Rose Colored Glasses

Journalist Clara Bingham, born into the Louisville Courier Journal family, reflects her elite bias that was typified by the “radical chic” of 1970. Born too late (1963) to experience the late 1960’s she writes as a “wanna be” member of the Weather Underground. Her book is series of oral histories to describe the period between Woodstock (Summer 1969) to the end of 1970 as the anti-Vietnam War movement reached its apogee. The interviewees are a mixture of new left political types, veterans, G.I.s, pop culture figures, feminists, Black Panthers, LSD/marijuana entrepreneurs, high Nixon administration officials, occasional police officers and F.B.I. agents. She is at her best with histories of the Army math center bombing at the University of Wisconsin and National Guard killings at Kent State.

Although she has a host of interviewees her sample is biased towards her focus on the Weather Underground and in particular, Bernadine Dorhn and Bill Ayers. Recall that the Weather Underground glorified violence by initiating the “Days of Rage” in Chicago in 1969 and three of their members died in a bomb making factory in a very toney section of Greenwich Village. The victims of the bomb were to be G.I.s at Fort Dix, New Jersey. Ayers and Dorhn, both children of privilege, are unrepentant to this day. Not true of Michael Kazin and Mark Rudd who dropped out of the organization and moved on. Kazin is now a distinguished historian at Georgetown and Rudd taught for years at a community college in New Mexico. Rudd noted, and this is important, that it is results, not intentions that matter. Bingham’s failure is to look more to intentions than results.

I was more than a casual participant in the milieu of the late 1960s. In fact I knew several of her interviewees including Tom Hayden, Jane Fonda, David Mixner, Barry Romo and Carl Bernstein. But unfortunately in her over-coverage of Dorhn and Ayers she leaves out her opponents in SDS who did not go the bomb making route. For example she could have interviewed Mike Klonsky and Marilyn Katz, both Chicago neighbors of Dorhn and Ayers. She also avoided interviewing the folks involved in what was then called the Revolutionary Communist Party. She fails bringing out the fact that there were an awful lot of little Lenins running around. They were hardly democratic and they worshipped at the altar of the Castro and Ho Chi Minh dictatorships. However, that would not have been consistent with her story line of how the late 1960s gave birth to the new soul of America.

She also quite accurately how much the new left was in thrall of the Black Panthers as the vanguard of the revolution, but she neglects to bring out that all too many of the panthers were street thugs. To bring out that point it would have helped if she interviewed former Ramparts editor David Horowitz who over the following decades moved from left to right. He witnessed the thuggery of the panthers in the Oakland of the early 1970s.

To be sure the reaction to the horrors of the Vietnam War and the Cultural Revolution of the 1960s changed America to its very core, but it would have helped if Bingham gave a more balanced account. Although on balance the 1960s were a force for good, the era left quite a bit of wreckage in its wake. 

The full amazon URL is:

Tuesday, June 21, 2016

Sheryl Sandberg: An Out of the Box Choice for Hillary's VEEP

Although I am not the first to mention her, I believe that Hillary Clinton would hit it out of the park if she named Facebook COO Sheryl Sandberg as her pick for vice president. In Sandberg you have an accomplished woman with a national reputation as an executive and author. Her technology cred would make her both a favorite of millennial voters and their suburban parents. She would make a very stale Hillary look fresh.

Moreover Sandberg is not without Washington experience. She served as chief of staff to Treasury Secretary Larry Summers from 1996-2001. Although she and Hillary may not be BFFs, they both know each other. Think about it in this exceptional year, does Hillary want a dull boring politician or does she want to bring some excitement to her campaign and some one who is far more familiar with emails than she is?