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Weekly Financial Report
With Scott Roulston of Fairport Asset Management
Friday, March 29, 2002
Scott Roulston, CEO of Fairport Asset Management, discusses
the positive effect that optimistic consumer confidence is having on the
economy, the changes proposed in Congress with regards to stock options
and how they are accounted for in Company balance sheets, and the latest
Arthur Anderson news where former Fed chairman Paul Volker has offered
to oversee the beleaguered firm.
April Baer–If you've been watching the economy,
it's been a pretty solid week. The government reported the Gross Domestic
Product grew almost 2 % last quarter, signaling the end to the recession.
Orders for durable goods soared and so did consumer confidence. Even Broadway
seems to have bounced back from its post-September 11th woes. What was
once Les Miserable is Camelot all over again. With us this morning to
discuss the week's business news is Scott Roulston of Fairport Asset Management.
Scott, good morning.
Scott Roulston–Good morning, April.
AB–So, consumer confidence is up. Looks like
orders for durable goods are rosy, too. Why is everybody feeling so gosh
darn good all of a sudden?
SR–Well, the outlook for employment, in particular,
was part of the consumer confidence number that you mentioned. Consumer
confidence is a very important leading indicator. Consumer spending is
about two-thirds of the economy, so if consumers are confident, that bodes
well for the future of the economy. At this time, consumers are especially
confident about employment - that they are going to have jobs. And that
bodes well for their spending habits and just for the outlook over the
next several months. Now, if you look on the other hand, at what's really
going on with heavy manufacturing in this area, the anecdotal evidence
that we've seen is that a lot of companies are still struggling. It's
a mixed bag.
AB–It seemed like there were some positive
signs coming out of the technology sectors, too. Is this a good time for
someone to buy in?
SR–I think it's an interesting time to start
to nibble. You know, 2000 and 2001 were pretty crummy years to be an investor
in technology stocks and even so far this year. While the S&P 500 was
flat for the first quarter, the markets closed today, so the first quarter
is pretty much over. The market was flat but technology stocks were still
down about 10%. It's an interesting time to take a look at some of these
tech stocks. For example, we own Cisco, Dell Computer, IBM, Flextronics,
which would really capitalize on an up tick in technology spending. The
question is when are companies really going to increase their capital
spending on technology?
AB–This week I was seeing a lot of stories
about rumblings coming out of Congress about stock options. There are
many companies that offered their employees the chance to buy company
shares at a guaranteed price by way of compensation. But this stuff never
seems to show up on the books when companies are audited. Coming out of
the Enron fiasco, Congress is concerned about this and talking about passing
some regulation. How might Congress change the rules on stock options
without completely trampling on the rights of legitimate companies, who
just want to have an alternative compensation package?
SR–That's a great question, the way you framed
it right there. If you go back to the Enron thing, Fastow (their CEO)
almost bragged about the fact that they used options as a way of reducing
their compensation expense. Let's just explain for a second. Stock options
are not expensed. So you don't record them as income. Even Chairman Greenspan
is coming out against these stock options, the way they are accounted
for right now. I like the way Warren Buffett described it. He said if
stock options aren't compensation expense, then what are they? And I personally
am in favor of accounting for stock options in some other way than the
way they currently are. On the other hand, growing companies (and we want
to have a lot of start-up companies, technology companies in Northeast
Ohio for example), growing companies can't afford to pay big salaries.
Therefore they will use options instead, as a way of compensating people
to come and work for their company for maybe a little bit below market
rate, with this prospect of getting even more down the line.
AB–We missed you while you were on vacation
last week. While you were out with your ear to the ground, what were you
hearing? What's the word on the street?
SR–(Laughter) Well, a lot of talk about the
accounting profession. You know, they used to say that accountants aren't
boring people, they just get excited over boring things. But certainly
what's going on with Arthur Anderson…
AB–A little bit too much excitement there,
maybe…
SR–It's true. It used to be a boring profession
but now it seems to be in the spotlight.
AB–Seems like you just can't get famous by
being a rock star anymore. You have to go into accounting. Seriously though,
the accountant's job is to help a firm increase profits as much as possible
while still playing the watchdog. If there's anything in the Anderson
case this week, do you see a suggestion there that maybe one firm can't
do both things for a company?
SR–Certainly. And that's pretty much what
Paul Volcker has suggested for Arthur Anderson. The partners at Arthur
Anderson now seem to be in favor of his proposals. But they're giving
it grudgingly and I'm afraid it may be too little, too late. You are absolutely
right. The accountants can really play the role of trying to reduce a
company's taxes and at the same time try to enforce their tax compliance.
The difference between tax avoidance and tax evasion is a pretty fine
line, some people would say. It's crossing a line from maybe a legal standpoint.
AB–All right, Mr. Roulston. We'll see you
next week.
SR–Have a good weekend.
AB–Scott Roulston of Fairport Asset Management
joins us each Friday.
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