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Weekly Financial Report
With Scott Roulston of Fairport Asset Management
Friday, August 2, 2002
Scott Roulston, CEO of Fairport Asset Management, discusses
the charges filed against WorldCom executives, the lack of charges in
the Enron case, and GE's leadership move to declare stock options as compensation.
April Baer - As analysts roll down more blue data
on the economy this week, the markets did get a few thrills to the beat
of corporate thrashings. The Securities and Exchange Commission continued
putting pressure on several firms entangled in accounting trouble, but
those confidence-boosting measures were not quite enough to help Wall
Street traders avoid a triple digit loss yesterday. Today more economic
data will be helping to set the early tone for trading. Reports from the
government are due on July unemployment, as well as personal income and
spending for the month of June. Scott Roulston of Fairport Asset Management
joins on Fridays to talk business. Scott, how are you holding up today?
Scott Roulston - Doing well, thanks, April.
April Baer - This week the television served up
a few more images of top executives being cuffed. This time it was WorldCom's
CFO and another financial official, I believe, who surrendered and were
charged with seven counts of securities fraud and conspiracy. What do
you think is behind all that? Should that be much of a surprise to people
who've been following the WorldCom issue?
Scott Roulston - Not all. I think the Bush administration
is trying to get out in front of this and is taking it very seriously.
You know, for a while Eliot Spitzer (the Attorney General of New York)
was really outdistancing Pitt of the SEC or the Justice Department. I
think the question now is why aren't we seeing some arrests with Enron
officials? Enron is taking quite a while.
April Baer - That is funny - the biggest scandal
of them all and no arrests yet. I mean, should we draw much from that
or was it just a timing issue, do you think?
Scott Roulston - It is curious because WorldCom
only took 5 weeks and Enron has been over 5 months. I think it shows us
that Enron is much, much more complicated. We saw that in part this week
when some Merrill Lynch investment bankers testified before Congress and
two out of three of them took the Fifth Amendment. They were supposedly,
or allegedly, setting up these sham loans to keep debt off the books and
everything. I think you also might have it just be a matter of time before
you have a Wall Street analyst or two taken away in handcuffs. The Wall
Street firms just don't think that is possible - that they could be targets.
It's not business as usual. I think we are seeing the Bush administration
is showing that corporate execs can be treated just like bank robbers.
Maybe we ought to find whoever is making those orange suits and invest
in that company!
April Baer - I hear they're moving to stripes in
many areas these days - back to the old classics. (laughter) Let's talk
about market indicators for a minute. Could you recap for us some of the
most important data that came out this week? I understand the Beige Book
showed growth but maybe not enough?
Scott Roulston - Growth is sluggish. This week's
numbers were disappointing. The Bears kind of had their day. I don't think
we can say double dip recession, but the expansion is not going as well
as we thought. The disappointing numbers that you are referring to - the
ISM (which used to be called the Purchasing Managers Index) was down.
You had consumer confidence down. And on top of that the government restated
GDP. Instead of having one quarter of recession, it turns out we had three!
Now, all of that is kind of hindsight - that's looking backwards. I think
still we are seeing an up tick in the economy but it is just coming very
slowly.
April Baer - This week GE made a big splash, announcing
it's going to change their accounting procedures making employee stock
options an expense. Now I confess, this one is a little over my head.
Can you explain the significance of that?
Scott Roulston - Well, up until now most companies
have granted stock options (that is, the right to buy stock at a certain
price) as an incentive, especially to their executives. I think at GE
somewhere around 10-20% of their total work force is eligible. The thought
is that the associates can influence the stock price to go up and therefore
over time this will be a real incentive for them. And as shareholders
benefit from a rising stock price, so will this incentive benefit the
executives. The problem or the controversy is that Greenspan and Warren
Benefit have been saying you ought to treat this option as an expense.
It's just like compensation. And GE has now taken a leadership role and
said we will treat it as an expense. But for GE it's about a $30 million
a year charge, which is only 1 cent a share. So it's not a big deal for
them and I think it was a masterstroke by Jeff Imelt, the Chairman of
GE, to do that. And also he signed off early on this August 14th deadline.
He certified their financial statements along with their CFO so he's taking
responsibility and being accountable. You know, I don't buy this stuff
where the CEOs say "I don't know what's going on down below in parts of
the organization". I'm surprised that more CEOs and people advising them
in Cleveland and other places don't get out in front of this issue. So
what GE did was symbolic but very important.
April Baer - Scott, we are smack in the middle
of the year and I just wanted to take this opportunity to ask you what
investors might start to think about in terms of their portfolio tune
up? Is this a good time to start reassessing what's going on?
Scott Roulston - As just a general tip, I would
say take a look at your - it doesn't just have to be your portfolio, it
could be your home mortgage. Take a look at the interest rates that you're
paying because interest rates have dropped and you might be able to do
a refinance. I understand the banks are very busy these days refinancing
and bringing down the mortgage payments for homeowners. As far as your
portfolio allocation, yeah, you might take a look at rebalancing it. Make
sure of your asset allocation (I know some people don't even want to open
those 401(k) statements these days!) but you should and take a look at
it. Maybe you can be saving even more in your 401(k). You don't have to
put it all in the stock market. You can put it in the money markets funds
and other things. But maximize that 401(k) contribution.
April Baer - Scott, thanks so much for joining
us.
Scott Roulston - You bet. Have a great weekend.
See you next week.
April Baer - Thanks a lot. Scott Roulston with
Fairport Asset Management joins us every Friday to talk business.
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