In defense of corporate quarterly reports

Executives, fund managers and even politicians have criticised publicly traded companies’ undue focus on generating profits in the next quarter instead of making investments with good five-year prospects.

To encourage these companies to take a longer-term perspective, several regulators have shifted corporate reporting requirements from quarterly to semi-annually.

Most prominently, in 2013 the European Commission amended its Transparency Directive to abolish the requirement for quarterly reports by publicly traded companies in favour of semi-annual reports.

After an impact assessment, the commission concluded that “quarterly financial information is not necessary for investor protection”.

But a recent study severely undermines the commission’s conclusions.

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Is the Bond Market in a Bubble? [Wall Street Journal]

Bonds issued by governments and companies are priced high these days. In the seesaw relation of bond prices to their yields, prices are up, and yields are smacking hard against the ground, at record lows.

Investors, wary of stock valuations and looking desperately for yield, have poured money into bonds and bond funds.

There was a brief scare in September when bond prices suddenly fell over concerns that the Federal Reserve and other central banks might end their “easy money” policies.

But that pullback quickly vanished, with investors convinced that the Fed will move slowly in eventually raising rates. Bond prices recovered.

So, are we left with a valuation bubble that will burst, as tech-stock investors experienced more than 15 years ago? Or are the worries merely another false alarm, which bond investors have heard before for many years?

Robert C. Pozen, a senior lecturer at MIT Sloan School of Management and former mutual-fund executive, argues that the situation is verging on a bubble as yield-hungry investors are gravitating toward riskier bonds. Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia, says he doesn’t see the credit excesses that would qualify this market as a bubble.

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US money market funds: the gain isn’t worth the pain [Financial Times]

Next month the new rules of the Securities and Exchange Commission (SEC) will become effective for money market funds (MM funds).

Most importantly, MM funds with any assets from institutional shareholders – e.g., corporations, pension plans and insurance companies – will no longer maintain a constant net asset value per share of $1. Instead, the net asset value of institutional MM funds will fluctuate on a daily basis – for example, 99.8 cents per share on one day, and $1.01 per share on the next.

The new SEC rules apply to institutional MM funds investing in short-term debt of cities and states – called “municipal” MM funds. The new rules also apply to institutional MM funds investing primarily in short-term debt of banks and top-rated companies – called “prime” MM funds.

However, the new rules do not apply to institutional “government “ funds — investing almost all their assets in short-term debt issued by the US Treasury or federal agencies, loans backed by such debt or cash.

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Negative interest rates are counterproductive [Brookings Institution]

Central bankers in several countries have entered the “neverland” of negative interest rates in an effort to promote economic growth and boost price inflation to 2 percent per year. These countries include Denmark, Switzerland, Sweden and Japan as well as the European Central Bank.

These central bankers apparently believe that negative interest rates will motivate consumers to save less and spend more. In turn, higher consumer spending will allegedly induce companies to invest in new products and facilities — thus, promoting economic growth and raising consumer prices.

However, negative interest rates have so far not produced the desired behavioral changes of consumers or companies. While there are many possible explanations for these non-results, I believe that many central bankers have underestimated the adverse psychological and political effects of their unusual monetary policies.

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Retirement healthcare could bust the budgets of many US cities [Brookings Institution]

While the deficits of public pension plans have been widely discussed, much less attention has been given to the obligations of US local governments to supply healthcare for their retired employees.

The unfunded liabilities for retiree healthcare for the 30 largest US cities exceeds $100bn, according to the Pew Charitable Trusts, a Philadelphia-based non-profit organisation. The unfunded liabilities for the 50 US states exceeds $500bn, according to Standard & Poor’s, the rating agency.

Retiree healthcare plans are uniquely American. They exist because the US has never offered universal healthcare before Medicare, the national social insurance programme, at age 65.

Many employees of cities and states retire between 50 and 55, so local governments usually provide them with highly subsidised healthcare between retirement and Medicare, and sometimes beyond.

Yet retiree healthcare plans of local governments, on average, have less than 10 per cent of the funding they need to meet their future obligations. By contrast, if a public pension plan were less than 60 per cent advance funded, it would be considered to be in dire straits.

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No More Dizzying Earnings Adjustments [Wall Street Journal]

Whether Microsoft’s $26.2 billion purchase of LinkedIn makes sense might depend on where you look. Glancing at LinkedIn’s press release for the full year 2015, you will see a prominent projection for “adjusted” earnings this year of $950 million.

Yet if you closely read the press release and its appendix, you can figure out that the company’s projected 2016 earnings under GAAP, the generally accepted accounting principles required in securities filings, are minus $240 million.

What accounts for that enormous difference? Like many companies, LinkedIn reports one set of figures to the Securities and Exchange Commission but touts adjusted figures elsewhere. LinkedIn’s adjusted projection excludes large expenses: $630 million for stock awards to executives and $560 million for depreciation and amortization.

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Money Market Funds in China Become Less Systemically Risky [Real Clear Markets]

Last year, China’s stock market took a tumble, which sent shock waves through the global securities markets. Now, money market funds are booming in China and could present the next systemic risk. While Chinese regulators have taken steps to reduce that risk, the question is whether they have gone far enough.

Assets of Chinese money market funds have doubled in the last year – from approximately $350 billion at the end of 2014 to over $700 billion at the end of 2015. These funds are primarily sold online to individual investors by Internet giants like Alibaba and Baidu.

Money market funds have become so popular in China because they offer higher interest rates than retail bank deposits. But these funds achieve higher rates by investing in a much riskier array of debt securities than U.S. money market funds – and the average Chinese investor may not be aware of the level of risk involved. If there were significant defaults in the debt securities held by

Chinese money market funds, investors would likely run for the exits, just as they did last summer in the Chinese stock market.

To prevent these potential problems, the Chinese Securities Regulatory Commission has adopted rules, which became effective in February of this year. These rules are designed to decrease the riskiness and increase the liquidity of Chinese money market funds, although the rules are still looser than the regulations for U.S. money market funds.

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This single act would help many Americans reach retirement savings goals [Market Watch]

It’s true for everyone: despite our best intentions, we often fail to accomplish what we set out to do. When it comes to retirement investing, millions of Americans do not meet their own declared saving goals for retirement.

As a result, almost one-third of the U.S. population has no retirement savings at all, while many others will fall well short of what they will need for their Golden Years.

A solution can be found in the field of behavioral economics, which suggests ways to help Americans start saving. It seems that saving is a lot like dieting — small changes can help you reach your goal.

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