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As a result, economists and Wall Street analysts are upgrading their outlook for the year. Growth for the economy is being projected at a 4% rate by the forth quarter and the Dow projected above 11000.
There is a small problem with the reported data. Not that it misrepresents what has occurred, but that most of these “economic indicators” are weather sensitive. With the mild winter to date, particularly in the Northeast, it should be no surprise that retail sales and the sale of houses improved over the same period last year.
The increase in reported GDP is probably overstated. Government accounting practices, at least as to how inflation, productivity, and GDP are measured, should come under the same scrutiny as company data. Improvement adjustments for technology influence the inflation index, which adds to adjustment problems in GDP and productivity.
If oil prices continue to rise and March and April weather are more normal, expect the GDP reports for the next period to be less pleasing. The speed of the recovery will be much less than now forecast. With the stock market priced for a strong recovery in profits, a strong market recovery looks remote.
Stocks in the News
The H-P/Compaq merger effort seemed to get a boost last week. The Institutional Shareholders Services (ISS), who advise institutional shareholders, supported the merger. In addition, the Federal Trade Commission (FTC) imposed no conditions on the merger, which was viewed as positive by many. The market didn’t appear to agree as both stocks dropped in price on the information.
The ISS reviewed a massive amount of data related to the merger deal and concluded on balance the merger was beneficial to stockholders. The problem is ISS is dependent on data provided by HP and their advisors. You can be sure the data provided overstated the benefits and understated the problems. The advisors that value such a deal will make the most favorable assumptions about integrating products to cost benefits and projections of margins to support the merger.
The FTC’s report was less favorable when you consider what was said, that the merger would not impair competition in any relevant market and that the merger would actually enhance competition in the computer industry. This would imply that gross and net margins would suffer with the merger. Hardly what an investor would like to see.
H-P has chosen to attack Mr. Hewlett rather than address his concerns with sound data and analysis. Also their need to keep information from the investors suggests to me that the merger would be a difficult sell if the investor knew all. Given the history of problems with large mergers, investors should be prepared for disappointment if the merger is approved.
Accounting Irregularities
Companies criticized for their failure to disclose financial information, especially off-balance-sheet items, are now making more information available and explaining the impact of these accounting activities. Additional information is always good for investors. It improves investment decisions.
Some companies appear to be taking a different approach. I received an interesting annual report and proposals for approval from Novartis. Shareholders were asked to approve the annual report, activities of the board (as if I were privy to board discussions), appropriations of available earnings, and reduction in capital among other items. The annual report was 136 pages with over 30 pages of notes to the financial statement. It was difficult to get an overall picture of the company’s performance given the layout of the report. Why my approval for the annual report and other items? Why so many pages of notes? Why the Forward-Looking Statement Disclaimer? Makes one wonder.
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