Financial Shenanigans

The subtitle is How to Detect Accounting Gimmicks & Fraud in Financial Reports and the author is Howard M. Schilit (2010, Third Edition).

You may have noticed that I have been a more active reader lately, after some time off.  In fact, I have a new and longer commute to work, and the obvious way to pass the time has been to revisit an old friend.

The latest choice in literature is also a manifestation of re-engaging a formerly strong interest.  I have been a bit disconnected from thinking about stocks and the economy and how to interpret those topics in tandem.  The most recent book is an effort to reawaken that part of the brain and to think about public companies and accounting, and how those forces work together.

Accordingly, as the title should suggest, this read is largely an exercise in understanding the tricks that companies will play to hit the quarterly number and goose revenues and profits.  And the tricks, they are a plenty.  They include…

-Recording core business purchases as capex, so as to include the expense on the investing section of the Cash Flow statement, thereby lowering operational expenses and juicing revenues and cash flow from operations.

-Speeding up the recognition of revenue on long-term contracts, well in advance of the scheduled installments.

-Recognizing revenue before a customer’s right of return has expired.

-Improperly allocating proceeds from a sale (which are one-time in nature) from product sales (which are above-the-line and correlate to revenues earned).

-With unconsolidated joint ventures, playing games with whether requisite control exists (usually 20%) such that results should show up as revenue on the income statement or as fair value on the balance sheet.

-Depreciating assets too slowly.

-Playing around with reserves and allowances, so as to have a goody bag to smooth out earnings from quarter to quarter.

-Messing around with the interest rate on pensions so as to reduce the associated pension expense.

-Increasing the residual value on depreciable assets to lower the expense.

-Showing restructuring events every quarter, even though it is an event that should not be recurring.

-Improperly treating certain events as sales of receivables rather than as borrowings.

-Using acquisitions to boost cash flow from operations without any outflows (albeit the purchase itself is an outflow, but can be excluded from the operations ledger).

As they say, use it or lose it.  I’m trying to get my brain to think and go in many different directions, as the next phase of my life proceeds.

100 Days

The last time I returned to running after an injury, I trumpeted it with a much more exuberant post header. I am trying to be a bit more careful this time, in all respects.

As the title might suggest, after exactly 100 days of healing, I tried running again for the first time yesterday. A very modest and short run, under the supervision of a physical therapist, but it was a start. Overall, in handling the sequel to my stress injury, I think I was more proactive in treatment and made efforts to be more careful about how much exertion I experienced on a daily basis. I also did a better job of trying to do other things that might remain a part of my routine, such as swimming, where I actually took some lessons since technique is so important.

Recently, I also read the book Run Less, Run Faster by Bill Pierce, Scott Murr and Ray Moss (2007, 2012). Through their FIRST program, the authors are big proponents of the 3Plus2 system, an exercise routine in which there are 3 key runs each week plus 2 other days of cross-training. The runs are comprised of one speed interval day, a tempo day, and a long run. The suggested methods of cross-training, which are days in which the athlete gets some rest from the movements and rigors of running, include swimming, cycling, deepwater running and rowing. The whole idea is that variety and avoiding too much running will help to keep a runner injury-free and from getting overworked and exhausted. And the results, apparently, are race times that continue to improve for those who follow it. The book includes a whole bunch of suggested training programs, for both the running and cross-training segments. I look forward to seeing what it can do for me.

Swimming Time Away

I’m not gonna lie, I miss running. And to say that I’ve easily transitioned to life as a swimmer would be wee-bit of an exaggeration. I have had a few swim lessons and realize that I pretty much have no idea what I’m doing. That, and the pool I swim in is always really crowded, with people totally ignoring how fast they are going relative to anyone else in the lane.

Nevertheless (I think I use that word a lot), I have been scouring the internet for suggested workouts. Because, as it turns out, when I just turn up at the pool with no game plan, my workouts kind of suck. Here’s one I am going to try:

-10 minutes easy
-4 sets of 100m, hard pace (recover between each set)
-10 minutes easy
-250m (alternating 25 hard, 25 easier, with no breaks)
-10 minutes easy

All told, that probably keeps me in the pool for about 45 minutes, which seems decent. I will probably wear my short fins to remind me to keep my legs engaged. It’s hard to get as much out of swimming as a good run, but only more time in the water will help me to get there.

I have a follow-up appointment with the doctor this week. My leg was feeling better, but then started to hurt again. I’m hoping this break (pun intended) won’t be another 4 or 5 month production like last year. Which is why I need to figure out this swimming thing, just in case.

What's on my mind today

-I finished Opportunities in Emerging Markets by Gordian Gaeta (2013), which basically lays out the case for investing in those economies and ideas on how to do it. The first third largely reads like a textbook, and then loosens up a bit with chapters written by investment managers who focus on these locales. An interesting tidbit is that higher private equity flows into a developing market are often a precursor to future stock market growth for the country. Which, of course, speaks to the fact that a functioning and liquid stock market is also an important player in a country’s growth prospects. The advantages of these markets are faster growth, favorable demographics, healthier sovereign balance sheets, movement towards global integration, attractive market valuations, inefficient markets, and lower correlation to the rest of the world. As a generalization, investing in resource rich economies is a good idea. If I ever taught a class on the subject of frontier markets, I would probably include this book on the reading list.

-With the return of my leg injury, and no more running for a while, I am embracing the swimming pool again. Except, whereas last time I lost motivation, I am now paying someone to coach me through “training” for the swim portion of a triathlon. Hopefully I will do a better job of sticking with it and making it a permanent part of my future workout life.

-I fear trying to call a bottom in anything these days, but today’s piece out of the Casey group spoke of continued long term optimism for gold, but a greater sense that the bottom was not yet in. When the biggest gold bulls are acting cautious, is that what capitulation kind of looks like?

Hill Runner

I have happily returned to my running ways, spending a lot of time lately in the Central Park loop. Incorporating the forefoot/mid-foot strike into my stride, I am causing myself much less lower limb discomfort.

Anyway, I came across a pretty nifty conversion formula for figuring out how to simulate certain hills in the park onto a treadmill. To use it, you need to know the change in elevation that you’re experiencing and over what distance – a GPS watch allows me to keep track of both. As for the formula:

-In Central Park, what is known as “Heart Attack Hill” near 110th street and CPW is about .4 miles long. The first step is to convert that distance into feet, so multiply it by 5,280 (2,112 feet).

-Next, divide the change in elevation from bottom of the hill to the top (96 feet) by its length (2,112) and multiply that answer by 100. The result (4.55) offers a smoothed out approximation for the percentage incline of the hill.

-In order to capture the wind resistance that comes with running in the elements while on a treadmill, add 1 to your guesstimate above.

So, if I want to run “Heart Attack Hill” at the gym, set the treadmill to 5.5%, pick the appropriate pace, and get going.

Mish Mosh

A few things to cover:

-Today's jobs report was probably a big boost to the Obama campaign, as the unemployment rate dropped to 7.8% -- the lowest it's been during his presidency.  The meaningful decline from 8.1% was triggered by a household survey that suggested 873,000 jobs were added in September.  Sounds great, right?  Well, a full two-thirds of that number (582,000) were part-time.  So, that's the society we're becoming.  We create jobs, they just aren't terribly good.

-This guy doesn't typically view the world as I do, but he captures well my complaint about the "great" thinkers of the dismal science: "Economists generally focus purely on the efficiency/growth effects of inflation..."

-I have been running again with some regularity (after suffering through foot tendinitis in my initial foray two months ago).  My shins are barking a little bit, so I have started doing an interesting exercise designed to counter shin splints.  You stand on a step, heels in, with most of your foot hanging off.  Do 60 seconds non-stop of flexing your feet all the way up and all the way down (30 seconds with legs straight and 30 seconds with knees bent at a 45 degree angle).  3 sets, one-minute rest in between each.  By the end of the five minutes, it feels like your legs are going to fall off.

-And, finally, it gave me a good laugh...

Where do you rank?

Interesting article which identifies 5 goals that all men should strive for in terms of physical capability:

1) Achieve a waist circumference of .80 or less

2) Bench one rep at 1.5 times your body weight

3) Do a set of 10 pull-ups

4) Run one mile in no more than 6.5 minutes

5) Reach down and touch your toes

The list is not meant to mirror as any kind of scientific study of what's required in order to be in "shape", just a list of goals which speak to good health.

With respect to number 4, since returning from my stress injury, I am surprisingly close to being back at that sort of pace for any given mile (although I used be able to do multiple miles at that type of pace or better).  I know I can do 3 and 5.  Never checked on 1, but I have always been thin and weigh the same now that I did in college.  Number 2 is likely the biggest challenge.  Again, in my early twenties, I could bench twice my weight.  Lately, I typically max out with a set of 3 to 4 reps at about 1.2 times my weight.  But, something to try for, I guess.