Consumers Exceed Expectations, and CFAs - Vote NO

By: Chad Hudson | Wed, Mar 27, 2002
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Once again the U.S. consumer amazed Wall Street by having more confidence in the economy than it expected. Consumer confidence jumped over 15 points in March to 110.2. This was the largest increase since March 1991, which was related to the Persian Gulf War. While the consumer continues its long running spending spree, manufacturing continues to wallow. Durable goods orders excluding transportation fell 1.3% to $124 billion.

Existing home sales did slip 2.8% in February to a 5.88 million unit rate, but it still was the second-highest level ever recorded. New home sales rose 5.3% in February to a 875,000 unit rate. While this was below expectations, the number of homes sold, but not yet started rose to 27,000 from 22,000 last month. This provides an indication that new home construction will remain solid. It is interesting to note that California sales are on fire. The number of existing homes sold increased 25.5% in February from year ago levels, while experiencing a 20% increase in prices. Assuming that the U.S. consumer will retrench, well you know what assuming does…

We should have little fear of a double dip recession, according to the National Association for Business Economics (NABE). The NABE said that 76% of its surveyed analysts put the risk of a double-dip recession less than 50%. But Robert McTeer, president of the Federal Reserve Bank of Dallas, admits that "as the economy gathers momentum and gets stronger, an adjustment will have to be made, but I'm in no hurry." I'm sure everyone is equally as shocked as I was to learn McTeer is not itching to raise rates.

The Greenspan put is alive and well. The minutes of the January FOMC meeting were released last week. In the meeting the Federal Reserve discussed the "implications for the conduct of policy if the economy were to deteriorate substantially in a period when nominal short-term rates were already at very low levels. Under such conditions, while unconventional policy measures might be available, their efficacy was uncertain, and it might be impossible to ease monetary policy sufficiently through the usual interest rate process to achieve System objectives." Several reporters talked to the infamous unnamed official, and learned that "unconventional policy measures" could include buying equities.

The Fed also mentioned that the recovery would gradually strengthen partially due to "the added consumer purchasing power arising from recent declines in oil prices." Since January 30, the last day of the meeting, the price of oil has increased about 36%. The Fed believes that the "persisting uptrend in household spending would support the economic recovery. However, household spending had been relatively robust during the cyclical downturn and likely had only limited room for a pickup over the coming quarters, and intense competitive pressures could well constrain profits, investment, and equity prices." The Fed had the same feeling regarding the housing sector - "The large additions to the supply of new homes in earlier years tended to indicate that additional impetus, if any, from housing construction would be limited over the next several quarters." The recovery will have to be based on consumers since "indications of accelerating capital investment were still quite limited."

Gretchen Morgenson, writer for the New York Times, penned a column discussing the co-dependency in the telecommunication industry. She includes a quote from David Barden, telecom analyst at J.P. Morgan, that sums up the past couple years: "The underpinnings of the emerging telecom bubble were a phenomenal miscalculation. At the time it seems like a logical progression of history: cellular, the Internet, the new thing. It was bold, it was risky, it was expensive. And it was wrong." I would argue that it was logical at any time in the last four or five years. Last year, Barden issued a research report titled "The Matrix" in which he "unearthed 184 relationships among 49 companies." The dollar amounts are staggering. Barden was only able to put a dollar amount on 61 relationships, or about one-third. These 61 relationships had a value totaling $22 billion. The majority of relationships found were commercial or strategic, which accounted for over 90%. Barden was only able to sniff out 5 vendor financing deals, but noted that finding information regarding vendor financing deals hard to come by. The amount of co-dependence was definitely much bigger. Some estimates last year put the total amount of financing put up by telecom equipment manufactures at over $15 billion. With all the business relationships between competitors and suppliers, it is quite obvious how the bursting telecom bubble toppled so many companies.

The rest of this commentary is directed to any CFAs regarding the Continuing Education vote.

The Association for Investment Management and Research (AIMR) has proposed instituting a continuing education program. AIMR contends that a continuing education program will solidify its place among investment designations. Continuing education might bring a little more respect to the profession from the uninformed public, but I doubt the uninformed public is the target group for most charterholders. If AIMR wants to put itself on a pedestal and distance itself from recent indiscretions, including the popping of the Internet/technology/telecom bubble, Enron and other accounting shenanigans, if AMIR truly wants the perception that the CFA designation spells "confidence for investors worldwide" as proclaimed by a recent advertising campaign, AIMR need to do more than mandate members read a book or a bunch of journal articles. In order to instill confidence in clients that a CFA "offers objective insights, real-world experience" AIMR must take a tougher stance against the abuses of the past couple years. AIMR should determine which analysts showed a blatant disregard for investment analysis and strip them of their charters. This would truly show that AIMR is an organization based on "relevant Body of Knowledge and the professional standards embodied in the [CFA] program" instead of just paying lip service.

The key disagreement I have over the proposed Continuing Education is what material will be acceptable. AIMR has lost touch with its core members. Out of over 55,000 members, only 1,272 members specialize in real estate, futures and options, or derivatives, yet account for more than 25% of level 3 questions. Furthermore only 475 members are in the academic world, with 828 members holding doctorate degrees. Looking through last years' Financial Analysts Journal, academics wrote an overwhelming number of the articles, 67% were penned exclusively by professors or PhD candidates, while another 19% were written by a team which included someone from academia. In total academics were associated with 86% of the articles written in 2001. I know the FAJ is held out to be an academic journal, but that is the point. With less than 1% of the membership being a part of the academic world, why publish an academic journal? Shouldn't AIMR cater to the overwhelming majority that actually practices investment decision making?

AIMR states that members will not be confined to AIMR publications and events, and will be able to products "that meet the Continuing Education Program criteria for acceptable Continuing Education credit."

The three main criteria for qualification are:

While this looks straight forward, when answering direct questions regarding material not on a pre-approved list, AIMR's has been very opaque. Plus how many of the CFA readings would have been excluded based on those criteria? Additionally the Continuing Education will have the power to "adopt, review, and revise" the Continuing Education Policies and Procedures. I cannot help but be cynical of a committee with such wide latitude. Especially given how the CFA curriculum has digressed over the past decade and the relevance of the material currently published by AIMR. I have no confidence that AIMR will truly have and maintain a true and open policy.

Instead of trying to uphold the CFA designation as measure of excellence, AIMR has tried to balloon its membership as much as possible. AIMR has not only watered down the CFA curriculum, but eased the passing requirements as well. AIMR has tried to be an organization to encompass all aspects of investing instead of concentrating on the principle idea envisioned by its founders - a rating or certification for security analysts. Please take this opportunity to vote against the Continuing Education proposal by voting against the amended bylaws. Hopefully a "NO" vote will send a strong single to the leadership that its interests are not aligned with its members that are practicing investment decision makers.


Chad Hudson

Author: Chad Hudson

Chad Hudson
Mid-Week Analysis

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