Welcome To Aloke (Al) Ghosh’s Blog

Al (Aloke) GhoshWelcomzicklin-school-of-business_416x416e to my weblog, www.alokeghosh.com. Via this personal blog, I am sharing pertinent issues, current topics, and policy matters in the fields of auditing, financial reporting, and corporate finance with relevance for auditors, hedge fund and mutual fund managers, controllers and CFOs of public companies. The targeted audience includes my current and past students, colleagues from academia and practice, and anyone else fascinated by the crossroads of auditing, accounting and finance. Because my academic training and professional experience overlaps these three interconnected business fields, my commentaries/ideas/claims are often a distinctive outcome of a triangular subject-matter lens rather than a specialized subject-matter lens.

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Tryst with Transylvania

transylvaniaSituated in central Romania and surrounded by the Carpathian mountain chain, Transylvania or the “land beyond the forest” is easily one of Europe’s best-preserved medieval towns. Bram Stoker’s 1897 vampire novel was inspired by Vlad Dracula, a 15th-century Wallachian nobleman who lived in a castle close to Brasov (a town south-east of Transylvania). According to some estimates, Transylvania has about 100 castles and fortresses and about 70 fortified churches.

Some travelers describe Transylvania as ‘the last truly medieval landscape in Europe,’ which seems quite accurate. Hergé, the creator of Tintin, might have had Transylvania in mind when he wrote ‘King Ottokar’s Sceptre’! Some of the more prominent Saxon regions in Transylvania including Sighișoara, Biertan, and Viscri are deemed as Unesco World Heritage Sites.

Brief History

Because of Transylvania’s colossal natural beauty, the region was coveted and acquired many times over by various empires and kingdoms. The region was an integral part of the Kingdom of Hungary between 950-1526. Subsequently, it became an independent Principality (1526-1690) before being reabsorbed by the Habsburg Empire. It was united with Wallachia and Moldovia to form what we know as Romania today after the Austro-Hungarian Empire was dissolved in the Treaty of Triannon. After World War I, Transylvania became part of Greater Romania.

The region was dominated by Wallachians, Moldovans, Hungarians, Germans, Romas, Jews, and Armenians. Because of the diversity in racial composition, Transylvania’s history is marked by turbulent periods. The cultural differences within Transylvania are stark. According to experts, the South is dominated by a Saxon culture, the East and North East characterized by a Hungarian culture, the North is more Slavic.

Traditional Cuisine

Transylvania’s cuisine is heavily influenced by German, Greek, and Turkish cultures. The key condiments include thyme, red pepper, tarragon and some regions specific wonders like leuștean and cimbru. The staple ingredient is built around lamb, beef, chicken or pork.

All meals traditionally begin with a soup or ciorbă which has many variations including beef, egg yolk, flour dumplings, homemade pasta, or regional vegetables. One national treasure is ciorbă de burtă or a soup made of a cow’s stomach. Soups are traditionally served with a red or green pepper on the side to spice up the palate. As a leading producer of cabbage (varza), it is not surprising to find variations of cabbage cooked in slow heat with various types of animal protein. The most popular side dish is mămăligă – polenta served with a dollop of fresh smântână (sour cream).

Some of the popular main courses include sarmale (cabbage rolls stuffed with spiced pork and rice), Tochitură (pork and beef stew cooked in spicy tomato or wine sauce) served with fried egg yolk. The most popular grill food is a distinctive form of sausage called mici (grilled rolls of minced pork, beef and lamb). What distinguishes a mici from other types of sausages is the absence of any sheath around the meat.

The dessert menu includes strudels and cakes, clătite, (crepes filled with chocolate or fresh fruit) and the simply divine papanaşi or a fried dough sweetened with cream cheese or jam (a sweet beignet). Food is typically served with wine, which is less than mediocre (the natives beg to disagree), beer, which is of high quality, or ţuică (plum-based snap liqueur sure to give you a hangover).

Beware, the culinary experience in Transylvania is expected to increase the chances of a heart attack. But then who cares about the efficacy of arteries pumping blood into the heart when one has a date with ‘Ambrosia’ and divine food.

Noroc (cheers)!

Brasov, July 11, 2016, 1.45P

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Can Migration Explain Britain’s Decision to Exit EU?

BrexitNearly 52% of British citizens (17.4 million) voted in the ‘referendum’ on Thursday to exit the European Union. The outcome is startling because, from all accounts, the economic cost to Britain in the short- and long-term is expected to be staggeringly high. In less than 3 days, the global financial markets lost more than $3 trillion. During this period, the FTSE lost more than 100 billion pounds. The British pound, which was trading at an exchange rate of around $1.7 about a year ago is trading today at around $1.35.

The worst may not be over. Many sophisticated analysts believe that the pound could fall to as low as $1.10 within a year and it is projected that the U.K economy might hit a recession with a precipitous decline in property prices.

Why did the majority of the voting electorate elect to exit the EU and embrace large economic costs? One common explanation is linked to the sustained inflow of migrants from other EU countries.

Migration Statistics

Statistics disproves this theory. In 2015, the inflow of foreign nationals into Great Britain was 630,000. The increase in foreign population in 2015 as a percentage of Britain’s population, which is around 65 million, is less than 0.01%. Most economists would consider such an increase as a rounding error.

Between 1990 and 2015, Britain’s population grew from 57 million to 65 million, which translates into a modest increase of less than 1% per annum. Again, this small magnitude of the inflow of foreign nationals into Britain is unlikely to drum up mass hysteria among British citizens. Granted, the politicians have exploited the foreign migration issue to harness their individual political careers. However, the migration numbers from the census bureau do not support the casual observation that migration is a key factor driving the British anger.

If the scale of ‘legal’ migration fails to provide a compelling narrative why the majority of British nationals, principally the English, chose to exit the EU, there must be other persuasive economic explanations why 17 million rational British individuals didn’t hesitate to marry into an economic uncertainty.

Factor Price Equalization Theory

The Nobel Laureate in economics, Paul Samuelson, wrote his theory of “factory price equalization” in 1948. His theory might provide deeper insights into Britain’s current dilemma.

The Theory: According to factor price equalization theory, the prices of identical factors of production (typically labor and capital) will be equalized across countries as a result of international trade in commodities. Thus, when two countries have a free trade agreement, even without free mobility of labor, any differential in wage rate (price of labor) and rent of capital (interest rate) between two trading countries is expected to slowly dissipate. With the advent of free mobility of labor, as in the case of EU-Shengen countries, the factor price equalization process converges rapidly.  

Wage Disparity

Anecdotal evidence suggests that much of the migration of EU nationals into the U.K. has been mostly from Eastern Europe, which is typically identified as having depressed wages. For instance, according to World Bank statistics, the average monthly wage rate of Poland is €430, for the Baltic States (Lithuania, Latvia and Estonia) it is €380, for Hungary it is €358, for Romania it is €279, and for Bulgaria it is €215. For some Western European countries like Spain and Portugal the wage rates are also quite low (around €600).

In sharp contrast, the average monthly wage rate of Great Britain is around €1,550. Thus, the average wage rate of U.K is about 3 to 5 times larger than the wages of the migrant countries.

Economic Outcomes

  • Negative outcomes
  1. Wages in the host country are expected to decline as new migrants from lower wage-rate countries provide their services at a lower price in the U.K. The influx of competition injects considerable downward pressure on the wage rate of the host country. Unfortunately, U.K. workers must bear the brunt of this cost. In the absence of any barriers to entry in the labor market, i.e., specialized degrees or technical skills, wages of the host country will decline. Typically, “blue collar” workers who do not have a comparative advantage are most affected by migration. In contrast, “white collar” workers remain unaffected because migration does not affect competition in this sector.  
  2. Depending on sector specific labor migration, the abundance of labor force will also lead to some loss of jobs. Again, the job loss is expected to be confined to the blue collar working class because of fierce competition and limited growth opportunities in this sector.

The combination of job losses and a decline in wages gives rise to public discontent, anger, and resentment. This resentment is likely to be confined to working class. This is a strategic reason why the voting pattern in the referendum can be explained by the level, or lack, of education. The more affluent people or the more educated people would vote against an exit while those with lower levels of education or having less financial security would vote in favor or an exit.

  • Positive outcomes

Economists often underscore the gigantic economic benefits of migration. Yes, wages/rates decline with migration but it spurs investment, which in turn leads to more jobs. Consumers always benefit from migration and trade because of lower prices.

The Politics of Winner and Losers

A fundamental human natural law is that there are winners and losers in any society. An optimal and emancipated society aspires to minimize the number of losers while maximizing the number of winners. Judging from the referendum, a disproportionally small segment of the U.K population appropriated much of the gains from being part of the European Union, while a large segment of the population lost because of the union.

The U.K experience is a reminder that gains from trade, or common markets, must accrue to all strata of society. Otherwise, there will be social unrest or perverse outcomes that are to the detriment of the country’s long term economic welfare.

Migration issue is a sensitive topic in the U.S. as well where the discussion centers around illegal immigration. Whether the benefits of migration accrue to the majority of the citizens of the host country will decide whether ultimately host countries become more welcoming towards migration (illegal or legal).

At the end of the day, we are all migrants. Some migrated recently, while others migrated a while back.

Helsinki, July 1, 2016; 9.59P

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Chatham Professor Earns Distinguished Fulbright Award

Indian Express, North America Edition

New York – March 1, 2016 – Aloke (Al) Ghosh, Professor at Baruch College has been chosen as a recipient of the prestigious Fulbright Aalto University Distinguished Chair Award for research in Finland and other European countries.

 Ghosh is a Professor of Accountancy at the Zicklin School of Business. Starting in the summer of 2016, he will engage in scholarly activities, conduct research, give lectures, conduct seminars for doctoral students and faculty, and consult with senior administrations at Aalto University.

“I feel extremely honored to be receiving this prestigious award,” said Ghosh. “Consistent with the Fulbright goals and objectives, my endeavor would be to exemplify the power of international academic exchange, share my knowledge and understanding of cultures with the intention of bridging the academic and cultural gaps between the U.S. and Finland and with the ultimate goal of a more peaceful and prosperous world.”

Professor Ghosh graduated from Tulane University, in New Orleans, where he earned his Ph.D. in Accounting and Economics. His Master’s degree, which is in Economics, is also from Tulane University. Speaking about his expertise and how it has contributed to his selection of the Fulbright Honor he said, “I graduated from Tulane in 1993, which was 23 years ago. Because my academic training includes Economics, Accounting, and Finance, I am able to use an interdisciplinary lens to provide unique and distinctive insights on business subject matter rather than use a specialized lens derived from one area of expertise.”  He continued, “My endeavor would be to engage in high quality scholarly research with faculty at Aalto, give lectures on my subject matter of expertise, conduct seminars for doctoral students and faculty, and consult with senior administrations at Aalto University.”

Ghosh has published numerous articles relating to topics in financial reporting and analysis, capital markets, auditing and corporate finance. These articles have appeared in The Journal of Accounting and Economics, The Accounting Review, Review of Accounting Studies, Contemporary Accounting Research, Journal of Finance, Auditing: A Journal of Practice and Theory, Journal of Corporate Finance, Financial Management, Journal of Management Accounting Research, Journal of Business Finance and Accounting, and many others.

With the support of the United States government and through binational partnerships with foreign governments, especially the Fulbright Center in Finland, the Fulbright Scholarship Program sponsors U.S. and foreign participants for exchanges in all areas of endeavor, including the sciences, business, academe, public service, government, and the arts and continues to increase mutual understanding between the people of the United States and the people of other countries. Currently, the Fulbright Program operates in over 155 countries worldwide.

Chatham Professor Earns Distinguished Fulbright Award

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Equestrian Polo Designer Fails to Score

198_Polo_Ralph_Lauren_logo_profileThe stock price of Ralph Lauren, an upscale apparel company renowned for its Polo brand, has taken a thrashing lately. The stock has declined by about 50% over the past one year because of sluggish demand in the US and a decline in the value of its overseas sales from a strong dollar. In the third quarter of this year, the company reported a colossal 39% drop in  earnings.  The company also lowered its fiscal 2017 guidance numbers. Investors fear that the company may be at the vortex of a long-term slump.

End of an Era

To energize the polo pony, Mr. Ralph Lauren, the iconic designer-founder of Ralph Lauren and its sole Chief Executive Officer (CEO) and Chief Creative Officer, finally decided to step down as the CEO after being at the helm for almost 50 years. Mr. Lauren is hoping to inject some youthfulness into the septuagenarian polo team. Stefan Larsson, who is a former H&M executive and president of Old Navy, was hand-picked by Mr. Lauren to take charge of a company that is under attack.

Mr. Larsson will report to Mr. Lauren, although Mr. Lauren characterized their relationship as a “partnership” which is understandable considering that Mr. Lauren is the largest individual shareholder in his company and is expected to play a role in major decisions. Essentially, the company is separating the roles of the professional manager from that of the creative manager. The separation of the two roles will help assure Wall Street that the creative aspirations do not bleed the financial foundations of company.

Brutal Cost Cutting

Under the new strategy labelled as “New Plan Forward,” the incoming CEO intends to slash costs to fashion a reversal in downward profits. The company intends to close 50 stores, lay-off about 1,000 employees (or 7% of its workforce), and remove three of the nine layers of management that stand between the CEO and sales team.

The clothing production lead times will be amended from 15 to 9 months. Certain clothing lines will be on a hyper fast production time whereby it will be moved from the development stage to the shop floor within eight weeks.

The cost cutting strategy is bold and brutal, the Swedish CEO intends to slash costs by about $180 million to $220 million per year which is in addition to the $125 million in cost cutting completed last year.

Restructuring Costs

According to the plans, the company is projecting $400 million in restructuring charges and additionally the company intends to write off as much as $150 million in inventory that is scheduled to be liquidated. Evidently, near term earnings numbers are going to take a big hit before increasing.

Uncertain Prospects

The reasons for Mr. Lauren giving up some operational and financial control of the company after 50 years are notable and praiseworthy. Once a founder-owner company becomes sufficiently complex, the natural economic progression for the company is to retain a high quality professional manager who is responsible for supervising day-to-day operations, mange investments, and make optimal financing decisions with the objective of maximizing firm value. The advent of a professional managers also assures investors that the financial aspects of the company are not being compromised as creative side blossoms.

However, some of the restructuring plans are hard to assess. Some immediate concerns include,

  1. Why hire a CEO from outside the company? Why not hire an insider who understands the value of the brand?
  2. Can young CEO render value while being under the influence of a powerful founder-owner?
  3. Why pick a CEO from a low-priced apparel designer company that is not a direct competitor?
  4. Why are the business models that helped revive the fortunes at Old Navy and H&M likely to be useful for Ralph Lauren?
  5. Cost cutting strategies can only render value up to a point, eventually the principal driver of earnings is revenue growth.
  6. Too much cost cutting can also harm the brand value because of a loss in human capital.

Considering all these questions, the future of Ralph Lauren remains highly uncertain.

Helsinki, June 21, 12.48P.

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How Mobil(e) is ExxonMobil?

Losing Triple A Credit Rating

Losing Triple A Credit Rating

ExxonMobil Corp. had the honor and distinction of having a gold-plated AAA credit rating since the post WWII period. However, fortunes can change abruptly when one is trading products of mother nature. Last week, Standard & Poor’s (S&P) downgraded Exxon Mobil’s credit rating for the first time in almost 70 years from the coveted “AAA” rating to a “AA+” rating citing expectations of continuing low oil prices. ExxonMobil joins two other US companies with S&P AA+ credit ratings; General Electric Co. and Apple Inc. The two remaining US companies with the highest possible corporate AAA debt ratings are Johnson & Johnson and Microsoft Corp.

Exxon Mobil History

ExxonMobil is an American multinational oil and gas company based in Texas. It is the largest direct descendant of John D. Rockefeller’s Standard Oil Company. Exxon Mobil was formed in 1999 by the merger of Exxon (formerly Standard Oil Company of New Jersey) and Mobil (formerly the Standard Oil Company of New York). ExxonMobil is also the Fifth largest publicly traded company by market capitalization. ExxonMobil was the second most profitable company in 2014.

Downgrade Reasons

S&P stated that the “company’s debt level has more than doubled in the recent years, reflecting high capital spending on major projects in a high commodity price environment and dividends and share repurchases that substantially exceeded internally generated cash flow.”

S&P also said that while Exxon made efforts to reduce capital spending, the maintenance of production and replacing reserves will ultimately require the company to spend more. Because the company is returning cash to shareholders, instead of building cash or reducing its debt, the company faces limits on credit improvements even when oil prices recover.

S&P cautioned that it could further lower its rating on Exxon if the company is unable to sufficiently adapt to a prolonged period of low commodity prices. The downgrade is not a complete surprise. In February, S&P downgraded rival Chevron Corp and warned that such a move was also possible for Exxon.

Shareholder Payments

ExxonMobil paid out $325 billion as dividend and share repurchases over the last 11 years which exceeded its outlays for new property, plant and equipment of $272 billion over the same period. During the fourth quarter of 2015, the company paid out $3.6 billion in dividends and share repurchases, which is more than it earned in that quarter.

In February, Exxon Mobil changed its strategy and declared that it would only repurchase shares to offset dilution, and not pay back cash as dividend.  

Why Repurchase Over Dividend

Many companies prefer stock repurchase over dividends. One explanation is accounting based therefore cosmetic and the second explanation is more economic.

Investors tend to focus on accounting earnings, mostly earnings per share (EPS), which is computed as net income divided by number of shares outstanding. When a company buys back (repurchases) its own stock, it reduces the shares outstanding and thereby increases its EPS. This type of an increase in reported EPS is cosmetic (nip and tuck). Shareholders care about the pie (earnings) and not how the pie is being shared (EPS). So stock buyback initiated to increase EPS is a akin to a magician’s show intended to circumvent reality.

The advantage of stock buyback is that it is a one-time cash payout unless the company elects to announce future buybacks. Dividends, on the other hand, are more permanent in nature and investors expect continuation of dividend payments when one is announced. Therefore, companies wanting to preserve future cash prefer stock buyback over dividend.

ExxonMobil wants to buyback stock to offset the stock price decline from declining oil prices. Given the low oil prices, it has cut back on its planned investments or production capacity. However, when oil prices bound back, it wants to preserve cash to fund its future growth which is why it prefers stock buyback over dividend.

Stock Price

ExxonMobil’s stock price went down from a high of around $103 in 2014 to a low of $72 in 2015. The stock is back at around $90. With oil prices trending up, we can only expect ExxonMobil’s stock price to continue its upward trajectory.

Chatham; June 11, 2.11P


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The Mexican Wall (Mart) Spectacle

walmartWal-Mart Stores, the leading private employer in the world, operates in 25 countries with a strong presence in Mexico. Roughly about 20% of Wal-Mart’s 11,500 locations are based in Mexico. Over the last three years, the Justice Department has been investigating allegations that Wal-Mart paid bribes in Mexico to obtain permits. 

A group of beneficial Wal-Mart owners filed a complaint with the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) that Wal-Mart’s auditor, Ernst & Young (E&Y) was aware of the bribery long before the company disclosed this irregularity to U.S. authorities in 2011. According to the complaint letter, E&Y as the independent auditor should have reported the suspected bribery to the SEC as soon as it became aware of such improprieties in 2006.

Bribery Act

The Foreign Corrupt Practices Act of 1977 (FCPA) makes it unlawful for persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. The Act was amended in 1998. The anti-bribery provisions of the FCPA now applies to foreign firms and makes it illegal for foreign companies to pay bribes in the U.S.

The Act levies criminal and civil liability for paying bribes to foreign government officials. The Justice Department has jurisdiction over the FCPA.


The Justice Department launched an investigation following a 2012 New York Times article about the alleged Mexican bribes. According to the article, Wal-Mart Mexico unit paid middlemen to obtain permits and that Wal-Mart executives chose not to pursue an internal inquiry into the suspicious payments.

Although the three-year investigation remains incomplete, according to Wall Street Journal, the case could be resolved with a fine and no criminal charges against Wal-Mart executives because the charges may not be as severe as previously anticipated.

Auditor’s Obligations

According to the auditing standards (AU section 317), auditors have a responsibility to design procedures that provide reasonable assurance of detecting illegal acts. In cases of bribery, the auditor is also implicated because bribing a foreign government official is illegal in the US and also because any bribery is likely to have a material effect on a company’s financial statements.

Companies that pay bribes generally record the underlying transactions in their accounting books as legitimate operating expenses to avoid detection. Since bribes often involve disbursements of cash, recording a bribe as a legitimate operating expense results in false reporting of expenses on the income statement.

What are the duties of the external auditor when it becomes aware that its client is suspected of violating FCPA provisions?

The answer may surprise you.

  • If an outside auditor discovers an illegal act, it is required to notify responsible authorities within the company including the company’s board and audit committee.
  • The external auditor is not required to notify the government.
  • Only when the company refuses to take corrective actions or the company’s books are compromised is the auditor obligated to notify the government.

Essentially, the rules and obligations are suggesting that the company has the obligation to correct improper acts and also inform appropriate government authorities.

Top Gun: Tom (Cruise) Ray

According to Chief Tom Ray, past Chief Auditor of PCAOB and my colleague at Baruch College,  external auditors are not legally obliged to inform outside regulators about potential scandals except in limited circumstances. Auditors are required to report those acts to management and the board’s audit committee, which is responsible for monitoring financial reporting and disclosure practices. The accounting firm also needs to evaluate whether the bribers would have a material impact on financial statements.

Top gun in auditing, Tom states that only when the company doesn’t take appropriate actions, an outside accounting firm may be legally required to report the problem to a federal agency,


Needless to say, Wal-Mart will become target of lawsuits. E&Y, with its deep pockets, is also likely to become a prime target. However, if the norm is to pay bribes to secure contracts, especially in developing and emerging countries, U.S. companies are at a disadvantage relative to almost all other countries that do not have anti-bribery provisions.  

Maybe it is time to have an anti-bribery world statute.



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Cookin’ Apple Strudel with Some Cinnamon

apple-ceo-tim-cook-has-dataApple Inc. recently reported its first-ever revenue decline in 13 years. The stock price of Apple has declined by about 30% over the past 12 months. The high flying stock was trading at a high of $135 around May of last year but today it trades around $95. The billionaire investor Carl Icahn announced last week that he had sold his entire stake in Apple citing China’s economic slowdown. He also worries that the government could make it very difficult for Apple to conduct business.

Some financial gurus disagree with the market’s negative assessment of Apple and the company’s future prospects. The Sage from Omaha, the Financial Guru Warren Buffet, does not share the market’s adverse outlooks on Apple. Buffett’s Berkshire Hathaway Inc. declared on May 16 that it had invested $1 billion in Apple Inc. stock earlier this year. Apple stock went up the same day by about 4% which created value of more than $18 billion.


Among various Apple products, the iPhone business is the prime driver of Apple’s profitability and global growth. Apple iPhones account for almost two-thirds of its global revenues. China plays a crucial role in propelling Apple’s business. Following the U.S., China is Apple’s second-largest market in the world. Tim Cook, the CEO of Apple, has visited China 8 times since taking up the reigns of the company.

Many investors have serious doubts whether China can contribute towards Apple’s growth. With a slowing Chinese economy, phone sales have declined in China which is a key reason for Apple’s deceleration in revenues. To confront the decay in revenues, Mr. Cook visited China earlier this month and met with senior government and Communist Party leaders. Apple also announced that it would invest $1bn in Chinese ride-hailing app Didi Chuxing to better understand the Chinese market.

Is the China commentary likely to lead to “one bad apple?” Carl Icahn seems to believe so.

Cookin’ With Spices

The solution for Apple is to replicate the Chinese success story with another country with comparable population and one that is hungry for smartphones. Low and behold, Cook landed in India this week just in time for a monsoon wedding. Mr. Cook is hobnobbing with the Indian Prime Minister, meeting with key industrialists, and boogying with the Bollywood starlets. Mr. Cook is cookin’ Apple strudel with a hint of cinnamon!

India accounts for only 1% of iPhone sales. Why? The answer is simple. India’s market is dominated by phones under $75, while Apple’s models start at around $500. As a price sensitive market, it is not surprising that Apple with its expensive iPhones has been unable to make a dent on the smartphone market in India. Apple is now aiming to grab the Indian smartphone market share and resurrect its growth story.

Bilateral Trade  

Apple has announced major investment in India. It plans to set up the first development Centre in India in Hyderabad. Apple also announced a “design and development accelerator” in Bangalore. Although, Apple is expected to continue to have its manufacture hub in China, the company had announced last year that it plans to invest $5bn in India to make Apple devices.

But what does Apple want in return for its massive investments in India? According to the Economist, Mr. Cook is hoping that the Indian government will allow Apple to sell its refurbished phones in India, which has the dual advantage of finding an outlet for its used phones and also meet the lower price barrier of smartphones in India.

Future of Apple stock?

Hard to say, but winners like Apple have a way of figuring out how to win even when the odds are stacked against them. They defy all odds, which is why we call them winners.

It is safe to ride the apple wave with the King of Omaha.

New York, May 20, 2016; 12.12P

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The Curious Case of Elon Musk

TeslaIn the first quarter of 2016, Tesla Motors reported total revenues of $1.15 billion and an adjusted loss per share of 57 cents. Investors and capital markets rely on positive earnings, a measure of profitability, to value companies. Since 2010, the company has reported a loss every year. If positive earnings serve as a barometer for stock valuation, Tesla stock is unlikely to capture your imagination.

Yet, investors have driven up the price of Tesla as if they are driving the Aventador, the Italian stallion, on the Autobahn. The stock price of Tesla was around $20 in 2010 and today it is worth $207, which translates into a heart pounding growth rate of more than 900%. If you had bought 1,000 Tesla shares in 2010 for a modest investment of $20,000, the same investment would be worth almost a quarter of a million dollars.  

Irrational Exuberance

What is the basis for such irrational exuberance? Are investors assessing “value” of Tesla based on its revenues or expected future profits? The company’s total revenues grew from $117 million in 2010 to $4,030 million in 2015, which is an astounding growth of 3,400%. Estimating equity value based on revenues and disregarding economic profits is like chasing James Bond’s Aston Martin in a Cinderella Carriage. Could investors be arriving at intrinsic value using expected future profits. Sure, I could also win the New York lottery!

Most analysts have a sell recommendation on Tesla yet investors are treating the stock like Malva Pudding served with Witblits. So what is the rational explanation for the fascination with Tesla? Most likely, investors are really betting on the ingenuity and brilliance of Elon Musk.   

The Musk of Zorro

Elon Musk is a South African-born Canadian-American entrepreneur, engineer, innovator, and investor. He is the CEO and product architect of Tesla Motors. He is also the founder CEO of SpaceX, co-founder and chairman of SolarCity, co-chairman of OpenAI, co-founder of Zip2; and co-founder of PayPal. As of April 2016, he has an estimated net worth of US$14.2 billion, making him the 68th wealthiest person in the US.

Mr. Musk has stated that the goals of SolarCity, Tesla Motors, and SpaceX are based on his vision to change the world. His desired goals include reducing global warming through sustainable energy production and consumption, reducing the risk of human extinction, and setting up a human colony on Mars. He has envisioned a high-speed transportation system known as the Hyperloop, and has proposed a VTOL supersonic jet aircraft with electric fan propulsion, known as the Musk electric jet.

Tesla Models: Bevy of Beauties

The company caught the attention of the avant-garde driver when they produced Tesla Roadster, the first fully electric sports car. The company’s second vehicle was Model S, a fully electric luxury sedan, which was followed by the Model X, a crossover. Its next projected vehicle is the heavily hyped mass-market electric car Model 3.

The price of eco-friendly and curve enhancing beauties is not cheap. Models S and X are around $100,000. Only Model 3, a Musk gift for the masses, is priced around $35,000.  According to Tesla, reservations for Model 3 is approaching the 400,000 mark. The expected shipping date is not until the end of 2017. Many of the later orders fulfilled may not be available until 2019 or 2020. Model 3 should be renamed “Phantom of the Opera.”

Are you ready to test drive a Tesla or invest in the Tesla stock? You will certainly enjoy the “ride.”

Chatham, May 13, 2016; 12.30A

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Dragon Versus Tiger: A Growth Slugfest

india-chinaBased on World Bank estimates, India’s economy grew by 7.3% in 2015, which was higher than every other major nation including China. For the first time in more than 20 years, India recorded the highest growth rate in GDP. In sharp contrast, according to the numbers released by the Chinese government, China’ economy grew by 6.9% in 2015.

Asian Development Bank (ADB), a Manila-based multilateral bank, projects China’s economy to grow by 6.5% in 2016 and by 6.3% in 2017. Even with excessive monetary and fiscal stimulus, the consensus is that China’s average growth rate in the next five years is unlikely to exceed 6.5%. A more realistic expectation is that the growth is likely to be lower because of the weaker demand from major developed industrial economies.

ADB is predicting India to become the fastest-growing major economy.  The projected economic growth rate is 7.4% in 2016 and 7.8% in 2017  propelled by investments in the public sector and lower oil prices.   

Dragon Warrior Restrained

With a debt hang, housing glut, and excess capacity in factory production, Chinese officials are projecting tougher years ahead. Fears over a slowing economy and concerns over plunging oil and commodity prices have started to chip away into China’s phenomenal growth rate observed during the last decade.

China is transitioning from being an investment- and industrial-oriented economy into a consumption economy, which is a key indicator of a major developed and industrial economy. China’s government is expected to encourage this transition which bodes well for consumers in China. Nevertheless, the ever so competitive China might consider various ways to augment its growth by relying on deficit financing.

China’s stock market volatility is also likely to have some negative repercussions. The stock market observed a massive run-up followed by the gut-wrenching plunge, which reflects underlying uncertainty.

Tiger Unleashed

Bullish on India, the International Monetary Fund has projected a robust growth rate of 7.3% for 2016 and 7.5% for 2017. IMF welcomes India’s emphasis on public infrastructure spending, reducing subsidies, improving the labor and product markets, and enhancing the strengths of financial institutions. As one of the world’s largest oil importers, India has benefited from low oil and energy prices, which has been a major factor in propelling current growth and is a key factor in explaining future growth rates.

A key source of concern in India is that the country’s banks, especially the public banks, have a disproportionately high percentage of “bad debts” on their books which have yet to be written down. According to Reserve Bank of India, about 21% of all loans to large Indian companies were “stressed” as of June 2015, up from about 17% in September 2013.

The data on the growth rate in India must be taken with a pinch of salt and lots of spices. Most worldwide investors are often mistrusting of India’s growth numbers  because of the unreliable process by which data are gathered and assimilated. Therefore, the stock market may not reflect the renewed economic optimism as foreign direct investments may decline if institutional investors do not believe in the growth numbers.

For U.S. investors, both India and China continue to appear as attractive investment opportunities especially considering the weak growth rate in the US and Europe.

New York, May 5, 2016; 12.52P

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Kingdom Turns to Goldilocks Capitalism

the-oil-kings-9781439155189_hrThe Saudi royal family controls the world’s biggest oil reserves in Saudi Arabia. The riches from the black gold is the basis of the royal families’ power, influence, and legitimacy. The family is considering to take Saudi Arabia’s Oil Company (ARAMCO), which is a state owned enterprise, public. ARAMCO is one of the world’s most secretive oil companies which reveals almost no information on revenues and offers only limited information on its hydrocarbon reserves.

According to media speculation, Crown Prince Salman, who is the son of the current King and often considered the power behind the throne, made public statements about the sale of ARAMCO shares. The Prince claims that the IPO is being initiated to confront corruption and usher in transparency. In a monarchical autocracy, which is renowned for lack of democratic freedom and beholden to absolute power, it remains unclear how he intends to deliver on his promise.  

So the billion-dollar question is why consider an initial public offering (IPO) at all and then why now when the oil prices are rock bottom?


The value of ARAMCO is derived from its massive reserves of crude oil, which the company claims to be around 265 billion barrels. The cost of oil extraction is around $4 per barrel, which happens to be the cheapest exploration cost compared to the extraction cost anywhere else in the world.  In the United States, lifting that same barrel of oil could cost anywhere from $25 to $80 per barrel. The efficiency with which the Saudi company can extract oil is faster than any of its rivals. According to Forbes, ARAMCO can mine as much as 13.5 million barrels of oil a day, which equals 15% of the world’s daily oil needs.


If ARAMCO goes public, it is estimated to have a market capitalization as high as $10 trillion, which easily exceeds the market value of the world’s largest publicly traded energy company ExxonMobil. If ARAMCO were to float just 5% of its shares in an IPO, it would raise somewhere around $500 billion. Any IPO by ARAMCO would make history as the largest IPO in the world.

The investment banking industry must be doing the belly dance in anticipation. The standard IPO fee for an investment bank is 7%. Even for a 5% IPO of the oil company, an investment bank would collect around $35 billion.

Why Now?

The Economist writes that when they asked whether Saudi Arabia was undergoing a “Thatcherite revolution”, Prince Salman replied “Most certainly.” However, it certainly does not make obvious financial sense. Why cash-in on your hidden treasures and then do it when the price of that treasure is at a historic low.

Is there some rational reason for the colossal decision? Considering how deftly the royal family has managed to retain power for the longest period in the world’s most volatile region, the answer most definitely is yes.

So what is that hidden reason? Is the explanation for the IPO a financial, political or geo-political one? Only time shall tell the hidden story …… Until the story unfolds,  we can only keep guessing.

New York, April 29, 2016; 10.07P


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