VideoBetween the Lines
George Donnelly
Don't believe everything you read. That's certainly one of the lessons from the August press release hoax that more than halved the price of Emulex Corp. stock in 59 minutes and resulted in the arrest of a 23-year-old who had netted nearly $250,000 on his positions. The price quickly recovered after trading was halted on Nasdaq, but the event left many pondering the market's vulnerability to instant information.
It certainly was a wake-up call for the wire services, especially Internet Wire, where the suspect had worked. Says Michael Rockenbach, CFO of Emulex, a fiber-channel adapter maker based in Costa Mesa, Calif., "You don't want to be the only one without the news, but you don't want to be the only one out there with something like this," which claimed the CEO had resigned and that the company was the target of an SEC probe.
The gullibility of small investors also came into play. Rockenbach notes that most of the frantic trading was done by individual investors, "who tend to trade on news and the direction of stocks and tend to be much more reactionary. The larger institutions were more skeptical."
Running on Empty
Tim Reason
It hasn't been a good year for energy. California utilities struggled publicly all summer to avoid blackouts, and customers of San Diego Gas & Electric Co. saw their electric bills more than double, prompting $2.6 million in federal aid and an investigation by the Federal Energy Regulatory Commission. And the news promises to get worse.
The East Coast is expected to get a shock this winter, but not from electricity. Gas companies are warning of natural gas price increases ranging from 15 percent to 40 percent, say American Gas Association officials, and the Clinton Administration has been scrambling to boost low heating-oil supplies in the region. "Stocks are one-third of what they were last year at this time," says analyst Randall Nottingham of Boston-based Yankee Group. "Heating oil will be in very short supply, and if we get even an average winter, you will see price spikes and shortages."
Companies facing such spikes can lock in prices now with fixed contracts. But that's no defense against physical shortages caused by Mother Nature. Space heating and cooling accounts for up to one-third of an office building's energy costs, and a bitter cold snap or a heat wave can wreak havoc with an energy budget.
"We protect ourselves against warmer than normal winters by buying weather derivatives," notes Paul Forrest, CFO of Heating Oil Partners LP, in Darien, Conn., which distributes heating oil throughout the Northeast. "CFOs who want protection against colder than normal winters can go into the same market." As for the cost of heating oil this winter, says Forrest, "Companies can also fix their oil price with a cap and buy a put against it that compensates them if the price goes lower," he says.
Most companies will sign contracts that leave such exotic hedges to their utility or energy service provider, says Yankee Group senior analyst Richard Baxter. But the deregulated energy market is forcing its way onto the finance radar screen. "The average facility manager does not have the sophistication to handle forwards, puts, and weather derivatives," notes Forrest. "You need heavy financial analysis."
Not Depreciated Enough
Steve Bergsman
Congress has had a habit of tinkering with real estate depreciation schedules, and it may soon reexamine whether they match reality. A new study by Deloitte & Touche argues that the rate of real estate depreciation allowed under current tax law is too slow. The study concludes that the 39-year non-residential and 27.5-year residential schedules should be reduced to 20 years. The Real Estate Roundtable, a Washington, D.C.-based organization, commissioned the study to provide new data that could be used to demonstrate to Congress that current tax depreciation schedules are outdated.
"The tax system is supposed to reflect the actual economics of loss in value, but it does not provide depreciation quickly enough to match the actual loss in the value of buildings," says Randall Weiss, director of tax economics for Deloitte & Touche in Washington, D.C., and the lead author of the study. While the changes would lower taxes on any existing real estate investment, Weiss speculates that faster depreciation would also provide more incentive to invest in real estate.
Depreciation for an office building at 39 years "is simply much slower than the real economic rate of depreciation for that asset," says Stephen Renna, the Roundtable's vice president and counsel. "If you didn't make ordinary capital improvements to a building, it would have an economically useful life of 2025 years."
According to Weiss, previous research understated the rate of economic depreciation and overstated the appropriate recovery periods because it neglected to account for the substantial expenditures for building improvements after original construction.
The Price Of Bad Advice
Steve Bergsman
In August, Bear, Stearns & Co. paid $30 million to settle a lawsuit that claimed the securities firm gave bad advice to a software company involved in a merger. The case, involving the now-defunct Daisy Systems Corp., has put investment banks more carefully on guard when facilitating M&As.
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