Just like you never want to hear a doctor say "oops" in the operating room, you never want to see a going-concern statement in a financial report about a company you own. Accountants throw these in when they've been over the books, talked to customers, and checked the horoscopes and have concluded there is "substantial doubt" about a company's ability to remain in business. In short, don't blame the accountants if the company files for bankruptcy protection.

You¿d reckon that a going-concern statement would be enough to send investors running to the exits, but it's not. True, many large institutions automatically bail when an existing company gets slapped with one of these, but many individuals (often wrongly) take a chance they know more than the bean counters.

During the tech boom of the late 1990s, many companies actually went public even though they had been hit with going-concern statements. Many of those companies subsequently disappeared. Enough said.

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Friday, August 29, 2008

In English, Please

University of Michigan Consumer Sentiment Survey Could Be Providing False Hope

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Mark Lieberman, Senior Economist

FOXBusiness

The University of Michigan Consumer Sentiment Survey results for August, released Friday morning, improved to a higher-than-expected 63.0, up from 61.2 in July. Still, the data show continued weak levels of consumer confidence as they hover near June's 28-year low.

But even that might not be getting the full picture of pessimism.

The early results for August, reported on Aug. 15, had been even more discouraging.

The preliminary reading, 61.7, rose a scant 0.5 point from July. The improvement was only the second month-to-month gain in seven months.
The six-month moving average of the total index, which smooths out the results, continued to decline in the preliminary reading, falling to its lowest level since September 1980 (61.1). The six-month average has fallen month over month for 17 straight months -- the longest stretch since the index began in 1978, exceeding the 13-month decline in the six–month average from July 2000 through July 2001.
The expectations index component of the index drove the improvement, increasing for just the third time in 11 months. The smoothing six-month average, though, dropped to its lowest level since September 1980 (53.9).
The current conditions index, which improved in July, slipped back -- the 10th decline in the last 13 months.

As dismal as the preliminary results were -- and the overall survey results have indeed been dismal in the last year -- they could have been worse if the survey hadn’t missed a key demographic.

The Michigan consumer sentiment survey (begun in 1978), unlike its older cousin, the Conference Board’s Consumer Confidence Index (begun in 1969), is conducted by telephone -- which means the survey misses households that don’t have landlines. According to a Harris survey, about 20% of adults rely solely on cell-phone service. Those adults, according to Harris, are:

More likely to be under 40,
More likely to earn less than $15,000 a year, and
Less likely to earn more than $75,000 a year.

According to the most recent report from the Bureau of Labor Statistics, younger workers (using a cutoff age of 44) have a 7.6% unemployment rate, twice that of workers over 44.

In other words, the Michigan survey could miss those with the most pessimistic view of economic conditions.

Or maybe not.

“The Michigan figures really haven't over performed the other confidence measures to any increasing degree over the last ten years or so,” said Mike Englund, chief economist of Action Economics.

But two other economists disagreed.

“I think the structural change created by cell phones is growing exponentially and becoming a very large issue for data in general,” said Diane Swonk, chief economist of Mesirow Financial. “The Michigan survey is no different than the challenges are faced at the federal level.”

“This is absolutely a problem with the survey,” offered Dean Baker, chief economist of the Center for Economic Policy Research. “Of course, most surveys have serious problems with response rates, including the government surveys.”

Richard Curtin, who directs the University of Michigan survey, said he’s aware of the gap -- although he suggested it didn’t affect survey results -- and is working to develop a solution. The easiest fix, of course, would be to call cell phones, but that, Curtin said, would shift the cost of the phone calls from the questioner to the respondent, and may make responses more difficult. Michigan, he said, will experiment beginning next month with an Internet-based survey.

Then again, the omission may not matter, suggested Stuart Hoffman, chief economist of PNC Financial.

“The survey is already so low that the message of a sour sentiment is clear,” he said.

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.