Clear Indexes Ideas

All Aboard: Coach Inc. (COH)

A constituent, not just for the holiday season in the Claymore/Robb Report Global Luxury Index ETF (ROB) is the New York based company, Coach Inc. (COH). It also is a holding the Clear Large Cap Growth portfolio so it is well followed at Clear. Its signature leather designs and upscale marketing of accessories and gifts are world renown.

Founded in 1941, Coach began as a family-run workshop in a Manhattan loft. Inspired by a baseball glove, and after refining it to be softer and stronger, the infamous glove-tanned Coach handbag was created. Since then, there have been innovations in leather finishes, new grains and colors, and modern materials, but each collection embodies the same principles of classic design and American style. Coach has translated its appeal for products and gift items for both men and women seamlessly from continent to continent.

So many people this year will say "on my list; and make no mistake that my list is from Coach includes" handbags; cosmetic cases, belts, wallets, card cases, jackets, sweaters, gloves, hats and scarves; business cases and computer bags, and don't forget pet accessories. The company also offers luggage and travel kits, jewelry and fragrances, footwear and watches.

Coach sells its products through direct-to-consumer channels, including its own retail stores and factory stores, its online store and catalogs. Products are also sold through indirect channels comprised of department store locations in the United States, internationally, freestanding retail locations and specialty retailers. As of June 30, 2007, it operates 259 retail stores and 93 factory stores in North America and 137 department store shop-in-shops, retail stores, and factory stores in Japan.

An analysis of its fundamentals reveals a firm in sound financial standing and potentially undervalued. Even though it disappointed the street with its most recent earnings report it still boasts profit margins of 38.10% which is almost triple its peer group average and on revenues of $2.76 billion. The firm has grown to a market capitalization of $12.81 billion. The company has earned a one year return on equity (ROE) of 42.28% and a Return on Assets (ROA) of 30.18%. Top line growth continued last quarter at 27.80%. To look at the stock price today compared to six months ago (down almost 30%) or a year (down around 20%) with such strong numbers, we calculate the stock is well over-punished. We believe based on its fundamentals that the market will wake up and realize that a Price to Earnings ratio of 19.13 is absurd for a company this profitable while growing this fast.

Disclosure: Mr. Corn is CEO of Clear Indexes LLC and Clear Asset Management Inc. Coach Inc. (COH). is a constituent in the Claymore/Robb Report Global Luxury Index licensed for the ETF (ROB) for which Clear Indexes LLC is a consultant. It is also a holding in the Clear Large Cap Growth portfolio. Mr. Corn owns shares of the ETF (ROB) and shares of (COH) directly through his participation in the portfolio.

Another Reason A Recession Will Be Avoided

We can start this post with my being sick of the MSM begging for a recession. Why they are looking for any excuse aside from the deficit, the price of oil, the occupation if Iraq,  the falling greenback to the credit crisis.

Am I missing any other major issues? OK, so these are huge issues and ones that cannot be ignored. What also cannot be ignored is real wealth in this country and that consumers are not afraid to spend.

Last week I posted on gift cards, the retail stealth bullet, more on that later.

“The consumer is dead, long live the consumer.” This was the title of a post of mine last year so I could not very well use it again, could I? Well I used it the previous year in a note to clients, so I already had. The reason; at least one glass on the big Thanksgiving Day dining room table known as the US economy is more than half full.

Some products are sold, and others are bought. The key for manufactures and retailers is to create and then stock the items that are bought (predominately during holiday season) and then create an environment for the items that need to be sold.

There has been a lot of press about consumers cutting back. Much of this is about harder to get mortgages and falling home values. The press wants us to believe that too many consumers have mortgaged and re-mortgaged their homes, taking out loads of cash and have already spent it. There are many consumers, many who are in solid income brackets who refinanced their home and reduced their monthly payment while interest rates have been lower. This frees up cash.

Call me an optimist, but I do not feel there are too few people making good and responsible decisions. Lowering mortgage payments provides more available and discretionary cash without using their home as a piggy bank.

Bolstering this thought process, according to a report by The Conference Board last week, about 73 million US  households now have discretionary income, up from about 57 million in 2002. Total discretionary income in the US rose topping $1.7 trillion in 2006, with the household average at $24,335.

Defined for the study, households with discretionary income are those whose spendable income exceeds that held by households with similar demographic features. The proportion of  our domestic population with discretionary income has increased to nearly 64%, up from 52% in 2002 when the market  began its accent.

Nearly 78% of all discretionary income is held by households earning more than $100,000. Average discretionary income for this segment, $66,451, is 2.7 times the national average.

                                                       

DISCRETIONARY  INCOME HOUSEHOLDS
Total Households with Discretionary Income
2002	52.1%
2006	63.5%
Discretionary   Income (current dollars)
2002	$1,233.4 Billion
2006	$1,768.7 Billion
Average   Discretionary Income (current dollars)
2002	$21,657
2006	$24,335
Households With   Discretionary Income (by HH income)
$200k and   over	37.9%
$150-200k	16.1%
$100-150k	23.7%
$50-100k	19.4%
Under $50k	2.9%
Source: The Conference Board 11/07

So the well off and rich have more to spend making investments like Claymore/Robb Report Global Luxury Index ETF (ROB) appealing. It also provides the source to where holiday retail sales seem to be going, which according to MarketWatch is materially better compared to last year. The last three years have been record breakers, even if only posting small incremental increases. This year seems to smell more like a blow out despite all the woes around the world.

MarketWatch quotes ShopperTrak RCT Corp showing an estimates 8.3% sales increase and EBay Inc. (EBAY) also reporting a strong start.

Analysts predicting gloom and doom had also predicted a slowing of online sales and they will come to work tomorrow sadly disappointed. According to comScore Inc. Internet sales over Thanksgiving are up 29% to $272 million from last year. Friday’s web sales amounted to $531 million, a 22% gain over 2006 (data also from MarketWatch).

Resilient consumer numbers according to economists would have cut spending a mere 1-3%. The data shows a marked increase demonstrating, along with where the cash is sourced that the consumer is alive and well and living not just at the mall, at department and specialty store and at home online.

The numbers we are not hearing about are gift cards. These little buggers bring in cash but are not counted as revenue until they are redeemed.Since the National Retail Federation anticipates gift card sales to increase this season to $26.3 billion this season, retailers and the manufactures that supply them may have a jolly season. There will be winners and losers among retail firms and the manufactures who supply them.

For investors, this may be the good news that may lead the market higher by year end.

Disclosure: Mr. Corn hold no position in EBAY and his firm, Clear Indexes LLC is an adviser to Curtco Media the publisher of the Robb Report Global Luxury Index and he owns shares of (ROB).

Thanksgiving

It is time for us to take a break from the market and think of life in a bigger pond than just the market. Yes, I know that the world is filled with turmoil, hunger, strife, war and heartache. Yet there are wonderful things being accomplished all over this small globe of ours. Science, the arts, philosophy all are making progress.

Thanksgiving is a day to call or visit family, overeat, watch football and for many people travel to be with friends and family. And some will have great travel stories for Monday morning at work.

This post is not about a huge advance in science or a new discovery in the markets. Today, for Thanksgiving, I would like to request a simple and almost random act of human kindness. I would like to keep politics out of this. Today I would like to recognize a group of people who can not make it home for the holidays; the men and women overseas serving in the armed forces.

A web site, http://www.letssaythanks.com which is sponsored by Xerox Corp. (XRX) allows you to select a thank you card and Xerox will print it and sent it to a soldier that is serving overseas. You cannot pick who receives the card it, hence it being random. It will find its way overseas with the non-political intent on lifting the spirits of someone far from home.

It is FREE and requires less than a minute of your time. I plan on sending some tomorrow with my kids. I invite you to join me in sending a card.

I also ask that you act on being thankful in other ways, charity, kindness and reaching your own hand out to others, not just writing checks.

As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them. ~John Fitzgerald Kennedy

Disclosure: Mr. Corn does not hold a position in Xerox (XRX) and is long human kindness.

Dear Professors and Students of NYU, Lehigh and Columbia,

This week marks the final week of the Clear Next Generation ETF Contest.  This contest, which began October 12th and ends November 26th, is an excellent opportunity for students to apply their lessons in the classroom to a real world situation in the market.  We are asking students to design their own marketable Indexes designed for Exchange Traded Funds. 

Students must submit the following:

• Unique Strategy – not currently available as an ETF, ETN or Closed End Fund
• Description – of the unique idea and its investment thesis.
• Marketing Overview - why the fund would be attractive to investors, including brokers and Institutional Investors

The Grand Prize Winner will, besides the $4,000 cash prize, be eligible for an internship with Clear Indexes LLC.  That means the winner will have the opportunity to participate in the construction of their idea as it is turned into a live investment product and will participate at the stock exchange for the opening bell of the winning ETF!

Two Second Place Winners will each be awarded $1,000!

There will also be announced 10 Honorable Mentions.

How to submit Ideas:
Visit our website at www.clearindexes.com/contest.
FAQs are on the website.
DEADLINE November 26, 2007.

We have received many ideas and more than a few have hit the nail firmly on the head.

We look forward to reading more over Turkey and into next week.

Gift Cards are Changing the Score

Each year, as our country becomes more gift-giving challenged, the big retail product winner is now the “generically yours” Gift Card. Many of us were brought up being taught “it is the thought that counts” and then had the rude awakening as adults, learning to “get a gift receipt.” Today some people are lazy, others are fearful of buying the wrong thing for people after having been disappointed and had to supply too many gift receipts. Gift Cards are easily purchased from general merchandisers such as Macy’s (M), Sears (SHLD) and Walmart (WMT) to specialty stores ranging from Starbucks (SBUX) to Ralph Lauren (RL). Anyway you look at this phenomena, the National Retail Federation anticipates gift card sales to increase this season to $26.3 billion, up from $24.8 billion last year. Last year many gift cards were never redeemed adding to the bottom line of retailers but not the top line as revenue is not recognized until merchandise walks out of the store.

This time in 2006 I posted:

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Last year a lot of holiday shopping occurred as the; buy yourself what ever you want on me program, also known as gift cards. Last holiday shopping season, November 2005 and then in January 2006 I had commented for Bloomberg TV and radio about the tremendous impact of gift cards. Essentially, stores take in the cash for a gift card but most stores do not account the transaction as revenue until merchandise has been exchanged for the card. Not unlike the old travelers checks game, some cards are lost, tossed into the back of dressers and never used. There is quite the profit margin on those, yet they are not ever booked as revenue. Additionally, stores have the use of the cash, sometimes for months. Most cards are redeemed by February and redemptions slowly fade out until June. After June they are assumed to not be redeemed.  

This is an accounting and revenue recognition issue. It shows up in operating margins and other places that quants like us like to dig. The issue is the numbers are skewed. Gift cards are bigger and bigger numbers each year, over $18 billion in the 2005 holiday season.  

We are waiting to see how the big four accounting firms jigger the books. Of course, some of us will be watching very closely.

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Today, the availability of gift card malls and other expanded uses are making gift cards even more popular and versatile. Comdata Stored Value Solutions recently conducted its fifth annual survey of gift card purchases by adults providing insights into the upcoming holiday retail season.

• For the 2007 season the average gift card purchaser expects to spend $203 on holiday gift cards, up from $186 in 2006.
• The average amount per card increased from $46 in 2006 to $53 in 2007.
• 38% of those surveyed who have never purchased a gift card are very or somewhat likely to purchase gifts cards this holiday season, representing an 81% increase in new card users over last year.
• 53% of card users often or always spend more than the amount originally loaded onto their cards. They are also most likely to redeem their cards over two visits, increasing store traffic and the potential for sales over the value of the card.
• One in five says they pay retailers to reload their cards. On average, they reload cards with $47, up from $32 in 2006.
• 85% purchase gift cards because they want the recipient to be able to select their own gift, while 57% don't know what to buy.
• Department stores are still the most popular place to purchase a card, followed by clothing and book stores, then restaurants.
• One-half of gift card purchasers are more likely to buy a gift card that comes in a box, with ribbon and tissue, or in a tin.

The survey shows that the convenience of gift card malls is clearly a selling point for “lazy” or “I can’t figure out what to buy you” consumers.

• Last year, 94% of purchasers bought cards at a specific retail location. In 2007, only 88% prefer a specific location.
• Last year, 22% made purchases from gift card malls, and this year, that number increases to 27%.

The market for children's gift cards is also growing.

• Approximately one-third of all gift cards purchased last year were purchased for children or teens.
• 4% of cards purchased were for children under the age of five.
• Of those who have purchased gift cards for children, 35% are the child's parents, followed by 30% who are aunts or uncles.

Hispanics are the demographic utilizing the most Gift Cards

• Hispanics received gift cards with the highest average value among all ethnic groups; $71 representing a $33 increase from last year
• Hispanics (69%) are most likely to spend more than the value on their cards, making up the difference with their own money
• 26% of Hispanic report giving gift cards to children as a budgeting tool   

Stores, despite the delay in revenue are going to great lengths to drive gift card sales. Customization is the latest trend for branding and differentiation. Here are a few examples:

• Macys.com, upload your own photo onto a gift card and include a personalized greeting card for a mere $5 above the value of the card
• Bestbuy.com (BBY) offers personalized picture gift cards, for $4.50
• Starbucks.com has introduced design-your-own gift cards, along with a $4 customization fee
• For no additional fee Home Depot (HD) a card that doubles as a how-to do-it-yourselfer DVD or one that can be redeemed for a free 20-ounce Coke product
• American Eagle (AEO) is selling recordable gift cards so you can record a message for the recipient
• McDonald's (MCD) has teamed with Upromise to offer the chance to earn college savings with every purchase or reload of a gift card

A Consumer Reports survey found the dark side of gift cards. As the travelers check industry has found, an unredeemed card has a beautiful equation. Payment for no service = near 100% profit. The rub for retailers it that they do not get to book any revenue and for quants like me that means scrutinizing efficiency statistics for answers as profitability at these firms will rise if the numbers get big. According to Consumer Reports, the numbers are headed in that very direction.

A National Retail Federation survey found nearly 90% of shoppers plan to buy two or more gift cards this holiday season.

The number falling straight to the bottom line is still to be determined but $8 billion (Consumer Reports) in gift cards went unredeemed last year, as nearly a third of survey respondents with unused gift cards simply forgot about them.

Some conclusions:

• Gift Cards are more than simply here to stay, they are growing swiftly
• Gift Cards delay revenue which could deflate holiday revenue numbers and smooth them out in January and February when most cards are redeemed
• Many shoppers will spend more than the face amount of their gift cards making them a real asset for stores and some shoppers will even add money to their cards.
• Many shoppers never redeem their cards, causing profit without revenue, making firms appear more efficient then their operations achieve
  

Watch more than revenue this holiday season. Ask management to report separately for gift card sales. Based on revenue alone, Black Friday and Cyber Monday may come later than anticipated, but the bottom line still may improve and sooner than analysts anticipate.

Disclosure: Mr. Corn holds no position in any of the securities mentioned.

One Set of Rules: Are There Winners and Losers?

In the US we have what are known as generally accepted accounting principles or GAAP, accounting standards that must be adhered to by public companies. For some time, financial professionals, business people and politicians have been debating the merits of one global set of accounting principles and reporting standards.

Many people believe that the US laws are too complex and costly to comply with for non-US companies. Additionally, if a non-US firm is already complying with the laws of its home base, the expense in time, effort and hard currency may go beyond US compliance; adding to the equation may be posting in London, Zurich and Tokyo. This can prove to be a very expensive endeavor. However the US is notorious for its arduous procedures.

This week the SEC voted 4-0 to drop a requirement that foreign companies with U.S. listings reconcile their results to U.S. accounting rules. The reason is that regulators are hoping to eventually create a single, global set of accounting rules that could potentially benefit investors and companies world-wide.

In London, David Tweedie, the chairman of the International Accounting Standards Board (IASB), said he was delighted by the vote and promised to continue to work with American rule makers to achieve our goal of integrating capital markets with a common language for financial reporting.

The vote, which had been heavily lobbied by European companies, clears the way for accounting standards approved by the London-based IASB to be used in most parts of the world and makes it more likely that the rules will eventually become the primary rules everywhere.

For now, US companies will still have to follow GAAP. The S.E.C. decision leaves open the issue of how, if at all, investors will be assured that the international rules are interpreted in a consistent way across the globe. There is no international equivalent to the S.E.C. with the power to determine the proper interpretation of international rules.

FASB is financed by a tax on public companies. The international board must rely on donations from companies and others, as the American board did before passage of the Sarbanes-Oxley Act in 2002. In the absence of an international regulator, much of the work in assuring similar interpretations will fall to the large accounting firms, which have set up groups in London to coordinate their work. Neither the funding of the IASB, nor leaving the accounting firms on their own have historically produced the best outcomes. There is potential for powerful outside influences that require being addressed immediately and head on.

The new rule will take effect for fiscal years that ended yesterday or afterward, meaning that it will include all companies that use calendar years for their financial statements. Non-US companies that do not follow the international rules will be able to continue reconciling their statements to the US rules.

The idea is a good one that a single set of global accounting rules would make life simpler for investors and companies alike. Companies would not have to spend as much to compile accounts for their operations around the world, while investors would find it easier to compare corporate results for companies on a global basis.

While markets are global, currently individual countries and regions differ on whether they should operate to benefit investors, companies or in some cases governments. SEC Commissioner Annette Nazareth adds: If there is wide latitude investors will not only lose confidence in the reliability of financial statements but also will lose the consistency that U.S. GAAP provides.

Financial statements and the rules that govern them in U.S. and the United Kingdom are designed with the needs of investors generally taking priority over those of companies and auditors. Elsewhere in Europe, the needs of investors often take a back seat to corporate or political goals. In China, companies, markets and investors are all subservient to the needs of the ruling Communist Party.

Transparency and consistency drive the best investment decisions. We have posted on our blog that Trust in Business Requires Diligence. http://www.clearamideas.com/clearam_ideas/2007/11/trust-in-busine.html
Without oversight it may take years to sort out useful international standards. Policing these standards for mistakes, from honest to knowingly egregious will require new thinking and new oversight.

Although we applaud the goal of having a common set of accounting standards worldwide, the recent decision by the SEC which will no longer require foreign companies to reconcile their financial statements to US GAAP is a mistake.  US investors need a basis for comparison and in order to have an apples to apples comparison foreign companies which list in the US markets should adhere to US GAAP.

Clear Asset Management has expanded its ability to use data provided by non-US companies. Our Clear International Portfolio has demonstrated the strength of our multifactor models through the use of less stringent data and delivered superior performance over its 18 month track record.  Standards are imperative to efficient globalization. We are behind the concept of standardization, with an agency with a big stick enforcing the standards. But we do not support that at the expense of losing the ability to fairly compare foreign versus domestic companies.

Disclaimer: Much of this post has been borrowed or interpreted from excellent reporting by Floyd Norris of the NY Times and David Reily and Kara Scannell at the Wall Street Journal. Mr. Corn is CEO of Clear Asset management and participates in the Clear International portfolio.

 

They Just Keep Printing Money

It was a summer that began with high hopes as we watched the Dow Jones, NASDAQ, and S&P 500 all reaching record highs in June and the beginning of July. Then suddenly, what will go down in history as the infamous “credit crunch” of 2007 took place in mid-July. It started off with Bear Stearns (BSC) reporting their hedge funds’ exposures and subsequent losses due to high-risk subprime mortgages with leverage. Bear was forced to break the shocking news to hedge fund investors that their money was now worth a whopping 9 cents to the dollar. Unfortunately, Bear Stearns was not the only bulge bracket bank that was slaughtered by the mid-summer catastrophe that has spilled over into the fall months, with Merrill Lynch (MER) and Citigroup (C) the two most recent victims with each firm offering up their CEO as the sacrificial lamb.

With financial firms being destroyed across the board, the one investment bank that has managed to slip through this credit crisis without much damage has been Goldman Sachs (GS). Goldman has experienced the smallest write downs and the largest profit this past quarter and appears poised to perform again. While the markets have been extremely volatile over the last few months, one facet of its business that has maintained its consistency is Goldman Sachs Asset Management and its unparalleled ability to continue growing its assets under management despite taking its own bath this summer.

There were heavy losses suffered by two of its computer-driven trading hedge funds in the month of August, Global Alpha and Global Equity Opportunities. The Global Alpha fund was down 34.9% for the year to mid-September. The Global Equity Opportunities fund was down 23% in August alone and yet Goldman arranged for it to receive a $3 billion injection of its own and others' capital. But did the performance of these two funds adversely affect Goldman’s fundraising capabilities? Somehow, some way, the answer is no.

The black eye I have predicted has never come. During the summer turmoil, where Goldman lost billions for its clients, it was printing money in its proprietary trading operations, probably on the winning side of trades that were blundered by its hedge funds. Apparently neither ultra high net worth families or institutions care based on a new swift raise of capital.

Goldman has raised $4.5 billion for two new hedge funds. One of these is a credit hedge fund called Liberty Harbor that raised $2.7 billion. The other, GS Liquidity Partners, had $1.8 billion raised for it and will make investments in distressed credit. On top of these two funds which have already been fundraised for, Goldman is planning to launch yet another long/short equity fund in the next few months.

Goldman has brilliantly moved Raanan Agus from his position as head of the principal strategies group in New York to run this new fund. All three of these funds will be run by manager discretion, rather than by computer-based trading as the two underperforming funds in August were.

So what is it about Goldman that is allowing them to raise more money than even many of the winners of summer? Well, some might say it is just the fact that the name “Goldman” instills fear and greed in the hearts of ultra high net worth families and institutions. Others might point to the fact that Goldman Sachs has such a strong presence in every facet of the industry and around the globe, including former Goldman exec Duncan Niederauer who recently was made President of NYSE Euronext (NYX) after the defection of another Goldman alum John Thain over to the top spot at Merrill Lynch. Either way, the way Goldman prints money, the next time I stop at an ATM I will be sure to check to see if the legal tender it dispenses displays the inscription “In Goldman We Trust.”

Disclosure: Mr. Corn is CEO of Clear Indexes LLC. He does not hold any positions mentioned. Goldman Sachs Group Inc. (GS), Merrill Lynch (MER), Bear Stearns (BSC) and NYSE Euronext (NYX)) are constituents in the Clear Global Exchanges, Brokers and Asset Managers Index licensed for the ETF (EXB). Mr. Corn owns shares of the ETF (EXB).

E*Trade (ETFC): Liar, Liar, Pants on Fire

Let us be honest here. After scouring publicly available information, I post that E*Trade was an attractive stock with minimal subprime exposure. I was bashed as E*Trade Bank made mortgage loans. So I posted again stating that the downturn could hurt its business.

This week E*Trade has announced that a material portion of its portfolio has been down graded and more write downs are on there way. This stinks for holds of ETFC.

What really smells bad are the public disclosures, the timing of when management knew its true position and what else is hiding under the rug. The WSJ summaries the report well:

The New York discount online brokerage said its total exposure to collateralized debt obligations of asset-backed securities and second-lien securities at Sept. 30 was about $450 million, including about $50 million of "AAA" rated asset-backed collateralized debt obligations, or CDOs, that were downgraded to junk status.

In addition, the company said the "deterioration observed since September 30" will likely result in write-downs that exceed previous expectations, noting investors should no longer expect these earnings levels to be achieved.

The company said it expected the declines in fair value to result in further securities write-downs in the fourth quarter, adding it will no longer provide earnings expectations for the rest of the year.

On Oct. 17, the company reported a third-quarter net loss after writing down nearly $200 million worth of mortgage-backed securities squeezed during the summer's credit crisis.

The company, one of the biggest online brokerages, at the time also lowered 2007 guidance because of "the possibility of further credit deterioration."

E*Trade uses some $40 billion of customer cash from its bank and brokerage to make investments, including in asset-backed securities and CDOs.

Come clean. Take your write downs and move forward in an honest, transparent, long-term shareholder friendly manor. What happens to firms who lack transparency and realistic views of their use of balance sheet.

Separately, E*Trade disclosed that the Securities and Exchange Commission is conducting an informal inquiry of the company's loan and securities portfolios. The company is cooperating with the SEC inquiry, which began Oct. 17, according to disclosure in the company's third-quarter report.

I posted Saturday concerning Sarbanes Oxley, and it was the topic of my weekly note to our clients as well. The accounting standards board needs to get its oversight out of the office and onto the books of many of these financial institutions that have not come clean.

Are laws being violated? Is jail time around the corner for select executives for selective disclosures? Financial firms cannot hide behind mark to market as an excuse, sit around waiting for rating agencies to let them know when non-performing assets should be written down. It is a case of hiding behind the rules to fool the street and the company’s owners, the shareholders. What is worse is that many financial firms are still bragging about their risk management.

It is already past time to come clean. Do it now, it may already be too late to prevent this issue moving from the front page to the court room.

Understanding Aligned Interests

As a new media consumer and investor I have been watching the writer’s strike with great interest. The big media firms such as Time Warner Inc. (TWX), Walt Disney Co. (DIS), Viacom (VIA) and News Corp (NWS) have forced the hand, or the feet as it were, of the writers.

This has closed down my favorite TV viewing which is comedy focused takes on the news such as the Colbert Report. It is also delaying all original programming. This week producers who are also writers were threatened for not performing their jobs and marching in solidarity.

I am associated with several such writers. One sent out a blast email that I believe says it all from the facts and the heart. I have minimally edited the email to not reveal this person’s identity.

Whether you've picked up a copy of the New York Times, or watched Entertainment Tonight, you've heard of the current writer's Strike. Look, there's Tina Fey picketing outside the actual 30 Rock (Rockefeller Plaza). There's Jay Leno handing out donuts to striking writers in L.A.

There are buzzwords bandied about -- residuals, internet, DVD sales -- but I've yet to read the article or hear the news story that explains what's at stake and why I am striking. So, as your friendly neighborhood t.v. and screenwriter, I thought I'd give you the low down, from my perspective.

As most of you know, I am a writer for the t.v. series ********. Sounds glamorous -- if you saw our schlubby offices, or spent a day on set (essentially, an oversize garage) you might be disillusioned, but yes, it is a creative and at times a fun job. But it is mostly a job and one I work very, VERY hard at, putting in long hours.

So what choices are open to me? Moving on would be a completely irresponsible, suicidal decision for my career and my family if not for one thing -- residuals. Which are payments made to me every time an episode I wrote is rerun on t.v., or every time a DVD of a season is sold. I can count on a certain income next year based on residuals. Not enough to live on, but it will keep us from plunging into the abyss.

The two major issues between the Writer's Guild and the Producer's Guild are residuals from DVD sales and the internet. Currently, writers like me get 2.5% of the producer's profit off of every DVD sale. Which means when a DVD sells for $19.99; we make 4 cents. We would like to make 8 cents. We would like to make the same percentage of the producer’s profit off the price of internet downloads, which many people foresee as the main media through which people will receive their t.v. shows in the future.

The producers want to cut our DVD residual percentage (from 4 cents to zero) and to pay NOTHING for internet downloads. After weeks of negotiating, last weekend the Writer's Guild took DVD residuals off the table. We said o.k., we'll settle for our lousy 4 cents, if you make us an offer on internet downloads. The producers refused to change their stance: NO RESIDUALS FOR INTERNET DOWNLOADS PERIOD, they said. So, the decision was made by writers to go on strike.

Senior management and some analysts talk about how no profit has been made from internet down loads. It is a key part of their position. Then why are the same firms investing millions in design, marketing, technology infrastructure and on-air promotion to drive people to their web sites to down load? Apple (AAPL) may cross the two billion paid download threshold soon which includes music and television. Google (GOOG) bought You Tube for a reason. Selling ads is Google’s game. I can’t help but notice when going to http://www.comedycentral.com/shows/the_colbert_report/
videos/most_recent/index.jhtml to download a Colbert show that there are ads, and that when clicking to watch the show that there are ads in the frame of the video. Didn’t VIA sue GOOG to regain the page views from You Tube back to their own site? There is gold in on-line down loads; who are we kidding here?

I'm not asking you to do anything, other than think about the strike from this perspective as you start jonesing for a new episode of The Daily Show with John Stewart, or Grey's Anatomy (Sandra was out on the picket lines with her writers yesterday, that's my girl!) Although, if you want more information, you can go to: www.wgaeast.org

Some people have called us greedy, accused us of being spoiled. We don't really work for a living anyway, our jobs are too much fun! O.k., I confess, I have relished the extra time at home I've had this week, but I've also been on the picket lines every day (and let me tell you, walking around in circles is not endlessly interesting). But most of all -- I want to work. I'm an immigrant's off-spring, I grew up working at my parent's drugstore. Having a strong work ethic is an important value to me. But I'm also scrappy, and I don't like feeling taken advantage of. So, that's why I'm out there.

The quest for corporate profit is noble when serving the owners of the companies well; meaning the shareholders. That defines management’s role. The aligned interest is management being well compensated for delivering profits to shareholders, it is that simple. We get it; game shows, reality shows and movies are a large portion of evening entertainment for many people. The real draw however, the sustainable blockbusters and profit, have been the brainchild from real talent. The creative types, the writers who like the media moguls need to live. These writers represent the best of the best. That is why they were hired. They need to be managed well and compensation is an integral part of management, another alignment of interest.

From an investment perspective I send this message to the media firms. Talk out of only one side of your mouth and study the online data trends. Remember you are only compensating a writer when a sale is made (yes I get the overhead cost, you are selling ads to off-set that expense). Align your interests with your greatest asset, the ones that remake your brand every day. They ride up and down the elevator each day, just like in my business. It is a people business.

Invest in the future and stability of your revenue and profit stream by protecting your most important assets. This is about aligned motives to achieve a common goal, enhancing shareholder value.

Disclosure: Mr. Corn is CEO of Clear Asset Management Inc. He has no position in Apple (AAPL), Time Warner Inc. (TWX), Walt Disney Co. (DIS), Viacom (VIA) and News Corp (NWS). Google (GOOG) is a holding in the Clear Large Cap Growth portfolio. Mr. Corn owns shares of (GOOG) directly through his participation in the portfolio.

Trust in Business Requires Diligence

It is an unfortunate fact that business requires oversight. The positive aspect is that knowing means that a situation can be managed.

Last Sunday Mark Hulbert wrote an article for the NY Times titled: The Law of Unintended Consequences? Mark is the editor of The Hulbert Financial Digest, a service of MarketWatch and a smart and good guy. Mark writes:

THE Sarbanes-Oxley Act, enacted in mid-2002 in the wake of the Enron and WorldCom accounting scandals, aimed to improve the accuracy and reliability of corporate financial disclosures.

This objective may have been at least partly achieved, but a new study has found that the legislation may have had a serious side effect: It appears to have made Wall Street analysts less able to forecast corporate earnings.

Sarbox, as it is commonly known, may have had an unintended consequence according to this study, but it is a result that makes perfect sense. Analysts used to rely on non-public information and other information advantages. Sarbox is an important building block in leveling the playing field for all types of investors seeking to analyze companies, usually resulting in an investment or trading decision.

Sarbanes-Oxley is complex legislation, containing an assortment of features. One is stiff fines and penalties for reporting misleading financial data; the law requires that a company's chief executive and chief financial officer personally certify the accuracy of its financial statements. Sarbanes-Oxley also made a number of changes to corporations' governance structure, like requiring that the board's audit committee be independent and that the outside auditor have no conflicts of interest.

The study, titled "The Impact of the Sarbanes-Oxley Act on Information Quality in Capital Markets," set out to document some of the law's effects. Its authors are Joy Begley, an associate professor of accounting at the University of British Columbia in Vancouver; Qiang Cheng, an assistant professor of accounting there; and Yanmin Gao, an assistant professor of accounting at the University of Alberta in Edmonton. A version of their paper, which has been circulating since earlier this year as an academic working paper, is at ssrn.com/abstract=1008986.

Mark is missing Reg FD, which is Regulation Fair Disclosure, in his article, perhaps because it is not in the academic research. Reg FD is an SEC ruling implemented back in October 2000 mandating all public companies to disclose all material information to all investors at the same time. This means Main Street, Wall Street and money managers as well. The regulation is focused on eradicating selective disclosure. Before FD, management could inform select investors or powerful investment banking analysts, who received market moving information before everyone else. This provided salable information which was gobbled up by portfolio managers and traders and made investment banking research contain information that other market participants including individuals did not have. It was basically an unfair advantage that the SEC wiped out.

Regulation FD fundamentally changed how companies communicate with investors, by increasing transparency and timely communications.

Combined these regulations provide the most investor friendly set of reporting, timeliness of information and overall transparency that we have seen.

The laws are not fully enforced and there are tiers of compliance on the Sarbox side for smaller companies due to costs.

Overall, Sarbox, as the research shows, has made analysts less accurate. Not having an inside edge will do that to even a highly compensated group. Today the best analysts dig for their information, frequently becoming experts in the companies they follow, and their suppliers and customers. Only a select few make the effort and result in well informed, salable information.

For all of its costs, Sarbox helps prevent unintended consequences for investors, also known as big surprises. All of the market turmoil caused in part by the recent write downs by investment and commercial banks has cost two prominent CEOs their jobs, and more heads may soon roll.

Some of the write downs came as surprises as the valuation of some debt securities fell on the books of these firms. The question is: in previous quarters were they fictitious? Most analysts were caught off guard.

The write downs came into the investor and public light like a falling knife because if intent to hide them is discovered, more than the big salaries, bonuses and private jets are a stake. A trip to the poky may be in order, and I hear the cuisine is not so good there.

We will soon see how strong Sarbox really is. Most of the larger banks have reported earnings and have updated their fundamentals. The Royal Bank of Scotland (RBS.L) reported this morning that it estimates Wall Street's banks and brokerages face up to $500 billion in losses from writing off the riskiest of debt instruments. They estimate the firms with a large exposure are Citigroup (C), at an estimated $135 billion, and Morgan Stanley (MS) at $88 billion.

RBS estimates that many of these securities are currently parked in subsidiaries of banks or at other entities, and are comprised of bundled mortgages, car loans, credit-card payments and leveraged buyout loans. They account for well over $1 trillion of assets at publicly traded companies. Of course not nearly all of them will default, and over long-term many may prove solvent or be rescued. What investors need to know today is how these securities are being accounted for on balance sheets.

Trust being regulated has brought better but not perfect transparency and accuracy to an industry previously cloaked in intrigue. Our hope is to have companies comply with the law, fess up to their mistakes, sort out their balance sheets and explain to the public, law makers and most importantly their shareholders, where their company stands and is heading.

We look forward to trusted data, the good, bad and ugly. When transparency wins the day, all investors perform at their best.

Disclosure: Mr. Corn has no positions in the stocks mentioned.