Bruce Warner, CPA, CDP, CFF

Like many of you, I have been concerned about events over the past year or so, including the recession and the progress of political events as they impact business conditions. The value of my retirement accounts took a significant hit in spite of having a high quality, professionally managed portfolio. Most people who are nearing retirement experienced the same concern about declining asset values, forcing us to reevaluate our investment strategies and the length of our working lives.

While there is plenty I could complain about, the objective of this tome is to cite reasons for optimism and to bring a measure of perspective to these events.  I stress there that these ideas are my opinions, though I hope they will be helpful to you. The following factors are reasons to have hope about our future:  

Recessions Are Part of the Normal Flow of the Economic Cycle

Recessions have been a feature of economies around the world for hundreds of years. We have experience them before and will experience them again. In fact, we went a very long time since our last recession, so one was probably past due. It did not help, of course, that policy makers likely caused the real estate bubble that drove our economy into the tank.

While U. S. consumers have retrenched in their spending and are working on long-overdue corrections to their household balance sheets, they eventually will need to increase spending on cars, homes, major goods, vacations and Christmas. Consumer spending will rebound!  Inventories have now become relatively low, and will need to be replenished. These factors are very important to the lifting of the recession.  I think consumer lack of confidence, in large part, has been caused by uncertain political events and unprecedented government spending, but those factors are also likely to be modified.

Political Swings Have a Way of Self-Correcting

We are seeing the start of a self-correcting political cycle. Overreaching policy makers are beginning to see the consternation of the general public about excessive spending and aggressive health care plans. While we all want improvement to health care, the public is starting to demand a better remedy. Even if some poor policies are enacted now, remember that by 2010 the public must be satisfied or there could be major changes in the House and Senate.  Even the United States is not immune from economics; it can’t sell an unlimited amount of debt.  One of the strengths of our political system is that when the pendulum swings too far from center, then changes are made to force a more moderate course. Even enacted legislation can always be changed by a future Congress. Therefore, I am optimistic that over time reasonable policies will be enacted. We might remember that strident news is created to sell, not to inform.

Reasons the Earnings of Companies Will be Higher in the Future

The discipline of the recession is forcing companies to get even leaner and meaner. This is good. While it  hurts those who are laid off, our overall economic efficiency is improved as companies are forced to reduce fixed costs and to increase their operating leverage.  What I mean here is the well-known fact discussed in financial text books that companies who increase their operating leverage can improve their ability to generate higher net income increases in the future.  

Have you ever noticed that percentage sales increases or decreases don’t match changes in profits?  In large measure this is due to a company’s built-in operating leverage. In other words, once fixed costs are covered, an increase in sales brings a greater than proportionate increase in net income.  This also works in reverse during recessions; reductions in revenues bring greater than proportionate decreases to net income.  So as our economy rebounds, corporate profits are likely to rebound at a greater percentage of increase than is reflected in the percentage of sales increase. This will help the value of your retirement accounts because stock valuations reflect expectations for future profits. Neat, huh!!  This fact helps to bring some perspective on cycles of economic change and what they really mean to your own finances.

Well, Will My Portfolio Rebound?

Really, who knows!  But, based on my own experience as an investor and training in this field, I think the most important thing is to construct a high-quality portfolio that will suffer less of a decline in downturns and have a greater probability of rebounding as the recession ends and the vagaries of the stock market occur. In doing this, just a word about what is relevant and what is not. Relevant to an investor’s decisions are realistic expectations about future events. Not relevant are losses already realized; they are water under the bridge that you can’t change.  We should not hold on to poor investments for long periods of time just in the hope of a rebound; neither should one overreact to temporary declines in value by selling at the market low point.

The tricky though only relevant question is – how will the investment perform in the future?  You might consider whether the decline was just in “lock step” with the overall market, or was the decline due to company specific factors suggesting that the investment is not likely to rebound quickly, if at all?  Depending on the type of investment, relevant indexes are available, such as the S&P 500 index, to help one sort through this question. Becoming knowledgeable about your investments is important.

I think that your portfolio will likely rebound or improve, as long as you have a high quality portfolio, because earnings will likely rebound for the reasons I explained above. If you don’t have a high quality portfolio, then remember that you are in control of that decision. I caution that because investments are such a personal decision, a professional advisor approach is probably best for most people. This helps you avoid the tendency to overreact and buy or sell out at the wrong times. Buying and selling decisions are both very important.  How you liquidate your retirement portfolio is just as important, and may be more important, than how you go about building the portfolio in the first place.

What Else Gives You Optimism?

A number of factors provide a great deal of optimism about the future. Our economy and land are the home of the free and the creative!  We now have fantastic new tools, such as the internet, PCs and Blackberries, available to all to enable business wherever and whenever we choose to do so.

We have an egalitarian society.  A great deal of opportunity is open to all who are smart, creative and dedicated.  Yes, uncertainty has increased, but opportunity has increased as well. I hope this piece will give you reasons to look for the “silver linings” rather than just the problems as you confront your day today.

Have you ever experienced that sick feeling that comes when you realize your PC has been compromized by a virus?  Well, yesterday I experienced exactly that experience.

A very insidious virus penetrated the shield provided by McAffee Antivirus software on our system that runs on the XP operating system. The virus is insidious in part because it calls itself “Personal Antivirus Software.”  The virus results in a yellow shield icon in the notification area of your windows taskbar. From this spot irritating messages constantly appear that insist your system is infected with various worms and other bad viruses. This is all an attempt to get you to pay your hard earned cash to upgrade the “Personal Antivirus Software” to provide protection to your system.  While the virus was present we experienced various “balloon” messages claiming the presence of many existing infections to the system which were totally fabricated.

I found it challenging to locate a solution for this problem. When searching for solutions through my Windows browser, many web sites came up that appeared to me be be just further attacks from the same source. I noticed some of the web sites themselves would probably result in viruses since they appear to be from China. At first I attempted to download a solution from PC Tools, but that would not work since apparently the authors of this virus have blocked consumers from accessing well known vendors of antivirus software. A red box appeared on my system and the PC tools payment page would not load. 

 I finally used Google’s Chrome browser to locate Malwarebytes’ Anti-Malware software. That product did a very good job of cleaning up my system after a full system sweep. I was so grateful that I paid $25 to install the full version of the software, though the free version did the rescue job for me.

Here is a short video I recommend you look at regarding social media marketing:

http://www.journalofaccountancy.com/Multimedia/?bcpid=1842749430&bclid=1704093216&bctid=24700582001

This is a link to the training site mentioned in the video:

http://www.cpalearning2.com/

I joined “Twitter” recently and think it is a resource and tool that could really help with marketing when one develops the skills to use it effectively. I note, for example, the Newt Gingritch uses it constantly to promote himself and his business.

I have put up my new web site this week. Here is the URL:

http://www.brucewarnercpa.com/

This is an example of how “tweets” can be used effectively in connection with blogs, as done by the American Gas Association. See the right hand column of the site’s home page.

http://www.truebluenaturalgas.org/potential-gas-committee-natural-gas-supply-findings

I have found it not too difficult to add “tweet” links to a web site.

One thing interesting about Twitter is that you can search the “Tweets” to search for people with similar professional interests, you can put into Tweets short messages about what you are doing that others can find, and you can even probe the network to identify potential contacts. Tweets can point others to information of mutual interest, that may start a conversation between you and them.

Click this link to my article on the options available to natural gas pipeline developers for creative pricing of their projects to make them successful. I have surveyed the actual practices that are being used in the industry for one of my clients. If you would like more information, please contact me.

Here is a link I found that will help smooth your transition to Microsoft Office 2007. The get started tabs for Excel, Word and PowerPoint provide a number of resources to help unlock the power of the software. http://office.microsoft.com/en-us/help/HA102146851033.aspx

Energy projects are complex, long-lived business endeavors that involve a host of risk factors that are evaluated during the processes of project development, construction and financing. Many organizations do not have comprehensive models to confront these challenges. Additionally, they may not have personnel fully trained to model and evaluate their projects.

For example, does your company know what its cost of capital is, and how that cost of capital varies across different types of energy projects? (Projects should not be pursued if they may earn less than the firm’s cost of capital.) How does your company decide which projects to pursue?
Do you have quality control procedures in place to ensure quality in your modeling efforts, such as reviewing the reasonableness of key input assumptions and approaching modeling in a standardized, documented fashion?

Do your models robustly include the elements of a comprehensive project business plan? Do they incorporate the theory of examining the firm’s real options, or alternatives to the contemplated projects? Do you evaluate alternatives for negotiated, market-based and regulated pricing and implementation strategies? Do you consider how each project will impact your company’s overall financing strategy?
Do the models contain complete pro forma financial schedules, such as rate base, cost of service, balance sheets, income statements and cash flow statements? Do the cash flow calculations contain the impacts on cash flows of special income tax provisions and other energy incentives? Do your models evaluate a range of outcomes that may be experienced for the financial strategy you have selected, such as by using a range of inputs and displaying the results with tornado diagrams?

I recommend the following text book for materials that may help with improving your modeling efforts: Corporate Financial Management, Third Edition, by Emery, Finnerty and Stowe, published by Prentice Hall in 2007.

Memories of the Enron fiasco that rocked the energy sector in the early 2000s, other financial scandals and current economic and political events probably cause us to pause and wonder, “What went wrong?” And more importantly, “How can we prevent the same thing from happening in our own organizations?”

While the answers to these questions are complex, an understanding of psychological tendencies of individuals and groups can help to shed some light on the vulnerabilities we all have as human beings. For an excellent and easy book to read on this topic, I highly recommend Influence The Psychology of Persuasion by Robert B. Cialdini, Ph. D. The book is readily and cheaply accessible from internet booksellers.

I believe that without understanding human psychological tendencies and providing specific policies and training to combat them, business organizations can easily fail in meeting their obligations to shareholders and to other interested stakeholder groups, such as to important regulators (the SEC and FERC).

The AICPA, the Institute of Internal Auditors and the Association of Certified Fraud Examiners recently jointly issued a new publication to help organizations manage the business risks of fraud. The publication is called, “Managing the Business Risk of Fraud: A Practical Guide” The publication assists organizations to evaluate their own risk of experiencing fraud and helps in establishing relevant policies, detection measures and prevention strategies in this important area.