CFA Institute Front Matter Source: Financial Analysts Journal, Vol. 39, No. 6 (Nov. - Dec., 1983), pp. 1-39 Published by: CFA Institute Stable URL: http://www.jstor.org/stable/4478687 . Accessed: 13/06/2014 00:39 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. . CFA Institute is collaborating with JSTOR to digitize, preserve and extend access to Financial Analysts Journal. http://www.jstor.org This content downloaded from 185.2.32.110 on Fri, 13 Jun 2014 00:39:16 AM All use subject to JSTOR Terms and Conditions
Transcript
CFA Institute
Front MatterSource: Financial Analysts Journal, Vol. 39, No. 6 (Nov. - Dec., 1983), pp. 1-39Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4478687 .
Accessed: 13/06/2014 00:39
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp
.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].
.
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Selling high technology to a country that sells high technology to the world takes a company with superior products and much more.
And the digital PABXs that were just select- ed by Nippon Telegraph & Telephone Public Corporation are state-of-the-art advanced microcomputer technology
These PABXs, our System 3100, are the hub of an integrated business communications system that transmits voice and data simultaneously
But to cinch a multimillion dollar contract with the Japanese takes a special company One with a
reputation as the leader in digital communications equipment around the world.
And that reputation has to be built on a high standard of performance that the company offers its customers-and its stockholders.
The company is ITT We're investing in the future. What are you investing in?
For current news about ITT Corporation, phone toll free 1- 800-DIAL ITT for a continuously updated recorded message. r__. _ . _
? 1983, ITT Corporation, 320 Park Avenue, New York, NY 10022
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FIEAIEILl REALIYTI JIEHEAL Editor-in-Chief CHARLES A. D'AMBROSIO, C.F.A. Graduate School of Business University of Washington Seattle
Editorial Board
WILLIAM H. BEAVER Stanford University Stanford, California FISCHER BLACK Sloan School of Management, M.I.T. Cambridge JAMES F. COLE Guardian Capital Group Limited Toronto ROBERT I. CUMMIN Lloyd Investments, Inc. Philadelphia M. HARVEY EARP, C.F.A. Brittany Capital Corporation Dallas STEVEN G. EINHORN Goldman, Sachs & Co. New York CHARLES D. ELLIS, C.F.A. Greenwich Research Associates Greenwich, Conn. ROBERT FERGUSON Leland O'Brien & Rubenstein New York BRUCE D. FIELITZ Georgia State University Atlanta WILLIAM L. FOUSE, C.F.A. Wells Fargo Invst. Advisors San Francisco
Managing Editor JUDITH F. KIMBALL Advertising Coordinator Eloise E. Eisenhardt Production Manager Joseph W. Hollis
WALTER R. GOOD, C.F.A. Continental Group, Inc. Stamford, Conn. WILLIAM S. GRAY, C.F.A. Harris Trust and Savings Bank Chicago DAVID L. GROVE United States Council for International Business New York STEWART D. HODGES London Graduate School of Business Studies London GODFREY G. HOWARD North Carolina National Bank Charlotte IRVING KAHN, C.F.A. Kahn Brothers & Co. Inc. New York MARTIN L. LEIBOWITZ Salomon Brothers Inc. New York JAY 0. LIGHT Harvard Business School Boston EDMUND A. MENNIS, C.F.A. Consultant to Investment Management Palos Verdes Estates, California
Advertising Representative James R. Stack & Associates, Inc. 50 East 42nd Street New York, N.Y 10017 / (212) 867-9690 James R. Stack / Marketing Manager
ANTHONY H. MEYER Drexel Burnham Lambert Inc. New York RICHARD MICHAUD Lynch Jones & Ryan New York ROBERT D. MILNE, C.F.A. Duff and Phelps Investment Management Co. Cleveland RUSSELL J. MORRISON, C.F.A. Investment Counsel Toronto STANLEY A. NABI, C.F.A. Lazard Freres & Co. New York GORDON PYE Irving Trust Company New York JACK L. TREYNOR Treynor-Arbit Associates Chicago ADOLPHE J. WARNER, C.F.A. New York & Foreign Securities Corp. New York ROMAN L. WEIL University of Chicago Chicago ARTHUR ZEIKEL Merrill Lynch Asset Management New York
FINANCIAL REALIYTI FEEFIATIIE Officers: 1983-84
MATIHIAS PLUM, JR. Chairman ERNEST R. WIDMANN, C.F.A. Vice Chairman H. KENT ATKINS, C.FA. Vice President JOHN L. DUGAN, JR. Executive Director Staff
MILDRED M. HERMANN Secretary-Treasurer HARRY HANSEN Director of Education and Programs PEGGY E. KELLY Manager, Member Services RUTH GOLDKLANG Staff Accountant NANCY S. RIFKIND Self-Regulation Administrator For Change of Address: Send old label and new address with Zip Code, six weeks before moving. Headquarters Office: 1633 Broadway, New York, NY 10019 (212) 957-2860
Board of Directors: 1983-84
H. KENT ATKINS, C.F.A. Bankers Trust Company New York BERNADElTE BARTELS-MURPHY Shaw & Co. New York RICHARD M. BURRIDGE, C.F.A. Alliance Capital Management
Corporation Chicago EUGENE B. BURROUGHS, C.F.A. International Brotherhood of Teamsters Washington LINDA H. CHERICO, C.F.A. Valley National Corporation Phoenix LEON G. COOPERMAN, C.F.A. Goldman, Sachs & Co. New York JOHN L. DUGAN, JR. Financial Analysts Federation CHARLES D. ELLIS, C.F.A. Greenwich Research Associates TOM L. HANSBERGER, C.F.A. Templeton Investment Counsel, Inc. South Florida
C. ROSS HEALY, C.F.A. Standard Capital Management Corp. Toronto JEANINE REIME HELLER, C.F.A. Josephthal & Co. Inc. St. Louis HILTON McCREA JERVEY, C.F.A. Manufacturers Hanover Trust Co. New York FREDERICK L. MULLER, C.F.A. Atlanta Capital Management Co. Atlanta MATTHIAS PLUM, JR. Boston EUGENE C. SIT, C.F.A. Sit Investment Associates Inc. Twin Cities EDUS H. WARREN, JR., C.F.A. Capital Research Company New York ERNEST R. WIDMANN, C.F.A. Widmann, Blee & Co., Inc. Philadelphia GORDON T. WISE, C.F.A. G. T. Wise & Co. Houston
The Financial Analysts Federation, founded in 1947, is a non-profit professional organization consisting of 52 Financial Analysts societies located in the major cities of the United States and Canada. These societies have an aggregate of about 14,500 members who are engaged in security analysis, portfolio management, and executive direction of the investment function. The affiliated Institute of Chartered Financial Analysts awards the pro- fessional designation of "Chartered Financial Analyst" to qualified members upon successful completion of three examinations.
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Organizing for Creativity ......................... 25
Arthur Zeikel To find the creative people in your organization, look for the ones who are intellectually curious, highly intelligent, flexible, antiauthoritarian and goal-oriented. To encourage the most from them, allow them to express themselves without inhibition, give them demanding and clearly articulated perfor- mance goals and surround them with able people. They are very likely your key to superior investment performance.
Robert D. Arnott and James N. von Germeten Simple calculated market returns provide a basis for systematic asset allocation by indicating the future relative returns available from various asset classes. This information may be enhanced by the incorpora- tion of additional data on inflation and recent economic experience. A disciplined framework for transforming the resulting objective estimates into portfolio struc- ture will direct the portfolio manager to those asset classes that offer the highest retums, regardless of the prevailing consensus.
Electric Utilities: Assessing a Troubled Investment Environment .......................... 40
E. Bruce Fredrikson and Jeffrey Eckel Following a decade of unexpected increases in fossil fuel costs, historical- ly high interest rates and reductions in bond ratings, electric utilities are attempting to preserve their finan- cial health by increasing their rates, diversifying into unrelated fields, delaying or canceling construction projects, and shifting from fossil-fuel generating capacity, with its highly variable costs, to capital- intensive capacity such as nuclear power. Investors tend to view the rate increases and both the current and potential use of nuclear power with disfavor. Stock prices have risen, however, in response to diver- sification efforts.
How Wall Street Ranks the Public Utility Commissions .................... 46
Peter Navarro Tests of the rankings assigned public utility commissions by Wall Street investment firms indicates that two factors are critical to investors' perception of regulatory climate-the rate of return on equity allowed the utility and whether or not the utility is allowed to include construction work in progress in its rate base. Commissions that do not want to see the cost of capital to their utilities (and most likely the cost of service to their consumers) increase should allow higher rates of return and permit at least some construction work in progress in the rate base.
FINANCIAL ANALYSTS JOURNAL / NOVEMBER-DECEMBER 1983 O 2
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The Regulatory Environment for Public Utilities: Indications of the Importance of Political Process ............................. 50
Wallace N. Davidson, IH and P.R. Chandy An analysis of the factors that go into determining Wall Street's perception of the quality of regulatory environment indicates that favorable regulation involves minimum regulatory lags, authorization of a high percentage of the revenue increases requested by utilities, allowance of fuel adjustment clauses and allowance of construc- tion work in progress in the rate base. The single most important factor determining whether a regulatory en- vironment is viewed as favorable or unfavorable, however, is whether the state utility commissioner is elected or appointed.
Regional Differences in Municipal Bond Ratings ................. 54
Dale Morse and Cathy Deely Certain factors are genuine- ly relevant to the investment quality of municipal bonds. When hypothetical bond ratings based solely on these factors are compared with actual ratings, the results suggest that irrelevant factors-in particular, regional biases-are introduced into the rating of municipal bonds. Southern states, for example, tend to receive lower ratings than they should, whereas states in the central plains receive higher ratings.
Predicting Bankruptcy: The Value Line Relative Financial Strength System vs. The Zeta? Bankruptcy Classification Approach ............................. 60
Edward I. Altman and Joseph Spivack Two of the more prominent measures of corporate financial viability available to the financial community are the Zeta? model of bankruptcy classification and the Value Line Relative Financial Strength System. A comparison of these two systems reveals that the Value Line scores,
which are somewhat more subjective than the Zetas scores, nevertheless exhibit a high correlation with the latter. Both sets of scores also correlate well with published bond ratings.
S&P 500 Stock Index Futures Evaluation Tables ............................... 68
Gary Gastineau and Albert Madansky The major con- sideration that keeps the valuation of a stock index futures contract from being a simple calculation based on the arbitrage model is the timing of dividend payments. Dividend payments, rather than flowing smoothly throughout a quarter, tend to cluster in the 45-day period before the settlement date for the con- tract. The authors provide tables that adjust for this dividend pattern and allow the user to determine the appropriate value of a futures contract.
Pension Fund Perspective Michael H. Morris, William D. Nichols and Gregory R. Niehaus Considerations Driving Interest Rate Assumption Changes .......... 13
International Exchange Adolphe J. Warner New Disclosure Requirements for Foreign Issuers . o ..... o.. 18
Editor's Comment Matthias Plum, Jr. 6
Editorial Viewpoint C.A.D . ............... 10
Sidney Homer, 1902-1983 .30
Book Reviews Robert I. Cummin ....... ...... 77
Letters ........ ..... o o.. 79
FINANCIAL ANALYSTS JOURNAL? is published bi-monthly by REPRINTS of articles published in The Financial Analysts Federation, a non-profit corporation devoted the Journal are available at a to the advancement of investment management and security analysis. nominal cost. Payment must Neither the Federation nor its publication's editorial staff is responsible accompany orders of $ 1 0 or less. for facts or opinions contained in articles therein. Copyright? by Address requests to Reprint The Financial Analysts Federation, 1983. Printed in U. S. A. Department, FAJ. Articles may be reprinted only by permission of the Editor. Indexed in the Business Periodicals Index. Second class postage paid at the Post Office at New York, N.Y. and additional offices. SUBSCRIPTIONS. Domestic: one-year $36, two-year $63, three- year $81, single copy (prepaid only) $6.75; Outside U.S.A.: one-year $39, two-year $66, three-year $84, single copy (prepaid only) $9.10 (Europe), $9.65 (Asia, Africa, Far East). Copies will be airmailed to foreign subscribers at their request. They will be required, however, to prepay airmail postage (currently $5. 1 0 per copy to Europe and Japan).
For Change of Address: Send old label and new address with Zip Code, six weeks before moving. Vol. 39, No. 6 : Nov./Dec. 1983
Address all communications to: 1633 Broadway, New York, N. Y 10019 (212) 957-2866
FINANCIAL ANALYSTS JOURNAL / NOVEMBER-DECEMBER 1983 O 3
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"Didn't someone recently acquire Dexcel, the company that's a leader in gallium-arsenide field effect transistors, and microwave amplifiers for satellites, broadcasting and military applications?"
"Gould!'u>
Dexcel brings to Gould several new product lines that use gallium-arsenide semiconductor technology for applications in the consumer, military and com- mercial markets. Gould is also concentrating its interrelated technologies and products in five other rapidly expanding electronics markets: high performance 32-bit minicomputers, factory automation, test and measurement, medical instrumentation and defense systems. For more information about our growth strategy, write: Gould Inc., Department A, 10 Gould GOULD
|| Center,Rolling Meadows, IL 60008. JJ L
Electronics
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CSX Railroads Plan Ahead With Over $300 Million Slated For New Roadway Equipment And Yard Improvements This Year.
rail fleet this year requirements of its shipping And over the next four customers while increasing
years, CSX plans to add 3,800 its earnings capabilities. U miles of new and relay track Get to know us. We and 18 million crossties to manage railroads, natural its 27000-mile rail network resources, aviation services, CORPORATION which covers the eastern land development and half of the country resort properties. America's
With its state-of-the-art And you'll like the way Largest rail system, strartegic locartion, we do business at CSX. Transportation and unprecedented inno- Write to: Corporate And Natural va[tions in freight distribution, Comnmunications, P0. Box R~esource CSX Corporation continues C-32222, Department F-l F, Company: to anticipate the marketing IRichmond, VA 23261.
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Borg-Warner's Cycolac@ABS plastic provides less weight and more economy than N steel. And it's going into everything from motorcycles to electronics. That's today's Borg-Warner. Diversified for financial stability. A company worth watching. ?)1983 Borg-Warner Corporation
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r\n January 1,1984 we beyond our heritage. our regulated businesses. li will take up the reins of We will be more than a U S WEST will be ~....#divestiture and ride phone company. That is why staffed by no more than 100
alone. We are U S WEST, the we elected not to use the word key people, 25 percent of new parent company BELL in our name. them hired from outside of Mountain Bell, the Bell system. They Northwestern Bell all share the entrepre- and Pacific ?k neurial instinct and Northwest Bell. competitive spirit imrpor-
Geograph- Nodvwestii EM b5tant to our future. ically, we are the The change from largest regional our past will be more than holding company \ lAccording to newU.S. Census surgical. We have anew holding company Mountain ~~E Bureau projections, ours is the fastest sugclWehvanw created by the growing region in the country anatomy, a new metabolism divestiture of AT&T FasterthantheSunbet. and a new environment.
Philosophically, Layers of management have we are the most aggressive. been reduced. Ideas can
We were the first to be acted upon faster. appoint a board of directors. Decision making is now the We were the first to meet with mandate of everyone. the investment community. With court approval, we We ride alone. But we We were the first to name our- can pursue any new business are in no way isolated from the selves. We were the first to we choose outside the regulated world of telecommunications announce our new unregulated arena. And, in order to pro- technology. On the contrary, subsidiaries. And we were the vide the best return to our stock- we will ride the leading edge of first to establish an organiza- holders, we will. this technology with continued tional structure that can take Each of the subsidiary access to the research of Bell full advantage of the opportuni- companies of US WEST is Labs, and also to the best tele- ties presented by divestiture. autonomous. Our unregulated communications equipment and
Perhaps, more than any subsidiaries are completely research throughout the world. other company involved, we at U S WEST have demonstrated LU;PJEST that we are eager to compete l I in a deregulated environment. Interline NewVector U S WEST Direct Business deregulated environment. ~ ~(Comuncatons (Advaced Mobile (Directory Cm uiain
One of our irst order l M| untlln Northwestern | Pacitic conslt(in anj d (Pdhvone SystMems) a dver*tisiV nd ICommunicationsl One of our first orders Belnl o~~sen ot~vg Belll engineerings d~pudsig Equipment
of business was to establish a | We have clearly separated our unregulated subsidiaries from our regulated Bell companies strategic planning group to to take full advantage of divestiture.
explore and evaluate the most separate from the regulated We are ready. Three promising and profitable telephone companies. Each technologically advanced Bell avenues for growth. has its own accounting system, operating companies, a grow-
Initially, we are separate management, separate ing number of unregulated expanding in areas based on board, separate locations. subsidiaries and open trail as our expertise and experience Each must earn its own way. far as the eye can see. in the information industry. Each must make its own contri- For more information
There is no doubt that bution to investors. about U S WEST, write: John we will be a pace setter in the This important distinc- Trygg, Director of Investor fastest growing industry in the tion means that profits generated Relations, U S WEST, 7800 world. But we will not stop in our unregulated businesses East Orchard Road, Suite 290, there. It is our intention to grow will not be used to subsidize Englewood, Colorado 80111.
IlSSE===.m~~~~~~~~~~~~~~~~~~~~~~
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For all the same reasons your first suit was a size too big. You remember it, that classic gray herringbone tweed built for the long haul. Your father picked it out, and you watched, trusting him, while he lked to the salesman. Your mother specified the size-one you
_would grow into, one iat _wouldn't require an even
_greater investment the follow- ing year. You carried
Xithome and could~
wait to try
Bell of Pennsylvania, the C&P Telephone Corn (D)1983 Bell of Pennsylvania, the C& P Telephone Companies. Diamo)nd State Telephone, New Jersey Bell. Bell Atlantic Mobile Systems.
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darn sleeves were too long.) But it also occurred that may- be the suit fit your mother's perception of you, and you swelled with pride.
At Bell Atlantic, our "new suit" is the state-of-the- art communications network we already have in place. We, too, have room to grow. Our investment will also save us money in the long run. Why? Because we made it when consftuction costs were lower. And because we will not need costly new installations to handle our regioffs growing demand to move more information.
In short, we can grow profitably as usage increases. This will give us more discre-
ionary dolars to invest in new systems and new business
ventures, such as our mobile phone subsidiary, that promise a high return.
Aside from our lead in applied technology, we begin our corporate life with some additional strong suits: finan- cial strength; management strength; expenenced, dedi- cated employees; a clear-cut mission; a marketing orien- tation; and efficiencies of operation that should make us price- and earnings- competitive.
We look forward to our future in much the same way your parents did when they bought you your first suit secure in the quality of the product and the practicality of their approach; gratified by your trust and tinged with a forgivable amount of pride.
TM
panies, Diamond State Telephone, New Jersey Bell, Bell Atlantic Mobile Systems.
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GIVES US A HEAD STARt. Southwestern Bell Corporation and its future stockholders will
benefit from the same successful management that has built Southwestern Bell Telephone into one of AT&T's largest operating companies and an industry leader.
Our size will benefit us as well, for there is no need to combine us with another telephone company at divestiture. Retaining the same organization and management is helping to insure a smooth transition to an independent corporation.
Southwestern Bell Corporation will be headed by the same team that brought our total revenues-per-access-line to rank among the top five Bell System companies. The team that made us first in Directory Sales for the last six years. First among all operating companies in residential sales. And first in business sales of higher technology PBX systems.
With a blend of successful expenence, and youthful leadership, our top management will now guide one of the nation's largest corporations into the future. Providing the highest quality tele- communications service to America's economic growth center-the dynamic Southwest. And, at the same time, pursuing further opportunities with our new subsidiaries in complex customer equipment, cellular mobile phones and Yellow Pages publishing.
We at Southwestern Bell Corporation are very excited about our new future.
And very reassured to have such familiar faces guiding us there.
? S~outhwstern Bel Corporation A familiar Bell has a new ring.
For further information, contact our Manager of Investor Rekltions, Southwestern Bell Corporation, 1010 Pine, St. Louis, MO 63101 or call 314-241-4540.
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How our analysts com e up with them is their bu@sinss.
Sometimes the best way to solve a problem ^ , _ ~~~is to let the imagination soar far beyond it.
/ M _ I ~~~~That's why, at Drexel Burnham [ambert, /
lldo ~~~~~we don't expect our research analysts to
adhere to strait and narrow views. This is how we work. We give our people
a basic strategic direction to think about. Knowing full well that they'll use it as a take-off point for their own very individual thinking.
It's a technique that may sound a bit high- flown for an investment banking and securities firm. But it works.
It could work for you. If you'd like to know more about our creative approach to
o ~~~~~~~~investing, make it your business to give \
~~~~~~~Drexel Burnham Lambert a call.
> ~~~~~Drexdl Burnham Lamnbert Your bottom lie is our Op conern
60 Broad St reet, New York, NY 10004 (212) 480-6000. Offices in principalfinancial centers worldwide. Coprght, Drexel Burnham Lambert Incorpo~rated, 1983. Member SIPC.
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1ur I a s 8ern 1"oaG su sl8 aw has c0 a r r r Sum r l" 10 C0XgS0Z
IC Industries FoIr more information on how IC Industries makes the most of opportunities, please wite: Harry Grove, IC Industries, One Illinois Center, l ll East Wacker Drive, Chicago, Illinois 60601.
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