ebook essays pieces of the puzzle
Tuesday, December 20th, 2011
read the footnotes

I had the great pleasure of getting together with Michelle Leder last week.  She’s the founder of footnoted and remains at the helm even though it’s now a part of Morningstar.  Leder also was the author of Financial Fine Print, a 2003 book about the benefits of reading company filings and their footnotes.  I looked over the book again prior to our meeting.

It was a trip back in time to the names of companies and characters that defined the “low standards and false profits” (to say nothing of false prophets) of the late 1990s and early 2000s.  The principles addressed in the book still apply and the lessons it taught never seem to be learned.

I could write installment after installment from the book’s examples, but I chose AMR, the parent of American Airlines and the pension woes it could not escape.  Above:

1) This shows the expected return on plan assets and the discount rate used on the liabilities.  The top line was overly optimistic the whole way, just as it is at almost all pension plans, corporate and government alike.  Aiding and abetting this charade is the investment industry.  Pension consultants agree to the approach and sell-side and buy-side analysts don’t squawk.  (A future posting on the research puzzle will deal with this issue.)

2) Other than one year, the funding ratio was abysmal.

3) The benefit obligation as a percentage of market capitalization (the statistic that Leder noted in her book that caught my eye) looked better for a time, as investors ignored the burden, but it didn’t last.  Below:

4) The net income and free cash flow (in billions) for AMR.

5) Its stock price.

6) The average analyst rating on a five (all buys) to one (all sells) scale.

I stopped the charts at the end of 2010.  You can see the absolutely woeful pension situation at the time and that the operating results weren’t good either.  Yet the analyst crowd was still largely cheering.  You could have sold shares for dollars instead of dimes.

AMR filed for bankruptcy on November 29.  A few weeks before, footnotedPro (a subscription site cousin to the free site) highlighted changes to the company’s 10-Q that seemed to indicate that the probability of a bankruptcy filing was rising.  As the report noted, “there are very few accidents in the language of SEC filings.”  And if you don’t read them yourself, you should know someone who does.  (Charts:  Bloomberg terminal.)