TSC: Readers Talk Back
By TSC STAFF
12/08/2002 15:13
TheStreet.com publishes selected emails received by the publication and its staff members. To send an email intended for publication in this section, write to twocents@thestreet.com and include your full name and city. Letters may be edited for length, style, clarity and accuracy.
Re: Exchange-Traded Exchange: Merc IPO Due Thursday
The Definition of a Bubble
Mr. Goldstein,
Your story on the Chicago Mercantile Exchange's IPO seems to have been an attempt to scare investors away from one of the few good stocks currently out there. Your description of its growth as a " Nasdaq -like bubble" is missing the whole definition of a bubble -- a mistake made by countless investors and obviously by yourself.
The definition of a bubble is not enormous growth in earnings and revenues, it is an expansion of the valuation of what investors are willing to pay for those earnings. The Nasdaq bubble was not because companies were growing too fast! It was because investors were paying more and more for each dollar of earnings (if any) that the companies had.
It's great to finally see a company in today's stock market that has good earnings and revenue growth as well as a good pipeline for future potential (via increased volume on electronic trading and single-stock futures). It would be nice to see someone in the equities industry finally get it right.
Sincerely,
Mark Abraham, Austin, Texas (Received 12/06/2002)
Re: Siebel's Case Shows a Hole in Black-Scholes
Wise to Goldman's Scheme
Ms. Abramson,
Thanks for the story on Siebel . But, if I may, I'd like to point out that Mr. Goldman is once again being "ingenuous" and ignoring the truth in his whining about stock-option expenses. The point, of course, is that he should have been expensing his $650 million in options two and a half years ago , when they WERE worth that amount, not adding a footnote now.
I'm sure doing so would have knocked his stock down even more quickly, and he could have marked to market the options and reversed the expense each year, allowing him to post fantastic earnings for three out of four of those years.
Or, he could have NOT ISSUED a ridiculously huge amount of options, which has the potential to dilute the stock like a stock-watering scheme. This is what he's starting to do now -- i.e., not issuing as many options -- now that people have caught on to his scheme.
Cheers,
Blair Falconer, Toronto, Ontario, Canada (Received 11/20/02)
Playing by the Rules
Dear Ms. Abramson,
May I make a comment on your article about Siebel?
As you said, under the current accounting rules, companies are allowed to expense options at the price determined by the model at the time the options were granted.
This ruling is very important -- it is really the crux of the matter.
In the late 1990s bull market -- the stock market increased and so did the obligations of the companies who have issued the options. However, for many years, they under-reported the cost of the options. Yahoo! is a good case in point, since their stock has reached levels of more than $200.
When the stock is $200, the company loves to expense it as if the stock is still at $102. So companies loved this rule when their stock prices keep increasing and making new all-time highs.
Now that stock prices are lower, the rule comes back to "byte them".
Please feel free to contact me at any time when you have any derivatives related questions.
Izzy Nelken, Mundelein, Ill. (Received 11-20-02)
Re: EarthLink Sinks as Investors Go Narrowband
Comparison Has Wires Crossed
Editor,
The short-seller comparison of cell-phones and pagers vs. dial-up and cable/DSL is not a good one.
An Internet connection -- dial-up or other -- is the same service, regardless; just the speed is a bit slower. A cell phone and pager have different services. Furthermore, the cell phone's main competition isn't the pager, but rather the pay phone and long distance, which is far more costly.
So you see, it can be argued that the cell phone is popular because it's basically lower cost than the alternative. So, there it is, dial-up for homes and high-speed for businesses because of the lower cost. There are a lot more homes than businesses.
I bought United Online (UNTD:Nasdaq) some time ago, because I believed that new Internet users (and there are a lot still out there) would go to dial-up first because it's so much cheaper.
Jay Rubino, Norfolk, Va. (Received 11-19-02)
Re: Siebel's Case Shows a Hole in Black-Scholes
The Real Issue Is ...
Editors,
The recent article, "Siebel's Case Shows a Hole in Black-Scholes" brought up valid concerns regarding the expensing of options; however, it clearly pins the blame on the wrong culprit.
The issue with expensing options in Siebel's case is not that the BS model was wrong. The issue is simply that option values always change with the passage of time or a change in the price of the stock. In this case, the drop in the stock price combined with having less time left until expiration (of the options) serve to lower the value of the option.
Option pricing models give a value for that moment in time only; at any other moment, they must be reevaluated!
The issue here is with accounting rules that require companies to expense options whose value will always fluctuate with the passage of time and changes in the market price of the underlying asset.
Perhaps a title like "Siebel's Case Shows the Flaws in Expensing Options" would have been more informative? .
Mark Kaplan, Annandale, N.J. (Received 11-19-02)
Re: Stocks You Can Snag With the Insiders
Won't Snag That Advice
Editors,
The article "Stocks You Can Snag With the Insiders" by Managing Editor Jon D. Markman provided incredibly terrible advice to readers about "snagging" stocks insiders have purchased recently.
All of the recommended equities have uncommonly poor fundamentals, most of the companies are massively in debt and several are a breath away from bankruptcy. Many of the insiders that purchased their own companies' stock were covering losses they incurred by buying at higher prices earlier. Other insiders in those companies have everything to gain in presenting a facade to the world that the businesses they lead are sound.
Case in point was the stock Mr. Markman most highly recommended, Amkor Technology (AMKR:Nasdaq). He cited a recent inside purchase of AMKR as a clear sign of the "value" of AMKR, while the insider, a Mr. John Neff, just broke even on his earlier losses by a massive purchase of his stock on a "dead cat bounce."
If the insider dumps all that stock now, he will avoid that loss and a great deal of embarrassment among other insiders of the company that knew better than to get into that situation. Not a single stock Mr. Markman recommended could be remotely perceived as a value, and his list is comprised primarily of fiber optic companies, techs, telecos and businesses such as Lucent (LU:NYSE), Corning (GLW:NYSE) and ADC Telecommunication (ADCT:Nasdaq) in deeply troubled industries.
It is obvious why (as stated in the article) Mr. Markman has not chosen to invest a single dollar in any of the equities he attempts to foist on the public. It is not clear, by any means, why Mr. Markman has a position in which he can regularly publish such financial pap.
Don Blankenship, Dayton, Ohio (Received 11-18-02)
Re: In Denial Over Deflation?
Politicians Are Ostrich-Like When it Comes to Deflation
Editors,
The deflation process is well underway and -- if history is any guide -- policymakers will react too slowly and inadequately.
Those of us who were around in the 1970s remember a time when inflation was not part of the everyday language of the citizenry. Today, everybody knows what it is. It took several years before inflation became entrenched in the hearts and minds of consumers. It was only taken seriously after it became a serious problem.
I think policymakers will slow the process of deflation, but not extinguish it. Tax breaks will help. Then, just as they think it is no longer a problem, it will return worse than ever.
Did you ever get sick and the doctor give you an antibiotic and tell you to make sure you keep taking the medicine even after you feel better? If you don't, you run the risk of a relapse. Same thing here. Politicians will not take the problem of deflation seriously until it is firmly embedded in the national psyche.
Yes, a few tax breaks and some monetary stimuli will help, but for how long? We never seem to understand that the forces operating on us are bigger than the Fed and the government.
Everybody wants a repeat of the good old bull of the 1990s in this business. I would very much like to see my dear departed father again, too. Neither is going to happen, but their spirit lives on, haunting us for as long as we live.
Michael Shamosh, Irvington, N.Y. (Received 11-14-02)
Re: The Five Dumbest Things on Wall Street This Week
UAL Employees Say ESOP Shares Sale is 'Irresponsible'
Dear Mr. Two Cents,
I thought I would write a note on your article concerning the UAL pilots "throwing a temper tantrum."
The reason that the UAL employees, not just the pilots by any means, are upset by the sale of our ESOP shares is not about our retirement being diversified. This was set up as a separate retirement account, a sort of supplemental retirement, if you will.
Although we all took a major hit on our 401(k)s throughout most of the ESOP (deal) by not being able to invest, since we could not contribute while the UAL shares were high, we do have a company-sponsored retirement plan.
This ESOP, although widely unpopular among many employees, was about having some say in how the company was governed. It was also a way to bail UAL out of hard times and save jobs. Most of us didn't believe that we would get any kind of substantial retirement benefits out of the stock. To hold the stock until it can't fall any lower, and then sell, doesn't sound like a responsible way of managing a retirement account.
The reason people are upset by the sale is two fold: First, the stock is nearly worthless. Selling at $2.00 per share, while we paid approximately $46.00 a share, is too little too late. Most of the employees are down to just a $2200 form the $60,000 or so we invested.
This is not going to make a difference in my retirement at this point. You can't get much stock for $2200, yet none of this "diversification of funds" was thought of when the stock was $80 a share. That is when it would have made a difference had the stock portfolio been diversified.
I will risk the paltry $2200 I have left in the future of my company, since it is too late to supplement my retirement with ESOP stock.
The other reason for not selling the stock is we will lose any kind of control we might have thought we had in the company's direction. This may very well be the real reason for the sales. UAL may have found a way to get the three ESOP Directors off the Board without filing bankruptcy, and that may just be the whole point.
This ESOP experiment from a Wall Street perspective has been miserable at best, but it isn't over yet. There are many thousands of UAL employees who are still trying to make a difference, and who can possibly help to save this once wonderful company.
The sale is "irresponsible" in the eyes of many employees, simply because at this point, keeping the stock has more benefits than selling it.
There is simply not enough at stake when the stock is this low to justify selling it. When you risk your money on Junk Bonds, you just have to ride it out, or simply lose it all! The employees all helplessly watched while this stock plummeted. Selling low and buying high is not what I would call "responsible."
Richard Turk, Benicia, Calif. (Received 11-11-02)
Re: Opportunity Glitters in the Rubble
Welcome Judgment Day for RBOCs
Jim Cramer et al,
I would like to balance your perspective a bit regarding the "Baby Bells." You have been championing their cause lately, arguing that companies that have recently gone through bankruptcy might have an unfair competitive advantage in the marketplace.
Beside the WorldComs and Global Crossings , this would include the CLECs, such as McLeod , and the DSLs such as Covad . Many of these companies have failed, gone through the system, are purging their balance sheets via reorganization in one form or another, and are coming out the other side as lean machines.
Our bankruptcy laws serve a valuable economic function, as an important safety net that protects society. It would be dangerous for us to tinker with, or rather, tamper with, these time-tested processes after the fact.
In a recent Barrons , Prudential's Yardeni called these companies "zombies." I think that this is an apt description. Is it possible, Mr. Cramer, that the RBOCs had the unfair competitive advantage from the outset, through their protected monopoly status, and that these companies used or even misused that advantage to try to put the "upstarts" out of business?
Could it then be possible that the RBOCs created their own "Night of the Living Dead," in that having killed off the upstarts, these upstarts have now come back to life as zombies, drained of their souls (their former equity holders), and are now impossible to kill?
Is it possible that the RBOCs' strategy has now backfired on them, and that they deserve the result?
Ultimately, the true culprit is the Congress for tampering with the free market. The government created the (RBOC) monopolies that initially became anticompetitive, and then subsequently, so competitively advantaged that they distorted the market place in the other direction, killing off the newly created competition.
I strongly disagree with your assessment that the RBOCs "did it right," and are now being punished for it. Maybe they should have abided more by the spirit of the Telecom Act of 1996, and cooperated. It might have been the better course in the long run.
The law of unintended consequences can be harsh; the market giveth and the market taketh away in unexpected ways. The RBOCs should have been careful what they wished for. Now, perhaps, they deserve to pay the price.
Yours truly,
Elliot M. Simon, Harpers Ferry, W. Va., (received 11/04/02) |
