You said you'd sell when he did and he has in size. You live in denial, you amublance chaser you. Get real, this thing is circling the drain
ASTN: A professor who Mr. Goldfinger studied under remarks on stock sales: "MARKET WATCH Rumblings of an Avalanche
By GRETCHEN MORGENSON
NEW YORK -- Even though the NASDAQ composite index rallied
late last week, it is down 8 percent from its July 16
high, close to
the 10 percent drop that Wall Street considers a correction.
These stocks deserve a rest. At its peak, the NASDAQ was up 31
percent this year, compared with the 22 percent rise in the
Dow at its
high and the 15.4 percent increase in the Standard & Poor's
500-stock
index.
But the NASDAQ has dropped further than the other indexes,
raising a
troubling issue that was hidden as the market rose: Hanging
over the
market are an immense number of shares in big NASDAQ stocks,
including top technology companies, in the form of option
grants awarded
to executives and employees.
Companies of all kinds have issued oceans of options in recent
years. As
long as stocks were rising, option holders hesitated to
exercise them,
waiting for even further gains. Now, with many stocks --
especially
NASDAQ stocks -- well off their highs, transforming paper
profits into
real gains is mighty tempting.
How big is the overhang? Bob Gabele, director of insider
research at
First Call/Thomson Financial, calculated all the option grants
made by
companies in the NASDAQ 100 stock index from 1994 to 1998. A
staggering 4 billion shares were granted, worth $220 billion
at recent
prices. That amounts to roughly 9 percent of the market value
of the
entire NASDAQ 100 index.
"This is an avalanche-in-waiting," said Baruch Lev, professor
of
accounting and finance at New York University's Stern School
of
Business. "And this avalanche may fall at the worst time of
all."
If the market slows or a recession hits, expectations for
these shares will
fall, Lev said. Employees who can exercise their options and
sell shares
will do so, thereby depressing an already declining market.
An option grant is exercisable only if its so-called strike
price is lower
than the prevailing market price. But given the hefty gains
registered by
NASDAQ every year since 1994 -- the index is up almost sixfold
--
most option grants are exercisable now.
Cisco Systems said in its 1998 annual report that the average
strike price
of its option grants -- 1.562 billion shares -- was $25.23.
Cisco stock
closed Friday at $63.5625.
Companies report their option grants in the footnotes to their
financial
statements. To calculate the overhang, take the number of
shares
provided for in those grants and divide it into the total
shares the
company has outstanding.
It doesn't take much of a fall in stock prices to make option
holders itchy,
said Steven E. Hall, managing director at Pearl Meyer &
Partners, a
compensation consulting firm. When stocks plunged last fall,
Hall said,
"everybody got stomachaches looking at their stocks. All of a
sudden
people started saying, 'Maybe I don't want as much of my pay
in stock."'
Studying the effect of declining stock prices on option grants
at 60
companies, Hall found that a 15 percent drop in stock price
translated to
a 25 percent decrease in the value of options held by chief
executives.
Corporate America's love affair with options worked well as
stocks rose.
Giving options in lieu of cash keeps employee costs down and
helps
financially strapped start-ups. But when stock prices no
longer rise,
companies will be forced to pay more in cash to workers,
driving up
costs.
Lev points to another concern about an options avalanche.
"Firms in the
last four to five years increased debt significantly, mainly
to repurchase
stock so they can provide it to managers and employees," he
said. "So
debt is very high, the market slows down, people are dumping
their
shares. There is a significant risk here." |
