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Technology Stocks : Dell Technologies Inc.
DELL 117.31+2.3%Jan 28 3:59 PM EST
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To: larry who wrote (110702)3/22/1999 2:52:00 PM
From: Chuzzlewit  Read Replies (2) of 176388
 
I was asked to respond to the following portion of a PM:

"Aloha1, I am somewhat troubled by the Forbes article which is reported to have said that over the past three years, DELL has earned $3.1 billion from financial engineering (selling puts and trading calls) on its own stock and only $2.5 billion in other earnings. If this story is true, it will take some time to work through the market, but it is an axiom that you don't pay operating earnings multiples for financial engineering growth. The latter is simply not high-quality recurring earnings."

The poster has made an error that many people make. Trading in either your own stock or derivatives based on your own stock do not count as earnings. The accounting is anything but clear, but basically it goes directly into the equity accounts. So when a company reports earnings these sources of cash are never included. Therefore, the comment is off base because it has assumed that profits derived from options trading were part of earnings. They are not.

The converse is also true. When companies issue stock options to employees the implied cost is never explicitly listed as an expense. However, there is a federal income tax credit when those options are exercised, and that does appear on the income statement.

Hope this clears some things up.

TTFN,
CTC
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