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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: pater tenebrarum who wrote (76282)	2/20/2000 6:07:00 AM
From: re3	Read Replies (2) \| Respond to of 132070

Barrons had a favourable article on oil and related stocks. unocal was one of the suggestions. I don't have the article in front of me now, but it suggested that such equities were astonishingly cheap. besides unocal i remember a couple of picks were bhi and conoco

To: pater tenebrarum who wrote (76282)	2/20/2000 10:33:00 AM
From: Don Lloyd	Read Replies (4) \| Respond to of 132070

hb - [[...what about issuance of stocks via employee stock option plans? it seems to me that many companies are nowadays issuing stock to employees as fast if not faster as they buy their stock back. which is one of the reasons why i believe the accounting rules regarding stock options need to be changed...obviously, they are an expense in the final analysis...] Much too obvious to be true, IMO, although my record of convincing people of this is one of almost uniform failure. I agree that there is an accounting problem, and that stock valuations are incorrectly inflated due in part to employee stock options, but trying to correct the problem by adding in a phantom expense line is piling error on top of misconception. Most of the misconception is the result of almost universal faulty economic reasoning ( i.e. not Austrian). I feel entirely incapable of making a coherent argument this morning, so I will try to just make a list of issues that may relate to the problem. - From the Austrian POV, all costs are opportunity costs. When option grants are made, no changes in company operations are required by the placing of bit patterns in the option grant database. In fact all the cash flows are positive to the company even beyond the presumed reduction in required cash salaries to meet labor market competition. - The accounting for option grants, the tax code, and lazy market valuation techniques all combine to improperly reward the buyback of stock without exception and without regard for price and the real cost of the funds required. - Accounting should separately concentrate on the financial condition of the company as a whole on one hand, and on the ownership structure on the other. If a corporation were to hand out diluting shares to every other passerby in Times Square it would have zero effect on the financial condition of the corporation as a whole, but would simply result in real ownership losses to existing shareholders. Trying to commingle ownership issues into corporate financial issues is simply a source of distortion, masking the real effects on shareholders. The stock market is always so lazy that it always wants to reduce a corporation to a single number. If apples and oranges always sell at the same price, and are equally valued by consumers, then combining them into 'fruit' may be fine. However, the market really should pay attention to ownership issues by themselves, and the real costs involved in their past and future paths. - The most obvious (and wrong) argument for adding an accounting expense line for option grants is that an employee may receive millions of dollars for the stock that results from exercised options, so this huge amount of effective compensation must impact the company. Nothing could be further from the truth. In fact, the secondary effects of the tax code result in BENEFITS to the company that increase as the stock price increases. However, the real fallacy is an economic one. See the next point. - Most people believe that if a widget is sold by producer A to consumer X for $10, that implies that a widget has an intrinsic value of $10, at least for the moment. It is believed that A and X are exchanging equal value for equal value. This is wrong. Every voluntary, mutually beneficial exchange requires, by definition, that each side value what he receives more highly than what he gives up. In fact, of all the possible exchanges that an individual might make, he will almost always choose to actually make the ones that have the largest discrepancies in value between what is received and what is given up. This is all the clear logical result of Austrian economics, in particular the Subjective Theory of Value, combined with the economic law of diminishing marginal utility. In our specific case, the employee gives up a potentially higher salary in return for option grants of higher subjective value (often realized upon exercise), and the company gives up a potential ownership dilution, cost free to the company as a whole, in exchange for a) lower current salary expenses, b) the exercise cash proceeds, c) tax deductions for compensation costs which do not, in fact, exist. - The real costs to the company appear when they either borrow or allocate shareholder funds to buyback stock to offset option exercise dilution. This is done because the market rewards even useless buybacks and fails to punish the squandering of earnings and other shareholder funds for this purpose. - end of list, not because of exhaustion of items, but rather my own. -g- Regards, Don