Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Mike M2 who wrote (82779)	8/9/2000 1:16:29 AM
From: Don Lloyd	Read Replies (5) \| Respond to of 132070

Mike - [...Here is Bill Parish billparish.com ...] Thanks. While there is a lot that he covers that I simply have no opinion or knowledge of, and there may well be something to his take on macro economic instability due to index funds, there are a couple of quotes that make clear that he is subject to some serious economic misconceptions. "...Options Exercised and Retired: When stock options are exercised, the options are retired as the employee takes ownership of the stock. The value of these “retired” options should not be a subject of debate. Upon exercise, the options are valued at the market price of the stock less the exercise price and the employee pays W-2 taxes on this gain, even if the stock is not sold. The company then takes a tax deduction for wage expense for the same amount. What is surprising is that not a dime of this expense is charged to earnings at Microsoft, which they could voluntarily do. This amount alone for 1999 should exceed $9 billion even though net income is only $7.8 billion..." As I've noted before, the problem is the missing question : 'Value to whom?'. The value to the exercising employee in no way necessitates any particular cost to the company as a whole. It is the shareholders that suffer dilution to the degree that the company management and the board of directors allow, in their role as agents for the shareholders. Rather than an expense, the proceeds of the stock exercises, and the deductions are effective positive cash flows to the company. If in fact they do not show up on the income statement in any way, it is EARNINGS that would be effectively understated, not expenses. "...Remaining Options Debt Outstanding: The remaining unexercised stock option liability is a completely separate issue and a debt just as real as the current stock quote, especially if half of the options are currently vested and exercisable. We all know that stocks can be over and under valued yet the market gives us a price on any given day and that is the price. The Black Scholes and related footnote disclosure is a great mathematical model yet has become nothing but a Trojan Horse for plundering the retirement system. What the Treasury Department and Federal Reserve might concern itself with is that this debt, $60 billion at Microsoft, has no interest cost that hits the income statement and increases $800 million with each $1 increase in the stock price. Simply put, Microsoft is somewhat immune to Federal Reserve interest rate hikes, which explains why the stock is increasing as the Fed raises rates and continues creating a Long Term Capital like debt pyramid..." There is NO debt. What is really being described is a naked short call option being marked to market, with no time value involved. If the option were on some other company's stock, it would have some validity, as the assigned stock would have to be acquired at a presumably real cost. However, the ability to issue new stock essentially at will, at a cost of only diluting the existing shareholders, reduces the situation to that of a covered call with assumed assignment. There is NO requirement to buy back the stock to sterilize the dilution. That must be an independent investment decision made entirely on its own merits, although the reality is often different. Regards, Don