February 2001 Newsletter
Issue Two, Volume Two

SO MUCH FOR A SHORT MONTH

By Mike Gasior

Well, I need to begin by admitting that the end of the month indeed sneaked up on me. Certainly February has been a short month my entire life, but for whatever reason, I conveniently forgot that it was only going to have 28 days this year and that I should plan ahead. So much for foresight.

In keeping with the short month, I hope to keep this month's edition somewhat short as well since I am aware of my reputation for rambling. This may be difficult since there seemed to be so many stories recently which caught my eye and are worthy of mention. Our friends at FASB continue to do things which defy common sense and explanation. Microsoft is beginning to look like an amazing value. Wall Street is not yet bleeding out of every orifice of its body, but some of its employees might soon be. Will the "buy side" come anywhere near being ready for T+1 since it is now exactly 40 months away? And it still never ceases to amaze me how morons are willing to just flush their hard earned money down the drain. Whenever I'm asked "How are you doing Mike?" these days, I just have to tell them the truth that "I'm drowning in a sea of fools."

Speaking of fools, however, I incorrectly quoted the S&P 500 being down 2.7% and the NASDAQ down 17.2% for 2000. The correct amounts were down 9.1% and 39.2% respectively and I thank those of you who pointed out the error of my ways. This is especially disconcerting considering the correct numbers would have better belayed my point.

These are just some of the topics I wanted to touch on this month and I'm even leaving a few others aside. I would like to very much thank those of you who wrote with comments about my opinion on the California electricity shortages. I got an amazing amount of e-mail (the vast majority very positive, luckily) because CNBC.com posted my comments on their editorial page, which exposed my thoughts to a lot more people than usual. I think most people were quite clear that I was never picking on the citizens of California, nor was I mocking their current situation. My point was simply that there was no other alternative than what happened, given the series of events that lead to this crisis. I guess I'm just always surprised that others don't seem to see what I find obvious. I just feel like that kid from the movie The Sixth Sense. Why can't anyone else see what I see?

And in keeping with promises made to many different people, I will not mention this month my amazing predictions about the NASDAQ, Priceline.com or the bond market. I promise. Particularly to my friend who wrote to tell me that I had been predicting the decline of the NASDAQ "from 1993 to 2000..not a good track record". Well that is actually a little bit of an exaggeration, but I stand by the fact that I put it in WRITING in March of 2000. But I did say I would drop it.

WHAT IS FASB SMOKING?

The things I am about to tell you make perfect sense. You needn't be an accountant or take any seminar from me or anyone else to understand. These things are perfect common sense and are indisputable. Let me list them:

--You work for my company and have options to buy company stock at $30. The current price of the stock is $100.
--You exercise your options and buy the stock at $30.
--The Internal Revenue Service is going to ask YOU to pay taxes on the $70 capital gain you just enjoyed.
--The Internal Revenue Service is going to let THE COMPANY deduct that same $70 as a "cost of doing business" and will reduce my taxable income by the $70.

Simple enough. You must ask yourself, however, why the Financial Accounting Standards Board (FASB), which oversees all GAAP accounting standards in the United States, would NOT do the same thing. The consistent argument for not treating these options as expenses is the valuation of them. "What if nobody ever exercises their options? What is their value then?" Well this is a foolish argument since Nobel Prizes in economics were handed out a few years ago to a couple of gentlemen who came up with a method of pricing options which is now viewed as a staple on Wall Street; the Black/Scholes Option Pricing Model. Simply enough, options ARE expenses to these companies and FASB should consider them to be such.

Consider this idea:

--I pay you $100,000 this year in U.S. Dollars and another $100,000 in Euros. Your total compensation is $200,000 and of course would reduce my profits by $200,000.
--I pay you $100,000 this year in U.S. Dollars and another $100,000 in options on my company's stock. In FASB's eyes, your total compensation is only the amount that I paid you in dollars and this arrangement only reduces my profit by $100,000.

I know what you're thinking..this is stupid. Why would the IRS use the options value to reduce income, but FASB not use it to reduce earnings? Well, that's my point and I wanted you all to know this is going on. One last thing and I promise to move on. For the period ending September/October 2000, if Cisco, Dell, Intel, Microsoft and Sun Microsystems had been forced to expense their granted options, their total earnings would have been reduced by FOUR BILLION DOLLARS. It's tough to sneeze at that.

TIME FOR MICROSOFT?

I worry often that people will think that I just hate the stock market and think there isn't a stock I like anywhere. This is just not true. I just haven't liked the stock market lately, but now many outstanding companies are on "sale". Please be clear that this in NOT a recommendation of their stock, but a commentary on their company. If you decide to buy the stock on your own and it goes down, lose my phone number. And don't write me either.

I consider Microsoft to be one of these companies at the moment. I will be the first to admit that I have found them very annoying at times, as you would any huge company. But they have endured a ton of really awful news in the past year and they've found their stock price cut by more than half. I have read a ton of material on the company as of late, and some of the information on them is just jaw dropping. Consider some of the following:

--The stock peaked less than a year ago at $115. It closed today (2/28/01) at $59.
--It has a HUGE share of the software marketplace. (No kidding)
--It has a brand name nearly as good as anyone else in any industry.
--They have NO debt.
--They have $27,000,000,000 in CASH. Yikes!
--They should have revenue of $25,000,000,000 this year.
--About 40% of that revenue, or $10,000,000,000 will make it to the bottom line in profit.
--They are pushing heavily into many markets outside of PC's.
--230,000,000 people worldwide visit at least one Microsoft website every month.
--It appears that the Federal Appeals Court might NOT break the company up after all.

Now of course, none of this means that Microsoft stock is going to do fabulously well in the near or distant future, but I have always been someone who needs a business concept to make good common sense. That was my problem with Priceline.com. Priceline was a stupid idea and was ridiculously overvalued. I don't even know how Microsoft can screw this whole thing up at this point. It would be like taking over as coach for the Michael Jordan Bulls for just the playoffs, which I figure even I couldn't have messed up.

There are just too many really good things to ignore. I haven't bought any of their stock and don't know if I will. But I will be watching.

BLOOD IN THE "STREET"

I've been watching the behavior of Wall Street for the better of 20 years and the one thing that is very predictable, is how it behaves when business slows down. Declining markets always lead to a reduction of revenues for Wall Street firms. Reduced revenues lead to reduced profits. Reduced profits lead to a very quick reduction in expenses. The fastest and easiest expense to reduce is ALWAYS the humans. I personally think that collectively Wall Street might reduce it's employment by a little over 10% before the end of 2001. The ripple effect that this has is more than many people would ever believe since total employment on Wall Street only numbers around 335,000 people. Even if they DO get rid of 33,500, or 10%, most of America wonders, "Who cares?" Heck, DaimlerChrysler reduced their staff by 26,000 all by themselves. Why would 33,500 Wall Street'ers be a big deal?

Well it would be a HUGE deal to the Metro New York area who thrives when Wall Street thrives. It has been estimated that the financial industry makes up somewhat less than 10% of all Manhattan's workforce, yet contributes nearly 40% of the economy. You can be certain that the Mercedes dealers, South Hampton real estate agents, and the wait staff at New York's finest restaurants are sweating it good at the moment. When Wall Street sneezes, New York often ends up with the cold.

The first group that is going to be feeling the heat are the investment bankers since it is their business that has dried up the most. There were only three IPO's during January of 2001 compared to twenty in January 2000. At least at the moment, trading activity remains good and the trading desks should be okay for the time being. My old job, brokering, is a sales job, which doesn't get paid anything unless we're producing something so there's no real need to get rid of us. Usually we just get screwed over on our compensation package somehow.

It will ultimately be a very curious thing to watch what happens to my colleagues on Wall Street after more than $3 TRILLION of wealth just evaporates, since it has never, ever happened before.

T+1 AND THE "BUY SIDE"

This section of the newsletter is going to be very, very brief since I am getting sick of warning people about the perils of T+1.

The date has been chosen and is expected to be final and binding at this point. The United States is moving to a one-day settlement cycle in June 2004 and it is going to DRAMATICALLY affect how business is done in the financial markets. Here is Mike's scorecard on how I see the respective players preparing for the change:

DTC - All set. No problem. The Brokers - Nearly ready. They'll make it. The Custodians - Working on it. They either make it or they get fired. The Buy Side - T+1? What's that?

I don't mean to completely pick on my Buy Side friends, but this is pretty serious business we're talking about. If you aren't ready in time, you are literally out-of- business. You have 40 months to change your entire IT structure and rip out and replace every system you are currently using. Have you started this yet? Is there budget available for this massive undertaking? Is your stomach beginning to form this huge knot? Do you feel totally screwed at this point? Is it too late to post-out to some other division of the company far, far away from securities?

I'm not trying to torture anyone here, but I also don't want to hear from anybody about how I didn't warn you about this. I started a year ago and I'm STILL doing it. I'm frankly sick of hearing myself talk about it. End of subject.

I'VE GOT A BRIDGE IN BROOKLYN YOU JUST HAVE TO BUY!

I always hate to report these sorts of stories, but YOU try to imagine this.

--You get called by a Costa Rican company called Elfindepan.
--They tell you to expect MONTHLY returns of 50%.
--They tell you that your principal is GUARANTEED.
--They tell you NOT to mail a check. They'd rather draft it RIGHT OUT of your checking account electronically.

I'm not even going to write any more of the details for you. Like the fact that this Costa Rican outfit was founded and run by a plumber, a textile salesman and a retired chiropractor. The truth is almost always stranger than fiction, and the stuff I've told you here is the truth.

So how much would YOU let these people draft out of your checking account? Exactly! Nothing!!

But that's NOT what happened. About 860 investors let them draft $6.5 MILLION during a six-week period last May and June. My thought is that it's a shame that law enforcement even has to spend any of it's precious time investigating this kind of thing. I hate to sound callous, but you would assuredly qualify as one of the stupidest people on earth if you "invested" any money with this outfit and you clearly don't deserve to have any money. What is the matter with people for God's sake!?

Worse still, it appears now that this scam was up and running for close to two years and might have actually cleaned people out to the tune of $100 million. And just when I thought I had seen everything, I see something new. Oh well.

MY TWO CENTS ON DELL

Since I have my own forum to bitch about things, I just had my very first experience buying product from Dell Computer. I have to admit to you that I have always been a true admirer of Michael Dell and was keenly aware of their reputation as the leader in their industry with regard to customer service. It is no secret to anyone that nobody in the business gets higher grades than Dell when it comes to taking care of their customers.

Well given my own personal experience working with their "Customer Service" people I would definitely hate to find out what the WORST customer service in the industry looks like up close.

Let me just tell you what happened and you form your own opinion:

--I bought two new machines for my office. They were very fairly priced and Dell had them built for us and on a truck in less than 24 hours.
--I cannot tell you exactly how many computers I have bought in my life (50+?) but every single one of them has worked for me right "out of the box".
--The first Dell machine I set up didn't seem to even know it had a CD-RW installed in it, or even that it had a CD drive at all.
--I called Dell Customer Service.
--I was on hold for 41 minutes.
--I spent 67 minutes on the phone with a young woman who, quite frankly, didn't seem to know literally anything about computers. I actually became nauseous from the very loud sound of her chewing gum in my ear.
--After several (I think it was four) episodes of spooky, and complete silence, I had to ask the woman what she was trying to find in her manual. She replied that she wasn't looking in any manual. At this point I'm a little pissed off and can't help but drill her on what she had been doing for the previous 5-6 minutes.
--Finally, after I tell her how aggravated and unsatisfied I am with this purchase, she explains that I can package the machine back up and send it back to them AT MY EXPENSE to await my refund which should be processed within 30 to 45 days!! They can BUILD a computer and ship it in less than 24 hours, but cannot process my refund for a month and a half. Good grief.

So how did this work out for Mike? Simple. After I hang the phone up, I take my brand new computer apart and plug the CD drive into its power source since it had never been plugged in at the factory. How in the world did this machine make it out of the factory? And all of this is from the "leader" in the PC business. I am, not surprisingly, horrified. I wouldn't buy a single one of these PC maker stocks for the longest of time.

LOOSE ENDS

The final details on the Cayman Island and Bermuda seminars programs should be added to my website in the next week or so.

I am also going to be in New York March 19, 20 & 21 for our Introduction to Securities & Markets Seminars. There is still room in this program and if you would like to register please call my office at (860) 347-6568 and they will be happy to get you signed up. You can also register via the website.

http://www.afs-seminars.com

Copyright 2001, Michael Gasior. All Rights Reserved

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