March 2000 Newsletter
Issue Three, Volume One

THE LANDSCAPE CHANGES

By Mike Gasior

LOOSE ENDS

As always I need to begin this newsletter by thanking those of you who write me with all the kind words. I also appreciate your questions about various other topics. Sooner or later I will either address those questions by posting them (anonymously, of course) on the Website, or perhaps dedicate a newsletter to answering them. So please keep those cards and letters coming.

This month's newsletter goes out to nearly 150,000 accounting, audit, systems, and management professionals. If you want to print a prettier copy of this or any past month's please visit
http://www.afs-seminars.com to retrieve these archived issues. Any of your colleagues who would like to subscribe themselves can accomplish this on the homepage as well.

Since I have received so many requests asking me about it, I want to take this chance to assure everyone that I will be speaking about FAS 133 at great length during the Derivatives Seminar to be held in New York City on April 17th and 18th. I want everyone who attends to know that they will leave those two days knowing all they will need to know about the subject.

Also, due to the number of requests we have received, we have scheduled a full week of programs to be held November 27th through December 1st at the Sonesta Beach Hotel in Bermuda. Although this week was scheduled in response to our Bermuda clients, everyone is welcome to attend. We will post the details as to which programs will be held as they become available. Please check the Website or call my office at (860) 347-6568.

Now to the topics at hand…..

BEATING THE DRUM

It just never ceases to amaze me how the human learning curve can remain so flat for so long. In the first two issues of this newsletter I couldn't help but chastise some senior management a bit for turning a blind eye to some of the changes that will affect their industry shortly. It frustrates me because this industry has previously undergone similar, earth-shattering changes, which have rocked some companies right out of business. No, I wasn't in the business then; which was the 1970's. I was in high school trying to hustle a date for the prom like everyone else. But when I DID begin my financial career at the beginning of the 80's, I would listen to the folks who had lived through the 1973-74 Bear Market and lived to tell about it. I also tried to read all I could on the subject. Whenever I would speak to someone back then who was even 10 years older than myself, they always seemed to have worked for a firm that I had never heard of. Last month I recalled how Sandy Weill had built Shearson from almost nothing by acquiring firms that could no longer compete. If you are beginning to wonder what in the hell the point of this paragraph is, it's quite simple: Here we go again.

Some of the senior management who are currently in place at many companies have no clear idea what a real Bear Market looks like. They wouldn't see an industry shaping change coming from a mile away. If it's not affecting this quarter's earnings, then there must be no need to worry about it. I was sitting watching CNBC last year when I saw some portfolio manager of some Internet mutual fund as a guest on the show. Now, I don't usually think about such things, but I couldn't help but wonder if I didn't have underwear older than this guy. It's moments like that I realize how much of the investment community wasn't even there for the 1987 crash, much less 1973-74. What I am trying to say here is one of the oldest sayings on earth: Those who don't know history are doomed to repeat it.

And with that, I'll add two more items to the plate of these senior managers for digestion: Decimalization and extended trading hours. Add these two with the others I've touched on in previous months (T+1, FAS 133, Risk Management) and this is becoming quite a meal indeed. I hope everybody is hungry.

THE MOVE TO DECIMAL BASED PRICING

The first point I would like to make is that this move is happening to benefit participants in U.S. securities markets. When the people in my audience ask why it has taken so long I tell them it's the same reason almost everything happens…..and doesn't happen on Wall Street; MONEY. The follow up question to when I tell them that money is the reason is usually "How do fractions equate to money?" Well it's pretty simple. When the markets moved to 1/16's from 1/8's a couple of years ago, that assured the brokers and traders that the minimum spread between bid and ask pricing would be a bit over six cents, down from a bit over twelve. Remember that it's in the spread that traders and brokers make their living and I have eaten out of that trough for a large part of my adult life. Please be clear that I am not faulting them for this. But never forget that the SEC is always going to push for measures that improve the markets for investors and not the brokers. So here comes the latest change to affect my audience.

THE PROACTIVE UNITED STATES??

Whenever a change like this occurs, the tendency is to think, "Well isn't that a proactive move on the part of the U.S.?" To tell you the truth, the U.S. will be the last major world market to make this change. The majority of other countries have already made this change, and some of them quite a long time ago. Even our closest trading partner, Canada, has been trading in decimals for years. The Toronto Stock Exchange converted to decimal based pricing in April of 1996.

WHEN DO THE CHANGES TAKE PLACE

This has been chosen, and the move will be taking place on June 30, 2000. In reality, the 30th is the date by which participants in the market will need to be prepared to make the move. The actual date that the new trading will occur is at the opening bell of July 3rd. There was recently a spate of publicity in the past two weeks as the NASDAQ requested a delay on the implementation of the conversion. I read all the press releases and news articles during this period and the NASDAQ's argument seemed to have merit since they claimed that coupled with the explosive increase in trading volumes it would cause hardships to their members. This is no doubt legitimate and anyone off the street is aware of this fact. The Securities Industry Association Steering Committee on Decimalization announced quickly after the NASDAQ's request that they fully supported the idea. The New York Stock Exchange stayed somewhat mute on the subject comparatively speaking. They said that they would be completely ready for the change by June with no troubles. Perhaps they will be. But I have no doubt they would have appreciated a little extra time, as would have their membership.

All of the pleading for more time has fallen on deaf ears at the SEC. As of my writing this month's issue, the SEC has rejected the request for more time. I wasn't surprised in the least by the SEC's attitude on this issue. Back in 1995 when the U.S. was about to move to the T+3 environment the industry was hoping for an extension on that change also. As is often the case, the SEC pushed the industry to make the change on schedule. Seems like déjà vu all over again.

SO HERE'S THE DEAL

--On July 3rd, 2000, U.S. stock and option markets will begin to trade in decimals with the standard increment being five cents. Soon afterward the "minimum price variation" (MPV) will move to one cent.

--By the end of the 2000, all securities categories are supposed to be trading in decimals.

SO WHO CARES?

I know that many who will read this issue will no doubt sit there thinking that, for a change, this whole thing doesn't affect them. I urge you to think this over before giving yourself the day off. Nearly every area which must deal with the trading, settlement and accounting of securities will be impacted. Consider the following:

--Each and every computer system that compiles, computes, stores or displays securities pricing will be affected.

--All written materials that contain the current fractional pricing will need to be updated to accommodate these new decimal based quotes.

None of this might seem like a big deal to those of you (read accountants) who only end up converting these fractions to decimals anyway, to put them into your spreadsheets and reports. And if that is your only contact with the securities process, then consider yourself lucky indeed.

But the strains that this will place upon an already suffering system are going to be enormous. Here are a few more facts for your consideration:

--More stock will trade on U.S. markets tomorrow than traded in the entire year 1975. Lots more.

--When the "MPV" on stocks was 1/8th, there were a possible total of 8 prices between each whole dollar amount.

--When the "MPV" was decreased to 1/16th the number of possible prices between whole dollars increased to sixteen, or double the previous number.

--As the final "phase in" is completed this time, and the "MPV" is one cent, the number of possible prices increases to 100. Or to put it another way, more than five times the number of possibilities we currently have.

Now add all of that together and you have the potential for trading and support systems to face a heavy overload this coming summer as firms try to keep enough computer horsepower on the job. Once again, our systems professionals will be called on to make all of this sing and dance. And if they do their job perfectly we will never even know how close we skated to disaster…..again. I can already hear the conversations being had about how this whole decimalization thing turned out to be "no big deal". Just like that Y2K thing, it will be thought of as another big waste of money and was just a bunch of hype. Well, let me again thank those systems professionals in advance for a job well done.

MY TWO CENTS OF THE MARKET

If you have no interest in reading my opinion about the U.S. stock market, please page down or end your reading here. It's just now that I have a forum in this newsletter and I would like my opinion on the record about the behavior of this market. This is by NO means a recommendation at all! Please do not base any trading decisions on my comments. And if you do, lose my phone number.

Here are my thoughts:

--Value does matter.

--The stock market still goes down. We just haven't seen it in a long time.

--There are lots of people managing money who haven't a clue what a bloodbath looks like.

--In as little as 10 years, college professors will be talking about this period of U.S. stock market history as one of the "classic" speculative bubbles. Right there with the tulip bulb craze of the 1600's in Holland. The U.S. stock market of the 1850's. The Florida real estate market of the mid-1920's. The U.S. stock market of the 1920's. And the Japanese stock market of the 1980's.

--In the end there will be no money made by investors in ANY of the current crop of Internet companies. None. Not even if you manage to pick the handful of companies that survive the next decade. --Of the Internet "pure plays" trading right now, probably 90% of them will not exist in five years. --Over the next ten years nearly any other asset category will outperform stocks. --If you think I'm some sort of "whack job", consider the following:

--Dow Jones Industrial Average on December 31, 1964 was 874.12

--Dow Jones Industrial Average on December 31, 1981 was 875.00

--So it has happened before. Of course you need to have been born sometime before 1981 to know that.

--And so that everyone knows one more fact; I love the Internet.

So there are my feelings. I want these talking head stooge portfolio managers that CNBC parades in front of the public to stop saying that "everything is different". Every thing is NOT different. Markets can still go down and they WILL go down. It is not a question of "if" they will go down. The only question is "when" it is going down. Rest assured that it will. Don't bother to write me and ask me when that will be. If I actually knew that, do you think I would ever tell you? Next time you see one of those stooges on CNBC think about that. If I really knew what the stock market was going to do, I'd be on my 85-foot yacht somewhere off Antigua watching the NCAA Tournament with my satellite dish. I wouldn't be telling anyone. Remember the first lesson your mother taught you was that people who don't know history are doomed to repeat it. Welcome to my nightmare. Now I suppose I had better go buy some new underwear.

REMINDERS

For a growing list of financial resources please visit the Website at http://www.afs-seminars.com. I thought that rather than trying to cram a list of useful websites into each newsletter it would be easier to maintain a list on our Website. Just click on the tab named "LINKS". I continue to add links that I find worthwhile on a regular basis.

Also, the glossary of financial terms continues to expand. I am making an effort to constantly add new definitions, especially when missing terms are brought to my attention by readers. So please keep me up to date with terms you're looking for and can't find. I promise to make the additions as fast as I can.

NEXT MONTH

I don't want to commit myself to this quite yet, but I am tempted to write about some of the recent frauds that have occurred. Specifically the recent revelations about the hedge fund based out of Bermuda that falsified it's portfolio values. I might also comment about some of the other disasters which have struck in the recent past. I always feel that these events can serve as a wonderful teaching device to hopefully prevent similar events from happening elsewhere.

If you would like to add anyone to the distribution list, or change the e-mail address where you receive this newsletter, you can accomplish this by visiting our website at http://www.afs-seminars.com.

Copyright 2000, Michael Gasior. All Rights Reserved.

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