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THE FAST AND THE FURIOUS By Mike Gasior I know that I have lamented many times in months past that there seemed to be so many stories worth talking about, and so little newsletter space to dedicate to covering them. I have also gotten a few notes over the years that my newsletters can run too damn long. For these reasons I am going to try giving brief coverage to a bunch of subjects rather than extensive coverage to a few so this issue is a full 2.77% shorter than usual. Let me know what you think. Before I do anything else, I’d like to offer an apology to my Irish friends around the world. I try very hard not to be too “American” with regard to being painfully ignorant concerning matters outside the borders of the U.S., but even I occasionally slip up. This particular mistake is especially embarrassing since I truthfully know, and knew better, having actually worked for one of the largest U.K. banks. Still, I referred to the situation regarding the trading losses at Allied Irish Bank as having happened to “another U.K. bank”. Needless to say, Ireland is a proud and independent republic, and I knew that, which makes the error worse. In a few of the pubs I frequent around the world this sort of mistake would most certainly have earned me a punch in the mouth, and rightfully so. So I extend my apology and clarification to everyone who might have been ticked off over this. Now onward and upward to this month’s treasure trove of “quickies”. CLUB FED I was frankly surprised that so many readers felt I was way off base when I predicted that not a single person from Enron would end up going to jail over that whole fiasco. Not surprisingly, hardly anyone disagreed with my prediction that the weasel politicians wouldn’t do a damn thing to change the system, which allowed it to happen in the first place. Here are my facts for why I think no one from Enron will spend even a weekend in jail. I hope these statistics surprise you too, but you also know I like to back my feelings up with facts. --In the ten years between 1992 and 2001 the SEC brought civil charges in something just shy of 10,000 cases. The SEC felt strongly enough about 609 cases to refer to the U.S. Attorneys Office to pursue criminal charges and indictments. --Of the original 609 criminal referrals, 187 of them were prosecuted. --Of the 187 prosecutions, 142 of those were found guilty. --Of the 142 guilty people, 87 of those actually went to jail. --338 of the cases never resulted in anyone being charged with a crime. --84 of the cases are still pending an outcome of some kind. --Since 1985 the white-collar prison population has dropped from 2.8% of total inmates to 0.6%, and it continues to drop. I complained in previous issues that it made me sick to my stomach to watch these politicians pounding their fists onto tables and thumping their chests about the “outrage” of all these financial scandals. “How could this have happened?” they asked. I’ll explain to you EXACTLY how these scandals were allowed to happen, and these politicians shouldn’t be even a little surprised since they literally caused the whole thing. Period. Paragraph. Since the Securities and Exchange Commission is supposed to be safeguarding investors you might think that Congress would want to make sure they had enough resources to get the job done, but they haven’t been given those resources. In fact, the Congress has been using the SEC as a profit center for the government. Examine the following numbers for yourself and see what you think. --In 2001 the SEC took in revenues of $2,522,000,000. --In 2001 the politicians gave the SEC a total operating budget of $413,000,000 which is just a little over 16% of the revenue they brought in. --In 2001 the politicians added the other $2,109,000,000 to the account of the U.S. Treasury. --In 2002 the politicians wonder why there isn’t
adequate surveillance of U.S. financial markets by the SEC. You
explain to me how these people get elected since they must clearly
be complete idiots. Almost two years ago I suggested that the time had come for companies to finally begin accounting for stock options given to insiders. In February, Senator John McCain (Republican from Arizona) and Senator Carl Lavin (Democrat from Michigan) introduced a bill titled “Ending the Double Standard for Stock Options Act” which would have forced companies to begin accounting for these options in a realistic and transparent way. The current accounting rules defy any common sense and when I try to explain them to logical people, I know they are thinking that I must be making it all up. Here is a quick reminder of how the current rules allow companies to account for the options they grant employees and how this inflates earnings: --XYZ Company gives an executive a stock option with a value of $1.00 --XYZ Company is then allowed to deduct the $1.00 value of the option from their tax bill. --XYZ Company doesn’t have to take the $1.00 value of the option as a business expense, however. --Since XYZ Company had tax savings of $1.00 this directly increases their earnings even though there was no actual cash laid out by the company to enjoy this deduction. All the McCain/Lavin proposal would require is that when companies decide they would like to continue to take the tax deduction they must also treat the option as an expense, which would negate the earnings increase. Simple. Accurate. Companies began to immediately line up to oppose the new law, with even bitter rivals standing shoulder to shoulder aligned against it. I will be the first to admit that it’s difficult to blame these companies. As recently as the year 2000 just five companies managed to increase their earnings by $6 billion using this exact accounting technique. (Those companies were Microsoft, Intel, Cisco, AOL Time Warner and Dell) I’ll be keeping my eyes open to see if the politicians do the right thing here or cave to the lobbying pressure. Stay tuned. PULL THE TRIGGER Another troubling turn of events traces it’s roots back to the recent failure of several companies. Suddenly the rating agencies are becoming more athletic regarding downgrades of a company’s credit ratings before the financial situation becomes dire. Both Moodys and S&P are currently taking grief from Congress because both seemed too slow to notice Enron’s and others weakening financial condition which cost investors billions of dollars in losses. This is causing both agencies to move much more quickly to reduce the ratings on the bonds of some companies. The troubling thing is that in recent years many companies have attached ratings “triggers” to some of their bond issues. These triggers allow investors to “put” the bonds back to the issuing company, or they might force certain significant financial improvements in the company to satisfy creditors if the bonds rating falls to a “junk” level. This exact sort of trigger came close to sinking K-Mart over five years ago, but apparently only postponed the inevitable. There are currently a bunch of companies whose ratings are teetering a little too close to junk bond status and a few could end up hurting pretty badly if their bonds are downgraded. Here is the quick list of companies, which have bonds outstanding with a ratings trigger. The dollar number I quote is the size of the debt which has a “trigger” attached to it and I also mention how close this debt is to junk status currently. AT&T - $10,000,000,000 – Currently 3
ratings above junk There are many more companies with similar ratings triggers being held to their heads, although many are trying to refinance their current debt issues with new issues without triggers. I view this as just another troubling economic cloud on the horizon. HOT OFF THE PRESS These statistics were just released this week in the U.S.: --Personal income increased 0.3% in April --Personal spending increased 0.5% in April --Both the U.S. Treasury and many states report sharply decreasing tax revenues from income and capital gains taxes. This is one of a thousand reasons I don’t believe for a minute that the economic recovery is well underway. This sort of behavior by consumers is unsustainable and will only worsen the debt load they are under which is already at record levels. I beg you to remember that these same ding-a-lings who are telling you the recovery has begun are the same dopes that never saw the recession coming in the first place. Why in the heck would you ever listen to a single thing they say? JUST A LITTLE WALL STREET GOSSIP Truthfully, this story is not much of a secret on Wall Street, but I haven’t found it getting much mainstream press and wanted to share it with you. Earlier this year word began to leak out that the New York Stock Exchange (NYSE) was seeking to acquire the American Stock Exchange (ASE). Both of them have even admitted to having some preliminary merger discussions. People have wondered why the NYSE would be interested in the ASE since the ASE only handles about 3% of U.S. trading volume in stocks. What many don’t know, however, is that the ASE is the second largest options exchange in the U.S. after the Chicago Board Options Exchange (CBOE). On top of that, the ASE is the biggest marketplace for the trading of Exchange Traded Funds (ETF). Perhaps best of all for the NYSE is the prospect of using the ASE as a testing ground for new trading systems and new products on a smaller scale before rolling the out at the “Big Board”. Currently, the National Association of Securities Dealers (NASD) owns the ASE and any acquisition would need their approval. NEXT TIME MAYBE INVISIBLE INK Just last week England introduced the brand new five pound note which was supposed to be much more difficult to counterfeit since it contains a foil hologram and a metallic thread imbedded in it. Unfortunately the Bank of England began getting phone calls from people who said that the serial number on the note would simply rub off with your finger under the slightest pressure. The Bank of England is currently recalling the new currency because of this erasable ink problem and has stated that there are currently plenty of the old notes floating in circulation and there is no need for concern. I TELL YOU TO LISTEN TO WARREN BUFFETT LAST MONTH AND NOW THIS? Last month I tell you that one of the few people who I would ever listen to regarding anything they say about investments was Warren Buffett. While Mr. Buffett’s comments weren’t about anything regarding investments, his words struck me like a ton of bricks. Regarding the possibility of a nuclear attack occurring in the United States, his words were that it was “virtually a certainty”. Perhaps these words carried much weight with me since I’ve thought the same exact thing since September 11th. The current situation about who knew what prior to the attacks last September have truthfully gotten me pretty furious. As much as I love to torture politicians at every turn, not even the biggest weasel politician would have ever allowed the events of 9/11 to occur if they knew they were going to happen. To see any politician trying to make political hay out of the deaths of over 3,000 innocent people is disgusting and despicable and they should be ashamed of themselves. I’ll do them a favor and not use their names. Both the U.S. Senate and House Intelligent Committees got the same EXACT briefing that George Bush received at his ranch in Texas last August and nobody did anything about changing security measures because the threat was vague, minimal and among many others. If people want to debate whether the U.S. and world intelligence agencies can communicate better, well that might be an excellent thing to debate. In the meantime, the politicians should conduct themselves in an honorable and decent way, and the journalists who acted ridiculously and hysterically will need to rise even further to regain any respect. The following FAKE news story was forwarded to me and I wanted to share it with you. I wish I had someone to attribute it to because they deserve credit for some thoughtful writing since it paints a pretty interesting picture of how different history might have turned out. CONGRESS SEEKS TO OUST BUSH FOLLOWING RACIAL PROFILING, POLICE STATE MANEUVERS September 2001 Washington, DC (XYZ Wire Service) - Congressional leaders are scrambling to begin impeachment proceedings against President George W. Bush following several unprecedented federal security measures that critics say constitute an unconscionable assault on American civil liberties. Wall Street, meanwhile, is reeling from a seismic downturn while the airline industry is predicted to topple. The Bush administration's sudden imposition of several new - some say "terrifying" - policies came on the heels of an alleged FBI warning that radical Muslim terrorists were planning to hijack U.S. commercial airliners. In the past 36 hours, Bush has taken several steps that have sent American citizens and institutions into shock. Federal officials have: Detained and begun questioning about two dozen aviation students who are of Arab or Middle Eastern descent, prompting the Arab-American and Muslim communities to organize massive protests in several cities. Posted military personnel in airports and imposed extensive personal searches that have forced long lines, delays and charges of racial profiling as travelers who appear to be of Middle Eastern descent have been targeted by security inspectors. Ordered a tightening of borders and alerted immigration personnel to be on the lookout for suspicious activities, especially among Middle Easterners. As one TV pundit observed, there hasn't been this much furor in the nation's capital since the days of Vietnam War protesters. "This is insanity, this is an outrage," said Democratic leader Rep. Richard Gephardt on CNN's "Crossfire." U.S. Rep. Cynthia McKinney, D-Ga., has charged Bush with racial profiling. She has asked for an investigation into the FBI report that prompted these measures, saying that the report was too "vague" to justify any government action. In a radio interview, McKinney suggested that the Bush administration was fictionalizing a terrorist threat in order to justify imposing his conservative domestic agenda on an unsuspecting America. "I'm not saying he made it up; I'm just saying that an investigation might show that he did," said McKinney. Responding to such attacks, the White House is urging Americans to be patient. "We understand Americans' concern; President Bush did not take these steps without careful consideration," said White House press secretary Ari Fleischer. "Given that American lives were at stake, President Bush felt he had no choice." The security threat to which Bush allegedly was responding came in the form of a memo to the president during a routine daily briefing while Bush was vacationing at his home in Crawford, Texas. Bush had requested an intelligence analysis of possible attacks by "al-Qaida," a radical Muslim terrorist organization headed by a wealthy Saudi Arabian exile named Osama bin Laden. Bush specifically was interested in possible attacks on American soil, as most intelligence reports previously had focused on threats against U.S. targets overseas. Al-Qaida groups, which operate as small cells, claimed responsibility for several attacks on American targets during the Clinton administration. According to White House sources, Bush was concerned that bin Laden and al-Qaida had not been taken seriously enough during the previous administration. The new report said that bin Laden followers might seek to hijack U.S. airliners. "So what?" demanded McKinney. "Since when don't we know that terrorists might seek to hijack U.S. airliners? It's cold in Alaska, too. Did anybody mention that?" Fleischer noted during a press conference that another FBI memo, written in July, mentioned that two students at an Arizona flight school were thought to be linked to al-Qaida. "President Bush merely connected the dots," said Fleischer. "When you have two possible al-Qaida members training to fly airplanes in the U.S., combined with information that bin Laden may be targeting American airliners, you can't just hope nothing bad will happen. You have to act, and that's exactly what the president did." The Muslim American Society and The Council on American Islamic Relations joined McKinney yesterday at a rally in front of the Lincoln Memorial to demand Bush's impeachment. "Just because two flight students are 'thought' to be members of al-Qaida, Bush is rounding up Muslims?" McKinney said at the rally. "Can anybody say, 'racial profiling'? Bush will address the nation tonight at 8 on all major networks. At 9 p.m. CNN's "Larry King Live" will air a live interview with special guest Osama bin Laden. A TRULY TERRIFIC DOCUMENTARY ON HBO I’m obviously very sensitive about September 11th and the subject has crept into nearly every newsletter I’ve written since that time. As much as I’ve avoided personally visiting the Ground Zero area I have wanted someone to respectfully document the events of that day. There was a nicely done documentary shot by two French brothers which was aired on CBS over a month ago. I watched that and it contained footage you will not see anywhere else. This past Saturday HBO began airing their one-hour program, which I made sure I was able to sit and watch. All I can say is that the program was extraordinary and I can offer nothing but praise to HBO and the people involved in its production. I will admit that I was thankful it was only 60 minutes in length since I may not have been able to make it much longer than that. There was a feeling in my stomach by the end that I’d taken a swift kick there. If you can get HBO (or someone to tape it for you) I’d suggest you watch it. GET ME WILL SMITH! Although I have always preferred Wall Street, the
way that Hollywood handles their finances has always fascinated
me. There is a very interesting new measure of “star power”
making its way through Hollywood these days and I thought you might
find as interesting as I did. It simply measures how much a star
costs to capture a viewer. The actual name of this measure is CPV
or Cost Per Viewer. For anyone who thinks Will Smith is ridiculously
overpaid at $20 million per movie (although I have heard that the
number was even higher for Men in Black II) he may actually be one
of Hollywood’s biggest bargains. Here are the new economics
for actors and entertainers based on how much they are paid for
each viewer they attract: I FINALLY TELL YOU HOW TO GET VERY, VERY RICH This idea may sound goofy, but I actually wonder what is being done, if anything, to prevent this from occurring. I’m not even that smart but I would already have this idea underway if I had any ability to make it happen. The idea began when I read an article last week
in the Wall Street Journal about some cow in Cuba which died years
ago, but continues to hold the Guinness Book of World Records record
for most milk production in a single day. I think the cow actually
produced over 170 pounds of milk in one day. The article then brought
up the idea of potentially cloning this deceased cow in order to
increase milk production without needing to increase the size of
the herd. This, however, is not my idea for making you rich. I remember as a young man watching Secretariat win the Triple Crown and thinking what a spectacular animal he was. I grew up in a farming family and knew a little bit about animals and you could see that he was a freak of nature where everything had lined up for him genetically. When the specter of cloning first arose I truthfully thought is was a novelty with animals and a morbid possibility with humans. I truthfully didn’t see any real business applications for it. With mediocre thoroughbreds bringing a million dollars the idea of cloning a Secretariat for each Triple Crown season is an unbelievable thought to consider. If I owned the remains of Secretariat I would already be cloning a couple of new ones for each racing year from now until forever. What I would be curious to hear from any of you is whether or not thoroughbred racing has passed any regulations regarding the cloning of horses. Cloning farm animals seems like pretty routine stuff these days and there is nothing illegal about it either. Let me know the rules and regulations if you know them. ANOTHER BRAIN TEASER FOR YOU I was actually quite startled by how many responses I got last month regarding the brainteaser about the price of a tulip. For those of you who couldn’t bring yourselves to ask for the answer, the answer was $.21 for the tulip. The logic was simply that each consonant costs $.05 and each vowel costs $.03, which equals the twenty one cents. This month’s teaser presents a bit more food for thought, although I personally found it easier than last months. “A boy went out to buy some fishing equipment. He spent half of what he had plus $5.00 at the first store. At the second, he spent half of what was left plus $4.00, and at the third store he spent half of the remainder plus $3.00. He then had $5.00 left to put aside for bait. How much money did the boy start with?” If you want the answer, just reply to this newsletter and ask me for it. I’ll send it back to you via e-mail. WEEKLONG PROGRAMS IN HARTFORD, CHICAGO, LOS ANGELES, GRAND CAYMAN AND BERMUDA We are trying something in the U.S. this year that we have been doing for many years offshore, and that is host a weeklong series of programs where each day is dedicated to a single topic. Each subject is very timely given the current conditions of the market and I have been extremely excited about the response. I will be personally conducting each and every session and I would love to see you and your colleagues in attendance. For more information on course content or to register, please visit: http://www.afs-seminars.com/schedule.html http://www.afs-seminars.com/cayman.html http://www.afs-seminars.com/bermuda.html Look out for next month’s issue, which I am already doing my research for. I think you’re going to enjoy it. Copyright 2002, Michael Gasior. All Rights Reserved.
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May
2002 Newsletter
