November 2002 Newsletter
Issue Eleven, Volume Three

A HAPPY ANNIVERSARY

By Mike Gasior

Almost precisely one year ago, Enron Corporation filed for bankruptcy, which seemed to be a warm-up for the deluge of scandals that would follow. The list is a bit too long to list here again but obviously Tyco, WorldCom and Global Crossing along with the downfall of the Wall Street analyst lead the story. I have gotten some critical e-mail over the past year claiming that I have, at times, seemed fairly indifferent to these grievous stories. Although I never got my shorts in a knot about any of these incidents individually, I figured I might take this one-year anniversary to apply some thought to the overall phenomenon we have collectively experienced.

NO BIG DEAL

There, in three words, is my overall feeling about ALL of these messes compiled together; no big deal.

If you were to look back over the past 500 years of business history you would see this exact pattern during other manias, whether it was the spice trade, the land rush, the slave trade, the steam engine, air travel, automobiles or telecommunications. Any time you see a business cycle which resembles the boom which occurred during the late 1990's, you will always see the sort of wretched excess manifested in the trash can and shower curtain of our friend Mr. Kozlowski of Tyco.

Those of you who read this newsletter regularly have heard it too many times already, but the most important lesson in life I have ever received is that history ALWAYS repeats itself and those who have no concept of history are the ones who cause the repetition. I had to listen to all the snot-nosed punks during the 1990's telling me that the business cycle was over, the "old economy" was now irrelevant and most famously that "value didn't matter anymore". Well all those things were untrue and after some bloodletting it seems very obvious in retrospect.

I hate that I am making these scandals sound ho-hum, but in the perspective of the larger picture of business cycle history it really is.

Everyone wants a villain to embody the evil and the media is serving us images of white collar "perps" in handcuffs being lead to police cruisers. There will certainly be a few public hangings to satisfy the mobs thirst for blood and the opportunistic politicians will call for sweeping changes to protect the people in the future. I'm not certain at this point exactly which corporate honchos will serve as the fall guys for this current spate of scandals, but we are close to finding out and the volume will begin to go down on this issue. I think the end of this cycle is fairly close.

Please remember that the HUGE majority of corporate managers are tremendously ethical, honest and moral people who maintain the best interest of their shareholders and employees above all else. You will likely see executive pay begin to slide downward relative to the pay received by the majority of workers. The excess in this area was fairly widespread and in a toughening economy there will be too much pressure from boards of directors, shareholders and the public at large to allow it to continue.

One final thought I have on this matter is that a few of these guys are going to have to get sent away to an Attica or other "real" prison to make the message clear that this behavior is going to end right now. Only the prospect of becoming your cellmate's girlfriend Shirley will put the fear of God into the psychology of corporate managers in an earnest way. If this current crop of criminals somehow skates with easy sentences at some "Club Fed" the government will have missed their chance to begin the culture change.

A HISTORY LESSON ABOUT THE ANALYST PROFESSION

Sticking with my theme that not knowing anything about history is unhealthy, let me explain the beginning of the downfall of the stock analyst profession.

The slide began in earnest in very early 1990. Donald Trump had just opened the Taj Mahal in Atlantic City, New Jersey to much fanfare. An analyst by the name of Marvin Roffman worked for the brokerage firm Janney Montgomery Scott in Philadelphia covering the gaming industry. Mr. Roffman studied the Trump casino business and concluded that there was much too much debt on the balance sheet and once the "cold winds" of winter blow later that year; Mr. Trump's empire may fall like a house of cards. Unfortunately for Mr. Roffman, he wrote up a report on Trump Atlantic City expressing exactly those views.

Now although this might be difficult to imagine our friend Mr. Trump totally blew a gasket and went into a wild hissy fit demanding in a letter to then Janney CEO Norman T. Wilde Jr. that Mr. Roffman be fired for expressing his views or Trump would launch a huge lawsuit. Much to the dismay and horror of the analyst community, Janney Montgomery Scott fired their employee of 17 years, Mr. Roffman, and the next 20 years were spent sliding continuously into the situation we find ourselves now. Institutional Investor Magazine conducted a survey shortly after the Roffman firing asking analysts if they had ever been pressured to temper a negative opinion about a company, and 61% of them responded "yes". Remember the survey I'm referencing here is over 20 years ago.

The epilogue of the story is even more interesting. The Trump Taj Mahal found it's way into bankruptcy within a year of Mr. Roffman's report. And our Mr. Roffman sued both Janney and Mr. Trump and won settlements from each. The Trump settlement was undisclosed, but Mr. Roffman got $750,000 from Janney.

Not a whole heck of a lot has changed in the past 20 years either it seems. According to an article in the Wall Street Journal earlier this year, Mr. Daniel Scotto who was a bond analyst working for BNP Paribas, stated publicly that Paribas fired him for telling the firm's clients in August that Enron's securities "should be sold at all costs and sold now."

Then he was involved in a conference call in which he was even more emphatic, a call that was tape recorded because it took place on the floor of the New York Stock Exchange. Mr. Scotto says Paribas told him, "You are demoted. We do not think it was a good recommendation or a reasonable one." Paribas put Mr. Scotto on leave and subsequently sent him a termination letter. It will likely come as no surprise to you that Paribas had an investment banking relationship with Enron.

This is a lesson we all tend to learn from our Mothers at a fairly young age. If you don't have anything good to say, then don't say anything at all.

As much blame as I can lay at the feet of the brokerage firms for this whole situation, the consumers of this information need to take some responsibility for any wholesale acceptance of recommendations given to them. The current trend of everyone being a victim ready to sue for their own stupidity is one I'm quite fed up with. Some fat kids parents suing McDonalds for their child's lard ass?? These sorts of people should just be beaten with hammers.

Consider the following FACTS and tell me how any reasonable person could accept any recommendation from a brokerage firm without at LEAST a grain of salt. Zack's Investment Research of Chicago studied 8,000 analyst recommendations made by analysts of S&P 500 stocks during the year 2000. Of the 8,000 recommendations made, only 29 recommended selling. This is particularly curious given that the S&P 500 began the year at 1,468.25 and finished at 1,320.28, down a little over 10%. One would have expected a few more than 29 stocks to be a likely candidate for decline.

Simply considered, in a market which declined 10% for the year and 7,971 out of 8,000 suggestions DIDN'T tell me to sell, how stupid can I be. All I can think of is the Peanuts cartoon where Lucy always pulls the football away right before Charlie Brown can kick it and Charlie winds up on his back. Lucy doing it the first time was just mean. Every other time was Charlie's fault for being too stupid to learn from his mistakes.

"Fool me once, shame on you. Fool me twice, shame on ME."

Without repeating the first section of this newsletter, the current depths being experienced by the analyst community will remedied through the actions already underway. Fines will be paid, people will be fired and politicians will pound their fists. Then, once again, the job of analyst will begin its climb back to a trusted, honorable profession.

A COUPLE OF WORDS ON THE STOCK MARKET

Get out.

A FEW WORDS ON AL GORE

Get out.

But to take this to a deeper level; I just struggle to see what he is trying to do here. I dread the idea that Al Gore is going to be a constant image on my television for the next two years, but I'm afraid that is exactly what is going to happen.

I'm quick to admit that I was plenty sick of him after the last election, but some of the comments he has already made causes me to scratch my head wondering what the heck he's thinking. For example:

"This time I'm going to speak from the heart."

Does this mean the last time you were completely full of crap and saying whatever you thought people wanted to hear? I mean I knew he was doing exactly that the last time, but I suppose I'm just surprised to hear him admitting it.

"Now I'm not going to listen to polls and pollsters."

Which dovetails into the previous comment that he is clearly admitting this is precisely what he did during the last election. I've got five bucks that says that some pollster told him that it would be good to say those exact words.

As much as I hate to admit it, he may actually be doing some of the other Democratic contenders a big favor by insisting on running. The more respectable Democratic contenders like John Kerry, Joe Lieberman and Tom Daschle may owe Al a "thank you" by saving them from an almost certain pounding at the hands of George W. Bush. Then they will at least not be "damaged goods" as they position themselves for a more winnable campaign.

And one small piece of advice for Senator Daschle; someone in your position should NEVER even acknowledge that someone named Rush Limbaugh even exists. You're the minority leader of the United States Senate for God's sake and you just need to stop being such a crybaby about everything. Actually, this is pretty good advice for your entire party. Stop whining, complaining and trying to blame everyone else for your problems. You are the managers of your own destiny and the world is not filled with boogiemen trying to prevent you from achieving what you want. Start telling me what you WOULD do. Not all the things you WOULDN'T do.

MY TOTALLY FAVORITE STORY

Yesterday as I began to sit down to write this month's edition I scanned Yahoo for the "most popular" stories to be certain I wasn't missing anything obvious.

Well yesterday morning, THE most popular story was:

"Handcuff Sales to Women Booming"

According to the story, one of the largest adult chains in Europe, Beate Uhse, which was founded in 1946 and recently went public on the Frankfurt stock exchange, opened 5 shops catering primarily to women. Well starting the very first day, the shops struggled to keep handcuffs in stock daily.

With all the negative stuff I read every single day, what a wonderful story for me to hear. Although you might be thinking I'm being sarcastic I'm actually not. Just the idea that there might be scores of women walking around with a newly purchased pair of handcuffs in their purse is a terrific distraction from the daily grind for me. This is true barring any sudden correlating increase in the purchase of stun guns, baseball bats or hammers by women of course.

A PRETTY DECENT BRAIN TEASER

I got MANY fewer complaints last month that the brainteaser was too easy which pleased me. This month the premise seems simple enough, but you need to give this once fair consideration.

How many parts can you split a circle into using only 4 lines?

Give yourself a chance to figure it out yourself before going to look at the answer. You will find the solution at the following URL.

http://www.afs-seminars.com/brainteaser_Nov2002.html

NEXT MONTH

Year-end is upon us and I'm already working on compiling my "best of" and "worst of" lists, along with reviewing my predictions of last December and making my picks for 2003. This one is going to be pretty good.

http://www.afs-seminars.com

Copyright 2002, Michael Gasior. All Rights Reserved.

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