September 2003 Newsletter
Issue Nine, Volume Four

SCANDAL MONGERING

By Mike Gasior

Although I would be the first to predict that the worst of the financial scandals are probably behind us, it seems as though the media can't get enough of a good thing. The mainstream press has managed to keep their pipeline filled with a seemingly endless series of OJs, Bill Clintons, Scott Petersons and Kobe Bryants. Now it strikes me that financial reporters have clearly been bitten by the scandal bug. The only problem for me, however, is that many of these supposed outrages have been blown far out of reasonable proportion. I thought I might spend some of this month rating and discussing this rash of stories.

I also have to admit that I was somewhat taken aback by some of the mail I got after last months edition where I tried to paint a picture of the economics of the coming century. Those of you who have been reading these newsletters of mine for any length of time might be as surprised as I was at an email I received. This is the entire message:

"As long as I have been reading your column, this was by far your worst. I would think that the people you are trying to reach through your column would agree with me. Please get out of the cheerleading business."

Yikes! The cheerleading business? There are many things I get accused of being every single month, but being a cheerleader is normally not among them. Although I never name names when I quote people, I will suffice to tell you that this message originated in Canada. Although I was clearly painting a picture of the U.S. continuing to dominate the world economy in the 21st century I would have to imagine that this would also bode well for Canada too as the largest trading partner to the United States. So whatever impetus drove the author to write that email it certainly smacks of jealousy, insecurity, pettiness or some other unbecoming emotion best kept to one's self.

Now back to my usual cheerleading mode.

IRRATIONAL EXUBERENCE?

This stock market rally will not hold. Period. Paragraph.

I may have been somewhat too early with my purchase of puts on the NASDAQ (which I continue to hold with their December expiration), but the recent rallies in the U.S. and world stock markets so severely lack fundamentals it causes me to feel as I did three and a half years ago.

Think about these numbers that are the CURRENT P/E ratios on the major U.S. stock indexes:

--Dow Jones Industrials - 21x earnings
--S&P 500 - 29x earnings
--NASDAQ - 94x earnings
--Russell 2000 - unable to be measured

All of these numbers are much too close to historic highs for my comfort and I have no reason to believe that these companies will significantly improve their earnings in the near term. Without some immediate and substantial improvement in corporate earnings stock prices will fall and I'm beginning to suspect that this will occur soon.

THE "RECOVERY"

I don't buy into the notion that we have entered any sort of economic recovery and I believe the statistics are even beginning to bear out my feelings. The latest report of durable goods orders was a drop from the previous month as opposed to the increase expected by many economists and that is where I believe the story lies.

First you have very smart men and women in the world who actually control the checkbooks and vote on whether they think the economy is improving by writing checks or not. Then you have the other group of very smart men and women who are employed as economists who try desperately to predict what the first group is going to do with their checkbooks.

For the past several years the evidence seems amazingly abundant that the economists have consistently been much more optimistic about the economy than the people in charge of the actual spending. There also seems ample proof that the checkbook keepers have had a more clear vision of what the real economy looks like from an up close perspective.

The amount of Americans currently collecting unemployment benefits is somewhere just in excess of 3.8 million people and that is the highest level in over 20 years. People actively seeking employment right now is over 9 million and that is the highest number in at least ten years.

At the moment, improvements in productivity are growing at a rate that is quicker than the rate of economic growth and this is allowing companies to actually meet this growing demand with fewer and fewer workers. There are those who have referred to the current situation as a "jobless recovery" and I find that a flattering portrayal at best.

The facts are that any increases in corporate earnings have been largely due to reductions in costs rather than earnest expansions in most of these businesses. This is my primary reason for feeling the way I do about the stock market. The current level of deficit that individuals, corporations, local governments and the federal government all find themselves in provides me with little comfort. It supposedly provides stimulus to the economy, but where is it? Where is the fountain of growth that was supposed to be unleashed by 13 reductions in rates by the Federal Reserve, the $3 to $5 trillion in tax cuts and the stampede of American homeowners cashing in their home equity to blow the proceeds on an assortment of crap? Well, I don't see it either.

So unless you can imagine the Federal Reserve cutting rates a bunch more, the government dishing out a new wave of tax cuts and corporations going on a hiring and raise-giving spree then you'll need to explain to me where the engine that drives any recovery is supposed to come from.

Like Johnny Cochran says; "If it doesn't fit, you must acquit."

I've made my case your honor. The prosecution of the recovery rests.

THE DICK GRASSO DEBACLE

I actually screamed at the television in my hotel room as I heard the announcement that Richard Grasso had stepped down as Chairman of the New York Stock Exchange. It was the crowning moment in the scandal mongering that I have watched invade Wall Street in the past few years; and now I worry these witch hunts will become standard daily fare for the financial press.

Let me make yet another direct and distinct statement to you all:

Dick Grasso has done nothing wrong. Period. Paragraph.

Of all the publications in the world to stoop to such a disgusting, tabloid level of journalism the venerable New York Times ran a photograph of Grasso on a page with photos of Ken Lay of Enron and Bernie Ebbers of WorldCom. The second two mentioned cost their shareholders and employees billions and billions of dollars due to outright and flagrant fraud and corruption. I dare the New York Times and anyone else to name for me the horrible misdeeds committed by Mr. Grasso. This is an easy dare for me to make because I vividly know the answer, and the answer is that he has simply done nothing. Nothing but maintain the NYSE as the envy of the world's financial exchanges and keep the Big Board a hugely successful money making machine for its members.

But Dick Grasso was guilty of one simple thing. He got paid $140 million in deferred compensation as the culmination of a storied 35 year career at the NYSE that began with him starting as a clerk after getting out of the Army. If you ever listened to him, he truly loved his job and he loved the market he oversaw. He steered the exchange through some amazingly challenging obstacles during his tenure including September 11th and the recent blackout to name just a few. It is also a marvel that a human driven marketplace still holds such a dominant position in a computer-dominated world.

Quite frankly, I don't really feel like appointing myself the defender or apologist for Wall Street and I also don't know if Wall Street wants me to be one either, but there are things that need to be said.

Wall Street is about money. That's why people go there and that's why I went there. None of us try to kid ourselves that we're curing cancer or creating a vaccine for AIDS. Your paycheck is simply your report card and how you compare yourself to others.

I've been subject to exchanges like the following one hundreds of times during the past 20 years where the person hurling the comment actually thinks they are going to insult me or hurt my feelings:

Accuser - "This is all about MONEY for you people on Wall Street, isn't it??!!"

Mike - "Yeah. Sure. So?"

So Dick Grasso got paid $140 million and now may even demand the other $50 million he was going to let the NYSE keep in an effort to keep the job he loved so much. So what? It wasn't just a years pay but a lump sum deferred over many years. Yes, it's a lot of money but who cares. You Karl Marx types can save your emails telling me about the lack of healthcare in America or the record levels of poverty just reported by the government. Those things aren't Dick Grasso's or Wall Street's fault. He didn't garner that pay package by committing any frauds or crimes in the way Mr. Lay or Mr. Ebbers did and he didn't deserve to have his picture sharing a page with them either.

It is simply a shame that this story caused the turmoil it has at the NYSE and I simply refuse to believe that they are going to be better off without him.

RATING THE SCANDALS

I'll make a couple comments on a few of these scandals, but let me quickly sum up which stories are genuine and those that are witch-hunts:

Dick Grasso - No story

Freddie Mac - An accounting story, but also a story of an active and responsible board of directors. No fake earnings but actually massive earnings they tried to push into future years with their accounting misdeeds.

The Mutual Fund/Hedge Fund Story - A big story, but it doesn't appear to be a widespread story. This was VERY dirty activity, particularly on the part of the mutual fund companies who gave favored treatment to their large hedge fund customers to the detriment of their smaller investors. Personally, I can't blame the hedge funds for trying to negotiate a better deal because that's what they do. Luckily, it seems as though the activity is isolated to just a few companies, that I am certain will be punished by Elliot Spitzer from New York. I hate quoting anyone from memory since there is always room for error, but I was watching Jim Cramer on CNBC and will swear that I heard him say that when he was still managing the hedge fund he ran for many years, he approached Fidelity about doing some of this late trading and Fidelity told him "he should be ashamed of himself for even suggesting such a thing" and that they would never engage in such dirty things. At least stories like that give hope that not EVERYONE on Wall Street is dirty.

The Federal Home Loan Bank of New York - I have several of the 12 banks that make up this system as clients and have found them an important and integral part of the U.S. banking system. I also have personally found them sophisticated and conservative in the way they manage their businesses. This is why the recent announcement that the New York Bank lost $183 million in mobile home mortgages and was suspending their dividend was especially upsetting and surprising. I don't know enough of the facts to determine exactly what happened, but I have no doubt that this is a bad thing. I'm not certain if anything particularly wrong happened other than the fact that the bank left themselves exposed to losses of this degree. This is a more important story to me than the Freddie Mac story and I will continue to watch the facts here as they unfold.

The Frank Quottrone Trial - Barely a story. The accusations say that Frank directed allocations of hot IPOs to favorite clients of Frank and the firm. So what? Who was he supposed to give these allocations to? His least favorite clients and those hated most by his employer? This is common practice on Wall Street and always will be. The actual charge by the government is that Frank obstructed justice by sending an email to his staff to supposedly dispose of documents even though he knew there was an investigation underway by the government. In truth, the entire government case rests upon this single email and I would not want to be the prosecutor in this situation. I'm certain the government is not happy that they couldn't reach a plea agreement with Mr. Quottrone and I think the whole trial will hinge on jury selection.

Martha Stewart - Barely a story and not worth even mentioning. A total of $40,000 was involved and you all know my opinion of Ms. Stewart by now.

Ken Lay - A huge story. Why isn't he in jail yet?

Bernie Ebbers - Another huge story and perhaps an adjoining cell to Mr. Lay.

Dennis Kozlowski - Going on trial and then going to jail. I give even money on a fairly stiff jail sentence too, but the serious crimes will not be directly related to Tyco but to his own tax evasion.

MY TOP TEN BANDS

Truthfully, I didn't get much grief over my top 5, and I will quickly admit that there are probably 20 bands that anyone could have made a case for filling the second 5 spots.

The two groups that people had the most trouble with:

--Guns and Roses
--The Band

The two groups that people most often mentioned belonged on the list:

--U2
--Pink Floyd

I also must thank those of you who wrote and made me aware of Radiohead since I had been basically unfamiliar with their stuff and I have been enjoying getting to know them.

NEXT MONTH

I was at a client recently and got a request for the best financial, investing and Wall Street books to read and I promised them I would make my complete list available in an upcoming newsletter. Truthfully, I promised them it would be this newsletter, but I have honestly found the task more daunting than I expected.

I won't promise that you'll be able to sway my own personal opinions regarding the best books, magazines, newspapers and movies, but I will be glad to hear your votes for all of these.

Drop me a note with your thoughts on the best:

--Investment books
--Books on particular types of securities
--Books detailing Wall Street stories and legends
--Favorite business newspapers and magazines
--Best financial television programs
--Best Wall Street movies of all time

I will make my own choices and mention reader favorites as well.

BERMUDA SEMINARS ARE STILL "ON"

I have already expressed my good wishes and prayers to my friends and colleagues in Bermuda personally and hope everyone is safe and getting back to normal.

In the spirit of getting back to normal we continue to plan to hold our Managing Portfolio Managers program on November 10, 11 & 12, 2003 and the Securities Operations, Processing & Accounting program on November 13 & 14, 2003.

The property that we have used for many years is the Sonesta Beach Hotel and it was perfectly positioned on the beach facing south for the worst of what hurricane Fabian had to dish out. Although I've only seen photographs and read accounts from friends on the island, the damage to the Sonesta was substantial.

We are in active discussions with several other venues to host our sessions and we will post the new location on our website the moment one is confirmed. Simply visit the following link for complete and up-to-date information:

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

EASY QUESTION FOR MY NEW YORK READERS

Is it just me, or has traffic in Manhattan gotten worse every single day since Michael Bloomberg took over as mayor? Every single box in the city is blocked all day long and a red light doesn't mean "stop" to anyone anymore. It is hard to believe that a mayor can make this much difference to the traffic situation, but I have also read in the New York Post that the homeless are becoming more visible and aggressive and I have noticed the same thing myself. All I need to have happen is for a squeegee guy to spit on my windshield and I'll know for certain that eight years of progress has gone totally down the toilet.

BACK TO HOPEFULLY TOUGHER BRAIN TEASERS

I got a little flack that the brainteaser last month had slipped below Olympic standards so I'm trying to raise the bar a little in this edition. Let me know what you thought.

"Two ferryboats traveling at a constant speed start moving at the same instant from opposite sides of the Hudson River, one going from New York City to Jersey City and the other from Jersey City to New York City. They pass one another at a point 720 yards from the New York shore.

After arriving at their respective destinations, each boat spends precisely 10 minutes at the opposite shore to change passengers before switching directions. On the return trip, the two boats meet at a point 400 yards from the Jersey shore. What is the width of the river?"

As always, give yourself a decent chance at figuring it out on your own before being a weasel and peeking at the answer. You can view the solution at this URL:

http://www.afs-seminars.com/brainteaser_Sep2003.html

http://www.afs-seminars.com

Copyright 2003, Michael Gasior. All Rights Reserved.

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