Year: 2001

*IRA Reminder: You have until next Monday to set up and contribute to an IRA (preferably, in my view, if you qualify with an income below $95,000 single or $150,000 joint, a Roth IRA). The younger you are and more inconvenient this is, the happier you’ll be 30 years from now that you made the sacrifice and got into the habit. Not sure where to start? The nearest bank will do just fine. Do it this afternoon!*

Spencer Martin: ‘Re ‘analysts‘ Friday . . . you’ll get a kick out of this graph.’

Toby Gottfried: ‘Rather than, company earnings fall below analyst expectations, stock drops, shouldn’t those headlines read, analyst estimates exceed company earnings, analysts fired?

Ivy Guy: ‘I’m in New York for the first Ivy League Investment Club Conference, sponsored by Goldman Sachs. The conference began today with the delegates (students from each school) hearing the Goldman Morning Call at 7:15am, the summary of all the GS analysts’ calls for the day. One major point of the conference call was California’s electric utilities. There had been very positive developments on Thursday evening, and so the analysts said that the stocks (PCG and EIX) had nearly 100% upside; they were priced like they were going bankrupt, but this was a ‘near impossibility.’ To reiterate, this is at 7:15am yesterday, Friday.

‘The rest is history. At about 2:30, one of the scheduled speakers begins his talk by saying, ‘If any of you own PG&E, call your brokers–it just filed for bankruptcy.’ There was a palpable silence in the room. We didn’t know if this was some kind of joke. We’d just heard the analysts of Goldman Sachs – GOLDMAN SACHS – talking for several minutes (a good chunk of the morning call) about how this was a near impossibility. In a word, everyone was dumbfounded.

‘In my opinion, this was the best lesson Goldman gave us during the day, inadvertent though it was. If you print this, please don’t use my name or school.’

Emily Rizzo: ‘Re 400 MBA Candidates last week . . . Whatever happened to the clickle? I would love to pay you to write more of these columns.’

☞ Well, if you insist.

Carl: ‘This set of comments comes from April 17th and 18th, 2000. The NASDAQ was coming off of a month of very heavy selling and the index went from 5,000 all the way down towards 3,000. On April 17th and 18th the index shot up 472 points or 14% leading many to believe that it had bottomed. The NASDAQ closed at 3,793 on April 18th and has been chopped in half since that time . . .

“We’re telling people to buy tech stocks. I do think the bottom is over. Typically, with this kind of increase in volatility, the near-term returns tend to be sloppy. But in 12 months, it should be just fine.” — Jeffrey Applegate, chief investment strategist for Lehman Brothers.

“The Ciscos, the Microsofts, the Oracles . . . those companies will weather these kinds of storms.” — Richard A. “Rocky” Mills, branch manager at Sutro & Co.

“We continue to view most stocks (excluding dot-coms) as cheap, with an S&P 500 median (price-to-earnings ratio) of roughly 15 times 2000 estimates. Over the next 12 months, we believe the Nasdaq has 200 points of downside risk and 2000 points of upside potential, creating a ten-to one-ratio of reward to risk which makes this an opportune time to be aggressively buying stocks.” — Thomas Galvin, chief equity analyst at Donaldson, Lufkin & Jenrette.

“We do feel, however, most of the damage in the technology sector has been done. We think that we will see a turn. We’re very close to the bottom on this.” — Steve Wing of American Frontier Financial in Denver.

“It certainly reaffirmed that the notion of buying the dip — and that was some dip — still has some validity.” — Jim Waggoner, market and tech strategist for Sands Brothers and Co.

‘ . . . My favorite out of this group goes to Thomas Galvin’s comments. He actually estimated a 10 to 1 reward ratio for the NASDAQ but had it almost completely backwards as the NASDAQ ended up dropping about 2,000 points over the next year. This has to be one of the worst predictions that I have ever seen from a well-known Wall Street analyst. I swear that I must be the only one looking at this stuff. How these guys maintain credibility and continue to appear in the media is beyond me.’

☞ Thanks, Carl. This is a point I’ve been trying to make ever since The Only Investment Guide You’ll Ever Need was first published in 1978. Not that I could do any better than these folks. Well . . . maybe a little better than these folks. But in general, I sure don’t know how a company will perform in the future relative to Wall Street’s expectations for it. And if you don’t know that, you don’t know whether it’s stock is likely to rise or fall. It’s a tough game (another point I’ve been trying to make for 20-odd years). Which is why incurring expenses to play it generally makes less sense than keeping expenses to a minimum and investing most of your stock-market money through index funds.

John Seiffer: ‘Thanks to a mention on your site, I got a Handspring Visor last year for opening an account with what was then called DLJ direct. I waited the requisite time period and closed my account. Then they sent me a note saying if I funded my (now closed) account with $5k I could get another Handspring (which I’m in the process of doing) and now I find the offer’s available to all. There is no requirement to trade, you can keep the money in a money market. I’ll soon have enough handsprings to use as coasters.’

Before you all start writing to tell me, ‘See? Bush won Florida after all!’ please note that he almost certainly did not. I expect – but don’t know for sure – that the Wall Street Journal-New York Times consortium will report this a few weeks from now, when they are through counting not just the ‘undercount’ but also the ‘overcount.’

(The overcount is where, for example, someone circled Gore on the optical ballot, but then also wrote in, ‘Lieberman!’ or some such down below, rendering ‘the intent of the voter’ undiscernable to the machine – but clearly discernable to a human.)

For a bit more on the voting scandal – widely reported in Britain but oddly undiscussed on this side of the Atlantic – click here. It is a remarkable story. And for Molly Ivins’ latest, click here.

Molly pokes fun at the notion of a Bush mandate. And, really, about the only thing everyone agrees Geo W. and Congress have a mandate to do is to fix the election system so that every vote counts. After all, this is a big deal! A huge deal! The integrity of our democracy is at stake! So . . . where are the Congressional hearings on this? Why is no one in Congress getting to the bottom of this? Why are George and Jeb not making this a priority? Are the Republicans really concerned with what happened?

(‘And shucks,’ Strom may be thinking, ‘was the old notion of white guys with property being the only ones who could vote really so bad?’ After all, all throughout his formative years, women didn’t have the vote. And until he was 62, many African-Americans were denied access to the polls – a situation a lot worse than, but not completely unlike, what they endured in Florida in 2000.)

Tomorrow: Why Does Anyone Listen to Analysts?

I learned the other day that the vaunted filibuster – that can derail just about anything in the Senate – can’t derail the budget, which includes Bush’s proposed tax cut. It’s scary, because I had always assumed that if all else failed, there was always the filibuster.

The $1.6 trillion Bush plan, which is closer to $2.6 trillion if you look at it realistically, is, I have argued here several times before, dangerously large and, to my mind, blatantly unfair.

Well, check this out. It is excerpted liberally from Matthew Miller’s March 12 column (no one ever accused me of being ahead of the curve):

For weeks [Treasury Secretary Paul] O’Neill has been bellyaching about what he claimed were bogus analyses that showed how dramatically the Bush plan favors upper-income Americans – to which the fair reply of critics has been, ‘then issue your own ‘distribution tables.”

Indeed, the respected career civil servants at Treasury have routinely issued such reports, comparing the impact of proposed tax changes on people in different income groups. The only mystery this year was why that hadn’t yet happened.

Well, the other day O’Neill put out Treasury’s assessment, and now we know why it took so long. There must have been one helluva internal fight to get career officials to scrap their normal rules for doing such analyses in favor of a rigged methodology cooked up to make Bush’s plan look fairer.

For starters, unlike Treasury’s previous standard practice, O’Neill’s analysis deals with only part of Bush’s plan: the income tax cut. It ignores entirely the proposed estate tax repeal and corporate tax changes that amount to hundreds of billions of dollars – and which disproportionately benefit top earners.

Next, the new Treasury report compares the size of the income tax cut people will get only to the amount of income taxes they currently pay; the old standard method showed how an income tax change affected a person’s overall federal tax burden.

Take a modest-earning family that pays only $100 in income tax but $3,000 in payroll taxes. When this family is taken off the income tax rolls by the Bush plan, O’Neill scores it as a ‘100-percent tax cut.’ Previous Treasury reports would have rightly scored it as a 3-percent cut in the family’s overall federal tax burden.

Trust me, there’s more of this flimflam – the worst of which may be O’Neill’s refusal to show the actual number of dollars in tax relief people at each income level stand to receive (which gives rise to accurate claims that Bush is offering the rich a Lexus and poor workers a muffler).

While such duplicity is as normal in politics as in real estate, there are moral distinctions to be made even among frauds. When Democrats lie about Medicare, they rationalize it by telling themselves they’re doing it to win the power to make sure that Medicare is reformed on terms more favorable to the sickest, frailest seniors.

When Bush and O’Neill lie about their tax plan, they’re doing it purely to convince the nation they’re New Age antipoverty warriors when their plan mostly makes America’s top-earners better off.

I don’t know about you, but to me the Bush charade has the edge when it comes to cynicism and immorality.

The GOP plainly believes that if Americans know the full truth about who benefits from Bush’s tax plan, they’ll reject it.

Granted, Matt’s $100 / $3,000 example is extreme, to make the case. But the case is clear nonetheless. It’s hard to get average folks to favor a plan so heavily skewed to the top 1%. You can see why rich oil company executives would favor it. But why would the rest of the country be keen to risk a massive tax cut for the rich?

The Republican challenge, in effect, is to have the American people take this survey . . .

Please rank this list of alternatives in terms of priority:

1. Spend money to strengthen our national defense.

2. Provide cash assistance to help build new schools, renovate dilapidated ones, and hire more teachers to shrink class sizes.

3. Pay down the national debt, to keep interest rates low, the dollar strong, and prices low.

4. Provide meaningful tax relief for typical American households.

5. Beef up basic scientific research.

6. Provide incentives to encourage the development of environmentally friendly alternative energy that cuts our dependence on foreign oil.

7. Add a prescription drug benefit to Medicare for America’s seniors.

8. Provide massive tax relief to the 1% or 2% wealthiest households in America.

9. Continue funding for the 100,000 community police Uncle Sam has been subsidizing.

10. Continue and expand programs like Americorps, the national service program that has brought more than 200,000 young Americans of diverse backgrounds together to work in local community service projects.

. . . and get them to pick #8 as their first priority, largely crowding out all the rest. How do you get the American people to do that?

Well, Matt Miller’s column gives at least some of the answer.

PS to yesterday’s column . . . According to the April issue of Genre, 23 nations now allow gays to serve openly in their armed forces. ‘The United States and Turkey are the only original members of NATO that continue to ban service by known homosexuals.’

JS: “You write << Puts are generally not a good idea, whether buying or selling. If you win, the taxman takes a big slice. Whether you win or lose, there is a brokerage commission to pay. And if you lose . . . well, you lose. >> So why buy and sell stocks, since they also generate commissions, losses and taxes?‘

☞ With stocks, the commission can be a tiny fraction of the investment — $8 on $8,000, say, versus $8 on a $400 put. In the first instance, it’s a tenth of one percent, in the second, 2%. If the house takes 2% every time you play – or 4% if you sell the option rather than exercise it – it definitely mounts up. And many brokers charge a lot more than $8 to trade a $400 option. With stocks, time does not expire. You have longer to be right. And with stocks, you can keep your investment compounding largely or entirely untaxed for decades until you sell – and then be taxed at the significantly lighter long-term capital gains rate. With stocks, it’s not a zero-sum game as it is with options. Over the long run, everyone can win (although generally not everyone does), as the economy grows and pays out dividends. Options are bets; stocks are investments.

Jeff: ‘In discussing the writing of puts, you forgot to mention the lost upside opportunity. What happens if CSCO does NOT go below $20/share? What if it goes straight to 60? Then Pete K never gets his shares and Cisco, which he correctly notes is a well-positioned company, soars without him. Sure, he got to keep the after-tax, after-commission portion of his premium, but he lost the chance to make a huge long-term gain. If Pete likes the company and feels it’s selling at a good value now, just buy the stock.’

☞ Well put.

$END CA$H

Mike Koltak: ‘My father’s saying was about a kid in college who wrote: ‘Dear Dad: No mon, no fun, your son.’ To which the dad replied: ‘Dear Son: Too bad, so sad, your dad.”

CHEAP SUITS

Chip Ellis has located the web site for his $150 custom-made suits: thaitailornet.com. His tailor’s English isn’t perfect, but it beats my Thai. Of course, if it’s cheap off-the-rack suits you’re after, then – as I’ve written elsewhere, to Charles’s dismay – you’d want to go to Men’s Suits in New York, 118 East 59th Street, or its alternate location at Fifth Avenue and 47th Street. That’s what it’s called: Men’s Suits. Like a supermarket called, simply: Food.

MINI

If the automobile – due in the U.S. a year from now – is half as much fun to drive as the web site, I might even break down and buy a new car. (Well, not new new, but in a couple of years, once used models start going on sale.)

NOT SUCH A GENIUS AFTER ALL?

I met a Macarthur Fellow, recently – one of those guys who get a $500,000 ‘genius’ grant with no strings attached. Paul Lerman: “Did you see the recent New Yorker cartoon? Artist and friend having tea in typical studio with canvases and paints everywhere, he says: ‘My whole goddamn Macarthur is in NASDAQ.'”

FISCAL PRUDENCE

Rob Greene: ‘The Republicans claim that after the Reagan tax cut, the Democratic congress increased spending – thus the ballooning deficits. The Republicans don’t mention that Reagan failed to use his veto power to curb spending. Clinton, however, effectively used his veto power to control spending, which the Republicans also fail to mention. I am surprised that the Democrats have not brought this point to the forefront.’

CAMPAIGN FINANCE REFORM

Matthew Miller knocks it out of the ballpark, as usual. Click here.

Michael White: ‘I would like to suggest that Nader be known forever more as Ralph W. Nader.’

☞ This is probably more polite than calling him a big fat idiot, and may work just as well. Ralph W. Nader it is.

Warren S: ‘In all your rhetoric against tax cuts for the rich you seem to have forgotten about the current state of the economy. Remember just over one year ago when you didn’t advocate a tax cut because it would cause inflation? If I recall, your suggestion was “wait until we need it” (i.e. the economy stalls). Well, the economy has stalled. You don’t really think that a tax cut for the poor is going to help them start businesses and hire people do you?’

☞ Well, with unemployment near historic lows, I’m not sure things are so bad. And using the surplus to pay down the debt is its own form of stimulus, because it helps to keep interest rates low — say, for mortgages and home building.

Still, with the stock market down sharply and the administration talking down the economy and our confidence (like a coach running up and down the sidelines, as John Podesta has put it, shouting, ‘We’re gonna lose! We’re gonna lose!’), some early tax relief may be just what the doctor ordered.

But what kind?

The current tax structure seems to have worked pretty well since it was enacted, over unanimous Republican opposition, in 1993. Certainly it has worked well for the top 1%, toward whom so much of the Bush tax relief is directed. As Hendrik Hertzberg notes in the March 12 New Yorker, ‘From 1992, the year before a supposedly onerous new marginal tax rate kicked in, through 1998, the most recent year for which Internal Revenue figures are available, the average after-tax income of the richest 1% rose from about $400,000 to just under $600,000, and from 12.2% of the national net income to 15.7%.’

If Warren S. is right – that a tax cut for low-income folks won’t help stoke the employment engine – then I suppose he might argue that only those best off, and most likely to be able to start a business and hire people, should get a tax cut. But somehow, I don’t buy it. Lots of businesses were started, and people hired, in the Sixties, when the top bracket was 70%. Indeed, employment growth under Reagan/Bush was significantly less, when the top bracket was dropped to 28% and 31%, than it was under Clinton/Gore, when it was hiked to 39.6%.

People who start businesses do so in part because they know that their main reward, if they succeed, will come in the form of long-term capital gains. Cutting the top income tax bracket will not sharpen that incentive. Nor will an extra $40,000 a year in the pocket of an executive earning $800,000 a year encourage him or her to start a new business and hire new people. (An additional maid, perhaps, but that’s different.) Such a person already has access to capital if he has a good idea for a business. What’s more, this extra $40,000, if anything, reduces the incentive to risk everything and go out on his own.

The same holds true for ordinary investors. As the income tax rate falls closer and closer to the long-term capital gains tax rate, the incentive to take extra risk investing in a risky start-up falls, too.

Many new businesses will get started no matter what the tax structure is. But on the margin, lowering the top tax rate on ordinary income probably lessens the incentive to take the risk of financing a new business.

A tax cut is clearly in the cards. Democrats favor one, too. Just not so big as to keep us from paying down the debt. Not so big as to crowd out other priorities, like education and a prescription drug plan for seniors. Not so big as to risk crisis if it turns out the 10-year budget projections – which we all know are well-intentioned but fanciful – fail to pan out. And not so skewed as to redistribute wealth from the 98% at the bottom to the 2% at the top.

How about the Democratic suggestion to cut the 15% bracket down to 10% for everybody? That would save all income tax payers money, including the wealthiest, because the first few dollars of income even the wealthiest report on their 1040 are taxed at 15% and would now be taxed at 10%. So all would get a break, and it would be simple to do quickly.

When one surveys all the world’s challenges, opportunities, and woes (Africa is dying! the rain forests are dying!), it’s just very hard for me to rank as a priority the need to shift more wealth to the top 2% of Americans.

I’d love to know what Ralph W. Nader thinks about all this. And about our shutting down the Korean peace process. And our reigniting a world arm’s race with our unworkable $450 billion Star Wars nuclear missile shield. And our cutting off family planning aid to impoverished women around the world. And our proposed cuts in the budget for alternative energy sources that compete with oil and gas. And our taking the American Bar Association out of the process of vetting judges. And about arsenic standards and carbon dioxide standards and workplace ergonomics. But now that the causes he champions are being dealt blows day after day, he has vanished from the ramparts.

Pete K: ‘What are your thoughts on selling long-term PUT options on companies that you feel will be fine in a couple of years? For example, Cisco’s January, 2003, 20 puts are priced at $6. I could sell one of these puts and have the $600 premium in my account for nearly two years earning interest. Total exposure on the trade would be $1400 or so if CSCO goes to zero in Jan 03. [The $2,000 he would have to pay when the stock were put to him at 20, less the $600 premium he was paid to take that risk.] I wouldn’t mind owning the stock for a long-term hold if it falls below $20 and is put to me. This would be a small part of my portfolio and I think it is a prudent play given that some stocks are being hammered right now and stand a good chance at recovery in two years’ time.’

☞ A put (just to bring everyone up to speed), entitles someone to sell 100 shares of stock at a fixed price – $20 a share in this example. You buy one if you think a stock is going down. You sell one if you think it’s going up . . . or if, even if it does go down for a while, you actually wouldn’t mind owning it.

If you sell one put, you’d better be ready to pay $2,000 for 100 shares of Cisco, in this example, because that’s what you’ve agreed to do. If you sell 30 Cisco puts with a strike price of 20, don’t be surprised if you wind up paying $60,000 for 3,000 shares of the stock sometime before the put expires.

Of course, if Cisco is 21, let alone 41 or 81, the put-holder will not exercise – why should he sell you Cisco at 20 that he could sell in the open market for 21 or 41 or 81? And in that case, the put premium is all yours to keep.

Puts are generally not a good idea, whether buying or selling. If you win, the taxman takes a big slice. Whether you win or lose, there is a brokerage commission to pay (or two, if you decide to unwind your position before the put expires). And if you lose . . . well, you lose.

Pete: You should only do this on the assumption that you will indeed have the stock put to you. Buying Cisco at $20 a couple of years from now would not be fun if it were selling for, say, $5 a share on the open market, even though you had been paid $600 along the way. Even at today’s terribly low price, CSCO is still valued at $143 billion, nearly double the valuation of Ford and General Motors combined. At $5, it would still be valued more highly than General Motors is today. A mere trifle, but still not nothing.