Author: A.T.

All week we’ve been following preparations for the hotel visit of a famous actress, her arrival, the days subsequent, including yesterday, when she had a problem with her fax.

It is almost time to leave — but not yet.

“More than 400 society and civic leaders attended a luncheon and fashion show at the hotel today,” reports my secret correspondent, the hotel manager. “Fortunately, while all of this was going on, Ms. Star behaved herself — until she flew into a rage over the fact that the operators couldn’t overcome the fact that she had somehow taken one of her phones off the hook, which prevented them from directing the calls to that line as she had instructed. Of course, she wouldn’t allow anyone to explain the situation to her (she chewed out — and hung up on — the operator who tried), nor would she allow anyone to enter her suite to put the phone back on the hook. I finally had to call her secretary and ask her to come back to the hotel (her staff and the rest of the cast are staying at a budget motel down the street) to remedy the situation.

“Spent the rest of the afternoon smoothing ruffled feathers in PBX and at the front desk — and assuring everyone that they wouldn’t be ‘written up’ for any alleged infractions of our standards even if Ms. Star complained about their performance during her brief tenure. (The staff is beginning to count the HOURS until her departure.)

“I finally left the hotel around 6:00 p.m., after she headed for the theater and I was confident she couldn’t inflict any more emotional damage. Took one of the hotel pagers home with me to ease everyone’s mind (only fair — after all, I got us into this starry mess).

“Kind people that they are, our staff feels sorry for her–they think she must be terribly unhappy to be so disagreeable all the time. Maybe they’re right.

“Yesterday, my counterpart at one of the hotels where Ms. Star will be staying next called. ‘Rumor has it that she’s a handful; how bad does it get?’ I told him what I’ve told you. ‘That’s what I was afraid of.’

“He said that they drew the line on moving furniture in the suite. ‘We have expensive stuff up there, and we’re tired of replacing it.’ In fact, when they reached this point in the negotiations, he tried to convince the travel agent to book her at another property. But the TA insisted.

“What prompted this hotelier to call me was that by the strangest coincidence, a meeting planner happened to have just come to his property from the hotel where Ms. Star was last in residence. This meeting planner told him that by accident the cell phone he had ordered through the hotel had been inadvertently given to Ms. Star and vice versa. Since the meeting planner’s number had been distributed to all of the attendees (and there were close to a 1,000 of them!), it was imperative that he and Ms. Star trade phones (if nothing else, to save her from hundreds of nuisance calls). The hotel, which had arranged the cell phone rentals for both, contacted Ms. Star and before they could explain the problem, she told them to ‘F— Off!’ and hung up. Somehow — at great expense — they were able to redirect the calls or advise all of the attendees of the situation. But everyone was shocked at her intransigence.

“I forgot to tell you that I wrote her a letter late yesterday afternoon and asked that it be given to her after she returned from the theater last night. I decided to apply some ‘reverse psychology’ and allow her to direct her anger at me. It may have worked: There was not one unkind word or irrational act from her today. Not a peep.”

And what was the text of this miraculous letter, I wondered?

Dear Ms. Star [he wrote]:

It is a great pleasure to have you at The ———-. Your visit continues a tradition of hosting Hollywood royalty that began at our historic hotel more than seventy years ago; and, as you might expect, we treasure it.

We understand how difficult it must be to find an acceptable home on the road, especially when your venue changes weekly and the demands on your time are extreme. No doubt it is doubly frustrating having to manage your domestic affairs through a revolving door of people and regional customs. Throw in the fact that perfection is a process (not fully achievable in a week, much less a few days), and disappointment is inevitable, as much as we wish this were not so.

More to the point, many of our staff come from the poorest sections of the city, and you can imagine the joy they derive from being able to please our distinguished guests with the services they provide. This is particularly true of stars of your caliber. From the doormen to the housekeepers, you could not find a more devoted following or one more intent on making you smile. A kind word is all they require.

As a gesture of goodwill and a first step in mending any misunderstanding, we would be very honored if you would accept the enclosed gifts. The first is a cookbook that contains a brief history of the hotel, with a mention of Maria Callas and her historic visit many years ago. The second is a commemorative box designed exclusively for us by Tiffany & Co. Only a few were made, and we wanted you to have one as a keepsake.

With kindest regards,

“At this point,” continues my friend, to me, “I think I went into the bathroom and washed my mouth out with soap–for all of the bad things I was THINKING about saying to her. I’m still blowing bubbles.”

Not long afterward, Ms. Star’s limited engagement ended and she went on to the next city, the next cowering hotel staff.

“She left around 6:30 a.m. Even though a bellman saw her leave, everyone harbored a doubt that she was REALLY gone. Since my associates know that I’ve faced everything from grizzly bears to bobcats, they left it to me to enter her suite and check it out. I knocked first, of course. But it wasn’t necessary; she was gone. Gone now, and probably gone forever. I was relieved to see that the suite didn’t suffer any permanent damage. She broke a lamp earlier in her stay, but considering what could have happened — and what stars have done to our suites in the past — we got off very, very lightly.”

SETTLING THE BILL

“This morning I learned that at the last moment, Ms. Star switched credit cards on us. She established her credit with the touring company’s card and, on departure, asked the front desk to bill it to her personal card. This usually poses no problem; but given the enormous sum involved, it required a little more than just the basics to obtain an authorization code from the credit card company — to wit, her home address. Oh, great.

“Fortunately, we were able to leave a message for her secretary. (Somehow we didn’t think Ms. Star would entertain this question.) The call was not returned for most of the day. Each time I passed the front desk I asked if we had heard from the secretary, and the answer was invariably ‘no.’

“It brought to mind the agony I went through a couple of years ago when I went out on a limb for a somewhat obscure governmental agency from Zambia (at least, I think it was Zambia). They brought in their minister of agriculture and an entourage intent on seeing everything — first-class. I think when they finally wiped the last crumbs of room service from their mouths, the bill topped $50,000. And I didn’t have a credit card to back it up. Or a check. Or U.S. dollars. Or Zambian dollars. Or ANYTHING. Just a promise to pay from a very diplomatic retainer in Washington, D.C., who waved away my doubts with, ‘Don’t worry, you’ll get paid. I PROMISE.’ O.K. Sure. No problem.

“Every night I went home and tried to forget what a dent $50,000 would make in my personal balance sheet. What would it be like sleeping out under the stars. One week, no check. Two weeks, no check. Three weeks, no check. By the fourth week I was checking flight schedules to Zambia (and inquiring about the financial soundness of the Zambian government). Finally, in desperation, I called the diplomat again and asked him — in the interest of Zambian-American relations (not to mention my sanity) — to make good on his promise . . . via FedEx. Please.

“Something in my voice must have struck a charitable chord because the next morning that beautiful FedEx packet arrived with a cashier’s check for $50,000.

“About 4:30 p.m. Ms. Star’s secretary returned our call and cheerfully gave us the address. All’s well that ends well.”

Each of the last three days we’ve been following preparations for the hotel visit of a famous actress, her arrival, and the days subsequent.

This saga won’t go on forever, but neither is it over . . .

“The staff has begun to refer to Ms. Star as ‘Mommie Dearest,’ after Joan Crawford, who used to stay at the hotel during her heyday, behaving in a similar fashion but adding her own signature quirks (sending ahead a 10-page list of instructions, cleaning her own bathroom on arrival, ordering vast quantities of vodka, requesting mountains of towels and NO WIRE HANGERS, etc.).

“Fortunately, our staff and Ms. Star have come to somewhat of an understanding. They accept her abuse cheerfully, but in pairs. No one has the courage now to enter her suite alone.

“For example, this afternoon Ms. Star was having trouble with her OWN PERSONAL fax machine (she brought her own; we just installed the line for it). She told the concierge to report to her room in ’30 seconds.’ On the way to her suite, he grabbed the front desk manager — who’s known for his equanimity in the face of the most outrageous guest behavior — and persuaded him to accompany him to the lioness’s hot, humid den. They knocked on her door, trying to look composed even as their hearts were pumping wildly. She took her time answering the door, then made them stay in the hallway until she had made one last attempt to fix the fax machine herself. Frustrated, she told them to come inside and work on it.

“It turned out that the fax machine was in perfect working order — it was just that she was not familiar with sending faxes long distance (something her secretary usually handles for her, I guess). After they explained the problem and showed her the procedure, she berated them for failing to post the directions on her OWN PERSONAL fax machine. As the concierge opened his mouth to protest, the front desk manager poked him in the ribs. He, then, turned to Ms. Star and said with one of his most endearing smiles, ‘You’re absolutely right, Miss ———–. We should have done just that.’ She dismissed them, and the front desk manager told me later, ‘I think she might have said “thank you,” but I wouldn’t swear to it.’

“She is a difficult woman. One of our front desk clerks worked elsewhere for a summer. Ms. Star made an appearance there and pulled some similar stunts, including timing the delivery of her 7:00 a.m. newspaper. Apparently, when the poor bellman assigned to deliver it arrived at 7:05, she grabbed the paper from him and slammed the door in his face. Later, she called the front desk manager and gave him hell. ‘I’m very busy, and I MUST have my paper RIGHT AT SEVEN.’ OK. OK.

“Fortunately, this is not an issue with us. She sleeps until 11 a.m., as I’ve mentioned, and then leaves at four for the theater. I’ve been offered tickets to the show, but I’m afraid she might stop in mid-performance and shout something obscene at me across the footlights (who KNOWS what I might be guilty of).

“Yet, aside from all this, I understand from ALL who’ve seen the show that she is ABSOLUTELY THE BEST. No one can touch her riveting performance. Her fans adore her.”

Tomorrow: The Curtain Falls

We have been spending the week spying on a famous movie star staying at a hotel a friend of mine runs. Click here to catch up with preparation for her visit or to review Day One.

And now . . . back to our story.

“You probably picked up on the fact that the Divine Ms. Star reserves her contempt largely for the hourly employees, most of whom — given their positions at the hotel — are unable to defend themselves against her wrath: the operators, the engineers (one of whom was cursed out royally for having the nerve to ask her directly where she wished to have her VCR installed), the front desk staff, etc. This creates a considerable challenge for our management: How to keep morale high when an abusive guest pushes it to a new low. (One of my managers was in my office early this morning saying, ‘Do you know she is addressing our employees with the F-word?’)

“Not surprisingly, we don’t have an exclusive on these hotel ‘horror’ stories. This morning I had breakfast with a friend who handles a hotel across the Atlantic. She said that Barbra Streisand was at that venerable hotel recently and demanded that the maid vacuum the carpet backward toward the door of her suite so that the maid’s footprints would not be seen marring its plush surface. Only Miss Streisand was to have the privilege of taking the first virgin steps onto the carpeting each day.

“Fortunately, we are finding now that Ms. Star follows a routine that keeps her in bed until 11:00 a.m. and out of the hotel by 4:00 p.m. By the time she returns after the show, she’s too drained to do anything but have her dinner and crawl into bed. (This morning when I stopped by the PBX, the operators were debating who would place her wake-up call. One brave soul volunteered and let go a chirpy ‘Good morning, Ms. Star. It’s 11:00 a.m. and 68 degrees outside.’ Her reflexes dulled by sleep, Ms. Star let the operator complete the sentence before hanging up on her.)

“The maids report that she has four or five humidifiers operating around-the-clock in her bedroom now (moisture is beginning to form on the ceiling); she has turned off the air conditioning completely (allowing the room temperature to climb to nearly 90 degrees — ‘Oh, Lordy, it was hot up there!’ said one of our heavyset maids with a hearty chuckle, ‘And her chef a heatin’ up the place with her cookin’); she sleeps with an electric blanket (when you can’t get warmth any other way, you have to buy it I guess); towels cover the marble bathroom floors as well as the vanity; and her son’s framed picture graces her desk. They have been shown what they can and cannot touch — and told how quickly they must work. (‘She’ll be back here in less than 30 minutes,’ the assistant road manager warned. ‘Hurry, and don’t bother to vacuum — you can do that later when she is at the theater!’)

“Incidentally, Maria, Ms. Star’s irrepressible Costa Rican chef, has learned that one of our night cleaners is also from Costa Rico. She is DESPERATE to meet him and has sought assurances from our housekeepers that introductions will be made forthwith.

“Finally, before signing off for now, and to be totally fair, I should tell you that Ms. Star received RAVE reviews for her opening night performance. What do we know?”

Tomorrow: To Reach the Impossible Star

Yesterday, my source revealed how his hotel prepares for a very special guest. Her list of personalized requirements way exceeded my own. (A remote control TV, a data port, and some towels.) Click here to review them.

The saga continues:

“Ms. Star’s secretary arrived around 11:30 a.m., and she quickly went to work rearranging the furniture in the suite. Ms. Star has claustrophobia, so the housekeeping staff had to move the desk near an expanse of windows (first, removing the dining room table and chairs and raising the chandelier a couple of notches). Then, two credenzas were added to this setup to form a U-shaped command post. We were told that the credenzas would be used to spread out files.

“The secretary explained that our staff should not greet her in any fashion (no ‘Good Mornings,’ no smiles, etc.). When screening calls, the operators are to be ‘New York abrupt’ (the secretary looked around and said ‘I hope none of you are from New York’): ‘Joe Blow calling.’ This is a little tricky to execute. But we’re going to give it a college try. (Imagine fielding thousands of calls each day and switching back and forth from being ‘abrupt’ to one person and ‘pleasant’ to everyone else. A screw-up is inevitable.)

“Ms. Star arrived around 9:30 p.m. Her car pulls up and our congenial doorman, who welcomes everyone with a million-dollar smile (and who, incidentally, is the only person aside from the General Manager who can afford to wear one of that magnitude), proceeds to open the car door for Ms. Star. As he begins to say ‘Welcome to the…,’ she snaps ‘shut the door!‘ The doorman quickly obliges and steps back, noticeably shaken, having never been addressed in that fashion.

“Several minutes later, the star emerges. Her face is now lit with a beautiful smile. She greets the doorman, who, baffled by the transformation, cautiously opens the hotel door for her. Inside, she smiles and waves at the startled front desk assistant manager. (He — like everyone else — has been told by her secretary that she will not acknowledge the staff AT ALL.) She smiles and waves at the bellmen. She smiles and waves at the concierge. Exit stage left.

“Later that evening … Ring. Ring. (We answer the phone within three rings; it’s a hotel standard.) ‘Engineering? I’m cold. But I don’t want you to do anything about it tonight.’ Click. Unbeknownst to Ms. Star, her personal staff has spent the day in the suite with all of the terrace doors open wide. (It was cold and breezy here yesterday.) Her staff, who supposedly knows her likes and dislikes, does not adjust the thermostat in the room and shifts the blame to the hotel.

“In the morning, I call her secretary who is carrying one of the five cell phones Ms. Star has rented for the visit. Me: ‘Good morning. We understand that Ms. Star was cold last night.’ She: ‘Yes, she’s always colder than the rest of us; and, besides that, she’s not feeling well.’ Me: ‘I see. When would you like an engineer to check the thermostat?’ She: ‘I’m on my way to the hotel right now. I’ll call you when I find out.’ Me: ‘Thank you very much.’ (She never calls. Presumably, she discovers that the thermostat is not an objet d’art; it controls the temperature in the suite.)

“Ring. Ring. The concierge lifts the receiver: ‘Ms. Star wants another VCR in her suite,’ says the secretary. ‘Right away,’ says the concierge. Two minutes later. Ring. Ring. The front desk clerk lifts the receiver: ‘Where is that VCR?’ screams the assistant road manager (who has also been assigned to place the same order). The front desk clerk calls to check on the status of the VCR. ‘The VCR is on its way.’ In ten minutes the VCR is in the suite, installed.

“Early afternoon… Ring. Ring. Operator: ‘Ms. Star, Mary Jones left a mess…’ Ms. Star: ‘I don’t know any Mary Jones.’ Click. Operator: ‘But…’

“Late afternoon… Ring. Ring. Ms. Star: ‘I want to talk to the front desk manager!’ Front Desk Manager: ‘This is Bill, how may I help you?’ Ms. Star: ‘My son tried to reach me and I never got the message. Make sure it doesn’t happen again. DO YOU UNDERSTAND? I DON’T WANT THIS TO HAPPEN AGAIN!’ Click.

“Front Desk Manager: ‘Operator, Ms. Star. said that she missed a call from her son. What happened?’ Operator: ‘Mary Jones called and left a message for her from her son. But before I could give her the message, Ms. Star hung up on me.’

“I call the secretary and explain the situation. Secretary: ‘Oh, her son is always pulling stuff like that.’ Me: ‘I see.’ She: ‘But, don’t let it bother you.’ Me: ‘We just want you to know that we are doing everything possible to follow your instructions.’ She: ‘I know. We deal with this every day. As her employees, we just shout back at her when she does this. Of course, I understand that you’re not in a position to do that.’ Me: ‘I’m afraid not.’ She: ‘If it makes you feel any better, she’s been yelling at all of us today. It started early this morning. Opening-night nerves, you understand.’ Me: ‘Of course.’

“Exit stage right. The star leaves for the theater in a mad rush, avoiding all eye contact. No smiles. No waves. No wire coat hangers.

“Some call it abuse; but in the hotel business, you might say we’re star struck. It gives the phrase a whole new meaning.”

Tomorrow: The Saga Continues

Recently, a friend who runs a swank hotel shared an inside story on the condition I name neither the hotel (it’s in California — how’s that for vague?) nor the guest in question, an aging film star whose name you would know. To me, it’s only a little interesting who she is or where she stayed. What’s neat is that this is all true, behind-the-scenes stuff. She had come to town to star in a musical.

The saga unfolded day by day, beginning even before her arrival:

“How do we get ready for someone like Ms. Star? First, I ask the star’s assistant to send me a list of their preferences. Most of the well-traveled celebs have a dog-eared form letter that outlines everything — from how their telephone calls are to be handled to when they want their suite cleaned. A lot of reporters like to get their hands on these lists because they LOVE to poke fun at the details. But we are very grateful for the heads up. There’s nothing worse than to send fresh-cut flowers to an actress who has allergies (been there, done that) or to deliver a bottle of rare wine to a talk show host who is a recovering alcoholic (done that, too). Ideally, we’d like to have a ‘preference list’ for all of our guests. It would save a lot of time and guesswork.

“It just so happens that this particular star brings her own chef. Part of her contract. So, the two-bedroom suite has to have a small kitchen, complete with a refrigerator (stocked with Diet Coke and 16-ounce bottles of Evian), a microwave, a toaster oven, and a tea kettle. No problem. (We built a kitchen in this suite years ago for an eccentric millionairess who enjoyed cooking. She was staying with us for several weeks while she worked on the museum wing she was donating.)

“The master bedroom must have a humidifier, a desk, and a small oval table near the desk. (She keeps her files on the smaller table and glances down at them as she works. Makes sense to me.) Each room is to have a two-line speaker phone. The suite will have one dedicated line for a fax machine, which travels with her. She will purchase three VCRs, one for each room, since our VCR rental fee is too high. (I don’t blame her; our fee structure is VERY pricy.)

“The minibar items are to be removed. (Why we have those things in the first place is beyond me. They are a constant source of irritation for many guests. But, the management insists that the revenue generated from those guests who want the convenience outweighs the cost of constant write-offs for those guests who swear they never touched the Godiva chocolates, the imported cheese, etc. Go figure.) The second bedroom is to be cleared of all furniture. The star brings her own exercise equipment, which will be delivered to the suite on Tuesday when she is away at rehearsal.

“A driver has been hired to squire her around, at a moment’s notice. The budget was $100.00 a day (12+ hours), so I think they’re going with some devoted theater volunteer. No legitimate chauffeur — including our own — would work for such small change.

“All her laundry and dry cleaning is to be delivered on wooden hangers. Each closet in the suite is to have 30 wooden hangers to start. (My guess is that she has quite a few designer clothes, and– at those prices–they certainly deserve to be hung with care on wooden hangers.)

“Every call must be screened by the hotel operator. When she does not wish to be disturbed at all, it’s ‘hold all calls’ (with two exceptions).

“The housekeeper will follow a schedule provided by the star’s personal assistant.

“The staff is not to address her by name, nor are they to approach her unless summoned. (This sounds more royal than the royals. But it’s understandable. Some hotel staffs aren’t very discreet: They fawn, they hover, they flatter, etc. A person almost has to be rude to get some peace and quiet. This is never an issue with us, since a breach of ‘protocol’ is cause for immediate termination.)

“There shall be no chocolates on the pillow. (A dumb hotel custom, I must say. But almost every luxury hotel does it.)”

Tomorrow: She Arrives!

Sure it can.

But are we near the top of a mountain, about to go over the other side — or merely at the first base camp above the foothills?

And why a mountain? Why any ultimate peak? Why can’t the market just keep growing — with dips along the way — more or less forever? (Answer: It can. But, oh, those dips.)

You will notice these questions were not sent in by one of you. Your questions are generally a lot more succinct and your metaphors, more engaging. Still, aren’t these questions we all wonder about every time the Dow adds another grand?

(One thing to say right off the bat: 1000 points on the Dow ain’t what it used to be. Many of us grew up wondering if the Dow would ever reach 1000. When it finally did, adding another 1000 was a 100% gain. Today, an extra 1000 is about 14%. So one might now expect the Dow to rise 1000 points every couple of years, just in the normal course of things.)

Now, what I’m about to tell you is so basic we forget to think about it . . . or tell our kids. In case no one told you, or you’re dialing in from Albania, where there were no investors around for several decades to clue you in — read on.

Over the long run, two primary factors determine a stock’s price: its expected EARNINGS per share and the MULTIPLE people are willing pay for those earnings.

If people expect Ford to make an after-tax profit of $1 billion next year, and Ford is divided into 100 million shares, its expected earnings are $10 per share.

Now, what would you pay me for a share of stock expected to earn $10 a year?

“I’ll give you twenty bucks,” I hear one of you say.

“No, way, Cyberdude!” I say.

“Way,” you say. “For one thing, I won’t actually get that $10, the way I would from, say, a savings account. A bird in the hand is worth two in the shrub.”

“Piffle,” I say. “You do get part of it in cash, as a dividend . . . and you should be grateful you don’t get the rest — because that means you don’t have to pay tax on it! It gets reinvested for you by Ford management, very possibly better than you could reinvest it yourself.”

“Well, OK,” you retreat, “I’ll give you $50 a share.”

“Cyberdude, Cyberdude — you really are from Albania. Right now there are people paying nearly $150 to get $10 a year in earnings from long-term Treasury bonds. You expect me to part with $10 a year for just $50?” (A Treasury that yields 6.7% pays out $10 a year for every $150 invested.)

“Jzmlec!” you respond, reverting briefly to your native tongue. “You want $150? That is a multiple of 15 times the earnings! You want me to wait 15 years at $10 a year to get my money back? In Albania, we all went into a deal that promised to double our money every year!”

“Don’t give me ‘jzmlec,’ Genc.” (I actually hope to meet an Albanian civil rights activist named Genc in a couple of weeks. I expect he knows nothing of high finance.) “In the first place, you all lost 100% in that deal. We Americans are much smarter. Even those of us who bought Spyglass at 120 only lost 90% (symbol: SPYG). I personally lost 99% of my money in Kenetech, the highly-credentialed windmill company (symbol: KWND), but that’s still not 100% — and I got to ride it for several years.” (Some of my holdings are better viewed as amusement rides than investments — the longer the ride lasts, the more value I’ve gotten for my money.) “But I digress. The point is, Genc, I want more than $150.”

“Khlyep! Nyepryecz! That is riDICoolous. You think Ford as safe as U.S. Treasury? With Treasury, $10 guaranteed. For your shaky $10, I pay tops $95. Last offer. Take leave.”

“Genc, Genc, Genc. You totally miss the point. The Treasury bond will pay $10 for every $150 you invest. But just as the $10 is guaranteed not to go down, so, too, is it guaranteed not to go up. With Ford stock, you’ve got thousands of talented people working to improve profits. And if that weren’t enough, you’ve got inflation. Even at 2% inflation, car prices and car profits are likely to rise a little over time. So that $10 could well be $15 after a few years. How about $200?”

“Two hundred? Pfft!”

And around and around we — and thousands of others — go, debating the relative risks and rewards of various stocks, and of the stock market in general. According to the stock market, the ultimate arbiter of all such arguments, I would be crazy to expect Genc to pay me $200 for $10 worth of Ford earnings (just as he would be crazy to expect me to accept $20 or $50). Auto companies like Ford, being mature, cyclical, and faced with lots of competition, don’t sell at anything like 20 times earnings (unless those earnings have hit a trough in the cycle).

So that’s stocks. What will they earn; what multiple will those earnings command.

For the stock market as a whole, it’s the same thing. What will be the overall level of corporate profits; what multiple will investors assign those profits.

If U.S. companies as a whole are able to grow their earnings per share at 6% a year, on average, then U.S. stock prices should rise at 6% a year, if the multiple stays unchanged. For the Dow, that would mean adding about 400 points this year and reaching 10,000 in under six years. Dow 10000.

What’s been happening in the last few extraordinary, breathtaking years is that profits have been growing a lot faster than 6%, while at the same time multiples have been expanding, magnifying the good results further still. If profits double, the stock market quadruples if, at the same time, the multiple at which it sells expands from, say, 11 to 22.

In the Seventies, multiples were much, much lower because interest rates were high (why pay $220 for $10 in earnings when, with U.S. Treasury bonds yielding 15%, you need pay only $70 to get the same $10?) . . . and because people had forgotten how rewarding stocks could be. Today it’s just the opposite. Interest rates are low, and people have forgotten how risky stocks can be. And there are also the people piling into stocks, bidding up their prices, simply because “they have to” in order to reach their hoped-for retirement goals. The computer says they need to grow their money at 15% or 18% a year to reach their goals, so what other chance do they have? (Unfortunately, the stock market doesn’t care about your need, any more than the lottery does. Indeed, when it comes to investing, it’s usually the least needy who do best.)

The simple fact is that corporate profits very possibly will continue to rise more or less “forever.” There will be bad patches along the way — maybe even soon. Something awful or even cataclysmic could even happen. But it’s not unreasonable to think that our population, economy, technology, productivity and profits — just about everything, that is — will continue to grow. If the U.S. economy grows at 2.5% plus another 2.5% in inflation, that would suggest nominal growth of 5%. (Profits can grow faster than sales if profit margins rise — but that can’t go on forever. Math keeps them from rising above 100%. Taxes, labor, and competition keep them in far tighter check.)

But what of the MULTIPLE? Can that, too, continue to expand more or less forever? Emphatically: no. Just as interest rates can’t drop below zero, so is there is a limit — fuzzier, to be sure — to how high the stock-market multiple can sustainably go. It’s not reasonable to think that there are enough Albanians in the world to bid prices up to lunatic levels (you see how hard-nosed Genc has already become) . . . or, if there are, to keep them at such levels for long.

Most observers agree that the fun with the MULTIPLE is largely over. If you had the foresight, luck or resources to ride the great market multiple expansion that began around 1982, when inflation and interest rates started their long descent — congratulations. Long-term interest rates may yet have a ways further to fall. (From 1880 to 1965, there was never such a thing in America as a home mortgage at more than 6%. From 1925 to 1965, top-grade corporate bonds routinely yielded under 5%.) But the market multiple is at the high end of its range.

That means it’s likely to stay about where it is (very roughly speaking) — in which case earnings increases of 5% a year would mean stock prices rising at 5% a year. Or else it will fall — in which case earnings increases of 5% could mean stagnant or even falling stock prices for a while. And if you ever got falling earnings and falling multiples — the opposite of what we’ve had the last 15 years — watch out. It would not be pretty.

Of course, it’s all a great deal more complicated than this, which is why, fundamentally, I don’t have a clue. To the extent U.S. companies invest globally and reap vast profits from their operations overseas, the U.S. economy could grow slowly while those companies’ profits grow faster. (Just because a company is U.S.-based doesn’t mean all its profits come from sales that are included in the U.S. Gross Domestic Product. If they make stuff here and sell it abroad, yes. But if they own factories that make it there, no. Or at least I think that’s the way it works.) And to the extent companies use their profits not to pay dividends (the old-fashioned way to reward shareholders) but to repurchase their own shares (the new, tax-savvy way), earnings per share will grow faster than profits — because the number of shares shrinks.

And so on.

As is evident to any of you who are economists, I barely made it through Ec 1.

Still, I do draw these conclusions:

First, the market MULTIPLE is not likely to widen much from here — at least not justifiably (irrational exuberance is always a possibility). It could shrink a lot if fear or inflation ever returned. If it stays more or less where it is, and corporate profits rise more or less in line with the economy, the stock market will continue to climb . . . and the gains, even if modest in percentage terms, would seem large to us old-timers — 500 points on the Dow seems like a big deal.

Second, irrational exuberance is a possibility. Crowds have a way of going to extremes. People have seen how incredibly well stocks have done, and how whenever they do dip back toward a 10% correction, they quickly rebound with a vengeance. What’s the risk? In addition, you have the demographics of us baby boomers, finally saving for retirement, and shifting our money from “safer” investments into stocks (as I and so many others have long counseled). So there’s powerful momentum toward buying, and that drives prices and multiples up, too.

But these things can get out of hand and end very badly (witness: Japan). Or they can be moderated by a watchful force such as The Fed, which can serve as a sort of “governor” on the speed of the economy, so it slows down but doesn’t run completely off the rails. (Did you ever have model trains? Isn’t there an electrical device called a “governor”? Not for nothing is the Fed run by a Board of Governors.) Either way, stock prices will not rise at “above average” rates forever — of that I’m sure.

Which is why even someone like me, who’s spent twenty years trying to persuade people to put their really long-term money into stocks, “because over the long-run stocks always outperform ‘safer’ investments,” gets a little nervous when everyone seems to have come to accept that, and all the risk seems to have gone out of the stock market.

I’m going to get a real tongue-lashing from my friends who say — rightly! — “you can’t time the market.” But I nonetheless suggest that if you have all your retirement money in U.S. stocks, and you can make some changes without incurring taxes, I would consider doing so. A chunk of my own Keogh plan is in things like REITs (which are stocks, but essentially high-yielding real estate investments) and bonds (like the bonds of South Africa’s giant electric utility, ESCOM). After all, almost as well known as the tried and true advice about not timing the market is the advice about not putting all your eggs in one basket. And U.S. stocks — while magnificent and likely to do very well over the long run — are just one basket.

Next Week: The Star Arrives

“Forget the fact that this is a good idea,” says one of its most vocal proponents. “Washington is awash in good ideas. This is a BIG idea.” And indeed it is. In theory (I’ll get to that), it would amount to something like a $45 billion-a-year middle class tax cut — without adding a dime to the deficit. “It’s certainly the biggest tax cut we’re likely to see this decade,” said Senator Daniel Patrick Moynihan as he and Senators Lieberman and McConnell introduced last month what they’re calling the “Auto-Choice” bill.

Faithful readers of this column will know that I’ve long advocated auto-insurance reform. In a state like California — one of the worst, but only Michigan does it well — nearly two-thirds of the $7 billion consumers pay each year goes to lawyers and fraud (I speak here of the $7 billion that goes for the “people” portion of auto insurance, not theft or dented metal), and those worst hurt recoup, on average, just 9% of their actual medical expenses and lost wages from this $7 billion pool.

As Consumers Union said as long ago as 1962: the traditional auto-insurance lawsuit system “produces results which are so unjust, capricious, and so wasteful of both the policyholders’ and the accident victim’s money that most laymen find it hard to believe the facts when they are first presented.”

But the facts are true, and they affect YOU, if you drive. All that’s changed since 1962 in most parts of the country; it’s gotten worse.

Michigan, in 1971, was the first and last state to fix this system. A dozen others only thought they had. Massachusetts, for example, passed the first no-fault law in the nation. But the trial bar sabotaged it as they have, more or less, all the others save Michigan. In Massachusetts, all you needed to start the lawsuit game was $500 in medical costs. So guess what? Far from being a “threshold” to weed out minor suits, it became a target instead. How hard was it to build the costs up to $500? (When the threshold jumped from $500 to $2,000 in 1988, guess what? The number of doctor’s and chiropractor’s visits for the typical injury claim jumped from 13 to 30.)

But how do you beat the trial lawyers? When enough money is at stake — and for them, this amounts to billions of dollars a year — they will say and do whatever it takes to win their case. I went on at some length about that last year.

The answer just may be this bill, Auto Choice. At the press conference to introduce it (technically, reintroduce it — it began last year with Senators Moynihan, Lieberman, McConnell and Dole), not only were senators from both sides of the aisle stepping up to the mike, but so were Al From, who heads the Democratic Leadership Council, conservative Grover Norquist, and a honcho of the Perot party. The New York Times, USA Today and others have given it enthusiastic ink as well.

Here’s how it works.

States would be allowed (not forced) to allow (not force) consumers to give up their right to sue-and-be-sued for pain and suffering. If you chose to stick with the current system, little would change from today. Or you could choose “Plan B,” the “Personal Protection” option. In that case, you could still sue anyone for uncompensated economic losses (medical, rehab, lost wages), but not for pain and suffering.

Why would anyone choose Plan B? Two reasons. First, premiums would drop like a rock. The Joint Economic Committee of Congress looked at this and estimated that if every consumer in America chose Plan B, they’d save, in total, something like $45 billion a year on their premiums. (Of course not every consumer would. And in many states the trial lawyers would doubtless succeed in preventing consumers from having the choice at all. But theoretically: $45 billion a year in savings, or nearly $400 for every household in America.) Second, you’d be assured of swift compensation for economic damages even if you couldn’t prove fault, or the other car did speed from the scene, or there was no other car (you skidded and hit a tree).

As to the specifics of how it would work, basically, there are three possibilities:

1. If two “lawsuit” drivers collided

• If two “lawsuit” drivers collided with each other, they would sue each other just as today. Often they would get nothing, or next to nothing — but that’s just how it works today. It would be expensive — also about the same as today.

• This is the system almost everyone is forced to “choose” today. If you earn $7 an hour and would just as soon not buy into a system that pays defense attorneys $150 an hour to fight your claim, and plaintiffs’ attorneys 33% or 40% of the settlement plus expenses to pursue it, tough luck. All that’s built into your premium. You’d just better hope whoever hurts your child doesn’t leave the scene, can be proven to have been at fault (sometimes kids just run out between two cars), and has insurance — lots of it. Few accident victims are so lucky. On average, those with actual losses in excess of $100,000 recoup just 9% of their losses from this great, expensive auto insurance system of ours.

2. If two “Personal Protection” drivers collided

• By contrast, if two “Personal Protection” drivers collide, their medical, rehab and wage loss would come from their own insurer, just as a health insurance claim might today. Not every insurer would settle every claim fairly, but built into the law is a 2% a month penalty for delay (my idea, I’m proud to say), so the dynamic would change several ways. First, you’d have the choice of which insurer handled your claim. Today, the guy who hit you made that choice — and he may well have picked an insurer based solely on price, not service. Under Auto-Choice, you’d select an insurer you felt would give you a fair shake (which in turn would encourage insurers to compete more on that basis, to win business). Second, you wouldn’t be the insurer’s adversary; you’d be its customer. Not to say a lot of insurers don’t treat their own customers like dirt sometimes, too. But just as American Airlines treats its own frequent fliers better than it treats United’s (you’ve seen them: they’re the guys in the middle seats), so might insurers tend to try to please their customers. Third, insurers could no longer borrow at zero interest by stalling you. Now it would cost 2% a month. In their own selfish interest they’d say, “Hmmm. Money costs us 8% in the commercial paper market, so it used to make sense to borrow at zero, instead, from accident victims. But at 2% a month, or 24% annually — no thanks. The commercial paper market would be cheaper. And fourth, the vicious cycle of ill will would be broken, or at least weakened. Today, many people hate auto insurers — and with some reason. The rates are sky high, the claims handling is adversarial and in many cases outrageous. So people do things they ordinarily would not. Neck hurts? Sure it does! After all I’ve paid — overpaid, really — all these years, why shouldn’t I get my little $10,000 windfall like everybody else. (In California, people are three and a half times as likely to claim whiplash as in Michigan, where there’s no cash prize for doing so — only medical care and rehabilitation.) Yet the insurers are in a bind, too. They know statistically that most of the whiplash claims are faked — but there’s no way to tell which. So they treat everyone with suspicion, and they also have their eye on those zero percent loans.

• Removing victims’ incentive to defraud insurers with phony or padded medical claims, and removing insurers’ incentive to “borrow” from victims by stalling (because now the rate would be 24%), could go a long way to make auto insurance claims little more of a battle than most health insurance claims. There would still be horror stories — and consumers should be encouraged to shout like hell and, if need be, sue for bad faith, when there are. But by and large, the war would be over.

3. If a “lawsuit” driver collided with a Personal Protection driver

• What if you chose to stick with the lawsuit system and were hit by me, who had chosen Plan B? In that case, you’d make a claim against your own insurer, suing it, if necessary, much as you would today if I had been uninsured or underinsured and you had bought uninsured motorist coverage. (If you haven’t, incidentally, you should!) The other analogy would be two drivers who both happen to be covered by Allstate. With the larger insurers, obviously, that frequently happens. You wind up suing your own insurance company, not because you’re its customer, but because the guy who hurt you is.

• The amount you could recover would be based on how much liability protection you yourself had purchased (just as today it is based on how much uninsured motorist coverage you purchased, or else how much liability coverage I purchased).

One thought to remember: Anyone in this system who couldn’t at least get his or her uncompensated economic losses paid without a lawsuit would be completely free to sue for that excess, whether they had chosen Plan A or Plan B. It’s just the pain and suffering portion that’s handled differently, because under the current system, it costs so much in legal fees to administer and so much more in fraud.

There it is in a band shell. It would give you a choice. It would save you money. It would make our economy more productive. It would even do a little to improve auto safety. (Today, insurers can’t reward you much for buying a safer car, because it’s the car you hit whose occupants you are buying insurance to protect. But when the insurer knows it’s your safety its insuring, it has an incentive to give you a break for buying a safer car — which in turn gives you a reason to weigh safety a little more heavily in your decision.) Choice. Price. Safety. Feel free to send a copy of this to your congressman.

Tomorrow: Can the Market Keep Climbing?
Next Week: The Star Arrives

There was something very curious about the feedback to my thoughts on “Ellen” last month. It was 100% positive . . . at first. Then, after a couple of days, the positive ones stopped and there were a few pretty nasty ones. (Well only one really nasty one, with much talk about hamsters. The others prayed for my soul — and what’s nasty about that?)

I have no explanation for this. Do those less comfortable with this issue think slower? Have slower modems? I doubt it.

Four messages I particularly appreciated:

From Dr. Tom Novinger: “Although I consider myself politically conservative and am happily married with four children and am a pediatrician who subspecializes in the evaluation of children who are the suspected victims of abuse or neglect, I believe that your comments today were right on the mark. One of the great ironies of the homophobic people that you quoted in your column is that they know and work with (and probably like) gays right now but don’t know it. The joke’s on them. I believe that gay rights will become the priority in the next 10 to 15 years that black civil rights was in the 60’s. Already I see a much greater tolerance for and acceptance of gays among my own adolescent children as well as among the adolescents I speak with in my practice.”

From David Plumb: “Thank you! Thank you! Thank you for today’s great column. As one who is, as my lapel pin says, ‘straight, but not narrow,’ I really appreciated your calm and rational essay on “Ellen” and something of the reality of homosexuality. As a member of an “Open and Affirming” congregation of the United Church of Christ, I have come to a much clearer understanding both of the challenges gay people face, and the need for ALL of us to learn from and understand people who are not like ourselves. I’m not even sure that ‘Ellen’ is all that great a show, but I think no one who saw her interview with Diane Sawyer could believe that Ellen Degeneres has ‘chosen a lifestyle’ of homosexuality. My wife and I both just wanted to hug her!”

From a guy on Prodigy: “This straight ex-Marine, ex-high school English teacher now at 67 years of hanging out and watching offers KUDOS for your column today. More power to you.”

From “Jeff, a heterosexual”: “I’m sure you will receive plenty of hate mail and I just wanted to send a word of support. PS – Even if being gay were ‘(a) a choice’ — so what? So what if someone chooses it? This is part of the homophobe’s argument I don’t quite understand.”

There were a lot more like Jeff’s, worried about the hate mail, but as I say, I got only one nasty message — not to say I’m naive enough to think everyone else is cool with this.

(“Wow,” I wrote back. “Finally a negative response. I had almost begun to forget the deep residue of hatred out there. I don’t mean to offend you, but I remember that when I was a teenager, and trying desperately to hide how I felt, I was equally homophobic. I’m not suggesting you are fighting any of these feelings. But as you know, some of the worst gay-bashers are, in fact, simply trying to prove to themselves or others that they are not gay. Anyway, I hope you’ll try to keep an open mind. I can assure you whatever you may have heard about hamsters sounds every bit as unsavory to me as it does to you. Good luck . . .”)

There were a couple of cold but civilized notes (“I don’t care to know . . .”). And, finally, a couple of well-meaning religious messages like this one:

From Lewis Toms: “Consenting to illicit sex (everything other than a man loving his wife) brings destruction and misery to all parties; it is not love and care. You are attempting to deceive yourself and others by writing that no harm is done in a homosexual relationship. It kills your soul and body; as a result, all of society is harmed.

“I pray that God would give you a new heart and new understanding so that you will awaken to the truth that to escape eternity in hell, you must cease your sin and come before God and beg for His mercy provided through the shed blood of Christ who died and suffered in hell for all whose names are written in the book of life. Jesus is the standard for real love and care. Hoping the best for you . . . ”

I think Mr. Toms really does wish the best for me, and I wrote him a long letter back. But to my mind, of course, there’s quite a contradiction here. He wishes the best for me, but would like to see me abandon my happy, monogamous, long-term relationship for a life without intimacy. I think my soul and body are not being killed but rather nurtured by this happy relationship. And I don’t see what harm it causes society. I know it’s made my friends and relatives happy to know I’m happy.

But enough. In fairness to you (and Ceres), I don’t plan to make this a repeat topic, any more than I expect “Ellen” to be on the cover of TIME again. Still, like it or not, for the fifty or a hundred million Americans who have gay children or parents or siblings, bosses or employees, or who are gay themselves, this is an issue for the Nineties. And, from my perspective, most people, after some understandable initial dismay, are coming down squarely on the side of reason and goodwill. Hats off to every one of them.

As usual, your feedback is considerably more interesting than the original. Two examples:

A TAX-FREE WAY TO “TAKE PROFITS” — SORT OF

From Professor Dana Dlott: “You will laugh at this… it is so obvious, but I have found a way to take some profits with no tax consequences .. even in a non-retirement account! Start from the premise that I put $1000 every month into a non-tax sheltered stock mutual fund. After reading your column, I thought, ‘why not sell off $1000 of the stock and put it in my money market?’ Well, obviously this is no different from simply directing my next payment directly into the money market, bypassing the stock market entirely — except no tax liability. So readers who fit this description might consider directing their new contributions to the money market or bonds for a while as a way to ‘sell off’ stocks without paying capital gains taxes.”

G-II

From Todd J: “I really enjoyed your column about flying from DC to NYC on your friend’s G-II. My guilt restricts my pleasure a bit when someone loans me their jet — but my party spirit compensates just enough for me to be a mogul for a moment.

“My favorite solo passenger story:

“A college chum, Chuck, was called to Casa Pacifica in 1973 for an interview with Nixon. The interview got delayed; however, Chuck finally met the President and got approved to be Al Haig’s assistant. The delay, Nixon found out, meant Chuck couldn’t make my wedding rehearsal dinner on Cape Cod. Nixon’s response: ‘take Air Force One.’ And so he did, flying as the only passenger from California to Massachusetts. He made the dinner, with his pockets bulging with powder-blue matchbooks with a gold, embossed Presidential seal.

“Lord, Chuck was insufferable during dinner. Afterwards, he walked out to the end of a stone jetty and lit a cigar. Surprise, a rogue wave came along and washed him into Nantucket Sound. He returned to the ballroom of the Wianno Club, soggy and bent cigar in his mouth with his black tie still dripping — and announced that his ego had been tamed. Two days later, I got married.”

Tomorrow: “Ellen” Feedback (but just tomorrow, I promise)

From someone in San Antonio (geez: am I the only guy on the Internet with a first and last name?): "I read your book; therefore, I know how you feel about debt. However, I’ve read conflicting reports about the so-called ‘high debt load.’ And it puzzles me that one’s ability to repay debt is not given full consideration. For example, I’m able to repay with no problem, I don’t anticipate any job adjustments. Please shed light on this tortuous conflict of interest."

I’m not sure I understand the question, but I do understand the answer:

Not repaying debt only makes sense if you can earn more on the unpaid balance (after tax) than it costs (after tax) to borrow it.

Right? There can be exceptions. (You want to keep the creditor hanging, because he’s your brother-in-law and you just enjoy annoying him. You want to keep your options open, because you might need the money for something urgent and not be able to borrow again.) But basically, from a numbers point of view, this is it.

Paying 8% after tax on a loan makes no sense if you invest that money at 9% pre-tax — which is to say just 5% or 6% or 7% after tax (depending on your marginal federal and local income tax bracket).

Indeed, paying 8% after tax makes no sense even if you invest at 13% pre-tax, 9% after tax — because the 1% "profit" in this example is not worth the risk . . . and with any investment that returns 13% pre-tax, I promise you: there’s risk.

It doesn’t make sense to borrow at 8% to earn 9% unless that 9% is certain. (And what kind of schnook would be lending to you at 8% when he or she could get a certain 9% somewhere else?)

Sure, if you can borrow at 5% after tax (because you have a strong balance sheet and are in a high tax bracket), and have an opportunity to multiply your money tenfold in some risky venture, maybe it makes sense to take on a little debt to do it, rather than unload other assets that are illiquid, or that would subject you to high capital gains taxes if you sold.

The irony is that — from an investment point of view — it makes much more sense for rich people to borrow than for average folks. Rich people get lower rates because they’re less likely to default, because they "buy the economy size" (banks would rather lend a million dollars than a thousand), and because they’re in higher tax brackets (and itemize their deductions, which a majority of Americans don’t). So borrowing costs them less. Meanwhile, rich people generally have better investment opportunities available to them, are better able to spread their bets over multiple bets, and have the staying power to weather storms along the way.

So the people who should borrow are generally those who don’t need to, while the people who should not are generally those who must. Or feel they must. In some cases, if they really, really try, they can get out of debt — and it’s my aim to persuade them to try, because in the long run, not putting it on a credit card will make life 18% cheaper.

Some things are worth borrowing for: an education, tools, and sometimes a home. Not much else.