Author: A.T.

The thing is, you have to have money to make money and save money to have money. And to do that — get out of debt and save money — you have to live beneath your means.

One key element of this is to stop buying things out of obligation. Buy things because you need them (and shop around for the best buy), not because you think you ought to. Like the new car you buy because yours sort of stands out in the parking lot. Or the budget-busting +anniversary gift you buy because you think something less would send the wrong signal.

Someone should come up with a bumper sticker that says something like:

“Sure — but MY car isn’t financed!”

That’d shut ‘em right up. It would show you have a sense of humor, that you are aware your car is a bit of a clunker (kitsch is OK if you know it’s kitsch) . . . and it would suggest that maybe you have a longer-range goal in mind.

A $3 bumper sticker could save you $10,000!

As for the budget-busting anniversary gift, that’s where the frugal poesy comes in.

Instead of two tickets to the opera with a fancy dinner beforehand, all in a chauffeured limousine — a $400 anniversary evening on your MasterCard that adds 18% interest to the bill — how about the same opera on CD (which she or he can listen to over and over without having to dress up), a book about that opera, and this poem? (Here comes the poem.) Total cost: $40. (Forgive me if you already read this poem in PARADE. It’s the only poem I ever wrote, so I’m milking it for all it’s worth.)

If love were cash you’d have it all.
But resources right now are small.
I’ve promised that I will not borrow —
The greater gifts to give tomorrow.

Better still, some frugal poesy of your own.

Tomorrow: Gerry Studds

Did you read Geraldine Fabrikant’s profile of SunAmerica Chairman Eli Broad (rhymes with road) a few weeks ago? Man’s built a heck of a company, heck of an art collection. But what really got me, near the end, was where she reported on his recent purchase of a Roy Lichtenstein for $2.4 million with his American Express card — so he could get the miles.

Now that’s what I call rich.

(Is it possible you have an American Express card and haven’t made the single call it takes to sign up for the Membership Miles program? Gad zooks! You are throwing money out the window! Call them at once — 800-297-3276. You can also use that number to see how many miles you’ve accumulated and check to be sure they have your correct frequent-flier numbers. You can’t yet do this via their web site, but it has some interesting features anyway, in case you want to check it out — www.americanexpress.com).

Tomorrow: Frugal Poesy

So here is this company that does . . . well, something, my broker’s not sure quite what, but it’s got a sexy symbol — DNA — and it had risen from just under 4 a year ago to 28 last month and 55 a few days ago. I had never heard of this New York Stock Exchange-traded company and neither had my broker. So now he gets a call from a client who wants to buy some. (It’s 77 when he gets the call, up from a low of 64 earlier in the day.)

“What?!” says my broker.

No, he’s not crazy, he says. He wants to buy this stock for his mother.

“Are you crazy?” asks my broker.

No, the guy is perfectly serious. Someone in his office bought 20,000 shares last week at 55. It’s a great stock. It goes up.

There seem to be a lot of stocks like that this year.

Does this make anybody nervous besides me?

My broker said, sorry, he wouldn’t buy DNA at 77 for this guy’s mom. His policy, in fact, is not to be stocks like this for anyone’s mom. Why? Part looking out for their interests, to be sure. But, he laughs, “they’re no lose stocks for these people! Stock goes up, they have a profit! Stock goes down, they’re in court in a wheelchair and respirator saying I recommended it.”

By the end of the day last week when he told me this story (Thursday), DNA had closed at 66-and-change. By the time you read this, it’s likely to be someplace between 40 and 100.

Typically, rising interest rates and pervasive speculation spell trouble in the stock market. Then again, who’s to say the upward climb in rates isn’t over and about to reverse? Or that the speculative frenzy is anywhere near peaking? Or even that DNA isn’t worth far more than 77? Heck, I don’t even know what they do (well, actually, they seem to be a holding company that invests in other companies) — and neither do at least some of the people buying their stock.

About the scariest, most dangerous thing you can do is short stocks. So please don’t take what follows as a recommendation that you do so.

But it’s hard to watch Iomega or Presstek or quite a few others bound up six points a day without at least thinking about it. Iomega’s low last year was 1-1/16 and it’s low this year was 11-3/8, and when Barron’s or somebody suggested it was wildly overpriced a week or two ago it was 43 and a few days later when I inquired about shorting it, it was 59 and the next day it was 66.

That’s not a bad run, from 1 to 66. With about 60 million shares outstanding, it means the company is selling for nearly $4 billion, all told. Some careful analysts, looking at the sales and earnings prospects for this company, doubt it is worth that much.

However . . . “nothing goes up forever” — though technically true — are famous last words to any number of bankrupt short-sellers. Still, at 66, surely Iomega is in the “blow-off” stage of this craziness, no?

I have no idea, but it certainly seems that way. Likewise Presstek, which Barron’s has been knocking for years. Someday, all printers may use the Presstek process (just as all computers may use Iomega disk drives). But in the meantime, Presstek earns just a few cents a share, yet sells at 114, up from a 1995 low of 21. Or wait: 114 was last month. Monday it was 149.

Usually, these things turn out to be manias or short squeezes (meaning that the short-sellers are forced or panicked into buying back the shares they shorted, which drives the price even higher, panicking or forcing still more shorts to cover their positions) . . . and eventually the stock drops back to earth.

But there are two problems in trying to buck the crowd and profit from the madness by shorting Iomega at 66 or Presstek at 149. The first problem is that the stocks may go to 350 before falling back to earth, if they ever do. It’s very hard to spot the top. The second problem is that you can’t short them now, at these prices, even if you wanted to.

Try it. (Well, don’t you try it, but I tried it.) At 50 I’m sure you could short all the Presstek you wanted. At 100, you still could short it (and would by now have lost $4,900 on paper for every 100 shares you sold short). But try to short it here at 149, when it’s really really overpriced (maybe — what do I know about printing?), and your broker will tell you, Sorry. I can’t borrow it.

[In order to short a stock, your broker has to be able to borrow the shares from someone who’s long (who owns it) and then sell those shares for you, with you hoping to buy them back at a lower price and “return” them.]

There are already so many people short these stocks (and in agony), you can’t short them.

You could buy puts instead, which is usually smarter anyway (well, less dumb). Buying puts limits your risk to whatever you pay for the put. You will generally lose the money you bet, but no more. Imagine, by contrast, having shorted 1000 Presstek at 30. No cash would have been required, if your brokerage account balances were of sufficient size — no money down! — but you would right now be sitting with a $119,000 loss. Whereas if you had bought 10 puts way back when Presstek was 30 last year, it might have cost you just $5,000, say (depending on the strike price and term of the put) to “control” those same 1,000 shares and profit from their fall. Better to lose $5,000 than $119,000.

But puts on stocks like Presstek and Iomega aren’t cheap. And they expire. If you’re really sure a stock is going to fall sooner or later (does the word hubris come to mind?) but you’re not sure when, you will make more money going short.

I could go into a lot more detail on this, but the whole point of this comment, which I haven’t yet reached, was to explain how to “create” a short sale even when your broker tells you that you can’t, because he can’t borrow the shares.

Let me say again: I’m not recommending this! Most people who short stocks lose money; all lose sleep. It is very dangerous. No kidding.

But if you can’t short a stock because it’s so high everyone else has shorted it and there are no more shares to borrow (possibly a good time to BUY it, though grossly overpriced, with the thought that a lot of those short-sellers will eventually have to be come buyers, pushing the stock even higher in a final panic), here’s how to create a synthetic short:

You simply buy a put and sell a call, both with the same expiration date and strike price.

Take Presstek. When it was 140 (hours before it was 149, but how could you know?), you could have bought an October 150 put for $29 and sold an October 150 call for about $11. (Each option covers 100 shares, so the actual cost of the put would have been $2900, plus commission, and you would have received $1100, less commission, for selling the call.)

The net result of that would be roughly the same as if you had simply shorted 100 shares.

Look at the outcome at both extremes. First, assume Presstek dropped to zero by October. Shorting 100 shares of the stock at 140, you would have made about $14,000. Likewise, more or less, with this “synthetic short.” The October 150 put would have allowed you to sell 100 shares of Presstek to some pathetic, writhing put-seller for $15,000 — shares that cost you zero because Presstek was now zero. So you’d have a $15,000 profit . . . less the $2900 you paid for the put . . . plus the $1100 you would be allowed to keep for selling the call (no one is going to exercise a call that allows them to buy a stock for 150 when it’s worth zero). Net net: $13,200. That’s about the same as shorting 100 shares of the stock at 140 and seeing it fall to zero. (The $800 difference, roughly, is in the spreads between the bid and asked prices of the options.)

Now take the opposite extreme. Say that instead of dropping to zero by October, Presstek hit 500. If you had shorted 100 shares at 140, you’d be $36,000 in the hole. If you had created this “synthetic short,” buying a put and selling a call, you would also be about $36,000 in the hole (plus a bit more for the spreads). You would have lost the full $2900 on the put you bought, which would have expired worthless (there’s no value in the “right” to sell Presstek at 150 when it’s 500) . . . you would keep the $1100 you got for selling the call . . . but whoever bought that call from you would exercise it, forcing you to pay $50,000 to buy and deliver 100 shares of the stock to him in return for his measly $15,000.

Risky, risky, risky.

But kind of interesting, no?

Let’s review:

1. We have a tremendous dependence on foreign oil.

2. Our foreign-trade deficit remains huge.

3. Reducing the budget deficit is a major national priority, agreed to by both Democrats and Republicans.

4. The tax on gasoline is dramatically lower in the U.S. than almost anywhere else.

5. We’ve largely lost interest in fuel efficiency when buying a car.

Well, then, here’s an idea: let’s lower the gas tax! Specifically, let’s repeal the paltry 4.3-cent hike in the tax that was enacted in 1993.

In fact, of course, that 4.3-cent tax hike should have been higher — a dime the first year, say, rising an additional dime each year for a total of five. That would have solved much of the deficit problem (figure about $1 billion per penny) and encouraged people to “beat” the tax by moving on to more fuel-efficient cars when they next bought one — a win-win situation for everyone but Exxon and the Saudis.

It’s fundamental: you tax the things you want people to cut back on or conserve; you lower the tax on the things you want to encourage (like work and saving and investing). So hike the gas tax, lower the deficit and the income tax and maybe the capital gains tax.

That the Republicans would move to cut the gas tax in an election year is predictable but embarrassingly bad public policy. That the Democrats feel they have to play along is almost as bad.

Remember: this money isn’t “free.” Dick Armey suggests we can recoup it by cutting the money out of education for our kids.

Wouldn’t it be better to penalize the Saudis and other oil producers rather than our own children? To do that, you simply keep (or better still raise) the gas tax, and watch as, on the margin, people drive 2% more efficiently, if they want to, to compensate. Instead of a car that gets 20 miles to the gallon, they’d eventually drive one that gets 20.5 miles to the gallon instead. The Saudis would see their oil revenues decline, which is too bad for them, but the American family would get to drive the same distance at the same speed at the same fuel-cost per gallon.

True, people don’t trade cars every year. But this has been an ongoing process. Very few people drive cars that get 10 or 12 miles to the gallon as a generation ago was common. Adjusted for inflation, we pay less for gas to drive a mile than at almost any time in our history.

Is this really a time to cut money from education? Is the way to compete in the global economy to de-emphasize education and burn more gas? Dole and Armey apparently think so. And politics being politics, the Democrats may have to cave in and go right along.

I’m pleased to see IBM stock has tripled since Lew Gerstner took over. And I’m pleased to be typing this on one of my three IBM Thinkpads. (Don’t ask.)

IBM has done great things for this country and this world, and I’m happy about its resurgence.

But c’mon! The horror stories! Not that IBM is alone in this, but IBM really does seem to lag far behind all those wonderful New Hampshire mail-order places when it comes to customer service.

I say “New Hampshire” generically. Some are out West, I think, others in Lord knows where — it’s all 800-land to me. But the point is they have that nice small-town ethic and friendliness and, sure enough, whatever you order arrives, as promised, the next day.

Not IBM.

Take this Thinkpad. It’s sensational, but one of the reasons I bought it was the 28.8 internal modem. After I’d done all the paperwork and planned my life around its arrival, the dealer told me it would come with a 14.4 modem instead, for reasons too technical to recount, but if I wanted to go ahead with the purchase, I should know that a 28.8 “software patch” would be available in a few weeks from IBM. So I went ahead and bought it.

Weeks turned into months, but finally this past November 4th I called IBM and found a human (after much “press 1 for blah-blah, press 2 for blah-blah, press . . .”) who knew exactly what I was talking about. He told me I could get the patch free by downloading it from the bulletin board, or for $17 with a credit card if I wanted the disks. I opted for the disks and was told they would arrive in 7 to 10 days. I ordered an extra Thinkpad battery at the same time.

The extra battery came promptly but was for the wrong ThinkPad model. To get the right one, I had to buy it and wait for a credit on the first. (They wouldn’t trust me to just send it back while they were sending the correct one.)

But what of the software patch to double my modem speed to 28.8? Three months passed — forget “7 to 10 days” — with not a peep.

Eventually I called and, yes, they had a record of all this in their computer, but couldn’t explain why I hadn’t gotten my disks. They said they’d put the order through again. Did I want them to rush them? Rush-delivery would be only $8 more.

“Now hold on,” I said. “You’re telling me — who own three $5,000 Thinkpads — that although the disks you promised are now +3 months late, you can offer me rush delivery for just $8 more?”

“Yep.”

A New Hampshire outfit would have been falling all over itself with apologies and offers of free delivery. IBM had no mechanism to deviate from policy, nor training to recognize any reason to do so.

The disks eventually came — 17 of them, with not a word of instruction or documentation. Fifteen of the disks, I eventually realized, were irrelevant. I still don’t know what they’re for.

Good computers; lousy customer service — unless, perhaps, you’re a Fortune 500 company. You’re likely to get a lot better service from an outfit like PC Connection, in New Hampshire (800-243-8088).

Tomorrow: Gas Tax

I am not one of those who bash the U.S. Postal Service. First class mail is a bargain at 32 cents (although with e-mail and electronic bill-paying I use less and less of it). The postal carriers really do deliver in the worst kind of weather, and I don’t believe it for a minute when people tell me the check they sent must have been “lost in the mail.” Slowed down in the mail, perhaps. Mangled every once in a while. But lost? Virtually never, in my experience.

That said, I am looking at a preposterous U.S. Postal Service ad in the Wall Street Journal. Full page. It shows a +$12 FedEx Pak, a +$6 UPS 2nd Day Air Pak, and a +$3 Priority Mail envelope.

Down the left side of the page it lists some other advantages, besides the Postal Service’s lower price. The first: MORE AIRPLANES. “We use more airplanes than FedEx and UPS combined to make sure your priority package or envelope gets to its destination.”

And they have more trucks, and you don’t have to call for a pickup, and they deliver Saturdays at no extra charge . . .

This ad is 23 inches tall. Everything about it is nice and big and legible. Except the one footnote, one-sixteenth of an inch high. It says (if you squint) “Price comparisons are based on Priority Mail up to 2 lbs. versus 2-lb. published rates for UPS 2nd Day Air and FedEx 2Day. Priority Mail is delivered in a national average of 2-3 days, measured from Post Office to Post Office.”

In other words, this whole ad is a joke. Because Priority Mail is no faster or more reliable than First Class! Imagine if the FedEx ads said, “When you need to get it there in two or three days, positively, on average. Well, not there exactly; we’re measuring that from FedEx station to FedEx station. But certainly within 3 or 4 days most of the time and rarely more than a week or two.”

Because that’s what you get for $3 from Priority Mail.

The service may have improved, but back when the slogan was “two pounds, two days, two dollars and ninety cents,” I had one Priority Mail piece that took +two months to make it from Miami to New York. There was nothing unusual about the item. The address was correct; it hadn’t been mangled. It just took two months. (It was as light as a feather, containing nothing more than a $5,000 check. After a couple of weeks, we stopped payment and FedExed a replacement.) Two months is the record for me, but there have been others in the 7-to-10-day range.

And why not? Because if the national average is “two or three days,” you’re going to need a heck of a lot of horror stories to make up for the ones that actually get across town overnight. (In Miami, this happens with First Class mail much of the time.)

One day, with all those planes and trucks, perhaps they’ll have something worth advertising.

“We’ve gotten our act together,” such an ad would read, “and can now guarantee to deliver Priority Mail in one or two days ordinarily, but three without fail.” Something like that might be worth paying for. But until then, it’s First Class for anything that isn’t time-critical; FedEx or UPS for everything else.

And lest you think I’m complaining only about a government-sector behemoth . . .

Tomorrow: IBM: Room for Improvement

Some say money is the root of all evil; others, quoting George Bernard Shaw, that lack of money is the root of all evil. (I say: since the matter is in dispute, may as well have it than not.)

But if we’re looking for the root of evil and for fundamental problems, why start with money? It’s people who are the root of all evil, and an overabundance of us, it can persuasively be argued, that is fundamental to many of the world’s worst problems.

I don’t mean to offend any particular person. Well, maybe Mickey Rooney. But as a group, we really have to start thinking about the size of our party. Six billion?

I know, I know: Malthus. Big ol’ cry baby. Whine, whine, whine. World population has doubled in just the last 38 years — positively teeming by Malthus’s standards — yet it’s not as if people are going to bed hungry or anything.

Well, there is a bit of that, I suppose, but c’mon: if the planet can’t support an additional 90 million new consumers a year — a new Mexico each year — then what kind of self-respecting planet is it, anyway? We haven’t scratched the surface of this fine planet’s carrying capacity. Your war, your over-crowding, your infectious diseases, your red tides, endangered species and global warming — just so much kvetching from the folks who care more about snail darters than strip malls. There was plenty of war and disease and chariot traffic back when there were only a billion of us.

Still, if you’re not certain technology will solve everything as the Earth’s population doubles and doubles again, it might be worth a click to check out the Zero Population Growth website. Full disclosure: I’m on the board.

Tomorrow: Big Potatoes

An enthusiastic young friend with a lot of hair on his back has been pushing me to buy stock in ThermoLase (TLZ). When he started pushing, the stock was around 22, up from a 1995 low of 3-5/8. He explained that right now the company had just one hair-removal salon in La Jolla, but that it had a patented painless laser process to permanently remove hair quickly. And for only $3,000.

This is not one of those companies where you can go crazy with lines like . . . “and once they saturate the market here, think of the billion Chinese!” . . . because, if I have my racial stereotypes right, the Chinese tend not to be all that hairy. Still, imagine grabbing $3,000 from every hairy-backed guy in America who wishes he weren’t. And from every gal tired of shaving her legs.

So the stock was a buy at 22, my friend said — what did I think? I asked the obvious question, how many shares is this little company divided into, and, as usual, my friend didn’t know. We’ve had this kind of conversation before. (US Surgical was his last pick. Having already tripled, it would nearly triple again. Then drop from 140 to 20.)

I looked it up, and TLZ has about 40 million shares out, so at 22 the company was selling for $880 million. A lot, I thought, for a single hair-removal salon — even perhaps for one with a patented process so promising as this one.

Naturally, the stock went up. At 26 or so, I read an article in Business Week describing another company, Palomar Medical (PMTI) with a similar-sounding technique said to be just a few months from FDA approval, and said to have ties to institutions like Massachusetts General Hospital in Boston. PMTI was $9.50 a share at the time and thus, with 15 million shares out, was being valued in the market at about $145 million.

PMTI, I reckoned, could be competition for TLZ.

So I did two things. I shorted some TLZ — up to 29-1/2 by this time — and bought an almost equal dollar amount of PMTI.

If hair-removal companies ARE worth a billion dollars, I figured, then PMTI would eventually sextuple, while TLZ, already valued by the market at a billion, wouldn’t budge. Or, if they collapsed, TLZ would collapse further. Either way, I’d come out ahead.

(Important caution: I usually lose money shorting stocks. It is VERY risky, ESPECIALLY if you do it with as little knowledge and research as I do. This comment is meant to amuse you, not lead you into making the same mistakes I do.)

Two weeks later, PMTI had climbed to 11-1/4, up 18%, but TLZ had climbed almost as much, to 34-1/2 (where I shorted some more). So my gains being long PMTI more or less canceled my loss being short TLZ.

Why am I skeptical of ThermoLase? I know next to nothing about hair removal, other than that I have a little of my own I wouldn’t mind getting rid of. But even though I can afford the $3,000 I’m told TLZ charges, I haven’t rushed out to La Jolla as of yet. So based on a sample of one, me (a sample size I all too often select in making my investment decisions), the Lase craze may be overdone.

My friend DID rush out to La Jolla and reports that after another couple of visits his hair should be history. (The process, he says, gets all your current hair. But at any time in the hair cycle, you’re gonna have some nascent hairs the laser misses — like seeds in the ground that later sprout — and so return visits are advised.) He also managed to get them to come down a bit on the $3,000 price, which led me to believe the demand for this process may not yet be at a fever pitch, even if demand for the stock is.

Now, it’s certainly possible PMTI will never get approval for its method, and that a million people a year will pay TLZ enough for it to net $1,000 from each one, after taxes. That would be a $1 billion profit to TLZ shareholders — in a league with companies like Sears, Merrill Lynch, 3M and Chevron — and would justify a stock price 10 or 15 times where TLZ is selling today.

But what if PMTI does make it, and competition from the hundreds of health care facilities that have signed up to license its process, once approved, drives the after-tax profit per hairy back down to, say, $300? And what if TLZ manages to corral just 100,000 customers a year instead of a million — still a lot of customers for a start-up business in what could become a competitive industry? That’s a $30 million profit, which at 15 times earnings would justify a $450 million valuation — about $11 a share.

Not that rationality has so much to do with any of this in the short run. TLZ could be 100 or 200 before the bubble bursts, if it is a bubble.

But I’m having a lot of fun with this. If PMTI goes up enough or TLZ drops enough, I just might have enough mad money to justify a trip to La Jolla.

Tomorrow: Evil