Table On-Topic Summary - 31-Aug-2002
A compilation of this board's financial/economic posts From 41307 to 41315

Post  41307  by  lkorrow       Reply
pmcw, thank goodness someone in telecom can manage assets. Now if they all could have figured out debt, they would have saved us all a lot of trouble!

Post  41308  by  Warstud       Reply
Speaking of LU..

Has anyone took notice of the insider buying recently in Lucent?

Post  41309  by  Decomposed       OT: Table ON TOPIC SUMMARY Aug 30, 2002

Post  41310  by  ttalknet2       Reply
uponroof: re the Islamic Gold Dinar -- Evidently this idea goes back at least to 1998 as described in this Jay Taylor article at Gold Eagle:

Also, below are some excerpts from Q&A with Jim Sinclair, an expert I'm really starting to admire for his knowledge and straight-shooting delivery:

Wednesday, August 28 "PRICE LEVELS & DINARS"

Q: The golden Dinar is just the beginning of a major correction in the global shell game called central banking. The amount of dollar units in Asia will find the trail to the gold market in the weeks and months ahead.
A: Can you imagine the incoming flack coming at these boys? If they actually do it, they will get my respect!

Monday, August 26 "GOLD, EU & THE DOLLAR"

Q: Is control of oil intended to be a substitute for gold in supporting the dollar?
A: Have you seen the Malaysian proposal to create the gold dinar by June of 2003 with 24 cooperating Islamic countries? I would say that if the US cannot stonewall that initiative, the dollar is in real long term trouble.

Monday, August 26 "MORE ON GOLD DINARS"

Q: Please read, my question(s) follows. Thank you.
KUALA LUMPUR, Aug 19 (Reuters) - Malaysia and a handful of other Islamic countries plan to bypass western currencies and use gold to settle bilateral trade from 2003, a senior Malaysian government official said on Monday. Prime Minister Mahathir Mohamad's economic adviser, Nor Mohamed Yakcop, told an international conference on the proposed trade system -- based on an electronic unit of value called a gold dinar -- would foster trade among the world's 1.3 billion Muslims. "The gold dinar could be an important facilitating move away from an inherently unstable and ultimately unjust global monetary system," he said. As you can see by this excerpt (written by Bob Chapman, The International Forecaster August 2002, #4 August 25 newsletter on the website ) it states that the plan to do business via the gold dinar would tie up between 200-230 tons of gold a year between $300-$350 an ounce. This does not seem right.
A: I read the original announcement but do not recall seeing a comment on a proposed amount of gold to be tied up.

(Note: Tonnage is NOT mentioned in the free version
of Chapman's article at GoldSeek. --tt)

Q: If true, it would put a damper on a gold bull market. Do you have any thoughts as to why or how that scenario about gold being range bound between $300-$350oz. would be accurate or possible if demand has just increased considerably.
A: I feel this is a commentators estimate, I would prefer to focus on this, should it occur, being the first huge pro gold chi nk in the armor of the dollar. It will impact not only market sentiment but also other currency units that might consider the same. although you are right that in the supply demand equation the number of ounces tied up are important Malaysia will not control the gold market. Gold will do what it decides to do.

Assessing the impact of Malaysia's gold plan

And finally, the e-dinar:

I didn't realize the gold dinar was so far along. Opinions about its success are contradictory but at least it bears watching, imo.

Have a great Labor Day weekend everyone!

Post  41311  by  pacemakernj       Reply
Roof, great post on the Japanese situation. As I've said recently keep an eye on this major issue. The Nikkei must stay above 10,000 by the end of March '03. If their economy goes back in the tank again at the wrong time look out below. They got bailed out this year because they thought the US economy was on track. But it isn't and that is why the Nikkei is back below 10K. This is very big, imo, for the POG. This might force more Japanese to buy gold. More importantly to sell their US assets. This bears close watching as we get towards the end of the year.

Post  41312  by  pacemakernj       Reply
L/PMCW, RE: Cable Stocks. Just a heads up Cramer was on Bloomberg yesterday saying that Paul Allen will do whatever it takes to insure CHTR sticks around. Cramer said there has been a lot of buying by some big (NBA owners) of all people. That the bonds were a better buy than the stock but at $3 could be a short term pop. CHTR and Comcast would be the likely survivors in the cable industry. Just FYI. For the record I am no fan of Cramer but I thought the news was interesting nonetheless. Pace.

Post  41313  by  Culmus       Reply
pmcw, maniati, re options

just to set the record straight, I have founded a company before myself (and subsequently sold it out to one of Europe's largest banks) and I do have working experience in the accounting industry, so no need to explain to me how a company works. I know perfectly well that the company is not the shareholders and vice versa, I had the impression you forgot about this distinction. We are also not talking about American C companies here but mature, listed companies.

From your earlier post, pmcw:

The corporation issues treasury new treasury shares. These are the same shares the corporation sold in the IPO for $10. We also pay $10 for out option shares. The corporation therefore receives $10M in cash and since no other options were issued or are outstanding, the next report will show the same figures for outstanding and diluted per share earnings. Remember, the number analysts track and I hope you do to is diluted earnings. If this dilution didn't happen, it is easy to assumable that the company, valued at the same per share metrics, would be worth exactly $55.55 per share or 11.11% more than it is after dilution. Therefore, if a shareholder were to sell, they would receive 10% less than they would have otherwise. This is the expense. (emphasis added) However, if all the shareholders were to sell, it wouldn't matter because the number of shares has nothing to due with the value of the corporation as a whole.

As I stated in my earlier post, the discussion whether or not options should be expensed, and how, is missing the point. To begin with, there is no legal basis at all for granting options to employees as a form of compensation, there simply isn't. That is because shareholders cannot be made personally accountable for company expenses (and you acknowledged that shareholders bear the expense), or whatever you want to call it. The company has to bear the cost of running its operation, not the shareholders.

That is the reason that I suggested to give up on granting options altogether, and so no company is having an unfair competitive disadvantage (no options? my God, we're gonna lose important employees) they should be forbidden by law. Period. Pay them (all of them) in cash and the whole problem is solved. Now you will reply that shareholders have voted to allow that form of "compensation". If they fully understood how this works they surely would stop working against their own interests IMO. I still can't believe it, with 7.3 billion shares outstanding the elected directors and executives have reserved themselves options on 2 billion shares at Cisco! Come on, if shareholders would think about handing over 30% of the company to insiders do you think they would still support this practice? I think not. Yes, formally the boards and managers might have gotten the shareholders approval but without shareholders fully understanding what they did, and in the meantime this practice has gotten totally out of hand. At any rate I strongly disagree that the number of outstanding shares has nothing to do with value of the company. That value is the number of (fully diluted) outstanding shares times the share price.

As I also said before, even if we were in search of a way to "expense options", there can't be any way to create a connection between options and the income statement. This is totally impossible because options do only affect ownership of the company and hence only the balance sheet. Therefore I can't provide any formula, not even as an example with regard to LLTC. Quite obviously LLTC has amassed a huge amount of wealth to their balance sheet (and shareholders) because that company is extremely profitable measured by the commonly used economic ratios such as return on sales and return on equity or assets.

You mentioned before that managers should be measured against their performance, that performance can only be measured by that kind of ratios, not by the stock price performance. Using stock price performance as a yardstick opens up the perfect incentive to cook the books or do whatever it takes to create a short term bump in the stock price.

maniati, since you and pmcw have pointed to this fact, I take notice that options are being granted at or out of the money on the day of grant. I acknowledged that in one of my earlier posts:

If pmcw is right (FYI, CSCO went public at a split adjusted 8 Cents, never traded below that and there are still options outstanding with a strike price of 1 Cent which someone has yet to explain to me, after all that is a discount of almost 90% to the lowest ever stock price) that strike prices in general are identical to or higher than the stock price at the date of grant then I still wonder how there can be a shift in corporate ownership to insiders to the tune of 10, 15 and 20% over a 10 or 20 year time frame. Something ought to be running incredibly in favor of insiders there, and against shareholders interests.

I will tell you what: It is the time period that these options are valid and the fact that they are repriced at lower strike prices anytime a stock tanks heavily. Insiders only have upside this way while ordinary shareholders are holding the bag.

Latest insider trades for selected companies, consider this (I'm going to use some other companies so I'm not being accused of bashing only Cisco):


A person called Ronald A. Wohl exercised options on Oracle shares on April 19th at a strike price of 49 Cents! Again, I now take as fact that in general the strike price at least equals the stock price on the day of grant or exceeds it. So this person had options with a strike price of 49 Cents, the last time ORCL stock traded that low (split adjusted) was in September 1992:

This confirms what I said above, if the optoins have no value at all on the day of grant then it is the extremely long time period during which they are exerciseable that gives these insiders only upside. In many cases they are being re-priced if the stock tanks, at least I have witnessed that many times before.

If these options are valid for 10, 15 or 20 years then they represent considerable value even if the strike exceeds the stock price on the day of grant.


On the 6th of March a person called Michael H. Jordan exercised options on DELL shares at exercise prices of between 29.2 and 53.5 Cents (!), the last time DELL stock traded at that price was in August 1994:

I do not take it as an extreme challenge to foresee a strong advance of a company's stock in a growth industry over a 10 year plus time frame. Even if they have lousy margins (which barely justifies a reward based on performance) and grow at sub-industry rates (not meaning ORCL or DELL here, just an example) these options are sure to make you extremely rich. Even Forrest Gump could become rich that way, and with a subpar performance.

Just these two examples to make clear your assumption that employees do not get extremely attractive conditions along with their option grants doesn't conform with reality.

You said:

Issuing an option has no wealth effect on the business. It has a wealth effect on the employee to whom it is issued, and on the other shareholders, but no wealth effect on the business. That's why it should not be considered a business expense.

I am in total agreement with you that a transaction involving options only affects ownership of the company and has nothing to do with the income statement whatsoever, just the balance sheet. On the other hand, these options are a form of compensation and hence there must be an expense for that compensation. As I said before, these options are nothing else but a mechanism for employees to buy stock at grossly discounted prices. If they can't be expensed in order to account for the fact that they are intended to represent compensation (which is the case) then options can't be at all, that's what I say. Since we mutually agree that options can't be expensed there is no legal basis for granting them IMO and the expense must be by way of other means, other than options. My suggestion: cash.

After - now hopefully unmistakenly - having stated that options are an inappropriate way (at least IMO) to compensate employees, let me comment on their effect since in reality they are being used (I might have mixed up these two matters before, causing that confusion). Even if someone figured out the "right way to expense options", double-counting is not the case because of the two unrelated components of options. Let's assume employees would get these options with a strike price that equals the stock price on the day of grant and they would have to be exercised on the same day. No luxury of 15 years validity. In that case the economic advantage to the employee would be nil, he would pay the days stock price and in effect this were nothing else but a secondary offering of the company to a selected circle of people, employees. But since there are new and additional shares outstanding now, they must be counted in the shares outstanding. This would be no dilution because the employee pays the equivalent of the current share price, he pays exactly what he gets in (market) value and the company gets in additional equity. This would be a value-neutral transaction for all parties, employees and shareholders. Now, whether that transaction takes place on the day of grant or 15 years later and despite the fact that the strike price 15 years later is only 20, 10 or 5% of the then prevailing stock price makes no difference at all. In any event must these shares be added to the number oustanding and this has nothing to do with the "compensation" and "expense" problem, there are additional shares given out and they must be counted. This does not equal any expenses to the company and hence can't be one of the two occasions they are being counted as "expense", therefore no double-counting. The dilution only comes into existence 15 years later after the stock price has increased way above the strike price. For the mentioned reason the dilution does not equal an expense. Would you agree to that? If not, why?

As I also said in my earlier post, if anything, compensation and therefore "kind of expense" is only the difference between the strike price (at grant or today) and the stock price when the option is being exercised some 10 or 15 years later. You and pmcw make it sound as if these options were "no big deal" when you emphasize that the strike price equals the stock price at the day of grant. As my examples above about ORCL and DELL demonstrate, these options ARE a big deal. What else is it if you can buy a stock at a discount of 95% percent or more, in other words a guaranteed huge profit?

Due to the distinction that the company is not the shareholders, in my humble opinion, there is no legal basis for granting options as a form of compensation at the expense of shareholders. If options still are being treated as "expense" then it only can affect the difference between the strike price and the stock price at the date of exercise. You are focusing on this part of the exercise. Here my conviction is that dilution can't be counted as part of that "expense" as demonstrated above. How to determine the value of the options that should be treated as "expense" is the point in question. Unfortunately the discussion has only centered around this question, whether options are an appropriate way of compensation at all has not been discussed. And the fact that this practice not only is without a lawful basis but also to the disadvantage of existing shareholders has been neglected, unless I missed some posts.

maniati, I'm fully aware that the value of these options doesn't come "from thin air" and that the value comes from the other shareholders. I said "thin air" because there is no cash immediately changing hands. No one, right at the day of the option exercise, pays cash out of his pocket, that I meant by "thin air". And exactly that is the problem, if someone would have to lay out the value of these options in cash, that person or company would realise just how much cash that would be and then the size of that expense would not only be realized but its outrageous level would become apparent as well. Only then would the lowering of that outsized expense become an immediate focus of everyone involved, except the insiders. And only then will the problem be tackled, whereas now the solution of the problem is just being pushed into the future.

As you say: "I know the corporate world is going to start expensing options anyway, but they will be wrong in doing it, it's a bad idea, it distracts attention from more important issues, and we are going to pay down the road." I wholeheartedly agree with you. The value of these options is so high that - should they ever find an equivalent entry into the income statements - their rightful recognition will have a severe negative impact on corporate profitability down the road. The bunch has to get its greed under control, or what did you mean by the more important issues that we are being distracted from?

Options (at least to the current degree) are wrong and, if, they are not double-counted...:-)



Post  41314  by  oldCADuser       OT: Seen today on the bumper of a Volvo in Orange

Post  41315  by  independentvoice0       Reply
culmus // excellent series of posts

it seems those who argue against you are busy engaged in lawyer-like recitation of arguments that bolster a point of view supporting their own values. i guess that's true of you too.

but lost in the debate here is the public policy purpose of financial statements in the first place, no?

isn't the whole idea of published income statements to provide prospective and current shareholders the most accurate possible view of a company's profitability? isn't the whole idea of having GAAP based on the public policy objective of providing the most accurate assessment?

the bottom line? options grants in lieu of cash compensation permit companies to hire people at some fraction of the expense they would otherwise present to a company. it may be viewed as a good gamble for companies, but it in making that bet, companies are also misstating the true expense of doing business in any given period relative to revenues. for a company starting with dead even revenues and expenses in an all cash compensation system, any reflection of profitability achieved by using options compensation in lieu of cash compensation to reduce expenses is misleading and in direct opposition of the very purpose of the income statement itself.

for that matter, why stop with compensation. companies can use options as alternative payment for all manner of expenses. in fact, if a company was willing to discount the options sufficiently, it's theoretically possible ot eliminate all expenses. true, the "expense" of these options would be reflected in other ways on the balance sheet. but that's the ULTIMATE RED HERRING. the real issue is whether the income statement accurately reflects current profitability. irrespective of whether the balance sheet accurately reflects ownership relative to net assets, the income statement is INACCURATE and fails to achieve the very purpose for which it exists.

your point regarding the relationship between options grants and performance are enlightening. as you point out there's something rotten in Demark when options can make an executive disproportionately wealthy all out of proportion to others working in a corporation, and those who front the capital for its operations -- even by dint of average or poor performance. there may be some who have a personal interest in trying to rationalize and justify the system that they wish to continue to use to feather their own nests (such as T.J. Rodgers), and even those who now retired who remain loyal to a system that was tilted to give them their own wealth, but no one ought to be under any illusion about the motivation. the hypocrisy stinks to high heaven.

ironically, issuing large numbers of options in lieu of compensation is not entirely dissimilar to the company and its shareholders taking the SHORT side of an options trade against their own stock. they're in essence betting against their own interest. that's perverse, eh?

if the options at issue are handed out in the form of IOU paper, the only way that turns out to be a better deal for the shareholders than having bought them on the open market and then handed them out, is if the company is LESS profitable and its stock grows LESS than the market expects and prices into the fair value of the options at time of grant. If the stock's value grows faster than the market expects as reflected in the value of the options, then it would be less expensive for the company to have simply purchased them on the open market at the time of grant, than to have sacrificed the equity at the time of subsequent exercise.

keep up the good work. i look forward to seeing how the various parties here come down on the crooked manipulations of earnings through deliberately underfunded pension and benefit plans, chief among them IBM. this whole earnings game is far from being done unwinding. at this point the emperors merely think they're wearing beach outfits rather than winter coats. the whole post-bubble wind down doesn't end until the last shameless apologist gives up the charade and former and current emperors all scurry off to re-clothe.