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I took my plunge last month. I was doing pretty good.. until I had to dump them all to get my Equity over 25K... I finally got the money raised, and then found the options cost basis was subtracted and not included in the 25K min req, so I was still under!
right now all I'm holding are DELL Jun 22.50 PUTS. Not looking for much, just waiting til DELL does a nice pullback and takes my GTCs out. Just getting the feel for options movement.
I'd like to find others who are into playing options... WHERE IS EVERYONE? :)
Have not traded options yet,But will soon.When I get educated.
Bigarow
Hi Poet! Bernard has updated http://www.indexpulse.com/
I am not sure if you have been following the MKTSS board but you might be interested that Bernard has added NDX charts to the website. Yesterday was a Great example of using the Plan from the MKTSS board to Short or buy Puts on the NDX. Take a look and see what you think about it. We have not talked too much about the NDX yet on the MKTSS board but I know that Bernard is interested in trading it. Perhaps we can get some insights from you about trading the NDX?
I hope that All is Well! Sincerely, Bob :^)
Good Luck to All! :^)
PLAN the TRADE and TRADE the PLAN!
Poet
Do you have play's in the index's here and now?
I am betting pretty heavy on down here, although I am quite nervous but today's gap up was close to forcing me out of my positions. I did not want to see new highs near term and thankfully we stayed below but I will take profits in the 1697 1282 area if we stall their.
I think we could get more run at new highs from there before we slide further.
I own QAV SB @.50 and I own DJV RR @.45/.50.
I also own QLGC and EMLX Puts and they are longer term positions QLC SG and UML SD, they are more expensive but I will give them room due to the volatility in the 2 stocks but if QLGC makes a new near term high I will bail because it could run to 57 or so pretty easily. I view QLGC as the leader of the 2 stocks even though EMLX has shown surprising strength here of late.
Good trading, steve
Hi Steve,
I check in from time to time. I trade index options (OEX and NDX), front month pretty exclusively. It's a decent income if you keep your eye on the larger market moves. Feel free to post trades and options information here.
Options are great trading vehicles, though a little tough for the average investor who knows little about technical analysis, IMO.
Hello anybody here?
I see the last post was March anyone interested in discussing options.
The past couple weeks have helped options as volume has picked up and so has volatility which helps us make money.
Although we are close to the summer doldrums and option premiums declining due time erosion. I am only holding Sept or Oct options once we are in the middle of JUNE as movement can disappear.
Good trading, steve
""They are buying every dip but the dips are becoming shallower. Should we get a breakout over 10635/1175 there could be some serious buying and short covering. Regardless of what we think may happen we need to keep those stops in place and our fingers crossed. The earnings warnings cycle has been very calm to date but that could change at any moment. Remember, the biggest surprises occur when you are not expecting them.""
These next two weeks are going to tell us a whole lot. IF the mkt doesn't start to complete wave down on earnings, it's going to follow the least resistance and move up. I am leaning toward seeing it move up, simply because I remember this quarter last year, and believe that it will be hard to not surpass those numbers.
SPX, I would say 1200 is probably more of a key. But if you look at the recent chart, you can see why he is calling 1175. Looks to me like it's going to happen. Sure, the numbers don't really back it upp. But these guys are sitting on tons of money, and just itching to put it into a return.
Semiconductors sure seems to be what is going to lead the bull. It's breakout in early March was really strong. Looking at the recent SOX chart, it's hard to not see it as bullish.
imho, Jerome
A little tough talk about inflation from Richard Hahn tonight:
Analysts representing the financial firms selling equity shares to the public spent the afternoon repeating their assertion that there is no inflation. Never mind the rising energy prices and CRB index. Never mind the rising long term interest rates. Never mind the solid precious metal prices. It was comical to hear the sell-side representatives sing in unison the ?inflation is dead? story. From this phenomenon, one should observe that inflation is the single, most feared factor terrorizing the sell-side people. If the existence of rising inflation were acknowledged, no one would buy high PE growth stocks and their reason for existence (and their big salaries) would cease. The Federal Reserve took the first step towards an interest rate tightening cycle, today. The purpose of a tightening cycle would be to extinguish the flames of inflation resulting from their own accommodative monetary policy, enacted since January 2001. The Federal Reserve's policy of massive liquidity injections and monetary stimulus (intended to bail out Wall Street) will result in conditions which will cause the Fed to burst the current stock market bubble, just like they were forced to do two years ago. This is a vicious cycle of market destabilization, which history will correctly attribute to the misguided leadership of Alan Greenspan.
A good essay on what the low VIX means, by Jim Brown, who runs the Option Investor website:
No Change Yet..
By Jim Brown
Who is on first? It appears that nobody knows. Greenspan and company changed the bias to neutral but stressed that real demand over the next several quarters is still uncertain. Meanwhile Merrill Lynch and Saloman Smith Barney see first quarter growth exploding at between +5% and +6%. Somebody is wrong. Greenspan is becoming increasingly optimistic as to the strength of the economic recovery but if he thought the first quarter was going to post a 6% growth rate the decision today would have been entirely different.
The major area of discussion appears to be growing demand or the lack of it. Many analysts claim the current economic rebound is being powered solely by a rebuilding of inventory levels and not increased demand. The FOMC called it a "marked swing in inventory investment which was expanding at a significant pace." Considering how low the inventory levels had fallen while corporations weathered the recession it is not surprising that the "stocking" orders are large. Unfortunately those same inventory levels are now rising rapidly which indicates there is no buying on the retail side. That lack of buying is the fly in the ointment.
Still the FOMC is hedging their bets and already telegraphing their intent to raise rates in the near future. The key word in the FOMC announcement is "accommodative". The statement said "although the stance of monetary policy is currently accommodative..." which means in English "we think the rates are too low for the current circumstances." However, after barely escaping with any hair left on his head after the economic crash Greenspan is not likely to rush back into an aggressive rate hike policy anytime soon. There is no inflation pressure and no signs of a long term recovery. Either way the FED should stay on the sidelines which they did today. The next meeting is May-7th and that is the meeting which could cause investors problems. It is also right after the majority of earnings for this cycle. Mark that on your calendar.
As evidence of the strengthening economy the semiconductor book to bill numbers announced after the bell showed a +10% growth from January to February. The book-to-bill ratio rose from .81 to .87 which means $87 of new orders were received for every $100 of revenue recognized. This "recognized" label was changed from "orders shipped" after problems arose with channel stuffing and orders refused during the recession. To recognize revenue the customer must accept the order and take delivery. The brightest outlook is in the equipment makers stocks. Chip equipment makers sold $28 billion of equipment in 2001. With newer, smaller, thinner, faster and cheaper chips the continuing trend the equipment makers are due to sell an entirely new wave of equipment. Intel just announced a move to the .09 micron process for the next generation of processors which make much of the old equipment obsolete.
The industry is reporting a dwindling inventory of chips and a sharp upturn in demand from China. Some analysts estimate that orders for chip equipment could rise by +17% this year which would equate to nearly $33 billion in orders. This should be very bullish to the semiconductor equipment stocks but may not impact the chipmakers themselves. Ordering new equipment may be bullish but if orders for the chips themselves do not increase then earnings will continue to suffer.
Did you vote? Millions did and according to HWP CEO, Carly Fiorina, the merger is a go. While she said it was still too early to tell for sure she felt from the number of institutions on their side at the close of voting gave them the win. Dissident Walter Hewlett insisted the vote was still too close too call. It will be a couple weeks before the official vote tally is released and the verbal battle ends. HWP dropped to $18.80 on the news and CPQ rose to $11.00.
In other tech news shares of Red Hat fell in after hours after saying that sales were slowing. The Linux system maker is finding it tough to compete and is losing market share to other vendors. Mercury Computer dropped nearly -$6 after warning that earnings would fall to only .05 to .12 cents from analysts estimates of $.24 cents. The company cited delays in shipments on defense contracts and a delay in recognizing revenue on those shipments. Not all the news was bad with Jabil Circuit gaining nearly $1 on earnings that beat the street and comments that they saw continued growth ahead.
The major indexes reacted to the FOMC news in typical fashion. They began the day with an upward bias and then crashed when the announcement was made. It never ceases to amaze me when the FOMC does exactly what analysts expected but the Dow trades in an exaggerated range at the announcement. The Dow dropped from 10664 to 10597 in the seven minutes following the news but rallied to close well over 10600 at 10635. Exactly on resistance again! For the bulls this is a strong signal since this represents the highest close since June-22nd last year. Every day that the index trades in this area, or in the case of Tuesday, spent several hours well over the 10635 area, the resistance is slowly eroding.
The S&P also dropped sharply after the announcement but recovered to close very near resistance at 1175. When these resistance levels are tested over and over again they will eventually produce a major move in one direction. The war between buyers and sellers is being fought and the ranges are becoming smaller and higher. Still, even with the post announcement volatility the VIX closed at another relative low at 20.35. I received several emails reminding me that the VIX can trade below 20 for some period of time without a market meltdown as in 1995. I agree. There is no magic number that instantly sets off a panic selling binge but there is a correlation between low VIX numbers and eventual sell offs. Selling occurs when there is nobody left to buy. Everybody who has money has already bought and everyone is waiting for the markets to rise. This causes complacency and the eventual market drop.
If everyone of our readers had $1,000 each on July 1st of last year and they were instructed to invest it (not trade it) when they felt the markets offered the best chance of a decent return, how many would still be holding their money? Everyone thought the drop after 9/11 was overdone and represented a tremendous buying opportunity. Doubtless, many would have invested then. As the markets rallied into late December many more would have taken the plunge not wanting to be left behind. Those that felt the market was already overvalued in early January would probably have bought the dip back to the Dow 9600 level at the end of January. There would likely be very few still holding money today as the Dow/S&P are struggling to break that overhead resistance dating back to late spring of 2001. Now you see the problem.
Everybody is already invested, or at least the majority of the buy and hold community. The volume is slowing as conviction wanes. The next opportunity to convince the remaining holdouts will come in the April earnings period. If they are convinced then we could make a new leg up. If they are not then we are doomed to slide into summer as those investors who bought the 9/11 dip and the February dip decide to take profits. The VIX is very low because nearly everyone has already voted in favor of a rally. When storm clouds appear over the markets the VIX will climb as investors take steps to protect themselves against a drop either by selling, buying puts or setting tighter stops. With good economic news appearing every day why do you think the markets are struggling to break this resistance? Is it because there are few investors with money left to spend?
Despite the VIX comments above there could still be several days of positive movement in our future. The end of the quarter is coming and many fund managers are still sitting on cash they did not want to invest until the next pullback. With no drop in site and positive news every day they may be forced to spend it to dress up their statements. The competition for fund dollars this year will be intense as the non-performers from last year are dropped in favor of a new horse for the next bull market. Managers will not be able to entice cash without showing a promising stable of thoroughbreds. They are buying every dip but the dips are becoming shallower. Should we get a breakout over 10635/1175 there could be some serious buying and short covering. Regardless of what we think may happen we need to keep those stops in place and our fingers crossed. The earnings warnings cycle has been very calm to date but that could change at any moment. Remember, the biggest surprises occur when you are not expecting them.
Sell Too Soon!
Jim Brown
Editor@OptionInvestor.com
Yes Poet, I think the Big Boys have been distributing shares last week... that's the main reason I'm Bearish... that is of course, they have also tried to distribute shares at 9600, but the demand was too big, and we have the run we are having now... make or break, sky is the limit or Bull becomes Steak.
signed,
Bernard
Here's a bit of what Richard Hahn is saying on his site today about the market over the next few weeks. As usual, it's bearish:
Technically, the market is due for a significant setback based on overbought and overvalued conditions. It should happen in the next three or four days. A bearish orientation is advised. However, if the market does not assume a technically bearish look by dropping through key support zones by Thursday, March 21, then the bulls will be able to easily invert the pattern. The time arriving around April 1 may turn out to be a high in the price cycle. That would be exceptionally bearish and one would want to have funds available to short some kind of irrational exuberance going into that time. That means one should be ready to cover short positions by Thursday, if the market stays afloat.
There are multiple waves pointing to Monday, April 1.
No Problemo! I like all of the Links :^)
Check out some of the Jokes!
Good Luck to All! :^)
PLAN the TRADE and TRADE the PLAN!
That's a greeat site, thanks so much for posting it.
http://www.oextrader.com
Here is a link that you might like as you mentioned earlier that you trade OEX options.
Good Luck Poet! :^)
Good Luck to All! :^)
PLAN the TRADE and TRADE the PLAN!
Thanks Bernard. At least my misery has company.
Hi Poet, the on going trading system on MKTSS was sort of failed on Friday as well LOL, we are on the same boat... ouch!
signed,
Bernard
Hi, Poet. Re: "Okay, so I blew it last week". I've heard it said that misery loves company, but whoever said that is full of hogwash. I dislike being in your company (under these circumstances).
Now, to top it all off, Alan Abelson, in his marvelous column in Barron's, has expressed the opinion that we might go up for a while. I could probably count on the fingers of one hand the times he has ever made a bullish comment ... even a short term one, like this one.
I don't know if you've ever read him, but he is a genuine delight. He can do things with words that will tickle your soul. He has been the main course of my Sunday morning breakfast for many years. About a year or so ago, he quoted John Maynard Keynes on the greatest stock market advice that has ever been formulated:
It seems a friend of Keynes had been watching the market during the depression and decided that what was happening was irrational. He made that observation to Keynes in asking his advice. Keynes' response was (approximately) "Friend, the markets can stay irrational longer than you can stay solvent."
A real hip-slapper, that.
Fred
The NYT on the connection between savings and the economy's eventual recovery:
March 3, 2002
Rising Savings Could Mean a Weaker Recovery
By DANIEL ALTMAN
After a jagged descent lasting two decades, the personal savings rate of Americans may be moving in the other direction. Increased saving will help the economy to grow in the long run, but it could also dampen the recovery this year.
Though Wall Street's big investment banks have not reached consensus, several of them predict a strong increase over the next two years in the share of Americans' disposable income that remains unspent. The change may have already begun: on Friday, the Commerce Department reported that the savings rate for January was 1.8 percent, up from 1 percent in December.
Because spending stayed strong during the mild recession last year, most analysts never expected consumers to offer the economy much of a boost in the recovery. More saving would further weaken the rebound ? after all, the more you save, the less you consume.
"This is going to be an anemic recovery, and the increase in the saving rate is one key element as to why," said Stephen S. Roach, chief economist at Morgan Stanley. The firm expects the savings rate to jump to 2.9 percent by 2003, from 1.6 percent last year.
The rate moved up briefly in the third quarter, to 3.8 percent, as consumers, in part responding to Sept. 11, took precautions for rough times. But in the fourth quarter, the savings rate averaged a measly 0.5 percent, near the norm for the last couple of years. From 1959, when the data were first recorded, through the early 1990's, the monthly savings rate had dipped below 5.5 percent only once ? a blip in April 1987. But the rate has not been above 5.5 percent since 1995.
Economists offer several explanations for the low savings rate in the 1990's, but first among them is the unprecedented bull market. "We had this huge stock market boom that was fueling a massive increase in household wealth," said Frederic S. Mishkin, a business professor at Columbia University. "When you're wealthier, you need to save less."
Even during that boom, Mr. Roach added, many mutual funds popular with individual investors underperformed the overall stock market. "Consumers who have left it up to their mutual fund managers to stash away money for their retirement period will be up for a rude awakening," he said. "When the stock market bubble popped, the only asset left to provide saving to the consumer was the home."
WITH privately held retirement wealth on the decline, the spotlight may shift to public retirement funds. Last month, the Congressional Budget Office projected that the Treasury would dip into the Social Security trust fund's surplus every year through 2009 to close its fiscal gap. If savers start to worry more about Social Security, they will share a motivation with their counterparts in Japan, where savings rates have been high for years.
"The Japanese personal saving rate is high because people are concerned about the inadequacy of government saving," said Fumio Hayashi, an economics professor at Tokyo University. "People save in case the government cannot deliver its promises." The surplus in Japan's social security fund, he explained, was not enough to pay for benefits owed to future retirees. The United States is heading down a similar road.
A surge in saving would offer workers some insurance against a less-than-luxurious retirement, but it would also offer the economy much-needed funds for investment in the long term.
"There's an issue of the long run versus the short run," Professor Mishkin said. "When you're in a recession, what you'd like to have happening is the saving rate still staying low. But from a longer-run perspective, what we'd like to see is saving at a higher level."
Professor Mishkin noted that the low savings rate had not severely curtailed investment ? yet. "We've had to depend on the kindness of foreigners, and that can't go on forever," he said. " One of the things you would like to see is that household savings actually sustain the funds for investment."
Not everyone is expecting an increase in personal savings. "We are impressed with the resilience of the consumer, which has led us to be a little bit more open-minded about exactly how quickly the wealth effect is going to work its way through," said Edward F. McKelvey, a senior economist at Goldman, Sachs, which forecasts a savings rate of 1.4 percent for the next two years.
The strong supply of credit to consumers could continue to make spending more attractive, Mr. McKelvey added. "There have been plenty of ways for consumers to get their hands on money if they've wanted to spend."
Okay, so I blew it last week and got short on Friday morning, even held over the weekend secretly hoping for a minor global debacle. To make matters worse, all my favorite reads on SI and beyond are throwing up their hands and saying it looks like we'll go higher. I'm doing a little wound-licking this weekend. -g
Here's a good article from the respected Gretchen Mortgenson in today's NYT. The message, simply put, is "still beware of analysts":
March 3, 2002
The Happy Talk Is Still Flowing From Wall Street
By GRETCHEN MORGENSON
A claque of Wall Street analysts who were rah-rah for Enron not long ago ventured from New York to Capitol Hill last week to educate the nation's lawmakers about the way they do their jobs. Those investigating the Enron collapse learned that analysts plumbing the financials of companies whose future securities offerings their firms hope to underwrite often do their best work with their eyes closed and their ears plugged.
A thinking person might expect that, under the spotlight, brokerage firm analysts might be a bit more circumspect about making wildly bullish pronouncements about companies that could benefit themselves or their firms. But a thinking person would be wrong. This is Wall Street.
Consider the Feb. 26 writings of Holly Becker, new media/e-commerce analyst at Lehman Brothers (news/quote ), about Alloy Inc., a direct marketer and media company in New York. Ms. Becker initiated coverage of Alloy with a buy rating just over three weeks after Lehman managed an offering of 6.2 million of its shares. She assigned the stock a price target of $26. The stock closed on Friday at $15.94.
Alloy sells mountain bikes and skateboards to boys and apparel and accessories to girls through Web sites and catalogs. It also publishes AlloyGirl magazine and Strength magazine, aimed at teenage boys. Its shares are down 26 percent this year, but Alloy is still hot. The company's $620 million market value is more than 3.5 times its sales last year.
Alloy has yet to turn a profit, but a reader of Ms. Becker's report might not realize this. Here is one of the reasons she gives to buy the shares: "Alloy's proven profitable business model and high-growth potential should bring further upside to the shares."
But according to the offering statement filed with the Securities and Exchange Commission last month, Alloy has incurred nothing but losses since its inception six years ago ? $76.7 million, to be exact. The company did generate earnings before interest, taxes, depreciation and amortization, or Ebitda, in the most recent quarter, but that measure is not what most investors consider a "profitable business model."
Another reason to buy the stock, Ms. Becker said, is its impressive performance since it went public in June 1999 ? up 15 percent, versus a decline of 17 percent in the overall market. Oddly, Ms. Becker argued that the performance "illustrates Alloy's ability to weather the poor economic environment." Enron had a top-performing stock. Did that illustrate its ability to weather storms?
Alloy's valuation is attractive, Ms. Becker opined, because the shares are trading at just over two times her estimated revenue for the company. The price target of $26 is a result of her estimated cash flows at the company over the next five years.
Ms. Becker did not return a phone call to discuss her Alloy report, which contains several interesting disclosures. In addition to underwriting the recent offering, Lehman makes a market in Alloy's securities, and an analyst who contributed to the report (or a member of his or her household) owns shares in it.
While Ms. Becker prattles, Jonathan H. Cohen, portfolio manager at JHC Capital in Greenwich, Conn., and former chief of software and Internet research at Merrill Lynch (news/quote ), provided some analysis. "Alloy has grown largely through acquisitions," he said. "Its stated strategy is to pay 11 or 12 times trailing Ebitda for the companies it buys. Yet Alloy's shares trade at 134 times Lehman's Ebitda estimate for the year ending January 2002. I have a hard time coming to terms with that discrepancy."
Jubak's Journal
Let's hope Global Crossing dies quietly
If the telecom emerges from bankruptcy intact, it could drag the entire sector into a death spiral. With its debt pared down, it could slash prices, hobbling competitors already struggling in a market with too much capacity.
Will Global Crossing be liquidated or is a bankruptcy reorganization in the company's future? This battle royal is clearly headed for the courts. What's the difference and why should you care? The outcome will tell investors a lot about how long the current recession will last.
Creditors who lent Global Crossing $14 billion are desperately trying to find an alternative to the deal currently before a bankruptcy court. The offer by two Asian telecommunications companies would pay them about four cents on every dollar they invested. One possibility: instead of selling the company intact, liquidate it by auctioning off each piece to the highest bidder.
Neither plan will do a thing for current equity investors -- they're likely to be wiped out completely.
So why is it important which side wins? Well, the result is critical if the telecommunications sector is to escape what is very dramatically called a death spiral. And the decision will help determine exactly how long the current recession will keep its grip on the business side of the economy.
Bankruptcy's failure
OK, so why could a bankruptcy reorganization that left Global Crossing pretty much intact produce a death spiral?
Think about this -- the company that came out of bankruptcy court would have all the assets, all the fiber networks and undersea cables of Global Crossing, but none of the debt. In the September 2001 quarter, Global Crossing would have saved $130 million in interest and another $60 million in dividends on its preferred stock.
That's almost $200 million, certainly not peanuts when the company's total revenue for the quarter was $800 million. Global Crossing could cut its prices by $200 million and be dead even with where it was before the bankruptcy.
Of course competitors like Level 3 (LVLT, news, msgs), Qwest (Q, news, msgs) and Williams Communications (WCG, news, msgs) still have to make their interest payments. For Williams in that same quarter, accrued interest came to $140 million on $300 million in revenue.
Keeping up with the Global Crossings
To keep up with Global Crossing's ability to reduce prices a competitor like Williams has two choices -- cut $140 million in costs or go bankrupt itself. No wonder that this week Williams announced that it was studying the bankruptcy option.
A Global Crossing that emerged from bankruptcy intact and debt-free would force so-far solvent competitors to cut costs or dump debt through bankruptcy. And each new bankruptcy would lower the prices that any company can charge in this market, pushing other companies to the wall.
Qwest wouldn't be safe, nor would WorldCom (WCOM, news, msgs), Sprint (FON, news, msgs) or AT&T (T, news, msgs). Remember that Enron shows no company is too big to fail.
Strictly speaking, this death spiral only directly affects the telecommunications service companies that compete with Global Crossing and the companies that sell equipment into the sector.
The bigger problem
But more broadly it points out a problem across the entire economy: despite the recent recession it has proven to be really hard to get rid of excess supply.
Look at the market for computer memory chips. Even though prices collapsed in 2001 to $1 per 128 megabit chip from $18, nobody wanted to be the first to call it quits. South Korea's Hynix is still hanging in despite an offer from Micron Technology (MU, news, msgs).
Most recessions are led by a collapse in consumer demand. But this recession has been led by a collapse in business spending produced by too much investment in the supply of memory chips, telecommunications equipment and fiber optic networks, to name just a few.
Consumer demand has held up pretty well in the period, which means the economy can't depend on a surge in new consumer spending to get the recovery revved up. That will depend on reducing supply. And all the evidence argues that while the economy is looking up, we've still got a long way to go before supply and demand are back in sync.
I look at the $COMPX chart on StockCharts:
http://stockcharts.com/def/servlet/SC.web?c=%24COMPX
for intraday I rely on those with fancy realtime feeds, which I've tried and didn't like, and watch the market closely.
I can't believe I'm up now. Better get back to bed. See you in a few hours.
Your up early this morning.Could I ask what do you use to chart the nasdaq along with time frame?
Here is some of the text of Alan Greenspan's testimony today. IMO, not terribly encouraging:
?For the period just ahead, the central tendency of the forecasts of the members of the Federal Open Market Committee is for real GDP to rise 2-1/2 to 3 percent during 2002. Such a pace for the growth of real output is somewhat below the rates of growth typically seen early in previous expansions. Certain factors, such as the lack of pent-up demand in the consumer sector, significant levels of excess capacity in a number of industries, weakness and financial fragility in some key international trading partners, and persistent caution in financial markets at home, seem likely to restrain the near-term performance of the economy.?
I tend to agree with you, alexed. I'm not too into long term holds (other than in IRA's) either in this market.
NDX options are the crack cocaine of index options. like trading with fire. I think the Q's are safer.
It looks like the COMPX is headed back down in the short term, BTW. The 50 day MA and 200 day MA crossed over to the sownside today.
I never got a chance to replie to your question.No I have not written coverd calls at this time.Been tempted,but I just can't get in that mind set of holding on to stocks long term.10K of QCOM,now thats scary to me.Long term= more then a day,even if I am wrong.
Been learning the DOW with Bernard Ng and bbgold.NDX,hmmmmmmm I'll have to look at it.
More on the fallout from the Enron scandal: changes in accounting practices and what it means to companies. From Bloomberg:
02/27 12:42
FASB Change May Add $100 Billion Debt to Books (Update2)
By Rob Urban
Norwalk, Connecticut, Feb. 27 (Bloomberg) -- U.S. companies may have to add more than $100 billion in debts to their books after accounting rule makers pass new regulations on the use of so- called synthetic leases used to hide real estate loans.
The Financial Accounting Standards Board members today agreed on most new rules for the type of financing vehicles that contributed to Enron Corp.'s collapse. Those rules will force ``the large majority of all synthetic lease'' arrangements to be reflected on corporate balance sheets, said FASB Chairman Edmund Jenkins.
Investors say the leases, which provide the tax benefits of real estate ownership while keeping the debt off the company's books, obscure the extent of a company's liabilities, and expose it to interest-rate risks. They're used by more than 2,000 companies in the U.S., including AOL Time Warner Inc., Microsoft Corp., Cisco Systems Inc. and Symantec Corp. to finance everything from headquarters buildings to retail stores.
``If the company could eventually be on the hook, then the liability should be fully disclosed on the balance sheet,'' said Victor Cunningham, director of research for the $1 billion Olstein Financial Alert Fund. ``Synthetic leases are short-term agreements and if we learn anything from Enron, it should be that this is not the kind of surprise that investors should have.''
AOL
In a synthetic lease arrangement, a financial institution sets up a special-purpose entity that borrows money to finance a new construction or to purchase an existing building for a company. AOL, for example, plans to finance construction of its new Manhattan headquarters through a synthetic lease arrangement set up by Bank of America Corp.
The entity holds the title and leases it to the company for the term of the lease, typically three to seven years, with the possibility for renewal. The leases also can be used for equipment purchases. During the lease's term, the company is allowed to deduct interest payments and depreciation of the property's value on its taxes. For accounting purposes, however, it treats the arrangement as a standard operating lease and keeps the property and the debt off its balance sheet.
The use of synthetic leases to finance real estate and equipment purchases has exploded over the past five years or so, said Richard Ader, chairman of U.S. Realty Advisors, a New York company that arranges traditional real estate leases.
Special-purpose entities, the off-balance sheet entities used in synthetic lease arrangements, hold more than $100 billion in corporate debt, Ader estimated.
`Just a Footnote'
``The banks structured these transactions and they used to run around with the accountants selling them,'' Ader said. ``You had the benefits of the tax deductions and yet for reporting purposes you treat it as a lease so the rent is just a footnote.''
Adding billions of dollars in debts to corporate America's books shouldn't adversely affect the companies' ability to borrow, said John Malysa, a senior director at Fitch Inc. That's because credit rating companies like Fitch, Standard & Poor's Corp. and Moody's Investors Service already take the leases into account in assessing a company's creditworthiness.
Most companies also describe the arrangements, in varying amounts of detail, in footnotes to their financial statements.
The effect of the proposed change will depend on the value of the real estate involved. If it's lost value since it was purchased, the company would have to book the property at its current market value, while its liability would include the entire remaining debt.
FASB, a private group that sets the ``generally accepted accounting principles'' used by U.S. corporations, plans to propose new guidelines on special-purpose entities, the off- balance-sheet vehicles used in synthetic lease arrangements, by next month. After a public comment period, new rules could be in place by June.
Who's In Control
The focus of the accounting standards board's effort will be to determine who controls the entity and who gets the benefit from it. The board's effort accelerated after the collapse of Enron, which used more than 3,000 off-balance sheet partnerships to hide billions of dollars in debt and inflate earnings.
``There's a sense of urgency now,'' said Ray Simpson, FASB's project manager for rule changes on consolidation.
If a sponsoring company controls the entity, and has the benefit of using the property, then it must be included in the company's consolidated financial statements, said Simpson.
``The lessee receives the primary benefits and by virtue of guarantees has the risks as well, so it would have to be consolidated on the balance sheet'' under proposed rule changes, said Simpson.
By April
The board expects to finish new rules, termed an interpretation of existing guidelines by the end of April. After a public comment period, they should be implemented by August said Jenkins. They'll apply immediately to new special purpose entities. Existing entities will have to meet the new rules by the beginning of a company's next fiscal year after Dec. 15.
Already, many companies are shying away from synthetic leases, said Thomas Elmer, a principal in Deloitte & Touche's real estate consulting business.
``We have had clients that were considering synthetics and decided on a different route; we've had other clients who have them and are now talking about unwinding them,'' said Elmer.
Krispy Kreme Doughnuts Inc. this month said it would eschew a planned $35 million synthetic lease for a new factory and put the financing cost on its books. A subsidiary of Wachovia Bank agreed to acquire the property and lease it to Krispy Kreme.
New Headquarters
AOL Time Warner plans to use a synthetic lease for a planned complex that will house its new headquarters, as well as a hotel, condominiums, a theater and retail space, said spokeswoman Tricia Primrose. If the rules are changed, AOL will use another financing method, she said.
Symantec, which makes computer-security products including Norton antivirus software, will continue using synthetic leases, Chief Executive John Thompson said. Symantec has $116.2 million in debt related to synthetic leases that doesn't appear on its balance sheet, according to a regulatory filing.
``I am not going to run away from a legal and useful financial instrument because of Enronitis,'' Thompson said.
Hi Alexed,
I was looking at a book from the 30s that showed how to base the direction of the economy by the production and order size of domestic pig iron. I would definitely say that Steel, Copper and Aluminum production would still be a leading indicator as to the base economy. These metals are still the core of most businesses IMHO. With all of the head fakes in the other markets I would not be surprised to see one with Metals also. Take Care Alexed! :^)
Good Luck to All! :^)
PLAN the TRADE and TRADE the PLAN!
Yes it might have,but I have noticed the markets revert to a lot of other old histories.Like profits.Remember when the .com's thought they did not need to make a profit?Thats only one example.Normally manufacturers start to get in orders and thus buy copper.Copper has risen only a small amount so I don't know if its a head fake?Or does this ancient indicator still have value with all the new technology.I would bet it does,tech does not seem to affect some things.JMHO.
Hi alexed, is there any reason behind that copper a leading indicator? copper's demand situation might have changed a lot due to the technologies improvement...
signed,
Bernard
Here's a very good general market synopsis from Option Investor:
The markets rallied unexpectedly Friday in the face of more
probes, accounting concerns, warnings and possibly weakening
PC demand. Does this seem strange to anyone else? I mentioned
above that INTC was "richly valued" according to Dan Niles at
a PE over 30 with demand slowing not rising. The Nasdaq's fourth
weekly loss in a row is due to the same problems. With the
Nasdaq trading at 88 times 2003 earnings it is suffering from
PE compression on a grand scale. It is not just the sky high
flyers with triple digit PEs like EBAY, PNRA, NVDA and GNSS.
It is every tech stock as the market as a whole continues to
correct for three years worth of excesses. Every time a high
profile CEO/company makes a "no recovery in sight" speech like
the new IBM CEO did this week, those recovering PE ratios take
another hit.
The Nasdaq is now down -18% from the January high of 2098 and
is on the verge of breaking down even further. Some analysts
feel that only a successful retest of the September lows will
pave the way for future gains. They point to the fact that the
Nasdaq was already in a nose dive when 9/11 occurred and they
feel the tech bounce was artificial given the lack of an economic
recovery.
Next week there is a minefield of economic reports that could
fan the recovery flames or smother them depending on the results.
Batting cleanup for the economic week is Greenspan who will
give testimony again on Thursday on the state of the economy.
Is it a V bottom, a U or a W? Greenspan will try and tell us
it is could be all three and none are really bad as long as
we come out with an eventual recovery. Also on Thursday is the
Q4 GDP, which is expected to show that the recession is history
and on Friday we get the Consumer Sentiment numbers again. Do
you think Greenspan gets those in advance so he knows how to
slant his speech?
The bottom line for Friday was "short covering again." Actually
several traders said there was a buy program when the S&P bounced
above support at 1080 at 2:PM and that buy program scared shorts
from Thursday's plunge to cover rather than risk a Monday surprise.
Whether this was the case or not the facts remain. The Nasdaq is
struggling and may continue to be the anchor dragging us down.
The S&P may have bounced off 1080 yet again but it clearly has
a down trend of lower highs and 1080 is likely to remain under
pressure next week. The Dow on the other hand is behaving well.
It has a clear pattern of higher lows since Jan-30th and while
the top remains slightly over 10,000 the trading range continues
to narrow.
With the common indexes conflicting we need to look at a broader
indicator. The Dow is 30 stocks, Nasdaq 100, S&P 500. Of these
only the Dow is showing any strength. Using the Wilshire-5000 as
our tiebreaker, the broadest index of them all is showing the same
down trend as the S&P and Nasdaq. The index of 5000 stocks closed
Friday at 10179, only +100 points above critical support at 10080.
The Russell-2000 is also showing the same downtrend pattern and
closed only +5 points above support at 458. These broadest of all
indexes confirm the Nasdaq and S&P moves. The Dow, while being the
most reported measure of the market is not really since it only
consists of 30 stocks. Still it is the Dow that is keeping us
from falling into oblivion. Without the strength shown by this
figurehead a retest of the September lows would already be in
progress. The question here is "how long can the Dow continue
to carry the flag?" IBM is already under pressure along with
INTC, MSFT and the financials. None of that is likely to change
and how many +3.00 days can we expect MMM to provide?
Hi alexed,
Back when I was holding stock (I had ten thousand shares of QCOM at one point), I traded covered calls a great deal. I think they're a wonderful source of income or a means to reduce the cost basis on a long term hold.
Since mid 2000, though, I've sold almost everything, as I believed (correctly) that the tech bubble would deflate. I still have SEBL and QCOM in my childrens' trust (it's a small trust) and sell cc's on them.
I also like calendar spreads: buying a LEAP call and writing monthly cc's on it to reduce the cost basis. If we EVER bottom <G> I'll look to be doing that on a few stocks.
Right now, I'm daytrading and position trading index options, mostly OEX calls and puts, but think we're close to a ST bottom on the Naz and will probably go for the crack cocaine of index options: NDX calls. They're like the QQQ on speed, but can make you a fortune if you trade them right. I had a nice trade on just two NDX calls on Friday afternoon, caught the short squeeze.
How about you? Do you write covered calls?
Do you use covered calls?Or do you just use calls,puts?
Wow, now that's an interesting article. I was very lucky to be a QCOM options holder during its meteoric rise in 1999 and early 2000. I've still got a few shares and was thinking of adding here. That article may have saved me some money.
Thanks so much for posting it.
Alex, I know nothing about commodities, so I'm not offering this comment with any claim to expertise, however ...
The "Commodities Corner" by John Gross in this weekend's Barron's talks about copper. The head and subhead are:
TAKE THAT, COPPER
Fundamentals don't support the metal's rally.
I repeat, I have no sense of whether the bullish or bearish stance is more valid. It's just that it seemed like a good idea to mention the item.
Fred
For those of you who don't know this?The price of copper rose a nickel two weeks ago.Copper is a leading indicator of the economic turn around.Its an advance indicator though.
A very bearish article,looks like the bulls are tucking their tail in and hiding.
QCOM IS THE NEXT TO FALL
========================
by Stephen Hu
After many years in stock market, I believe diligent analysis and
fewer transactions will help the overall performance. Day trading is
almost a sure way to lose money because the transaction fees and
bid/ask spread will add up to a significant amount to trader's
disadvantage. The strong convictions only come very few times a year,
and that's the time to execute. This time I think Qualcomm (QCOM) is
going down and recommend a sell.
Warren Buffet once said that when the shoeshine guys were talking
about buying stocks, that's the time he would sell. While, I saw a
shoeshine guy used a cell phone two months ago. That made me to do
some homework on wireless industry. I found some alarming data and
come to a conclusion: Wireless industry is grossly overcapacity and
in serious trouble.
Nextel has $15.6 billion in long-term debt and pay more than $1
billion a year in interest payments. Sprint PCS faces a monstrous
$15.4 billion in long-term debt, $4.5 billion in short-term debt and
$5.2 billion other liabilities, according to Securities and Exchange
Commission filings. To make things worse, wireless subscriber growth
is slowing down dramatically according to industry data, as evidenced
by that shoeshine guy already has a cell phone.
If the dot com bubble was bad, the telecom bubble is even worse. Why?
The dot com stock price goes up and down on paper, market cap come
from nowhere (maybe the hype?) and evaporate. But their debt size is
relatively small. Amazon has about $2 billion; Yahoo does not have
debt at all. So there is not much suffering to the creditors. Telecom
is a huge established industry and was able to borrow huge money when
the expectation was unrealistically high. They have been operating on
continuous borrowing to meet the cash flow requirements. Some
estimate that the total debt is over $100 billion. With 5-6 national
providers competing fiercely over market share by lowering prices,
nobody is making money. In fact most are losing big money on wireless
business quarter after quarter. Just think about over $100B was
invested in this money losing business with no profit in sight; the
chain effect could be devastating. Qwest was forced to fully tap a $4
billion backup credit line after it failed to find buyers for new
short-term debt. Sprint said today that it has no plans to draw on
bank credit, but I doubt they will have other choices. Most lenders
are concerned with the problems wireless providers are facing. With
lawsuits filed against major financial firms lending money to Enron,
everyone is on high alert. That's why Sprint PCS dropped to $8.75
today from around $24 in early January; Nextel dropped to $3.55 from
$11.67 with pretty much no bounce.
You may say the damage is already done and why am I saying this here?
While, I don't think it is over. If you were one of our clients who
followed our advice, as I did in my model portfolio shorted PCS at
15, I am still holding the PCS short and recommend clients to do the
same. I will give out the recommendation when I plan to cover it. I
expect more bad news coming about the debt issue. PCS will likely to
go much lower until someone like to pick it up. But who would like to
carry that debt load? Plus newer equipment to build networks is
cheaper and more efficient. I do see bankruptcy reorganization is a
serious possibility. One thing worth noting is PCS has over 150
millions shares sold short, which makes shorting it risky.
So what's the new idea? I am recommending sell QCOM. I put my money
where my mouth is, shorting QCOM in my model account. The bounce
backs will provide good entry points, preferably near $40. There are
23 brokerage firms covering QCOM at CBSMarketWatch.com: 10 strong
buys, 11 buys and 2 holds. I am betting they are wrong. You heard it
here on 2/19/2002.
The economy is a complicated ecosystem and all companies are living
in the food chain (supply chain). Qualcomm makes money when wireless
providers sell cell phone sets, or add/upgrade network equipment.
When the cell phone subscriber growth slowdown, vendors will cut back
on spending dramatically, they will feel the pain 1-2 quarters before
their suppliers. Same thing happened in the dot com age, the dot com
companies feel the pain first, and their suppliers like FFIV feel the
pain later. FFIV made real earnings about $1.3/share while it was
trading in mid 30s in late 2000. Many argued the business was solid
thus no worry. While, FFIV traded under $4 couple months later. I
think the same thing will happen to QCOM. With 70% drop of NXTL and
64% drop of PCS in 6 weeks, it is a little late to start short
position, but QCOM did not drop that much yet, which provides
opportunity to initiate a short position. Many people have high hope
on 3G data networks. I think the ramp up will take much longer than
most people anticipated. How many people would use a cell phone
device to surf Internet while on train or driving?
Technical indicators also showed QCOM is trending lower. The Center
for Financial Research and Analysis Inc. announced on Feb. 8 that
they found accounting issues in QCOM's report. The stock broke the
yearly low of $38.30 on that day. But it was later realized that the
issues were fairly small, and many brokerage firms recommended a buy.
The rally was short-lived and today it closed at $37.40. It is now
safe to say QCOM truly broke the yearly low, which is a very negative
sign.
The overall market, especially the large caps represented by DJIA and
S&P500 index are coming into a very dangerous zone. If you look at
the charts, you will find they bounced back after 9/11 technical
bottom, but just couldn't break the pre-attack downtrend line. The
indices formed a very smooth round peak and now trending lower. If
there is no significant good news, which I don't expect, the market
is poised to have an accelerated drop within the next couple weeks.
If there is any catastrophic event, this could be the crash my model
has been waiting for a long time. If it happens, this will be the
buying opportunity once in 5-10 years. I recommend reducing long
positions significantly, possibly selling all stocks to wait for the
buying opportunity, or have 20-30% long and 30-50% short. Simply put,
the risk is too high and the possible reward is too low for a heavily
long portfolio at today's market. I usually don't sell short except
when I feel the market will very likely to go down.
I am feeling much better than 2-3 years ago because the market is
very rational now. When we were on top of the big bubble all the
serious analysis simply didn't work. I am happy to see my model
portfolio (a real brokerage account) went from $68K in last July to
$145K as today's close. I am currently holding short positions on
PCS, QCOM, EMLX, VRTS and small long position on EONC.
DISCLAIMER: RECOMMENDATIONS AND ADVICE GIVEN HEREIN ARE MADE WITH THE
EXPRESS UNDERSTANDING THAT READER ASSUMES ALL RISK OF LOSS. I GIVE NO
GUARANTEE, EXPRESS OR IMPLIED. PAST PERFORMANCE DOES NOT GUARANTEE
FUTURE RESULTS. ALL INVESTMENTS CARRY RISK.
Rant or not, I can't think of anyone who'd disagree with you.
Now if I don't get back into the kitchen this minute, I'll be in trouble.
You may be slow ... but you're ahead of me!!!
It is very complex, Poet, and when you add fraud and deceit to the mix (I'm referring to the engineered solutions of the S&L debacle and the LTCM disaster), it becomes incomprehensible. As far as I can see, we don't have a clue to what reality is, as far as the world of finance is concerned.
Do you remember the Lockheed bailout, and the Chrysler bailout? Do you recall the "They're too big to fail" philosophy? When we stood by and watched our government rescue arrogant idiots because their failure would "put too many people out of work" we sowed the seeds of the nonsense we endure today. I wish I had the wit to change it.
I'm sure readers will consider this a rant. That's a shame. None of these things are secrets, nor are their results unclear.
Fred
Hi Fred,
You and I are definitely on the same page wrt Argentina and the very likely possibility that some of our biggest commercial lenders are in dangerously deep. I'm not terribly knowledgeable about such things either, but it strikes me that the increasing relianceglobalization of each country's economic balance puts all countries (particularly ours, which seems to have a hand in every pot) in a precarious position when one falters.
I've been posting these articles in an attempt to educate myself ('cause I'd better have read them carefully if I'm going to post them!) and it's good to know that some others are reading them too.
Please continue commenting. I've got a lot to learn.
The Argentine problem shows no signs of going away. I'm not very sophisticated about these things, but I wonder if the combination of Argentina and Enron isn't tugging at the corners of a house of cards. The reports I've read of JPM (JPMorgan Chase) derivative exposure borders on frightening. Things are ugly now, and I'm worried they might get a lot worse. The main thing that gives me hope is that the Fed is likely to engineer another LTCM (Long-Term Capital Management) resolution. That will push the problem a little further into the future, but won't the piper have to be paid one of these days?
Fred
A clear overview of Argentina's debt crisis and the mess it's in with the IMF:
February 23, 2002
In Argentina, I.M.F. Impasse Heightens Fear on Economy
By LARRY ROHTER
BUENOS AIRES, Feb. 22 ? Though Argentina and the International Monetary Fund are once again discussing new loans to help ease the country's economic crisis, a fundamental obstacle has emerged. The Argentine government says it cannot carry out the economic changes that the fund and other creditors are demanding unless it receives fresh money from abroad first, but foreign lenders say they cannot advance the country any new money until after it has shown some results.
"We need to break the circle," Economy Minister Jorge Remes Lenicov said last week before heading off to Washington to talk with I.M.F. officials. But neither side is willing to blink first. So the economy here, battered by a 50 percent devaluation of the peso, a freeze on bank deposits and a partial default on $141 billion in public debt, remains in a state of suspended animation.
Argentina argues that it has already taken a pair of steps that ought to be enough to win a resumption of credit, default or no default. The peso has been cut loose from a decade-long peg at one to the United States dollar and allowed to float ? it traded for about 49 cents today ? and President Eduardo Duhalde has submitted a budget for 2002 that sharply limits government spending.
But analysts say there is less to either measure than meets the eye. The budget is based on assumptions about tax revenue and growth, exchange rates and inflation that are considered unrealistic. And with so little cash in circulation because of the 11-week-old freeze on bank deposits, the government has found it easy to manipulate currency trading.
Argentina has not said much of anything about how it intends to solve a long list of other problems. These include recapitalizing a banking system that has absorbed billions of dollars in losses, amending a new bankruptcy law seen as discriminating against foreign companies, reducing the size of the state bureaucracy and curbing runaway spending by the provinces.
"It still seems that some things are in a fairly preliminary stage of discussion," said Joyce Chang, head of emerging-markets research at J. P. Morgan Securities. "They made some progress in Washington, outlining common objectives, but the fund still wants to see more of a strategy from Argentina, and Argentina still needs to do more."
The muted reaction of creditors has disappointed Argentine officials, who have repeatedly assured an anxious and angry citizenry that aid will soon be on the way. Before leaving for Washington, Mr. Remes told reporters here that he was disappointed that Argentina had not received "more resounding" support and praise for its initiatives.
"I think the Argentines felt there was nothing more they could do, and that the I.M.F. would recognize that," said Christian Stracke, a Latin America analyst at Commerzbank in New York. "They don't seem to recognize that the I.M.F. has been so seriously burned by Argentina in the past that it is determined to hold Argentina to a higher standard."
The fund cut off assistance to Argentina on Dec. 5. The government then in power fell two weeks later and failed to deliver on promises to cut spending sharply. Though Horst Köhler, the managing director of the fund, described the discussions last week as "very positive and cordial," other officials of the fund and officials of the United States government say that Argentina must still come up with a "sustainable plan" to reform the economy.
Speaking to the United States Chamber of Commerce in Washington on Thursday, Treasury Secretary Paul H. O'Neill said he saw Argentina's problems as largely self-inflicted, born of borrowing too freely to finance consumption rather than investment. Though there have been steps in the right direction in recent weeks, he said, more must be done before new loans are warranted.
Argentine officials have said that they will need as much as $23 billion to get the economy moving again, and they clearly expect that the bulk of it will come from the fund. But a spokesman for the fund, Thomas Dawson, said that "it is certainly premature to be talking about numbers" and that "there are no packages on the table."
Since Mr. Remes's return, the government has gone back to the drawing board to tinker with its economic plan. But President Duhalde has stepped up a diplomatic campaign that seems intended to force the fund to relent on conditions for a new loan.
Argentine officials said they were heartened by the visit late last week of the German chancellor, Gerhard Schröder; they said he agreed to plead their case with Mr. Köhler, a fellow German. Mr. Schröder was said to favor a "step by step" plan that would give the Duhalde government some of the needed money early on but dole out the rest in stages based on Argentina's performance.
Argentina's neighbors have been especially outspoken. At a meeting here on Monday, the six countries of Mercosur, the South American common market, issued a joint statement that called on lending institutions to "understand Argentina's complex situation" and to agree to aid the country while it pursues "internal policies that will permit economic growth" rather than more austerity, as the fund is demanding.
"There is a better way to help Argentina," the president of Brazil, Fernando Henrique Cardoso, said at a news conference that was also attended by Mr. Duhalde and the presidents of Bolivia, Chile, Paraguay and Uruguay. "We don't believe that it is fair to ask Argentina to get things accomplished first and then to get the aid."
This week's COT numbers just out:
COT Commercials Position for 19-Feb-02
Contract Net Pos Change In This Report
ND+NQ -1,397 +707 less short
SP+ES -67,250 -7,217 shorter
This means that commercial traders added more shorts on the SPX and OEX, have lightened up their shorts on the Nasdaq. The market generally trades in the direction of the commercials. FWIW.
February 22, 2002
End of Recession Is Seen, but Strength of Recovery Is Unclear
By RICHARD W. STEVENSON
WASHINGTON, Feb. 21 ? Economists and government officials said today that the recession had almost certainly come to an end but that it remained unclear how strong and sustained the recovery would be.
White House officials said the economy was growing at a modest but accelerating rate and again credited the tax cut President Bush signed into law last year for minimizing the depth and duration of the downturn.
But administration officials reiterated their call for an immediate package of new and accelerated tax cuts, saying the economy still faced problems, including economic weakness abroad, weak corporate profits and the possibility of a recovery, similar to the one after the last recession, in 1990-91, in which the unemployment rate remained high for months or years.
"We've seen jobless recoveries before," said Commerce Secretary Donald L. Evans. "We saw one in the early 90's, as a matter of fact. So that's why the president and the administration continue to be very focused on the importance of a stimulus package."
Their comments suggested that the administration was trying to walk a line between optimism about the economy and continuing to sell a tax-cutting agenda that it had linked to fighting the recession.
The package of tax cuts and other measures has been stalled in Congress for months, and administration officials made no new proposals today to break the partisan deadlock.
But they signaled that they remained solidly behind the efforts of Republicans in the House to keep the package alive in the face of opposition from the Democratic-led Senate.
They also expressed support for the decision by the House Republican leadership to continue to hold up what has been a routine action by government during a recession ? extending unemployment benefits beyond the 26-week limit imposed by most states ? until Democrats agreed to at least some of the tax cuts backed by the White House.
Asked whether the tax cuts and extension of unemployment insurance should be linked in a legislative package, Mr. Bush's chief economic adviser, Lawrence B. Lindsey, told reporters, "The two should be, yes."
Democrats said unemployment benefits were expiring for 11,000 people each day, and the administration and Republicans on Capitol Hill were holding them hostage to their push for tax cuts. With Republicans having blocked a compromise plan offered by Senator Tom Daschle, Democrat of South Dakota, the majority leader, Democrats said the onus was on Mr. Bush and his party to resolve the standoff.
The latest tussle over economic policy occurred as statistics provided more evidence that the economy was on the upswing.
The government reported today that the trade deficit in December fell unexpectedly to $25.3 billion from $28.5 billion a month earlier, a development that economists said meant the economy probably grew at a 1 percent annual rate in the fourth quarter rather than at the initial estimate of 0.2 percent.
A growth rate of 1 percent in the fourth quarter would be near-certain evidence that the recession was over and that it was short and shallow. The recession began last March, and now appears to have encompassed only one full quarter of negative growth ? last summer, when the economy contracted at a 1.3 percent annual rate.
The recession "probably is over," said William Dudley, chief economist at the investment firm Goldman Sachs (news/quote). "We're in recovery," Mr. Dudley said, "but we haven't seen all the data yet to confirm that."
The quasi-official arbiter of business cycles, the National Bureau of Economic Research, a private academic group, has not made a judgment about whether the recession has ended. Although recessions are popularly defined as two quarters or more of negative growth, the group uses a more flexible definition that tries to pinpoint peaks and troughs in economic activity.
Many economists say there is little doubt that the recession is either over or in its last stages, a view the administration endorsed today.
R. Glenn Hubbard, chairman of the White House's Council of Economic Advisers, said that private- sector forecasts of a 1.5 percent annual growth rate in the first quarter were reasonable and that the latest job-loss statistics were "consistent with recovery being under way."
Mr. Lindsey said the expansion "is here now, and the first quarter is likely to be a fairly good one as these things go." Mr. Evans said there were "lots of signs" that the economy was "beginning to begin its recovery."
But, speaking at a news conference arranged by the American Enterprise Institute, a conservative research organization, Mr. Evans, Mr. Lindsey and Mr. Hubbard cautioned that a smooth and robust recovery could not be taken for granted.
Mr. Evans said, "The business leaders that I talk to ? small, medium and large ? are still saying that they don't feel the strength of the recovery yet."
Mr. Hubbard said "there are important downside risks remaining" that justified the administration's continued support for an economic recovery package.
The package passed by the House would accelerate some of the individual income tax rate cuts in last year's tax bill, provide tax incentives to businesses to invest in new equipment and reduce the corporate alternative minimum tax. It would also provide a one-time payment of up to $300 per person to many low-income workers and extend unemployment benefits by 13 weeks.
Administration officials said the package was particularly needed to help ensure a rebound in capital spending by businesses.
Unlike most recessions, which are characterized as much by downturns in consumer spending as in business activity, this one was marked by relative strength in consumer spending. But capital spending by companies on equipment like computers, software and telecommunications technology plummeted.
As the recovery unfolds, the economy is not likely to get much of a lift from the consumer because consumer spending never weakened much, economists said. So the big question is how strongly capital spending will bounce back.
A survey released by the National Association of Manufacturers found that 45 percent of its members expected to increase their capital spending in the first half of this year by as much as 5 percent, while 38 percent said they anticipated a continued decline in capital spending.
The outlook for unemployment ? and therefore for the political implications of the economy ? remains muddled. The unemployment rate has historically continued to rise for some months after a recession; after the last recession ended in March 1991, unemployment drifted up for 15 months, to 7.8 percent from 6.8 percent, hurting the re-election prospects in 1992 of President Bush's father. The rate is now 5.6 percent.
Some economists said the rate was likely to hit 6.5 percent before falling. Others said it would not rise much more. "Labor market data is sending a clear message: the unemployment rate is likely to peak at 6 percent or less," said a report today from L. Douglas Lee of Economics from Washington, a consulting firm.
LOL!
Very funny. You're making me think, though.....
Can it be possible?
the Powers that be may actually look into and possible alter both the way Wall Street interacts with companies and how International Figure Skating is judged?
8>)
The Bird of Prey
The connection between Enron and Wall St. is about to be studied by Congress. Bolds mine:
February 19, 2002
Congress to Investigate Wall St.'s Ties With Enron
By LESLIE WAYNE
Now that Congressional investigators have looked at the role of accountants and insiders in the Enron (news/quote ) debacle, they are widening their investigation and focusing on Wall Street and the role it played in the company's rise and collapse.
Democratic Senate leaders have put Wall Street's relationship with Enron and potential financial conflicts of interest at the top of a broad Enron-related legislative agenda that was announced last week. Meanwhile, the House committee leading the Enron investigation is gathering documents and preparing to summon Wall Street executives.
These Congressional inquiries, still in their early stages, will examine the way Wall Street firms structured and sold Enron's limited partnerships. They also will look into the reasons Wall Street firms were issuing recommendations to buy Enron stock while they had detailed information about Enron's poor financial condition.
"We're trying to understand whether Wall Street firms had a vested interest to pump up Enron stock," said Senator Byron L. Dorgan, a North Dakota Democrat and chairman of the Senate Commerce subcommittee investigating Enron. "Even as Enron was collapsing, analysts were pushing a strong buy. Did investment banks have an interest in trying to keep the stock from falling too far and was there an attempt to deceive investors?"
No date has been set for committee hearings, nor have individual firms or executives been named. But already, some members of Congress have said they would like to examine arrangements involving Merrill Lynch , which underwrote and invested in some of Enron's off-the-books partnerships; Citigroup , which structured some of the deals to remove poorly performing assets from Enron's balance sheet; and Alliance Capital, which aggressively bought Enron shares for public pension funds as the stock tumbled in value.
"You can expect to see some Wall Street investment bankers and stock analysts coming before our committee soon," said Representative Diana L. DeGette, a Colorado Democrat and member of the main House subcommittee investigating Enron. "The whole Enron situation is ripe with conflicts of interest and Wall Street is no exception. We want to explore how much those conflicts lead to the huge overvaluation in Enron stock."
Among the questions to be explored is whether Wall Street firms urged investors to buy Enron shares in order to protect their relationships with Enron. Others will ask why some investment banks had an accurate picture of Enron's poor financial health but did not share it with their own customers.
Still others will look at whether Enron pressured Wall Street firms to push Enron shares into clients' portfolios or to put money into Enron partnerships. In addition, lawmakers will raise the question of whether Wall Street helped facilitate Enron's deceptive financial practices.
"We cannot say that we have evidence of wrongdoing," said Representative James C. Greenwood, a Pennsylvania Republican and chairman of the House Energy and Commerce subcommittee leading the Enron investigation, "but we certainly have concerns."
Yet taking on Wall Street is not an easy matter. Not only has Wall Street been a leading campaign contributor, but it supports a powerful lobbying force with considerable influence. For example, it took more than 17 years for the banks and brokers finally to agree on a modernization of securities laws.
For that reason, Congress may tread carefully. "This is not going to be an investigation of all firms," Senator Dorgan said. "But investment banks were enabling the Enron partnerships and participating in them, and we need to understand what happened."
Dozens of Wall Street firms were involved in financing Enron's rapid rise, selling its stocks and bonds, arranging acquisitions and, later, putting together the off-the-book deals that masked Enron's true financial condition. In doing so, these firms earned tens of millions of dollars in fees and put billions of dollars of Enron securities into the market.
They helped Enron on the way up and on the way down. As Enron's downward spiral began, Wall Street firms ? among them Credit Suisse First Boston, Citigroup and Deutsche Banc Alex. Brown ? helped finance Enron's side partnerships that removed lagging assets from the company's balance sheet. In these deals, the banks arranged partnerships that allowed Enron to appear more profitable than it actually was and then sold several billions of dollars in bonds backed by Enron stock.
In other cases, dozens of banks and brokerage firms were approached about investing in Enron side partnerships and were shown confidential documents disclosing the extent of Enron's off-balance-sheet deals. Yet this information was considered confidential and not shared with Enron shareholders or clients of these Wall Street firms.
One of these firms was Merrill Lynch, the nation's largest retail broker, which was the underwriter of a partnership called LJM2. Other LJM2 investors ? all of whom had more information about Enron's finances than Enron shareholders ? were Citigroup; Travelers Insurance, a Citigroup unit; an investment group affiliated with Morgan Stanley Dean Witter (news/quote); and a group of Merrill Lynch executives.
A spokesman for Merrill Lynch, Joseph Cohen, said: "There is no need for us to comment. Our dealings with Enron were proper." John Meyers, a spokesman for Alliance Capital, which was the largest institutional holder of Enron shares, said, "Given the information available at the time, we consider our investment to be reasonable." Citigroup declined to comment.
Speaking for the industry, Marc E. Lackritz, executive vice president of the Securities Industry Association, said Wall Street, too, was hurt by the Enron collapse.
"We hope that Wall Street will not be pilloried," Mr. Lackritz said of the upcoming hearings. "We've been victimized like other investors. Our analysts were stonewalled and lied to and didn't have adequate information. We were victims, too."
Securities experts say this line of Congressional inquiry highlights ways that safeguards put into investment banks to protect confidential information can hurt investors. Some experts, like Arthur Levitt, former Securities and Exchange Commission chairman, have even suggested that Wall Street firms refrain from making stock recommendations on companies whose deals they are financing.
"Clearly, when you see analysts recommending a buy after the company has declared bankruptcy," Mr. Levitt said, "and when you see many of these schemes devised by investment banks, there are quite a number of items that bear looking at. Firms may very well consider not doing research on companies they have an underwriting relationship with."
At the heart of many of Congress's questions is the so-called Chinese Wall that prevents Wall Street firms providing investment banking services to Enron, or any other corporate client, from sharing financial information with their own stock analysts who make buy and sell recommendations on stocks.
"One of the questions to be investigated is whether we need to keep some information flowing between the two sides of a firm," said John Coffee, a securities law expert at Columbia. "One side of the firm knows it is dealing with a highly risky leveraged company, but the colleagues across the office are putting out a very bullish recommendations, which they would not do if they knew about the risk."
Joel Seligman, a securities expert and dean of the Washington University Law School, said that if Congress was considering eliminating potential conflicts within accounting firms, it should consider the same for investment banks.
"There should be a systematic prohibition on a firm recommending a stock while it is being underwriting," he said. "Perhaps we should go further and have investment banks chose whether to provide brokerage or underwriting, but not both."
That proposal may get a hearing in Washington. "It's not a bad idea," said Representative DeGette. "It's the same thing as with the accountants."
The New York Times on Enron's accounting practices. I've bolded parts:
February 17, 2002
Enron Had More Than One Way to Disguise Rapid Rise in Debt
By DANIEL ALTMAN
A long with the debt it spirited away in partnerships, Enron hid billions in loans in plain sight.
The company took advantage of accounting rules to count large loans from Wall Street firms as financial hedges instead of debt on its balance sheet, according to accountants and industry analysts. The effect was to mask its weakening financial condition.
Records held by Arthur Andersen, Enron's longtime auditor, and people close to the transactions show that Enron received $3.9 billion worth of such loans from 1992 through 2001, including at least $2.5 billion in the three years before the company filed for bankruptcy protection. Those loans were in addition to the $8 billion to $10 billion in long-term and short-term debt that the company disclosed in its financial reports in those last three years.
If Enron had in fact disclosed all the money as debt, then credit rating agencies, industry analysts and investors would have known earlier on that the company was riskier than it appeared.
Partly because of the way the loans were accounted for, the company reported a surge in its hedging activity, accomplished using financial contracts called derivatives, during its last few years. When pressed about the increase by skeptical analysts, Enron officials said the numbers reflected hedges for commodities trades, not new financing, the analysts said.
"They'd always tell us, `Don't worry about that, it's just hedging activity,' " said John E. Olson, the research director at Sanders Morris Harris who was one of the first analysts to challenge Enron's practices.
Enron officials did not answer requests for information on the accounting.
Enron's accounting treatment conformed to existing recommendations from the Financial Accounting Standards Board, the nation's accounting rule maker, said Timothy S. Lucas, director of research and technical activities at the board. But the group will soon reveal a new recommendation, he said, requiring that such transactions be accounted for as loans as well. The board was reconsidering its policy last September, before Enron's collapse.
To keep growing at a brisk pace in its final years, Enron needed billions in financing. Had the company raised the money by issuing more debt or taking out conventional loans, rating agencies might have become concerned and downgraded its credit, making it harder and more expensive for Enron to borrow in the future.
So instead, Enron engaged in sophisticated transactions with J. P. Morgan Chase (news/quote), Citigroup (news/quote ) and Credit Suisse First Boston. Enron entered into derivative contracts that mimicked loans but could be accounted for in less obvious ways. The loans with J. P. Morgan Chase were arranged through a shell company, Mahonia, but the other banks made loans directly to Enron.
From late 1999 through early 2001, Citigroup lent Enron $2.4 billion in a series of transactions known as prepaid swaps, said people close to the deals. In a swap, two parties trade the future returns on investments over a set period of time. For example, one party might pay a small amount to receive a fixed interest rate on a corporate bond in lieu of uncertain gains on the same corporation's stock. The counterparty accepts the payment and swaps the return on the bond for the return on the stock. Neither party actually needs to hold the underlying assets, as long as the payments are made.
Typically, neither party in a swap exchange receives all the agreed payments up front. In these transactions, though, Citigroup paid an estimate of the fair value of its portion of the swaps ? hundreds of millions of dollars each time ? immediately. Enron was obliged to repay the cash over five years, though its payments might have varied with market conditions. The transactions, though technically derivatives trades known as prepaid swaps, perfectly replicated loans.
Citigroup did not answer repeated questions about whether it had booked the transactions as loans.
Credit Suisse First Boston also lent Enron money using trades in derivatives. In 2000, the bank gave Enron $150 million to be repaid over two years. Enron's payments would vary with the price of oil.
Technically, the transaction was a swap. But because Credit Suisse First Boston paid Enron up front, the transaction took on the characteristics of a loan ? a reality noted by the bank. "It was like a floating-rate loan," said Pen Pendleton, a Credit Suisse First Boston spokesman. "We booked the transaction as a loan."
Enron's balance sheet told a different story. The company posted the banks' loans as "assets from price risk management" and possibly, to a far lesser extent, as accounts receivable, said Charlie Leonard, a spokesman for Andersen. The repayments that Enron owed the banks were listed as "liabilities from price risk management" and possibly a small amount as accounts payable, Mr. Leonard said.
Though Enron's accounting treatment conformed to accounting recommendations for prepaid swaps, rule makers intend to change the guidelines. "Under the first guidance, we decided a prepaid swap would be a derivative in its entirety," said Mr. Lucas of accounting standards board. Under forthcoming rules, he said, a prepaid swap would count as a loan as well as an underlying derivative.
Close readers of Enron's financial statements would have seen lines identified as assets and liabilities from price risk management in the assets and liabilities sections. These lines grew far faster than the quantities of commodities traded by the company. From the fourth quarter of 1999 to the first quarter of 2001, price risk management grew to $22 billion from roughly $5 billion in assets and liabilities.
Enron provided little explanation even in the footnotes of regulatory filings.
"There are just so many things that go into assets and liabilities from price risk management that I don't think it's possible to narrow it down," said Jeff Dietert, an analyst at Simmons & Company, a investment bank based in Houston that specializes in the energy industry.
Even after Enron's bankruptcy, analysts said they could not understand the financial statements. "Quite bluntly, those numbers are impenetrable," said Robert McCullough, managing partner of McCullough Research, an energy consulting firm in Portland, Ore.
Had rating agencies known about the additional loans, Enron might have had a harder time obtaining credit in other markets. "Considering that our credit rating was largely based on information now deemed by the company itself to be misleading, inaccurate, and false, it is pretty likely that the credit rating would have been different," said Fran Laserson, vice president for corporate communications at Moody's Investors Service.
The banks had little reason to worry about the swaps cum loans. In Credit Suisse First Boston's case, the amount was relatively small and time involved was short.
Citigroup went a step further by hedging itself against losses on the entire $2.4 billion in Enron exposure. In effect, it bought insurance by making other derivatives trades.
Citigroup set up trusts to sell securities called "linked Enron obligations" and "credit-linked notes," for which investors paid $2.4 billion in principal. Both types of securities paid a constant return unless Enron missed a payment to Citigroup or went bankrupt. In that case, Citigroup would take the investors' principal and replace it with a slice of Enron's debt with the same face value. An investor who held $100,000 worth of the notes when Enron filed for bankruptcy would have received the rights to $100,000 in debt issued by Enron.
The Citigroup trusts could have invested $1 billion of the principal directly in Enron, but they apparently kept the funds in safer investments as insurance.
In the spring of 2001, fuel prices fell. Enron's assets and liabilities in the category labeled "price risk management" dropped sharply.
Falling fuel prices could have explained some of the decline, but Enron did not respond to inquires.
Mr. Dietert of Simmons said that Enron's competitors in energy trading, like Dynegy (news/quote ) and Williams, might also have used derivatives for financing. Both companies list assets and liabilities from risk management on their balance sheets. For Dynegy, those figures grew to $8 billion from about $1 billion between late 1999 and the middle of last year. Steve Stengel, a spokesman for Dynegy, said that the "vast majority" of those figures came from hedges of Dynegy's energy trading, though he did not know the exact breakdown.
The New York Times had a long article about the problems in the fiber optics industry. I've bolded some parts.
February 17, 2002
The Fiber Optic Fantasy Slips Away
By SIMON ROMERO and SETH SCHIESEL
Only a few years ago, the dream of striking it rich by transmitting Internet data and telephone calls across continents and under oceans, through endless ribbons of fiber optic cable, captivated one company after another. But rarely in economic history have so many people with so much money got it so wrong.
Instead of a stampede of customers to fill up these fiber optic highways, the industry found itself with too many vacant lanes ? way too many. What had once seemed like a brilliant idea ? carriers' buying and selling future access on those fiber networks to meet expected customer demand ? became a swap meet unto itself, with its own peculiar bookkeeping.
As an element of the telecommunications meltdown that has come to light only recently, the market for fiber network access seems to have been an important common ingredient in the epidemic of accounting fiascos bursting out all over. Certainly, it played a major role in the unraveling of Global Crossing, which filed for bankruptcy protection last month. Fiber swaps hurt other big communications companies, like Qwest Communications International (news/quote) and Cable and Wireless (news/quote). And they played roles in the cascading problems of Enron (news/quote) and Tyco International (news/quote).
Significantly, the Securities and Exchange Commission took a close look at the practices involved in fiber deals a few years ago and apparently did little to contain transactions that later became the basis for a vibrant swapping market. Now, though, the S.E.C. and the Federal Bureau of Investigation are taking a new look, searching for signs of accounting fraud. Investors and former employees of the companies laid low by fiber swaps probably wish the government had stepped in sooner.
The S.E.C. has declined to comment on its previous or current look at Global Crossing. But its silence, together with copies of correspondence between the company and the commission obtained through the Freedom of Information Act by SEC Insight, a private research company in Plymouth, Minn., prompt a flurry of questions.
Among them are these: Did liberal use of such long- term capacity sales encourage the creation of an active swapping market? Did the S.E.C. accept Global Crossing's assertion of its accountants' independence without a fuss? More troubling, and perhaps hardest to answer: How can the telecommunications industry, now plagued by suspicions of sham transactions and accounting, right itself?
"There is no sector that illustrates creative destruction so effectively," said Howard Holme, president of Bandwidth Exchange, a capacity broker in Denver, referring to the theory of the economist Joseph A. Schumpeter that entrepreneurs generate innovation by rendering their predecessors' ideas obsolete.
There are few other industries aside from telecommunications that changed so quickly and produced so much confusion, Mr. Holme said.
Certainly, telecommunications is no stranger to turmoil after a meltdown at upstart carriers and established equipment makers resulted in the loss of more than 500,000 jobs worldwide in the last two years. Communications companies large and small are now in for an unexpected extension of this instability.
Among the most obvious candidates for closer scrutiny is Qwest, which said last week that it had received an S.E.C. subpoena demanding details of its dealings with Global Crossing.
Qwest has been forced out of the short-term debt markets amid growing doubts about the legitimacy of off-balance-sheet transactions involving Global Crossing and other companies. Fortunately for Qwest, which is based in Denver, it can count on a stream of revenue from local phone operations in 14 states.
The stress from the Global Crossing inquiry also extended to Europe, where Cable and Wireless of Britain and KPNQwest (news/quote ) of the Netherlands came under pressure last week as investors questioned their use of swap transactions to show healthy revenue gains when little or no money was actually generated.
Roy L. Olofson, a former vice president for finance at Global Crossing, contends that the company misled investors by engaging in these swaps, in which the outgoing transfer of capacity was counted as revenue while the incoming capacity was considered a capital expense, making it seem as if the company's cash flow kept climbing from such deals.
In some of the deals, Global Crossing and its counterparts issued checks to each other in equal amounts, potentially allowing each to use the proceeds as an increase in revenue, according to Mr. Olofson's lawyer, Brian C. Lysaght. In other transactions, no money may have changed hands.
Qwest and Cable and Wireless are just two companies known to have done swaps of this type with Global Crossing. Other companies include Flag Telecom of Britain, China Netcom and Telecom New Zealand, according to people close to Global Crossing. Many other companies, including Tyco and WorldCom (news/quote ), used the same type of transaction to show growing revenue before the market for such transactions abruptly collapsed about the middle of last year.
The collapse was caused, in effect, by market forces. With the spot price of bandwidth down 90 percent and bound to fall further, it made no economic sense for carriers to make long-term leasing arrangements.
Such complexity was much less common in the telecommunications world just five years ago, when big companies like AT&T (news/quote), British Telecommunications (news/quote) and Deutsche Telekom (news/quote) dominated the business.
Long-distance phone calls were of decent quality but expensive. The Internet was not the big deal it is today. When the industry's titans ran short of capacity on their own systems or on crowded transoceanic cables, they hammered out deals with one another by swapping space on their networks.
This system worked fairly well, partly because it helped the companies avoid the need to raise additional money for the installation of cables across the Atlantic or the Pacific. That changed in 1997 with the creation of Global Crossing. It dreamed of profitably transmitting phone calls and Internet data across a 100,000-mile fiber optic network spanning more than two dozen countries. Companies like Level 3 Communications (news/quote) and 360networks (news/quote) quickly sprang up as rivals.
There was no way the average investor could have known that Global Crossing's business model had come under scrutiny in June 2000, when the company's potential appeared almost as unlimited as that of the Internet itself. But on June 5 of that year, the S.E.C. began to take a close look at Global Crossing's books.
Among the S.E.C.'s concerns were how Global Crossing accounted for capacity swaps and the independence of its auditor, Arthur Andersen. Global Crossing had recently hired as its executive vice president for finance Joseph Perrone, the Arthur Andersen executive in charge of auditing Global Crossing.
In fact, according to people close to Global Crossing, Mr. Perrone was already known at the company as co- author of a two-page memo dated Feb. 10, 1999, before his hiring, in which he recommended how to best account for capacity swaps.
Among Mr. Perrone's suggestions in the memo, these people said, were to keep the contracts 60 days apart, apparently to avoid suspicion that the deals were reached merely to help each party meet its quarterly financial objectives, and to require each party to submit separate cash payments, apparently to create the look of a valid deal.
In its July 20, 2000, response to the S.E.C. query, Global Crossing made it clear that its accounting had been accepted by Arthur Andersen. Global Crossing also said it had based its long-term leases on an arcane interpretation of Statement 66, a rule for recognizing profit or loss from sales of real estate developed by the Financial Accounting Standards Board, the group that sets accounting standards for business.
The S.E.C. apparently gave Global Crossing its blessing to proceed with the long-term leases of capacity on its network that eventually were the basis for the swaps the company made with Qwest and several other companies in 2000 and 2001.
Global Crossing continues to deny that it has done anything wrong. And transactions by Global Crossing and others that have been called into question are based on a legitimate, longstanding practice in the telecom industry known as an I.R.U. sale.
I.R.U. stands for the indefeasible right to use a certain amount of bandwidth on a communications company's network. For instance, Company A might own a network that links Seattle and Chicago. Company B has customers in those two cities who want to communicate.
Company A might sell Company B the right to use 622 megabits of capacity on the Seattle-Chicago route for 25 years, meaning that Company B would have the right to transmit 622 million bits of digital information each second on that route. In exchange, Company B might write a check to Company A for $100 million.
Company A must now choose between two methods of accounting for the $100 million, both potentially legal. The more conservative path would be to record the $100 million as income gradually, over the life of the I.R.U. contract. If the contract were for 25 years, the company would record $4 million in revenue each year, or $1 million each quarter. Most well-established telecommunications companies, like AT&T, use the more conservative method.
The more aggressive method would be to record the $100 million as revenue all at once. Under certain circumstances, this method can fall within generally accepted accounting principles. Nonetheless, it is generally shunned. In fact, Qwest appears to be one of the only major companies to use it.
GLOBAL CROSSING essentially tried to have it both ways at once, and even then did not follow its own rules and may have misled investors, according to statements by Mr. Olofson.
In some cases, Global Crossing appeared to use the more conservative method in its formal revenue statements. Global Crossing, however, encouraged investors to focus not on its formal revenue statements but rather on an unofficial measure that it called "cash revenue." Many analysts and investors did just that.
It was in its cash revenue statements that Global Crossing often recorded all of its I.R.U. sales at once, helping the company meet its quarterly financial targets. In the first quarter of 2001, for instance, about one-third of Global Crossing's roughly $1.6 billion in cash revenue appeared to come from the upfront recognition of I.R.U. sales.
A result, according to Mr. Olofson, is that Global Crossing did not even follow its own rules for reporting cash revenue, rules that investors relied upon. Last year, Global Crossing recorded $150 million in cash revenue from a transaction in which it did not actually receive any cash, according to Mr. Olofson.
Among the company's partners in various reciprocal deals, EPIK and Qwest have publicly acknowledged working with Global Crossing. A Cable and Wireless spokesman said, "Certainly we have purchased capacity from Global Crossing, mainly capacity within Europe." He declined to specify the size of the deals. A spokesman for Flag declined to say whether his company had any dealings with Global Crossing. Calls to China Netcom and Telecom New Zealand were not returned.
As far as the other companies' accounting practices are concerned, EPIK has said that it uses the more conservative method, as has Flag. Cable and Wireless reports its results under the accounting standards of both Britain and the United States. Under British standards, the company often records I.R.U. sales all at once. Under American standards, the company says it spreads out those sales over the life of the various contracts. It is unclear how China Netcom and Telecom New Zealand report results.
There will it all end? One clue may lie in the history of the nation's railroads, which are often compared to relatively young fiber optic systems. Some fiber optic operators, like Qwest, even got their start by laying fiber along existing rail lines.
By now it is almost forgotten that railroad companies expanded with ferocity in a post-Civil War boom that resulted in a spectacular financial collapse called the Panic of 1873. Many small investors were burned by the scandalous activities of concerns like Union Pacific Railroad, which, like Global Crossing, stretched the boundaries of corporate behavior in its day.
But eventually, as true believers of the fiber optic age are quick to point out, the glut of unused railway capacity was absorbed.
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