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Investment Advisor Alleges MS Financial Fraud
Bill Parish, of investment management firm Parish & Company, claims Microsoft's stock prices may be artifically inflated, and that MS may actually be losing money instead of generating huge profits. Parish says you haven't heard his claims before because "...Microsoft is a significant advertiser in the major media [and] it has been hard to get exposure there." Slashdot offers no opinion one way or the other on the acccuracy of Mr. Parish's allegations. Please read
his report and decide for yourself.
Maybe the guy has a point in that the gullible public should be made more aware of the problem (and I freely concede that this *is* a problem: only not limited to Microsoft, not having such huge importance, and not likely to lead to the financial meltdown of the free world). But financial professionals know the situation quite well. And the measures that he proposes against Microsoft are quite ridiculous.
I disagree, mainly for the large amounts of cash involved. M$ had basically lied, saying they are making 30-50% profit margins when they are not. This keeps raising their stock price (and get's them into indexes and 401k) to a level where they recieve a constant demand. The problem is the value behind the company. Everybody here knows that the only value that M$ has in on paper. Paper that says you can't copy their software, paper that says you must buy a license for every 5 users, etc. They have "nothing" of real value. Take this paper away (or reveal how transparent it is) and you realize that the highest valued company in the world HAS NOTHING OF VALUE. Then you factor in the large number of people whose retirement is tied to that value, and you see the scope of the problem.
Their accounting practices also make themselves look better than other companies and then when John Q. looks at who to invest in, he picks M$. Thus IBM, HP and others, whose accounting is honest, look like crap and they must use the same dishonest technique to create a competitively profitable image. M$ is the image making machine, they have created a huge image of a profitable company that is made out of paper and burning away from the inside.
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And yet... the man talks like an insider. I don't see anyone challenging his facts, and they're all over the article- stuff like this: This stuff is _all_ _over_ the article. Being sort of obsessional is normal for an accountant... and in this case the obsessionalness has produced a guy who singlemindedly tracked down seemingly everything Microsoft is doing, without even understanding what he was dealing with. He seems to think that he could expose their total fraud and everybody would go, "Oh! Gee, OK, let's stop doing that, we were wrong!". Stupid- but I don't see how that challenges his assertions, it only challenges his media savvy and understanding of human beings (which I can sympathize with).
But this story isn't _about_ human beings, except in that they try to justify themselves- it's about obscure accounting cheats and tricky ways of committing fraud. In that area, this peculiar fellow has convinced me he knows what he's talking about- indeed, it's _all_ he knows- and I share his conclusion- Microsoft is built on accounting fraud, and as it takes over the entire economy (illustrated by its addition to Dow Jones- this fellow doesn't even get into the problems of having _any_ huge stock included on all main indicators- currently, when MS crashes _everything_ will go down, NASDAQ, Dow, you name it...), it poses a risk directly comparable to what happened to the Japanese economy.
This is serious stuff, even if it's being hyped by a peculiar fellow who doesn't understand the need to downplay his self-aggrandizement (probably doesn't even understand that's what he's doing, if I read his character correctly). Try and focus on his conclusions (when they don't consist of 'Appoint me to your 401K committee!') because there is a great deal that should be listened to here.
..outlines and says how they have been doing each thing.
+&x
Two very valid (and relevant) points that come out of Buffet's strategy include that:
The "split" issue appears to me to be a pretty irrelevant matter in this; the contention that splits result in people overvaluing stock seems to me to be irrational.
I don't particularly care what the stock price is, or how many shares I have; what I care about is the multiple, namely How much my holdings are worth.
As far as I'm concerned, a split should only affect the value of my holdings if there are a lot of people that don't understand basic arithmetic ( e.g. - multiplication) and who are incapable of coping with the simple equation:
If you're not part of the solution, you're part of the precipitate.
Funny that you should notice one tactic of argument and ignore another...
Because it was blatant and well addressed in the actual article. Kaa's statments basically call the guy a liar to his face since he (parish) repeatedly said in the article that he was not biased for or against M$ in any way and even lauded thier office products while belittling the POS that is Win98.
Gawd, I wish there was a way to tell which posters read the article. This one was particularly long, the Linux comments don't come till near the end, for those of you that just scanned the first 5 pages.
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Absolutely. The trouble is, this is really stupid :)
You're absolutely right that small business suffers- not just small business- no matter _who_ you are, you had better be able to spin a line of hype and vapor because 'sound expansion' IS NOT ENOUGH. It used to be a _good_ thing to focus on building businesses and providing value and a going concern that could build on successes and expand to handle more customers well. Now that is actually a bad thing, because the goal has become cashing out and building vapor-business bubbles that are too good to be true- and aren't.
Our friend the peculiar accountant has a number of things right, and one of them is the bad effect of this sort of thing. Good companies with honest practices and sustainable expansion are choked off by vapor businesses growing like kudzu vines. In an era where the best way to earn money is to set up a pyramid scheme of options and tax dodges, and where the best way to do business is to outspend and choke your competitors and constantly lie and deceive with vapor and false promises and then make sure you can't be held legally accountable for the fact that you're selling crap products and trying to prevent anyone else from competing with you, is 'The Internet Age' really the right term? Wouldn't 'The Stupid Age' be more apt?
I'm really not surprised. Several companies have artifically hyper-infloated values even though their business acumen has led the companies to constantly incur losses, especially in the case of certain Internet stocks like Amazon.com -- who have lost money every year it has been running, but yet still has a worth of more than $100/share. It seems to be the condition that the stock market hopes to inflate the prices of these stocks because they are being hyped so much by the media without the realization that some of them will never make a profit. Microsoft is no exception. People see it as a "safe" tech stock without taking into consideration factors in the industry that are costing MS money and probably driving profits below zero. It's almost like they are determined to bne ignorant of tech stocks.
The author of the above article is scared. It takes some serious balls to call the richest man in the world a thief and a liar. If you read the whole story (and I suggest you do, if this gets large-scale media attention it could be big) he gets more personal at the end. Mainly the guy has tried for some time to get this story out. No one seems to be refuting it, all of the attacks on the story seem to be directed at the man, not his facts. Perhaps that is why he is so scared.
So now he is putting his own name on, he's got a big whistle and he's blowing it. It mentions in the article that M$'s accountant did the same thing in '96 and got fired for it. He's sending it to everybody. Action has already been taken from PRNewswire (against him). He sounds committed and it often takes serious resolve to change entrenched assumptions. More power too him, I'm gonna send this article to my friends and ask that they do the same. Each may do his part to slay the evil behemoth, if they feel it should die.
It's a slow news day, lets see if we can get this story on CNN tonight. Turn the public's interest and awareness of Microsoft against them. Anybody know (or is) a reporter?
+&x
The peculiar thing about this is the double standard. There are many people who totally mock and scorn the concept of OSS because to simply donate effort and time to a thing, without expecting compensation, is considered at best stupid, and at worst positively evil and sinful (a point of view that always startles me. Helping others is _bad_?) ;)
Yet here we have someone who's weird but sincere, and is also doing what he can like a good little capitalist to increase his wealth and power of influence. _Why_ does this all of a sudden become a fatal PR blunder? I could see OSS-fiends becoming very critical, but what on earth is causing so many people to jump on this point? He's trying to sell himself and his judgement. Isn't that what you're _supposed_ to do? Are you suggesting that he should be doing all this thinking and scheming and writing for _charity_?
I once got paid to do finance theory research work, working on code that compared Black/Scholes calculations with the results of computations coming from a similar calculation using discrete steps. I presently have about $10K invested in index funds. It would be pretty silly for me to imply that index funds are only for stupid people, and that's certainly not what I said.
Index funds most certainly are decent investments for diversifying away risk; those that invested in index have often done better over the last couple of years than those investing in other forms of mutual funds.
The point was that those that don't have the basic knowledge ( e.g. - to know that Value = Quantity * Price ) to invest in stocks with a faint bit of intelligence should put their money into investments that don't require that attention.
We've got people who haven't the rationality to evalate what they're doing deciding that they can become "Day Traders" at E-Trade and AmeriTrade. I don't oppose people buying some stock; that's liable to be educational and diversify ownership. But naive new investors certainly shouldn't jump into the shark-tank of daytrading. That's a really dumb move.
If you're not part of the solution, you're part of the precipitate.
Looking over this article I'm not greatly impressed. Stock values and gaining/losing money are just too hard to gauge without an extremely rigorous model, and this guy hasn't impressed me, or mentioned much I hadn't already heard about. Many very intelligent people have serious arguments about the financial health of entire countries like China, and no one really has "the answer." But I DO know from personal experience that his complaint about the media is definately true- it's kind of sad too. It's not so much that Microsoft is a major advertiser, but rather that the econ/financial divisions of most major media outlets have lately been unapologetic "rah-rah" guys for the stock market in general, and put far too much faith in it reflecting actual economic value. It's not a conspiracy, it's just that most of these reporters are heavily invested, both personally and financially, in the very markets they review, they see everything getting better and better, and get irritated with people trying to point out dangerous bubbles or potential instability. They also don't believe that rich people would EVER be duplictitious. Oh well, the future is a crap shoot- maybe they're right. (but hey- they're not :) )
On the other hand, the complaint about stock splits seems to me to be devoid of real validity.
The critical equation in dealing with portfolio valuation is:
The average split results in multiplying quantity by some factor; while we might quibble over the "strong form" of the Efficient Market Hypothesis, markets certainly appear to have been reasonably efficient at recognizing that when the number of shares gets multiplied that price needs to be correspondingly divided.Remember that the number of shares that are outstanding are an artificial construct; the number of shares issued is arbitrary.
If you're not part of the solution, you're part of the precipitate.
>That much is obvious, but isn't it also obvious
:)
>why this course of action would affect the price
>of each share, and specifically the shares that
>were owned before the dilution? I mean, assuming
>that people were assigning a value to these
>shares in terms of the value of future dividends >or earnings in some way.
I would expect it to be included, yes. I'd expect the information to be reflected in the market price (it only takes one person with significant assets recognizing the pricing error to correct it).
>1.If Microsoft does not (or cannot) buy back the
>option shares, they dilute the stock, and this
>has a material effect on existing stockholders.
Yes, certainly. But the effect shrinks the earnings per shareholder; it can never make them negative.
>2.If Microsoft does buy back the option shares,
>then the cash used to perform the buy back has to
>come from *somewhere*, and this also has
>material effect on existing stockholders.
It's the same amount of dilution as in 1. This way, though, the shares are for a smaller company than in 1. The company is giving up part of its assets to remove some of its owners, just like what happens when partner leave partnerships. It's a change in capital, not an expense as Parrish claims.
>And I think there have to be far more sensible
>ways to estimate the likely value of the option,
>or at least its possible effect on shareholders.
>One way would be to use the company's historical
>data: how much was an option of $X over the
>market price really worth in the past?
This one *can't* work. If this was an accurate predictor, it would also by definition predict the future share price. If that were true, people would borrow to buy the stock until the price today was smaller than that future price by only the interest rate. Since this hasn't happened, the predictor can't be reliable.
Now you make me take off the economist hat, and reach for my statistician's hat
>Another way would be to use "normative" data over
>a market sector: in the software services sector,
>what is the current value of an option of $X over
>the market price? The problems with those
>methods, however, are clear: the past history
>might not be relevant, or there may be no history
>at all
There are a variety of ways to do this, but they come down to weighted averages of the potential future gains, with zero value for all values with the stock below the exercise price. There's a lot of literature on this in both econ and finance. The problem comes from agreeing on the relative probabilities and finding the comparison stocks. Before using this, you'd need to be convinced that you have created a system *less* prone to manipulation than the current system--and that's going to be a very hard sell (who chooses?). And even with this, you're still talking about a rearrangement or redemption of capital, not a true loss. It still all comes down to dilution, and giving up capital to avoid the dilution.
None of this should be read as meaning that the undiluted earnings per share figure has any meaning. The inclusion of diluted earnings in a footnote is certainly a first step. But whatever the solution is, I don't think it involves treating the options as some type of expense rather than a capital issue; any such solution would be more misleading than the current version, where at least the true data exists.
Conspiracy theorists are, of course, free to conclude that putting MS on the DJ was a move to interfere with the DoJ case, since any hard hit on the price of MS stocks will have a very visible effect on the DJ average, after which the defense will cry "Our society can't afford a negative judgement!"
Damn straight! I don't know who is technically in charge of such decisions, but anybody who doesn't believe Microsoft was leaning on the decision as hard as they could... well, believing that MS is oblivious of this sort of thing, unwilling to use it as a weapon, or concerned with the larger issue of society and the markets as a whole, is not 'sensible' or 'levelheaded', but just 'stupid'.
OF COURSE that's the idea behind it. MS is now (if I am not mistaken, and I might be) on EVERY major index. Their collapse would _slam_ the economy of the entire world. That's just obvious- where has it become a conspiracy theory to suggest that MS has a stranglehold on the entire US economy, an argument which they themselves have darkly hinted at in their court cases? It's a no-brainer. It would be really stupid to believe this would have no effect on the independence of the markets.
Now, when you start asking if this is a _good_ thing, then you can get into arguments. Personally, I think it's extortion- I don't think it is a good thing to hand over control of the economy to a vapor business. MS is that business, and I think it's a particularly bad move to try and have them represented in every index and tie their influence to every nook and corner of the stock market. I'm not even a big fan of the stock market- seems not very productive to me- but even so, this is just not fair. For people who do want to play investor and try to make money just by figuring out who's winning and losing (without actually doing any real work or producing anything), it's absolutely necessary for those people to have somewhere to jump if, say, MS tanks. Which will happen, even the Roman Empire fell- and if MS is ubitiquous, that means that in the peculiar world of the stock market, everybody loses and there is nowhere to turn. If they were just representing the NASDAQ and left the Dow alone, people could dump NASDAQ and jump to the Dow and the economy would rock violently without necessarily collapsing. If MS becomes synonymous with the economy- well, we're already looking at Great Depression-like social statistics for certain age groups, and have been for years. The 80s were a major era for dumping money into retirement funds and making yuppies wealthy while the lower classes got basically hosed. That never changed, and to this day, your average American is hardly in a position to play investor- this whole stock market brouhaha is the toy of the upper class, and the division continues to widen. The lower class (economically) doesn't _have_ money to put into the equation anymore.
Well, when the upper economic class is hit, there _is_ no more. _That_ is why those speculating yuppies should be protected, _that_ is why MS's creative accounting and bubble economics must be curtailed. It's like that trickle-down stuff only in a darker twisted form- rather than providing a bounty of wonderfullness for everybody, currently the rich are the only means of _subsistence_ for the poor. Not opportunity, mere survival. It's inequitable, but if you simply hit the rich with, say, a stock market collapse, they will simply tighten their belts, take some losses, and then the economy will really start to _hurt_.
Personally, I figure that almost anything is better than that.
Er.. No. Microsoft has followed and is following legal, acceptable and very widespread accounting practices. You may question whether these accounting practices are helpful to make reasonable investment decisions, but it is a complaint targeted at FASB, not Microsoft.
So it's legal and ethical to report that you earned 2.5 billion when the actually value of the company decreased by the same amount in 3 months?
That's why it matters how much money they are doing it with. Lying about having $100 is a lot different than lying about $10 billion, especially when people are relying on that $10 billion to feed and house them after they retire.
Funny, you seem to believe that information (such as source code, for example) has no value.
The source code has value to Microsoft only because they can control its distrubution. They use legal, not logical or natural means to do so.
This is a shaky proposition. It turns out their "profits" are built upon the same shaky ground.
Do only physical things have real value to you?
Personal attacks in logical discussions are flames, and are ignored.
+&x
Er.. No. Microsoft has followed and is following legal, acceptable and very widespread accounting practices. You may question whether these accounting practices are helpful to make reasonable investment decisions, but it is a complaint targeted at FASB, not Microsoft.
So it's legal and ethical to report that you earned 2.5 billion when the actually value of the company decreased by the same amount in 3 months?
That's why it matters how much money they are doing it with. Lying about having $100 is a lot different than lying about $10 billion, especially when people are relying on that $10 billion to feed and house them after they retire.
Funny, you seem to believe that information (such as source code, for example) has no value.
The source code has value to Microsoft only because they can control its distrubution. They use legal, not logical or natural means to do so.
This is a shaky proposition. It turns out their "profits" are built upon the same shaky ground.
Do only physical things have real value to you?
Personal attacks in logical discussions are flames, and are ignored.
+&x
People that choose to be this ignorant have no place investing in the stock market.
They should buy:
- Long term government bonds, or
- Index funds
both of which are more suited to the action of those that wish to remain blithering idiots.If you're not part of the solution, you're part of the precipitate.
I have heard arguments like this before. the gist of them is generally that, due to outstanding debt in the form of unvested or vested but not yet cashed stock options (which are not kept on the books), Microsoft is actually losing money. Or, at least, does not have the valuation they would otherwise claim.
Of course these amounts really are kept on the books, they just get fiddled with before they end up as a footnote to the balance sheet. In accordance with law and prevailing accounting methods mind you (doesn't mean it is honest though). So I don't think I would personally go so far as to term it 'fraud' or a 'pyramid scheme' as the author of this piece has done. But he goes farther yet -- claiming that this could result in a complete collapse of the financial markets if it is not dealt with...
The weird thing is, Bill Parish appears to have some credibility on the surface. He mentions talking to the SEC Chairman, Arthur Levitt, and providing information on this to several fund managers. The article itself is well written and cogent.
Intersting notes -- One of the author's suggested 'fixes' is to "Prohibit Microsoft from buying back its own stock, instituting stock splits or selling put contracts and engaging in other hedging activity for 10 years. These are tricks used to manipulate the stock price and have contributed greatly to building the financial pyramid. It might make sense to outlaw this practice all together."
This is unlikely to happen, being as these activities are common among nearly all publicly held companies. But then he goes on to suggest that someone should "Prohibit Microsoft from offering employee stock options or any employee based ownership program for 10 years. The truth is most people go to Microsoft for stock options."
Huh! ***OUTLAW STOCK OPTIONS?*** Even as a one-time thing this would be a precedent that could destroy the high-tech economy we have grown in the last few years!
Of course another author suggested remedy is to "Request to have me as a guest on your talk show, radio station or other media outlet or speak at your convention. You might also send my Web site link to friends and people of influence such as other business leaders, political leaders and journalists, both here in the U.S. and abroad."
I sense several levels of hidden agendas here. Especially considering the harsh tone of the second half of the article. He even accuses Microsoft of 'Money Laundering' in Brazil and 'Corrupting Higher Education'. Such claims tend to marginalize his other arguments by making the Mr. Parish seem looney and fixated in his hatred of Microsoft. This is sad, because there more than a little merit here.
Jack
- -
Are you an SF Fan? Are you a Tru-Fan?
While it has been proposed to change accounting procedures so that these real expenses are accounted for, what may be needed instead is to force investors to make investments for the long term (high taxation of short-term investments would be one approach). I think investment professionals would be a bit more cautious about Microsoft if they had to make a firm commitment even just for a year or two.
Of course, it's not going to happen. To me, it looks like Microsoft (and many other companies) are continuing to do the equivalent of printing money and creating inflation that is accounted for nowhere. I don't see much real value that corresponds to the paper value that is represented by their stock. At some point, there is a good chance that it will all collapse, and I suppose then we will get reforms.
To believe the authors findings, you have to believe that all financial markets are essentially rigged through simply supply and demand. There is no doubt that the price of Micro$oft stock is driven in no small way through the demand for its shares. Mutual companies and 401K plans etc. do contribute to this continued upward pressure on the stock price. I call this DEMAND. Many stocks move without regard to the underlying financial situation in which the company finds itself. Amazon may not be the best example of this but some of the other internet startups with far less revenue and even shakier business models are prime examples.
;-)
Witness the drastic pullback in stock prices for companies that fail to meet the hype and things reverse. Any IOMEGA stockholders out there. Take a look at a 3 year stock chart and watch the stock go from 1/4 up to 30 and back down to 3 as the bubble burst. Combined with close attention and regulation from the SEC, stock markets regulate themselves. Our markets and the controls on income reporting and accuracy are the envy of the world. Check out income reporting in some emerging markets to get a feel for how bad it can be. Sorry folks this guy is a nut.
Dave
NOT a Microsoft shareholder or employee unless mutual funds count
Microsoft Accused of Mis-using Cash Reserves "A lawsuit quietly settled late last year alleges that Microsoft's immense cash reserves were used to manipulate its earnings reports, giving the company the appearance of steadily increasing profits and allowing it to consistently exceed Wall Street projections."
SEC Probes Microsoft Accounting "Federal authorities are investigating Microsoft Corp.'s, practice of setting aside some of its software revenues and recognizing them later, chief financial officer Greg Maffei said on today."
Commentary regarding FASB trying to get stock options factored into financial statements "While these represent true legal and accounting vulnerabilities to Microsoft, the company's future is so strong that the long-term picture remains strong."
We want endless gardens of data, where the bits can flower, flourish and reproduce. -- Andy Mueller-Maguhn
Somehow this reminds me of the guy that claimed that he could get a lot more ip addresses out of the current IPv4. He showed a lot of figures, mathmatics, and poor writing skills. This article seems to be the same. "Microsoft is bad because it has too much money, sell your stock now"
WTF??? Article doesn't show any facts or show proof of facts, just makes assertions and tries to show it's valid by associating itself with prominent figures.. No Dice.
Lando
/* TODO: Spawn child process, interest child in technology, have child write a new sig */
The report does indeed seem to include a lot of speculation, and I have not been able to verify all of the facts. Regardless, the types of things that are alleged are done by many companies, for various, often less-than-ethical reasons.
The bottom line is usually 'what goes around comes around'. -IF- MS is really crossing the line with regards to how they cook the books, it will catch up with them.
'Creative accounting' is used by most major corporations, Billy G didn't invent it.
Lying about having $100 is a lot different than lying about $10 billion
Maybe to you, not to me.
Since you bit.. Stealing $100=Stealing from 1 person roughly a weeks worth of living expenses is much different than stealing $10,000,000,000 roughly 1,923,076 YEARS worth of food. Those are not the same.
They use legal, not logical or natural means to do so.
>What, pray tell, are "logical" or "natural" means? Besides, what's wrong with legal means?
The only reason M$ is worth money is because it is illegal for me to make copies of their software. I don't believe in the purity of the U.S. legal system. If you believe it is infallible, then we have a different argument. Because of our current setup software is valuable only if it can be made scarce, unnatural since it's reproduction cost is very near zero.
Under a more "natural" setup the value of software would be determined by it widespread distrubution and overall utility (support), rather than some legally forced "unnatural" scarcity. Under such a setup the value of said software would be substantially reduced but easier to support economically without the need for questionable accounting. This is a different notion for determining the value of software, but you asked, so..:)
I was just commenting on your strange observation that Microsoft has [n]o valuable assets.
They are currently valuable but on an unstable foundation. Much of that value is tied up in employees (paying their own salaries from future stock earnings) which can leave the company and take their own "intellectual property" with them.
+&x
If Microsofts stock went to 0 tomorrow, that'd have a lot more ramification than 75 points off the DOW. It would quite literally crush the entire tech industry. Monopoly or not, they're the biggest player in the markets today. If they sink, so do we...
If you look at the same facts in different ways, you can often get quite differering views. Consider this hypothetical situation of an employee of a company Options Unlimited: whose options vest after one year.
1990: Employee A Joins and is granted 100 options at current prices of $10. Company buys back 100x$10 shares.
1991: Employee A is granted 100 options at current prices of $15. Company buys back 100x$15 shares. Employee also excercises 1990 options at $10
1992: Employee A excercises 1991 options at $15 (current value $25) and leaves company.
Article viewpoint
Look at the year 1991 - Company bought 100 shares at $15 and sold 100 shares to A at $10. Wow - look at that $500 loss!
Company cost viewpoint
Cost: (1990) 100 x $10, (1991) 100 x $15 buybacks = $2500
Received: (1991) 100 x $10, (1992) 100 x $15 exercised = $2500
Nett cost to company = $0
Employee benefit viewpoint
Cost: (1991) 100 x $10, (1992) 100 x $15 exercise = $2500
Recieved: (1991) 100 x $15, (1991) 100 x $25 = $4000
Nett gain to employee = $1500
balance sheet progression
Beginning 1992: Contains 100 x stock worth $25, cash $0 (total $2500)
End 1992: contains stock $0, cash $1500 (total $1500)
Change over year $1000. (which is the same as the employee made on options over the year.
Summary
Options, are just that, options, and accounting for them is difficult. How do you value the 100 shares that are earmarked for employee A? at strike price? at market price? If the employee exercises them, the balance sheet value will fall, so that might suggest the strike price. However, until the options are exercised, they are still owned by the company, so the market price would seem more accurate.
I think the point that is interesting is that options are currently in the balance sheet at market price, so there is potentially a unrealised decrease in the balance sheet bottom line. If, for example, the stock price started to fall or flatten, the following might happen:
A) A lot of people might start to exercise their vestible options, resulting in balance sheet decrease.
B) A flatter stock would result in people wanting higher salarys, as options aren't as attractive, resulting in higher costs, lower profits, lower stock price, and repeat.
IMO, any stock that has a lot of options must keep growing, or it has the potential to start the downward spiral shown above, and if that sprial really started, it would be damn near impossible to stop
--
Exigo spamos et dona ferentes
\begin{\economics professor}
His claim of fraud is, in itself, fraudulent (or incompetent).
His claims seem to come primarily from the notion that microsoft sees a cost when stock options are exercised.
Take a step back, and think about this.
1) the existence of large number of options understates the potential number of shares. This is true--if there are 100 shares and 200 stock options, 1 real share represents not 1%, but 1/3% of the company. Thus the earnings per share are overstated. This is what the "footnote" business is: the "diluted" earnings, spreading earnings out over potential shares rather than actual shares, only occur in footnotes. The result is indeed that earnings *per share* are lower than reported. It does *not* affect total earnings.
2) The "debt" from these. Here is where this turns into nonsense. Many companies, including microsoft, do indeed buy back the shares when employees excercise options, in order to keep the total number of shares outstanding stable. But they have *NO* obligation to do so. Microsoft could simply allow more shares to exist. Done. No cost to Microsoft.
So why doesn't microsoft do this? Again, step back a moment. *If* the number of shares increases, the price drops. If you triple the number of shares due to options, the price will fall to (roughly) one third of its previous level. By buying back the stock, each share claims a larger portion of microsoft, and is thus worth more. Investors prefer this, and thus corporations do it.
If we assume, though, that a corporation *will* buy back the stock, it may make some sense to include that future cost (after discounting) to the business in some way (there are a number of ways to do this). However, to do so, we have to estimate or know the future price of the stock. If we knew this with certainty, this would also be the current price (less the interest in the mean time). And the important thing about options is that they are issued at *more* than the current price. If the current price is ten, the corporation might issue options to buy at a price of twelve. This would show each option as an *asset* rather than a liability (which, of course, is also nonsense).
The fundamental failure here is that the options are not so much transactions between employees and ms, but between employees and the current shareholders--a chance to become shareholders. This doesn't actually affect ms at all; it's a question of who owns ms. [though there is an effect in the wages--owners can be paid a lower wage than non-owners, just like any other business].
Bottom line: profit or loss is revenue less costs. Changing who owns the additional shares does not change the total profit, but merely the number of people splitting it.
3) Let's grant the division by zero, and assume that he really can predict future share price. Deduct what employees pay to exercise the options from the future share price that ms pays to clear them, and we get the cost to microsoft (more accurately: the transfer among owners of the various assets).
Oops, there's the problem: as more of these shares issue, the price drops. If microsoft has options outstanding for twice as many shares as the current share base, the proper share price to consider now is the price that would occur *if* the shares were exercised. That is, the price that would occur if the employees *kept* the shares after exercising the options. The more shares on the market, the lower the price for buy-back. Even if you grant the economically dubious assumption that the market price can be manipulated for small amounts of options (change is close to zero for a small number of extras), you have to assume that not only every shareholder of ms is a complete idiot, but that every other potential investor in the world is as well. Yes, the footnotes may "fool" some ("it's only a 3% error" may fly) for small amounts of options, but to assume that the same happens when the employees hold huge portions is silly.
Bottom line: to make the costs add up to enough to create a loss instead of profit would require the share price to stay up in the face of massive actual dilution, which wouldn't happen. Microsoft would buy back the shares at much lower prices in face of the dilution.
While I'm at it: the list of folks that agree with him set's off my b.s. baffle . . .
But the most important line is:
>6) Request to have me as a guest on your talk
>show, radio station or other media outlet or
>speak at your convention.
There we go: make me rich and famous.
Bottom bottom line: the claims of "fraud" are primarily arguments with existing accounting practice, some of which use the equivalent of division by zero to reach their conclusions. The author has a lot to gain, however, should not be dismissed. By the "unorthodox" definition (to be charitabl) of fraud used here, the claims themselve are fradulent.
[Note: I'm not arguing that ms stock isn't a price bubble. I believe so, but not for the non-reasons in this article.]
Lets follow the logic... stock market runs on PCs most PCs run windows MS stock grows coincidence? i think not.
Even if I could find any facts on this page to back up his outrageous claims (and I can't, all I can find is him saying over and over again that he has these facts), I still wouldn't believe him.
The next Cmdr Taco duplicate will be ready soon, but subscribers can beat the rush and see it early!
Maybe Roblimo wasn't sure if this story was accurate, and didn't want to look like an idiot by endorsing an idiot.
While Portfolio Theory provided quite unsurprising results, the way that Black/Scholes provides differential equations that usefully analyse what was thought of as statistical matters was pretty amazing, and has helped employ a surprising number of theoretical physicists in finance.
I would put index funds at the top of my list of "investments to consider" simply based on Harry Markowitz's 1952 Journal of Finance paper, Portfolio Selection. He didn't anticipate index funds yet at that time, but they're a pretty ideal representation of his construction of "efficient frontiers" and "optimal portfolios." (And I had his paper quite specifically in mind when I used the words "efficient" and "portfolio" in the same sentence...)
For the "compleat idiot," an excellent book on investing is A Random Walk Down Wall Street; it provides a reasonably friendly walk through modern finance theory, and happens to rank index funds fairly highly for use by "nonprofessional investors."
I like the idea of starting with a portfolio that's largely index funds, and gradually adding to that a reasonably diverse stock portfolio, as that allows avoiding the administration fees that mutual funds (of whatever variety) charge; that of course requires taking Buffet's position of "buying stock in order to hold it indefinitely."
If you're not part of the solution, you're part of the precipitate.
Yes, options can dilute the value of your stock. No, options are not being accounted for in the P&L because they don't really fit there. No, options are not very well accounted for in the balance sheet either, but every solution that has been tried has a serious problem.
Microsoft does buy the shares to fill the options on the open market, so they are better than companies that use treasury stock to give to employees who exercise their options. Their footnotes are good and are not misleading about the amount of options outstanding and the exposure that Microsoft shareholders face. Critics of options have no problem identifying the exposure because it is well documented in the footnotes. If you cannot or do not read and understand a financial statement, ask someone to help you or find a different investment vehicle.
This guy seems to really hate Microsoft...
But what he basically claims is that in Microsoft accounting (and specifically, in stating the earnings) the overhang of the existing stock options is not being considered. That's true. However, that's true for every company in the US that has issued stock options. This issue has been discussed by FASB (accounting standards setting body) several times and after quite animated debate, the existing situation -- that the companies are not obliged to put the outstanding stock options into their profit-and-loss statement -- was left to stand as it is now.
Basically, the situation is like this. Company X issues a stock option to employee Y at, say, $10/share. Let's say a year passed and the stock of company X is now trading at $100. You *can* say that the company sustained a $90 unrealized loss (I am ignoring the time value of money for simplicity) and that's exactly what Parish is saying. However, in the real world if the option gets cashed in, the company will not go onto the open market, buy a share for $100 and give it to the employee in exchange for $10. The company will just issue more stock.
Of course, this is not a painless procedure. The more stock is issued, the more the value of the existing shares is diluted (or "watered down"). If the company has 100 shares outstanding, each share was worth 1% of the company. If 100 more shares are issued, all shares will now be worth only 0.5% of the company, so the previous share owners clearly become worse off.
And that's exactly why the earning figures released generally show two numbers: one for outstanding shares (those that have been issued and are not treasury stock), and one on a fully diluted basis, which assumes that all stock options are turned into shares. It is quite misleading to say that this is a big scam that nobody knows about. Any investment professional understands what "fully diluted" means and that Microsoft does have a huge number of stock options outstanding. That hasn't stopped them from buying Microsoft shares in huge amounts.
Maybe the guy has a point in that the gullible public should be made more aware of the problem (and I freely concede that this *is* a problem: only not limited to Microsoft, not having such huge importance, and not likely to lead to the financial meltdown of the free world). But financial professionals know the situation quite well. And the measures that he proposes against Microsoft are quite ridiculous.
I suspect that Bill Parish at some point in the past shorted Microsoft stock (or didn't buy it, buying instead something else) and is now very very bitter about it...
Kaa
Kaa
Kaa's Law: In any sufficiently large group of people most are idiots.
This is how the corporate accounting rules work. They don't make any sense. There is a push to make stock option gains come on the company expense reports. It will probably happen. However, until then, Microsoft is following standard accounting rules.
However, as usual, Microsoft is doing a few shady things to exploit the system more than usual. Every tech company has HUGE stock options, the difference is the Microsoft plays more games then the rest.
Stocks are screwy anyway. According to economic theory, a stock's price = present value(future dividends), when in reality, there are no dividends because the tax structure makes capital gains taxed less. As a result, all earnings are returned and reinvested, making the company more valuable. However, because of the lack of dividends, the stock market has these problems.
Placing dividend income at (or below) the capital gains rate would fix the problems. It would force dividends to be paid giving stocks real values. Sure they would be based upon future earnings, but those earnings would start to come on established companies like Microsoft. Also, if cash on hand went to paying dividends, large companies wouldn't have nearly infinite revenue. Basically, profits go to the owners. However, by a shell game, instead of going to the owner, they are used to buy other companies, which increases the share price the amount that the dividend should (in theory).
This encourages the merger mania sweeping this country. A large, wealthy company with huge profits has 3 options:
1) Pay dividends
2) Buy companies
3) Pay dividends with stock buy backs
Dividends are out of the question for tax reasons. Three can cause trouble if it looks like you are paying a dividend (i.e., if Microsoft made %3 percent of it's share price in profits, they buy back 3% of the stock, which means that everyone's stock goes up that value, this continues until their are very few stock holders because the rest sold them back), however, this can cause suspicion as tax fraud. The resulting option is buying companies (or building internal divisions). Either way, a large company is forced to grow beyond it's optimal size, because real profits are out of the question.
Of course, if it grows beyond its means, diminishing returns kick in, growth drops, and the stock collapses... What a way to run an economy.
We need tax AND accounting reform.
Alex
A publication should not officially comment on something that may turn out to be false, because it can backfire nastily (libel?) and can cause damage to journalistic reputation.
As Slashdot subscribers, we don't have to worry about the latter problem, but I wonder if one day someone is going to libel somebody about a post made on Slashdot.
Can you provide a reference to a statistically validated study to support this claim? All splits on the NYSE are reported; it should be simple enough to do a study of the price increases resulting for all the splits over the last ten years. I'd expect to see such results in some place like the Journal of Finance; it would doubtless be a feather in the cap of someone wishing to overturn the Efficient Market Hypothesis.
If your claim were true, then even the weak form of the Efficient Market Hypothesis would be false.
However, those that actually study such things (as opposed to those that are out to sell you their Technical Analysis Newsletter) find things like the following:
- Graham and Dodd's Security AnalysisIt seems entirely more likely that if stock prices continue to rise after a split, this results not from the split itself, but rather for whatever reasons there were for the stock to rise in price before, perhaps because the enterprise is continuing to reap unexpectedly high profits.
If you're not part of the solution, you're part of the precipitate.
Other articles claiming the same have come along from more credible sources. Of course, if MSFT is "guilty" of "pyramiding," there are also a whole lot of other companies that are also guilty, particularly with the ludicrously highly valued activities that fall out of corporate mergers.
If "everyone else is guilty too," this undercuts this article's claims somewhat, as it implies that if MSFT is overvalued, then many other securities are similarly overvalued.
Which doesn't make Microsoft any righter, but does suggest that they're just a convenient "whipping boy" for someone's political concerns.
If you're not part of the solution, you're part of the precipitate.
- It targets a prominant public figure and alleges that he is at the head of a large scale conspiracy.
- Lack of firm evidence to support his position. I tried to read the spreadsheet, but my copy of Excel would not open it. Nothing else in the article gives me any confidence in his position.
- Various out-of-context bits and pieces are made to seem more important than they are. Specifically MS has been accused of manipulating its stock price by reserving money from rich quarters and turning it into profit during poor quarters. But this can only smooth out lumps and bumps, not maintain a long-term growth curve.
- Lots of references are made to people who don't believe the author, along with elaborate justifications for this. No doubt Alan Greenspan is snowed under by letters from crackpot economists and conspiracy nuts. This guy looks just like another one. Ditto the fund managers and newspaper editors. They know what a price support operation looks like, and this isn't it.
- Discussions of how courageous the author is being in revealing this truth.
- Predictions of apocolypse RSN.
I think MS is overvalued, but I very much doubt that the situation is this bad.Paul.
You are lost in a twisty maze of little standards, all different.
> Its hard to manuplate the Dow based on the choice of firms you put in.
Thanks for your post, because you told me something I didn't know. However, I still contend that it's manipulation. For example, CNN just reported that the 4 companies that came in had a 600+% growth rate over the past 5 years, whereas the 4 taken out had only a 60% growth rate over the same period. And the Dow has already raised its prediction for the end-of-year average.
Clearly, they've manipulated it to make it look better.
--
It's October 6th. Where's W2K? Over the horizon again, eh?
Sheesh, evil *and* a jerk. -- Jade
> Anything to keep those meaningless values from tanking!
And the Dow just switched out some traditional companies to make room for some active tech stocks. I have long thought that the fact that the DJ is an average makes it susceptible to artificial manipulation, to make it look like things are going better than they are. I think I now have an example to cite.
Best would be if they only swapped one new company in per year or so, rather than the four at a time like they just did.
Better yet if they had avoided swapping in Micorsoft, which is allegedly under investigation by the SEC for using a fraudulent/illegal cookie-jar scheme to inflate its stock values.
Conspiracy theorists are, of course, free to conclude that putting MS on the DJ was a move to interfere with the DoJ case, since any hard hit on the price of MS stocks will have a very visible effect on the DJ average, after which the defense will cry "Our society can't afford a negative judgement!"
--
It's October 6th. Where's W2K? Over the horizon again, eh?
Sheesh, evil *and* a jerk. -- Jade
"Kook" is too strong, and "idealogue" not strong enough. I think it is fair to say that this guy is more concerned and hyperbolic than most commentators, but I have read a number of stories from reputable sources (NPR, The Economist) that indicate that MS has had actual losses due to both time shuffling of earnings and the lamentable fact that no one (not just MS) has to report stock options as a debt.
In other words (and remember, not only am I not an accountant nor a lawyer, but I'm barely fluent in basic economics, so this is definitely a media created impression, not knowledgeable reportage), it may well be that MS has had multi-million dollar losses in the last few years. So have many companies that continue to have high stock prices and good long-term prospects.
I would very much like to see a change in the law requiring that stock options be included in financial reports as debts, because THEY REALLY ARE DEBT. The reason that I think the banking and SEC big-wigs are not all bent out of shape over this is NOT that MS is buying their silence, but rather that this has become a pervasive practice and changing radically and suddenly would probably have catastrophic consequences.
I would expect to see this practice regulated increasingly over time.
What I do not know is if this practice, if added up across the market, really amounts to a dangerous bubble. That would be an interesting question. The danger would depend on the ratio of vested, unredeemed stock options to the market cap of the company all weighed against earnings. If the P/E ratio is already out of whack and the percentage of options in total market cap is high, well, that would have to be risky, wouldn't it?
I guess I'd side with this gadfly to the extent that I think we should agitate for tighter regulation of the accounting practices that allow the "shadow debt" of options, and for greater disclosure.
Beyond that, I'd like to hear from several other experts and economists. This guy's story is interesting, but long on conclusions and short on data.
I believe that the author of this piece fully believes in what he writes about. It is unfortunate that he didn't include any of his actual analysis in the article, but then again, how many of us really want to look at all of the math involved? Well, OK, I do, but I've got a degree in Accounting, so I like that stuff.
I see some comments on Slashdot saying that what is mentioned in the article is just standard business practice. That is partly true. As the accounting rules currently stand, companies are allowed to play some minor games with their earnings statements. Examples of these include how inventory is valued, and how you account for orders at year end that you don't ship out until the next year. Probably the most flagrant of these is the "pooling of interests" that companies are allowed to use in mergers so that overpaying for a company doesn't hit you as a real expense. Thankfully that goes away at the end of next year.
However, the author of the piece makes it impossible to really see the extent to which Microsoft just has smart accountants and finance folks playing the game legally, and to what extent those smart folks are "cooking the books." You just have to realize that corporate accounting is really more art than science, and you do what you can within the law to look as good as you can. If I was an investor in MS (which I'm not), I wouldn't be worried by the author's comments. In fact, MS should go up in the next few days as all Dow index funds (not that there are that many of them) have to buy the stock to stay current with the index.
You can trust me. I'm with the government.
And yet, people still think that stock markets are a great way for society to decide how to invest it's time and resources.
They have worked much better than any alternative system that I know of... Or are you claiming that the government allocation of resources works better?
It's not democratic, and it's very obviously not even pragmatic.
It was never supposed to be democratic (in the one person -- one vote sense). You don't decide where the society will invest its capital -- all you do is buy pieces of companies that you like. The rest works out by itself. Read Adam Smith -- he understood how this works a while ago.
As to being pragmatic -- I take it that you know better than everybody what is pragmatic and what is not, right?
A casino in which the more money you have, the more likely you are to win.
A casino, maybe. If you buy and sell stocks randomly, it is mostly luck that determines what you'll get at the end. I don't see, though, why the more money you have the more likely you are to win. Let's say that I buy 1 share of Microsoft. The odds of the Microsoft stock going up are exactly the same for me and for Bill Gates.
Kaa
Kaa
Kaa's Law: In any sufficiently large group of people most are idiots.
I think Robin included that comment more as a reminder that just because Slashdot posts a link to a story doean't mean that they are endorsing it as the truth. Given all of the zealotry on Slashdot this seems like a very reasonable thing to do. Your *job* (should you choose to accept it:) would be to read the article and form your own opinion.
I'll agree that many stories do include a tounge-in-cheek comment with an anti-MS slant, but I've never taken them as an official Slashdot opinion, more as the posters attempt to be sly.
Anyways... I wonder how many people own MS stock and don't even know it. MS stock has been very popular with mutual fund managers (with good reason) for years.
I'm just cynical enough to believe that big companies, MS included, will try to get away with whatever they can. This sort of thing (if it's true) probably goes on more than we want to believe. The truth is, I'm sad to admit, I just don't have the time or the energy to really care.
> If MS stock were to deflate to it's normal value, I'd strongly worry about a deflation of stocks across the board, as the start of the pending 'diaster' that may hit the market.
That may be the plan. Let the bubble burst, have the uninformed/misled masses sell off cheap, then let the pros move in and buy cheap and sit back and wait for the market to climb back up to 10K within a year or so.
The stock market is, IMO, just a machine for pumping money out of amateurs' pockets and into the pros' pockets. For everyone who gets bit by buying high and selling low, someone else rakes it in by buying low and selling high.
--
It's October 6th. Where's W2K? Over the horizon again, eh?
Sheesh, evil *and* a jerk. -- Jade
This seems to have a touch of scare in it, but I wouldn't be surprised at all if it were true. It's funny that all the charts are in MS Excel.
It's 10 PM. Do you know if you're un-American?
Sure M$ is a pyramid scheme as are virtually all tech stocks. Technology actually works in such a way. Why do you think Moore's law works? Will it eventually crash? Doubtlessly but not in the way economists imagine. Before technology can crash in any big way we must have enough technology built up to deflate the cash behind the technology. At this point we should flip over into a gift culture completely as the economics behind technology are crashed. It isn't exactly a bad thing but just a change and changes can hurt even if they are healthy. Now maybe it's true M$ is carrying the whole thing a little to far. It does worry me a little having so many eggs in one shakey basket. I keep watching their spin.. so forward a few years ago but now begining to slow and wobble towards reverse. The people I really pity are their employees that work 50 hour weeks and take it all as stock expecting it to pay for their retirement and childrens education and such. If that bubble bursts they'll be the ones hurt the most. I for one would never put all my investments in any one product. It just isn't smart. :)
At what price learning? At what cost wisdom? The price is a man's peace of mind, and the cost is his life.
> This might explain why reporters are afraid to
> print the facts, for instance that Microsoft
> took a $9 billion tax deduction for wages in
> 1999 and didn't charge a dime of this amount
> against earnings.
Employee wages for R&D are tax deductable. It is done in the large corp I work for.
Speaking as a man with three years' experience as a stock market regulator ...
/. was trying to "manipulate MS' share price" is equally brainless. What on earth does the price of MS have to do with andover.net's IPO? You seem to be labouring under the impression that the stock market is a zero-sum game.
You're full of it, mate, and a poor Anthony Elgindy wannabe to boot. Slashdot posted a link to a site with a critique of MS accounting policies, which critique adds nothing to information already in the public domain other than the word "fraud" (which it is cleary wrong to add). Slashdot have not libelled MS, nor have they done anything which might bring down the wrath of the SEC. In any case, the public statement provisions of the law relating to IPOs have definite exceptions for media outlets (Or should newspapers stop publishing news in the run up to the IPO?)
And finally, your accusation that
full of it, I reiterate, and you will get no thanks from the SEC for wasting their time.
jsm
We get a lot of astroturfers here, though most of them post under the name "Anonymous Coward". [I once jokingly suggested changing AC to "Astroturfing Coward".]
However, I'm not conviced that there's a lot of ballot-stuffing going on here. IANA* [lawyer, economist, whatever], but it seems to me that the author raises some valid points, but tries a little too hard, and ends up overstating his case.
Most of his apparently valid points aren't exactly news, anyway.
Just my opinion; worth approximately what it cost you.
--
It's October 6th. Where's W2K? Over the horizon again, eh?
Sheesh, evil *and* a jerk. -- Jade
UK firms fear cost of tighter rules on options
"British companies may be forced to reconsider the way they reward staff as the result of a new threat to make granting share options more onerous. The Accounting Standards Board (ASB), an independent regulatory body with the power to set accounting standards, wants to make companies reflect the cost of issuing share options in their annual profit and loss accounts... While the ASB proposals are a long way from being finalised, the body is confident it will succeed in changing the rules. Andrew Lennard, assistant technical director of the ASB, said: "The arguments are compelling. I think we have the ability to set them out in a way that will command acceptance."
In recent years there has been considerable movement towards convergence in accounting standards. If the ASB can establish a respected and workable standard in the UK, this could make it much easier for the FASB to bring in changes in the US.
rodent...
rodent...
Tactical nuclear weapons are a viable alternative!
Various out-of-context bits and pieces are made to seem more important than they are. Specifically MS has been accused of manipulating its stock price by reserving money from rich quarters and turning it into profit during poor quarters. But this can only smooth out lumps and bumps, not maintain a long-term growth curve.
Maybe, but it's still illegal. With the valuation of Microsoft's stock (P/E approx. 60), it's very important that they show consistent earnings growth and beat consensus estimates. If they wern't "managing" their earnings, the stock would unlikely have this sort of valuation.
I'm not sure about the legality of speculating on their own stock (selling puts), assuming it's true, but it's certainly artificially supporting the stock. If they genuinely thought the stock was a good value (which they don't!), they'd simply be buying it back...
I fully expect Microsoft's stock to take a serious dive sometime in the next year or two based on decreased earnings growth and declining margins, and some of these additional factors could certainly add to the downward momentum when the tide turns.
Warren Buffet is adamently opposed to stock splits -- he refuses to permit them for his own companies, and discourages them publicly for others.
:)
He believes a stock split artificially inflates the price of stock, and would rather see large pools of investors (as in a mutual fund) buy single shares of high-valued stock to split among investors. You can invest in mutual funds which simply own shares in Berkshire Hathaway.
This goes with this investing advice that "the ideal amount of time to hold a stock for is forever". It's good investment advice, since it relies on the core meaning of the market -- we buy stocks because we believe companies will make money, and we want a share in the profits. It's the furor that ensues when we forget this and start madly speculating that causes investment bubbles and overvalued markets, which is bad for everbody.
Basically, Buffet is the antithesis of a day trader. Obviously, I have a tremendous amount of respect for him
...and it didn't seem irrelevant. He has his facts in order and the fundamental problem was well put. M$ has been lying extensively for years. I had wondered how a major company could put off MAJOR (NT5) product release indefinitely and still have 40-50% profit margins, now I know.
+&x
- A.P.
--
"One World, one Web, one Program" - Microsoft promotional ad
"Remember when the U.S. had a drug problem, and then we declared a War On Drugs, and now you can't buy drugs anymore?"