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February 2003

February 15, 2003

The Lakers and the Playoffs in the Same Breath
Maybe the Lakers WILL make the playoffs
posted by Rick Gagliano

The Lakers and the Playoffs in the Same Breath

On January 28, I wrote a story titled, "NBA Travesty - The Lakers Will Not Make the Playoffs," for which I earned the disdain and disrespect of many AllSports fans. I am still hoping for the Pulitzer Prize if it turns out that I'm right, though since that time the Los Angeles Lakers won seven straight and are staring at the Houston Rockets and the 8th spot in the Western Conference.

The Lakers actually could have leapfrogged the Rockets and taken a 1/2-game edge, but something funny happened at what used to be the Forum - now the Staples Center - last night. The Lakers lost and the San Antonio Spurs rewrote NBA history by winning their seventh straight road game.

By the way, winning seven in a row on the road in the NBA is quite an accomplishment. Not only are there very few seven-game or longer road swings, winning away from home is difficult in the this league. Even some good teams have road woes. What makes the Spurs' run so impressive is that they didn't run over a bunch of patsies; they beat some quality teams out there - including the Lakers. Prior to last night the Spurs' had put a hurt on Indiana, Orlando, Miami, Golden State, Denver and Portland. Sure, Miami and Denver are walk-overs, but the rest aren't bad. Kudos to the Spurs. Back to the Lakers.

Prior to last night, the Lakers, and their seven-game winning streak were the talk of the league. Kobe Bryant had been magnificent over that stretch, averaging 42 points per game and carrying the Lakers toward the promised land of the post-season. But reality came back to bite the Lakers right there in Tinseltown. Dreams of the playoffs were put on hold temporarily when the Spurs opened a nine-point lead and never looked back. The Lakers could not overcome a team that played solid defense for the entire 48 minutes - which is what it takes to win in this league.

Having Kobe and Shaq score more than half of the Lakers' points is not unusual. Having Kobe average more than 40 per game is. Here's what the two top Lakers did during their seven game extravaganza and the percentage of team points they scored.

January 29, 99-90 over Phoenix. Kobe 40, Shaq 25. 66%
January 31, 124-115 over Sacramento. Kobe 38, Shaq 36. 60%
February 1, 99-87 over Utah. Kobe 42, Shaq 21. 64%
February 4, 97-94 over Indiana. Kobe 35, Shaq 19. 56%
February 6, 114-109 over New York. Kobe 46, Shaq 33. 69%
February 11, 121-93 over Denver. Kobe 42, Shaq 20. 51%
February 12, 113-102 over Denver. Kobe 51 Shaq 18. 61%

Obviously, if Shaq and Kobe are putting up roughly 60% of the teams' points, somebody else is not contributing. Notwithstanding the fact that Derrick Fisher is consistently burned by better guards game in and game out, the problem seems to lie primarily on the small forward position. In the closest games during the streak, Rick Fox and Robert Horry were horribly outplayed. They would have done better taking the nights off. Against Indiana, Fox, 25 minutes, 2-7, 6 points. Horry, 30 minutes, 2-9, 6 points. Against Utah, Fox, 23 minutes, 4-5, 9 points. Horry, 28 minutes, 0-2, 0 points.

And last night in the loss to the Spurs: Rick Fox, 24 minutes, 0-4 shooting, 0 points. Robert Horry, 27 minutes, 2 for 6, 5 points. That's 5 points in 51 minutes from the #3 spot. That is just not going to cut it.

And while Kobe is putting up his incredible numbers - Kobe had 44 last night, Shaq 21 - he's not playing very much defense. Stephen Jackson was 4-4 from beyond the arc last night. Nobody was guarding him. Kobe was taking a cappuccino break, supposedly.

So, the Lakers, who arguably have the best scoring tandem in the league, also play pretty spotty defense, have a point guard who gets burned and a pair of small forwards who don't contribute much at times. Great team? Championship caliber? I don't know. Let's not overlook the fact that Kareem Rush, the seventh man in the rotation, hasn't found the range from 3-point land. He's 12 of 42 (28%) from out there, it being just a little further away than the college line which he enjoyed so much at Missouri last year. Rush is also shooting a remarkable 38% from 2-point range, and since he spells either Kobe, Horry or Fox, he's kinda, uh, well... a bust.

OK, so the Lakers may make the playoffs. There, I said it. Looking at the schedule, it seems to favor their chances. Nine of their next eleven games are at home. Meanwhile, the Rockets, who are clinging to that 1/2-game edge over the Lakers, play 7 of their next ten on the road - one of them at the Staples Center, Tuesday, February 18 against the Lakers. That could be for all the marbles, or, at least the #8 spot in the Western Conference marbles, which isn't really too many marbles at all.

If the Lakers DO make the playoffs, by no means a certainty, they will likely not win the Championship. Why? Well, the above-referenced items and the fact that they'll be the road team in the first two rounds at least. So, why not just skip it this year, regroup and try again in 2003-2004? Huh, how about it, guys?

I'd also like to say thanks to the many fans who have commented on my articles. I do have to point out that I am a Lakers fan and have been since the days of Jerry West, Elgin Baylor and Wilt Chamberlain. I am, however, also a realist and I don't see this team doing much this season. They had two close calls in last year's playoffs and didn't retool, add new players or make significant changes. Other teams have made changes and have caught up to the Lakers. I wish the Lakers the best, but the best they can do this season seems to be 8th place in the Western Conference. And that's not good enough.

February 10, 2003

Mutual Funds and the Pension Bomb
An ongoing disaster being hidden by corporations and government
posted by Rick Gagliano

Take a look at the January 27, 2003 issue of Business Week. Oh, you don't have a copy handy? OK, I'll share my insights with you then, and it won't cost you the $2.99 cover price and you won't have to subscribe at the ridiculously low rate of... whateveritis!

First, the issue is embarrassing and foreboding because on the cover is Rich Gannon, quarterback of the Oakland Raiders, the team that just lost the Super Bowl. Gannon himself threw FIVE interceptions. So, at least Business Week is keeping with tradition and fairness. Not only are they giving you losing stocks and mutual funds, now they're pimping potential losing sports wagers (the issue was on the newsstands well before the game was played).

But that is not the reason to look at this particular issue of one of the world's leading business publications. Across the top is scrolled "Annual Scoreboard THE BEST MUTUAL FUNDS." That being somewhat of an oxymoron around these parts, as in, we have the BEST cigarettes or the BEST chemical weapons, and the performance of the vast majority of mutual funds has been utterly and unequivocally a disaster for the past three years, so how could any of them be labeled "BEST" by anybody, much less the crack (or maybe the crack-smoking) staff of Business Week?

Well, those adroit and self-consumed editors outdid themselves with their list. Not only did they offer what, in their minds, constituted the best of a horrid lot of funds, they gave us over 600 of them from which to choose! Joy! Joy! Joy!

Scanning this list of the great, superb and undoubtable magnificent investment opportunities, I found a disturbing and recurring trend, scarily, in the column which seemed to me to be the most important, 2002 Returns. Yes, I want to know how these outstanding funds, run by equally outstanding and brainy Harvard and Yale-type managers, fared over the course of last year. One should be concerned with these things, as the return on capital invested is the path to wealth, no?

The very first fund (Business Week deemed to put them in alphabetic order so as not to be accused of favoritism, no doubt) sent shivers down my spine. The high and mighty ABN AMRO CHICAGO CAPITAL GROWTH N fund was given an overall rating of B+ and a category rating (according to the note: compares risk-adjusted performance of fund within category.) of A. Top marks! And such a catchy name. Surely, I need go no further, as this fund is the one for me! More Joy! Joy! Joy!

But what's this? The ABN AMRO CHICAGO CAPITAL GROWTH N fund showed a percentage return of -19.4% both before and after taxes (No surprise there as you shouldn't be able to tax a loss, though if the trend in the markets continues for long, the Midas minds in the government will find a way to fix that no doubt.). Hells bells! That's just dreadful. Almost 20 percent in just one year. That means you could have done the same, without any muss or fuss, analysis or brain-draining research, and without the aid of this "scoreboard" by just taking a twenty dollar bill for every hundred you wanted to invest and just tossing it out of your car or SUV window as you went careening madly towards investment wonderland (we're still out driving, looking for that place). Geez, Louise, if we had all done that, the highways would have been littered with twenties and there would be no more poverty, homelessness or disease. Or, at least we'd like to think that we put a dent into those problems by tossing money out of windows. Or we could have invested it with the bright young guy who runs that fund, which, remember, got a B+ and an A for grades. Very good.

As I scanned the pages of this sensational scoreboard, I noticed that nearly all of the funds (I believe there were between five and ten that actually showed gains) showed 2002 losses. Horror! People were actually losing money in the BEST funds last year? One shudders to think how people's investments fared in BAD or even THE WORST funds. Frightening! I scanned the list, noting losses routinely in the 15-25% range, some more, some less, but still, overwhelmingly, losses. Magnificent losses, not ordinary, yeah, 5 or 10% losses, but big fat ugly double-digit losses. Well, I'm certainly not recommending Yale or Harvard for business school anymore. These geniuses have managed people's money right out of their hands. They'd be better off stuffing that investment capital into a mattress, putting it into a shoe box or burying it in the back yard of their overvalued home. Some people are actually doing those things. Some people actually bought gold last year. Wise.

Now, back to the title of this tome, which had something to do with pension funds - and you thought I forgot. Well, I didn't. The sole reason I bring up pension funds and mutual funds in the same breath is that they are very similar and like animals. They invest heavily in equities, which, as we now know, was not such a good idea last year. Or the year before. Or the year before that. But looking at this scorecard of the BEST mutual funds, one must raise the following questions: If some of the supposedly brightest guys on Wall Street, managing these funds, lost all that money last year, how come corporations with pension funds are claiming that they made on average 9-10% last year? And the year before that? And the year before that? Isn't it more likely that the pension fund managers are probably not quite as bright as the mutual fund managers and actually LOST MORE? Huh? What gives?

The truth hurts and it's going to be very painful when these pension fund losses begin to get some notice. The corporations that must report to the SEC use estimates of their "gains" on pension fund holdings. Not a single one that I know of has reported a loss for the year, or last year or the year before that, even though the various stock markets have generally collapsed during that time. The truth is that these pension funds are LOSING money, have LOST money and have to be refunded and that means the earnings these companies reported, should there ever come a day that the SEC requires complete and total honesty, should be restated. Barring that, at the very least, these companies will have to spend some of their profits THIS YEAR and NEXT YEAR to repair the damage done to their pension funds, or change the payout structure, or, which is the most likely case, lie about it all, rip off all the pensioners and continue to tell everyone that everything's just fine, until it gets to be such a burden and so obvious that even our diligent horde of financial reporters will stop for a moment from scratching their collective heads and actually start writing about how vast and horrible this problem really is and then, maybe, somebody will tell the truth, or part of the truth, or something that sounds like the truth. Maybe

The problem is that nobody wants to know about these things. They all want profits to be higher, earnings to be soaring, stock prices rising. The opposite of those things is what has been going on and what we are about to experience and it isn't going to be pretty as we head down this particular road. I'd guarantee it, but I'd hate to be right, even though I probably, likely, like 99% sure, am.

The pension fund mess in the nation's largest, oldest and established companies - many of them stocks which are components of the Dow Jones Industrials - is going to absolutely shatter investor faith for a very, very, very long time. It will likely go down as one of the worst financial disasters of all time. The good news - as if there is any from such a catasthophe - is that it will probably signal the beginning of the end of this wretched, seminal, secular bear market.

February 06, 2003

Who's Really #1 In the NCAA and does it matter?
A look at potential #1 seedings in the March Tourney
posted by Rick Gagliano

After watching various teams melt down in the past week, beginning with Pittsburgh's narrow loss at Syracuse and culminating in the monster crushing of Florida by Kentucky, it's becoming obvious that being ranked in the top ten in any poll is not a formula for success.

Over the past week, we've all watched in horror (or glee, depending upon which side of the line you're on) as Duke got humbled by Florida State, Connecticut lost to Boston College at home home by 25, Michigan State came from behind to best Illinois, USC took out Oregon, 91-76, Colorado beat up on Texas, 93-80, and just last night (Wednesday, Feb. 5), Seton Hall upended Notre Dame, 78-72, while UConn lost another, probably putting their Top 25 ranking to rest for now, to Virginia Tech, 95-74.

The sheer number and the magnitude of some of these losses by supposedly "solid" teams boggles the basketball brain. The overriding similarity of the gargantuan upsets was that the ranked teams were losing these games (with the exception of UConn) on the road. In both the ACC and Big-10, road teams are winning less than 25% of games, so the road is indeed rough. But it also points out the balance and parity in many of the conferences. Teams gather great amounts of confidence on their home courts, usually playing in front of huge, screaming, wild crowds.

A few teams have escaped relatively unscathed during all this mayhem and they now look to become the top seeds when the NCAA Tournament Committee commences the unenviable task of seeding 64 teams for the annual March into Madness. Of these top teams, Kentucky, who put all doubts to rest by dominating Florida in the first half and coasting to a double-digit win, did its damage on their home court. The Wildcats look like a solid #1 seed come March, because they have a stifling defense, upperclassmen playing key roles and a solid coaching staff, with grossly underrated Tubby Smith roaming the sidelines.

Speaking of Kentucky, down the road in Louisville, Rick Pitino's squad has ratcheted up their winning streak to 16 straight with a 77-71 win over Cincinnati, and also look like another #1 seed. Not to be missed in this streak is that the Cardinals took out Kentucky back on December 28, and their last lost, way back on November 30, was to another team worthy of a closer look, Purdue. The Boilermakers finally showed up in the Top 25 this week after Indiana and Michigan State took turns stumbling out of it.

While the Cardinals roll on, also note that the win over Kentucky was also the Wildcats' last loss. Kentucky has an 11-game winning streak of their own going.

If Louisville and Kentucky survive the rigors of their respective remaining conference schedules and do make it to the tourney as #1 seeds, who will fill the other two spots? The consensus, all season long, has been Arizona in the West, though there are doubters as these Wildcats dropped a home game to Stanford, 77-82, on January 30 and overall the Pac-10 is not considered to be very strong this season. Other than that loss, however, Arizona is nearly perfect, with only a 1-point defeat at LSU tarnishing their record. Luke Walton was missing from the lineup for that game and probably would have tipped the scales in AZ's favor. Still, the Wildcats look pretty solid at 16-2 and a relatively light Pac-10 schedule ahead. Lute Olsen could potentially bring this squad to the tournament at 25-2.

The last spot is the most troubling to fill, as there are a variety of candidates including Texas, Oklahoma, Oklahoma State and Kansas from the Big 12, Pitt and Notre Dame from the Big East or Duke or Maryland from the ACC. The Big East and Big-10 are likely to get shut out of #1 seeds this season, and the ACC might be wondering what happened as well because the Big 12 teams look mighty talented and well-coached. It may easily come down to Kansas or Texas for that other #1 spot.

In the ACC and Big East, there's still some sniping going on from the likes of Wake Forest and Syracuse, both of which are improving teams with upset and big game capabilities. The conference tournaments will be telling and those neutral-court games will reveal quite a bit about individual teams' ability to get it going in the tournament. Other teams to keep an eye on which are not going to get #1 seeds are Marquette, Creighton, St. Joe's, the aforementioned Purdue and just about any team that gets in from the SEC, notably Georgia and Auburn.

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Why Large Investment Firms' Analysts Can Never Be Trusted
Buy, Sell or Hold? Does it matter?
posted by Rick Gagliano

In 2002, the revelations of misleading and outright false investment recommendations form some of the nation's top brokerages became the focus of investigations, scandals and the general news. Savvy investors, who follow such things, were not surprised that the Henry Blodgets and Jack Grubmans of the world had misled investors. In fact, many stock traders had already been alerted to the tricks of the trade and had been warning others for years. It was not unusual to see on internet stock message boards - shortly after an upgrade or downgrade - notes that bent contrary to what the analysts were recommending.

The prevailing knowledge worked like this: if a stock was solid, but overpriced, and a firm wanted to establish a position in the shares, a downgrade would be issued; conversely, a company with limited appeal, but overpriced - like many of the dot-coms and tech stocks - in which a firm had a position it wished to exit, an upgrade would be issued. In each case, the movement of the stock could be rigged to suit the need of the brokerage in question. So the saying went, "if they upgrade, sell, if they downgrade, it's a buy."

That this would seem so unusual or unseemly is to be naive to the extreme, and that's exactly what most of the individual investors in the late nineties and early part of the new millennium were. To say that most investors in those days trusted analysts or that most investors didn't perform their own due diligence is an understatement of immense magnitude, overshadowed by the dismal results of the past 3 or four years. They talked, many listened, blind to overall financial outlook of individual companies and/or the entire economic landscape.

When the dust finally settles - it's certainly not over yet - the public will have been fleeced of trillions of investment dollars by firms and analysts whose business dictates that they do three things: 1. Protect the investments of the firm; 2. Protect the investments of their largest clients; 3. Encourage trading by everyone else.

It comes as somewhat of a surprise, even to seasoned investors, that these firms don't issue upgrades and downgrades every day on hundred of companies. That would certainly encourage trading. Of course, it would be absurd - almost as absurd as believing them - to issue so many recommendations. But, it also goes contrary to the first two directives of the brokerages. In order to protect the investment of the parent firm, analysts are not encouraged to make their best picks public. It's like a trainer who has stabled a hot horse, ready to race. He knows the horse has been eating and sleeping well, training strongly, and is in the right spot to win the race. The trainer knows, and so do the barn hands. But telling the general public is a distinct no-no because that would only lower the odds, decreasing the eventual payout. The trainer might also instruct the workout boys to breeze the horse slowly, clocking in at less than optimal times, leading the handicappers to believe that the horse is less than fit. The result is that an even-money horse goes off at 3-1, a HUGE difference if you're betting.

Same thing with stocks. If an analysts knows a company is about to report record earnings, or new product sales have exceeded expectations, or other such good news, the analyst and his/her firm will be in first, their top clients, next and finally, after the stock has run up 20 or 30 percent, the upgrade will be issued. The stock may run another 10 or 15%, all the while the firm and their top clients are selling their shares to the unwitting public, as the stock gets to a price where it is no longer a bargain or share price movement is near or at the top.

When a stock returns 20 or 30% over a short time, shouldn't the analysts be telling us to sell? Sure, if they had told us all to buy when shares were cheap. But they didn't. They kept that information to themselves, reaped the profits and tacked on more gains when they told everyone in the world to buy. If analysts and brokerages were really honest, fair and transparent, the upgrades and buy ratings would be issued when the share price is low and they would advise clients to sell when the stock has seen significant gains.

However, Wall Street works in mysterious ways, ways that are not kind to small, individual investors. They don't tell the whole story, and while not outright lying about stocks most of the time, they rarely tell the whole story in a timely manner, i.e., one that would be most beneficial to the largest number of people. So, because of the dictates of their business, analysts, unless they are completely detached from companies who buy, sell or own securities, can never fully be trusted. Their first allegiance is to their firm, their last to the general public. As long as brokerages can make more money trading stocks themselves than the commissions generated by encouraging individuals to buy and sell, there will always be a double-edged sword and at least a large kernel of doubt surrounding their practice.

And just today, prior to the merket opening, Merrill Lynch has issued a sell rating on Goodyear Tire (GT). The stock closed Wednesday (02/05) at 3.67. Less than a month ago it was trading for more than 7.00. It's been on a steady decline from 30 a year year ago, and as late as August it was trading in the mid-teens, so why did it take this "analyst" nearly a year to tell everyone NOT to buy this stock and why is he telling us to sell it now that it's lost nearly 90% of its value? Goodyear announced that it was cutting it's dividend (from .12 to zero) two days ago. Didn't the analyst have a clue about this beforehand? Isn't that what he's being paid to do? Analyze? Anyone who hasn't sold by now is either asleep or dead, as well as broke. Is the analyst really doing anyone a favor here? It may be prudent to keep an eye on this one because there's probbaly a good chance that Merrill will be buying soon. Around and around we go.

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February 05, 2003

Downtown Magazine's NCAA Men's Hoops Top 25
Kentucky takes top spot!
posted by Rick Gagliano

NCAA Men's Basketball Top 25 - February 3, 2003

1. Kentucky
2. Louisville
3. Arizona
4. Texas
5. Florida
6. Oklahoma
7. Kansas
8. Marquette
9. Maryland
10. Duke
11. Notre Dame
12. Oklahoma State
13. Pittsburgh
14. Stanford
15. Georgia
16. Syracuse
17. Wake Forest
18. Creighton
19. Illinois
20. Purdue
21. Dayton
23. North Carolina State
24. St. Joseph's
25. Mississippi State

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