UBS’s Take on the World Economy

In a recent conference call with clients, UBS’s chief economist and head of asset allocation, said that their targets for growth in the global economy have been revised downward.  UBS is now expecting 3.6% growth in 2008 and 3.8% growth in 2009.  Specifically, the U.S. is projected to grow at only 0.8% this year down from a standing estimate of 2.1%, while growth in Asia is expected to grow at 7.8% and growth in euro-based countries should grow 1.3%.
 
The dollar is expected to remain weak against emerging currencies, with the euro peaking at around $1.50 and giving up some gains to about $1.40 in the back half of this year.
 
Financials kicked off the current market volatility in the U.S. and elsewhere, and while there have been some significant write-downs thus far, UBS believes that a second and third leg of write-downs are still to come, possibly from credit card issuers and for corporate bonds.
 
What does this mean for global stock markets?  UBS currently likes U.S. equities, especially relative to European equities, believing that expanding profit margins will be one catalyst for enhanced market valuations.

 

Laurie Berman, Senior Vice President, lberman@pondel.com
 
 

Hedge Funds, Activists Go Undetected

The 13D rule requires investors to disclose stakes of more than five percent, and the Hart-Scott-Rodino Act requires investors to disclose when they invest more than $60 million.  With these required alerts in place for decades, why are public companies surprised when they find a hedge fund or activist fund has taken an enormous stake and is well poised to mount a proxy contest?  
 
Today’s hedge funds and other activists have cleverly found that the law requires them to disclose only when they control more than five percent of the vote, not five percent of the “economics” in a company.  These hedge funds and activists have quietly and cunningly been able to get around the rules through complex “swap” agreements with investment banks.
 
Here’s a simplified version of how the loophole works: An investor calls an investment bank and says, “Please buy 100 shares of company X. You can hold onto those shares in your name — and technically, you can do whatever you want with them. In six months, if the shares have gone up, you’ll owe me the difference. If they go down, I’ll owe you. And for all the cartwheels you’re doing for me, I’ll pay you a ‘small’ fee.”
 
The banks buy the shares on the investors’ behalf, but technically never transfer full ownership until a predetermined time and price.  During the time in which these shares are “parked” in the investment bank’s name, the investors do not own the shares at all, just the “economics” of them, and are therefore not required to file the regulatory notices.
 
Is this legal?  The answer is yes.
 
Although it may sound absurd, the funds are doing nothing wrong. But given the possibility for abuse and the impact on other shareholders, this loophole should be closed.
 
A spokesman for the Securities and Exchange Commission said they are looking into the issue — but clearly they are not acting fast enough.

 

PondelWilkinson, investor@pondel.com
 
 

NYSE Euronext to Acquire AMEX

NYSE Euronext, the owner of the New York Stock Exchange, announced that it has entered into an agreement to purchase the American Stock Exchange (Amex) for $260 million in NYSE Euronext stock.  As part of the transaction, current Amex members will be entitled to receive additional shares of NYSE Euronext common stock based on the net proceeds from the expected sale of Amex’s lower Manhattan headquarters.
 
The deal is expected to close in the third quarter of 2008.  No word yet on what impact, if any, the merger will have on Amex listed companies.

 

Laurie Berman, Senior Vice President, lberman@pondel.com
 
 

Fed Head Acknowledges Risk

Federal Reserve chairman Ben Bernanke told the Women in Housing and Finance and Exchequer Club today that the U.S. Central bank is prepared to act aggressively to help stem problems caused by the recent housing slump and strains on the credit markets that are putting economic growth at risk.
 
Many analysts who fear that the United States is headed for a recession, reacted positively to the Fed chairman’s remarks and his public acknowledgement that the economy may indeed be in trouble.
 
Bernanke commented that policy makers are now more worried about sustaining economic growth than they are about inflation and pointed to rising oil prices, lower stock prices and falling home values as drivers for hurting consumer spending over the next year.
 
The Federal Open Market Committee, the Fed’s policy setting body, will hold a two-day meeting January 29-30.  Bernanke’s comments today reinforced expectations that rates will be cut by a half percentage point.

 

Laurie Berman, Senior Vice President, lberman@pondel.com
 
 

Kendall Jackson

So, NIRI hosted its annual Los Angeles dinner last night at the Loews Santa Monica Beach Hotel.  I was the first person to arrive (gulp) and quickly did a u-turn at the door to avoid feeling like an over zealous investor relations professional.  But then I noticed Kendall Jackson standing at the bar.  I affixed my name tag to my lapel and meandered over to the bar for a chat with Mr. Jackson.  I kept my head down at first, you know, to keep the casual nature of the event in full effect.  Armed with business cards and a fresh coat of antiperspirant, I proceeded to speak with Mr. Jackson.  I said hello, and before he could utter a word, his handler, the bartender, informed me that it would cost $5 to speak with Mr. Jackson.  
 
I forked over the $5 and spent the next hour and a half entertaining Mr. Jackson, along with other investor relations professionals.  We met Jeff Morgan, the recently appointed chief executive officer of NIRI.  We said hello to Jim Lucas of Abernathy MacGregor.  We also listened to Linda Kelleher, executive vice president of NIRI, talk about shareholder activism and where the industry is headed.  Specifically, Kelleher said instead of letting activist shareholders come to you with questions about a particular company, you should proactively be reaching out to them.  My motto for 2008: Engage activism with activism.  And with that I finished my conversation with Kendall Jackson and proactively ordered another one at the bar.

 

Evan Pondel, Senior Associate, epondel@pondel.com
 
 

E-Proxy Timeline for Early Adopters

According to NIRI, 29% of investor relations officers surveyed said that they expected their companies to adopt a combination of notice and full set delivery of proxy materials in 2008.  22% plan on using the notice only model (also called the notice and access model in which a company sends a notice to shareholders at least 40 days before its annual meeting of shareholders letting them know that proxy materials are available on a public website other than EDGAR), while only 3% plan on sending a full set of proxy materials to all shareholders.  Almost half of those surveyed were still undecided as to how their company’s proxy materials will be delivered this year.

For those companies choosing to blaze the e-proxy path, the following timeline provided by NIRI should prove helpful:
 

  • Immediately – Determine method for proxy material delivery (notice only, full set delivery only or a combination of the two).
     

  • 60-100 days prior to annual meeting – Coordinate proxy delivery plans and important dates with partners, including your IR firm, outside legal counsel, annual report printers, proxy material website builders and proxy solicitors.
     

  • 46+ days prior to annual meeting – Confirm that your proxy website is running properly.  Remember that materials must be in both readable and printable format.  The website must ensure visitors’ anonymity and be capable of handling heavy traffic.
     

  • 45+ days prior to annual meeting – Deliver notice and access cards to all parties responsible for mailing materials to your shareholders.
     

  • 40+ days prior to annual meeting – Mail notice and access cards to shareholders (as well as printed proxy materials if you are adopting a combination delivery strategy).  Remember to file your notice and access card with the SEC.

 
Some additional NIRI pointers:
 

  • Monitor proxy responses regularly.
  • Respond to investor requests for printed materials within three business days.
  • Record requests from shareholders who have opted to receive paper materials on a permanent basis.

 

Laurie Berman, Senior Vice President, lberman@pondel.com
 
 

A Little Optimism for ’08

It never hurts to express a little optimism for what could be in 2008.  And the Wall Street Journal did just that this morning with a list of why investors should feel pretty darn good about the year ahead.
 
Drum roll, please.
 

  1. Stocks rally — Assuming we’ve seen the worst in the fourth quarter.
  2. The housing market stabilizes — Really, how low can it go?
  3. Consumer spending remains solid — A healthy job market is keeping those cash registers ringing.
  4. Corporate profits accelerate — The jury is still out on this one.
  5. Economic growth accelerates — The Fed’s gonna have to provide some assistance here.

 

 – Evan Pondel, Senior Associate, epondel@pondel.com