Curbing Enthusiasm on Short Sales

On Wednesday, February 24, 2010, the SEC narrowly approved curbs on short selling, addressing what some consider to be one of the major contributing factors of the 2008 financial crisis.  The new rule is a modification of the “Uptick Rule,” which was designed to be a preventative measure against downward spiraling stock valuations in turbulent markets.  However, the rule was eliminated in 2007 because of its lack of efficacy.
 
The new rule will operate much like a circuit breaker, taking effect once the price of a stock has declined by 10 percent in a given day. Once triggered, short sales will no longer be permitted at or below the National Best Bid or Offer for the remainder of the day and the following trading day.
 
The modified uptick rule will take effect in approximately 60 days, but stock exchanges have up to six months after that time period to implement the new rule.
 
Highly debated since the 2008 financial crisis, short sales have been one of the most controversial issues facing the SEC.  Opponents of such regulation have pointed out that financial stock valuations tumbled even after regulators imposed a short-term ban on short selling late in 2008.  Others have voiced strong disappointment that the modified uptick rule did not go far enough to protect investors.  One thing is for sure – this is not the last we’ll hear on short sales.

 

PondelWilkinson, investor@pondel.com
 
 

New SEC Scrutiny

  1. The SEC is now requiring, not merely suggesting, that companies disclose whether the roles of chairman and CEO are held by one person, and if so, why the company wants to keep it that way and the reasons it believes such an arrangement is appropriate. There also must be a separate “lead” director.
     

  2. In addition to business experience of directors, disclosure henceforth must be made as to specific experience, qualifications and attributes that led the nominating committee to the conclusion that the person should serve as a director in the first place. Likewise, if a director is chosen to sit on a particular board committee, the reasons why should be disclosed.
     

  3. Stockholder meeting voting results this year must be reported via an 8K within four days of the meeting. The old requirements, no longer in force, called for reporting results in Forms 10-K and 10-Qs.

 
As with all SEC mandates, legal counsel should always prevail.

 

Roger Pondel, President, rpondel@pondel.com
 
 

Reading Between the Lines

When I was a kid, one of my father’s many recurring jokes was: “If it’s raining and you want to stay dry, just walk between the drops.”  Sorry Dad, it wasn’t that funny, and, of course, it wasn’t even possible.
 
It is possible, however, at least interpretively, to read between the lines of some of the negative economic news these days and find something favorable.
 
For example, take comments published in the Wall Street Journal from London Business School finance professor Elroy Dimson on long-term investment returns:
 

  • “Stocks may face a long road back.”
     

  • “There’s no guarantee of a quick rebound.”
     

  • “We’ll have to wait nine more years before the Dow Jones average has a 50% chance of hitting its 2007 highs.”
     

  • “It may be a long time before investors are again willing to value stocks at much higher than the long-term average of 15 times earnings.”

 
U N C L E!  Enough already!  OK, so here’s the silver lining between the professorial comments: 
 

First, if, as the good professor professes, the Dow Jones average will double in nine years, that will signify a total return of 7.5% per year. Try to get even close to that by stashing your money in a bank account.
 

Second, for more than 100 years through 2008, U.S. stocks have averaged an annual 6% return after inflation. Not bad either.
 

And third, there are many stocks of solid companies these days that are trading well under 15 times earnings, leaving plenty of room for appreciation.

 
So be careful, but jump in already. The water’s not that bad.  Just don’t try walking in between the raindrops.

 

Roger Pondel, rpondel@pondel.com
 
 

The Audacity of Junkets

Just months after floundering financial institutions secured billions of dollars in bailout money from American taxpayers, they are getting plenty of heat for their dumbfounding misuse of the money.
 
The most recent case involves Wells Fargo & Co., which canceled a pricey Vegas trip after their itinerary was leaked to the media and created a storm of criticism. Wells Fargo, which collected $25 billion in bailout money, had booked 12 nights at the Wynn Las Vegas and sister hotel, the Encore. Not exactly planning to slum it, were they?
 
This is just the latest transgression. Wall Street securities firms should send a thank you note to Wells Fargo for replacing them in the Audacity Hall of Fame and knocking them off the front pages. Wall Street was blasted by President Obama and pretty much everyone else with a conscience for its irresponsible behavior after reports of $18.4 billion in bonuses being paid out in 2008 as the industry collapsed, costing taxpayers billions of dollars and tens of thousands of job cuts.
 
The Wells Fargo incident also comes on the heels of an ABC report that accused Bank of America of allegedly spending $10 million on a week-long Super Bowl party and Morgan Stanley planning an “elegant gathering” at a five-star resort in Florida.
 
Instead of spending taxpayer bailout money on lavish Vegas junkets, bonuses in the billions and executive spa treatments, maybe these financial institutions should be using the cash to buy a clue. Or, at least, spend it on a good crisis communications firm like PondelWilkinson.

 

— Ron Neal, rneal@pondel.com
 
 

Yes, Virginia, There is a Santa Claus

All is not doom and gloom for this coming holiday season.  While pundits and prognosticators are predicting less than robust (to put it mildly) retail sales through the rest of the year, one industry, at least, anticipates great holiday sales.
 
Let’s here it for this country’s gamers, who are expected to help the sales of video games remain strong this year and in 2009.  A recent Yahoo! Tech article points out that industry executives said their optimism is fueled by “solid sales of advanced game consoles made by Nintendo, Sony and Microsoft.”  While this projection, which was made at the BMO Capital Markets interactive entertainment conference in New York, seems to defy common sentiment, we could all use a bit of good news today.
 
So, the next time you run into a video game freak or perhaps just an average 10 year old boy, thank them for shining a bit of a bright spot on the economy.
 
Let’s hope those industry executives are right.

 

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

Putting Stock in an Elephant or Donkey

Following last week’s historic election, many investors are probably wondering if their obliterated 401(k)s will take a turn for the better under Barack Obama. Is your stock portfolio really better off with a Republican or Democrat in the White House? Well, frankly, trying to determine the differences between the parties using stock market data is folly…but let’s do it anyway.
 
According to a recent New York Times graphic, if you had to invest exclusively under either Democratic or Republican administrations, here’s what the results would have been.  For the sake of fairness, Herbert Hoover’s presidency under The Great Depression has been excluded.
 
In nearly four decades, a $10,000 investment in the S&P stock market index would have grown to $51,211 under Republicans. Invested under Democratic presidents only, $10,000 would have grown to $300,671 at a compound rate of 8.9 percent during the same time period.
 
Four Republicans with solid gains include George H.W. Bush, who wins out with the best average annualized return – excluding dividends – of 11%, followed by Dwight D. Eisenhower (10.9%), Gerald Ford (10.8%) and Ronald Reagan (10.2%). The Republican bell curve was weighed down by the Richard Nixon years (-3.9%) and, of course, President George W. Bush, whose number stood at -5.1% as of mid-October. Barring huge gains over the next few weeks, Bush’s number will be the worst since Hoover, a whopping -30.8%.
 
Bill Clinton’s term was the only double-digit gain among the Democrats, finishing with an average annualized return of 15.5%. The rest of the Democrats – Franklin D. Roosevelt, Harry Truman, John F. Kennedy, Lyndon B. Johnson and Jimmy Carter – ranged from 6.5% to 8.2%.
 
Whether you’re running with the Elephants or the Donkeys, I’m certain both parties would agree that a bull run would be nice during the next presidency.

 

Ron Neal, Senior Associate, rneal@pondel.com
 
 

Russell’s Annual Index Reconstitution

On June 27, after the market close, Russell Investments will rebalance its entire family of indexes, including its 25 U.S. indexes.
 
Russell undertakes this Herculean task every year to “maintain true representation of global equity markets and avoid capitalization and style slippage.”
 
There are a few important dates to watch for:
 

  • Friday, June 13 – Announcement of preliminary additions and deletions to the Russell Global Index and the Russell 3000®.
  • Friday, June 20 and Friday, June 27 – Updates made to the list of preliminary additions and deletions.
  • Friday, June 27 after market close – Indexes are reconstituted.
  • Monday, June 30 – Final index membership lists posted.

 
Index memberships and rankings are determined using a company’s total market capitalization.  Although we won’t know the size of the largest and smallest companies in each newly reconstituted Russell index until June 30, here’s a look at some statistics for the current indexes
 

  • Largest company in the Russell 3000® Index: $468.5 billion market cap.
  • Smallest company in the Russell 3000® Index: $261.8 million market cap.
  • Largest company in the Russell 2000 Index: $2.5 billion market cap.
  • Smallest company in the Russell 2000 Index: $261.8 million market cap.

 
What does this reconstitution mean for public companies?  According to Nasdaq, the day Russell’s indexes are reconstituted is generally one of the heaviest trading days in the U.S. equity markets, as index and other asset managers reconfigure their portfolios to reflect the new composition of Russell’s indexes.  If your company is included in any of Russell’s indexes, be prepared for heavier than usual volumes at the end of this month.

 

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

In and Out

Effective with the start of trading on February 19, the Dow Jones Industrial Average will add Bank of America Corp. and Chevron Corp. and drop Altria Group Inc. and Honeywell International Inc.  Reuters said that this is the first change in the 111-year old Index since April 2004.
 
The composition of the index is determined by editors of the Wall Street Journal and while there are no set criteria for a stock to be added or deleted, the editors of the Journal intend that all of the components of the index be highly established U.S. companies that are leaders in their respective industries.

 

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

Nasdaq Update

Nasdaq recently began placing its relationship managers in the field to keep them geographically closer to the listed companies they serve.  For example, Southern California (from San Diego to Santa Barbara) is now covered by two Nasdaq relationship managers who reside in the region.
 
Listed companies should maintain proactive relationships with their relationship managers as these folks can trouble shoot any issue from compliance to listing standards to bell-ringing ceremonies to renting out the Nasdaq MarketSite in New York City for your next analyst day.
 
We were reminded of a couple of interesting tid-bits when Nasdaq visited our offices recently:
 

  • Nasdaq’s 2008 Core Services for listed companies (which include free webcasts, a dynamic annual report and Board tools, among others) are valued at $25,000.
  • Participation in bell-ringing ceremonies, at the open and close, are market cap driven.  In general, a listed company must have a market cap of $500 million to open the market and $250 million to close the market.
  • Nasdaq’s European investor conference is open to companies with market caps of at least $1 billion.
  • Pre notification to Nasdaq for all press releases is now handled via an electronic disclosure form at https://www.nasdaq.net/ED/IssuerEntry.aspx.
  • Each listed company has a dedicated surveillance account manager called a market intelligence director (MID).  Your MID can provide you with information about large block trades or significant price swings in your stock.  You can work with your market intelligence director to initiate calls when your stock price moves by a pre-determined percentage or when a block of a pre-determined amount of shares changes hands.  You can also call your market intelligence director whenever you need more clarity on how and why your stock is moving.

 
Log on to your company’s Nasdaq home page here for more information.

 

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

Saying Tata to Economic Jitters

If there is any indication that the economy is softening and consumers are interested in curbing their spending habits, it’s the Tata. Yes, the Tata. Despite a name that is often associated with someone saying goodbye, the world is saying hello to arguably one of the most inexpensive cars on the road. Both Portfolio and The New Yorker ran stories about the Tata in recent weeks. So, how inexpensive is the Tata? Try $2,500. And you thought the Smart car was an economical solution to rising gas prices, market volatility and the lack of coolness in your life.

 

Evan Pondel, Senior Associate, epondel@pondel.com