Category Archives: markets

A Compromise for the SEC?

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A letter-writer to The Wall Street Journal‘s Wednesday Letters section offered a compromise for the SEC’s proposed change to company reporting from all of them reporting quarterly to all of them reporting semi-annually.

Large companies should continue to report quarterly so that stakeholders have timely signals for pricing and risk management. Micro-caps, by contrast, could move to semiannual reporting without leaving investors in the dark if a few safeguards stay in place. Material developments should still be disclosed promptly between reports; companies should provide a short, standardized mid-period update with such core metrics as sales trend, liquidity and interim financials. Whatever the frequency, they should retain a light auditor review to discourage aggressive accounting.

Aside from ignoring the myriad of companies whose sizes are intermediate between micro-caps and large, most of his suggestions are not materially different from the current quarterly reporting requirements. Quarterly reporting, after all, is quintessentially intermediate to semi-annual periods, and his standardized mid-period updates are those quarterly reports.

The only concrete suggestion, material developments reporting, already is required by law: that’s what Form 8-K is for.

And this from the letter-writer:

This approach targets the real pain point—fixed compliance costs that bite hardest at the smallest issuers….

Moving to semi-annual reporting would be a boon for all companies, large, micro, and intermediate. That large companies “can afford quarterly reporting” while smaller companies cannot is a tired and useless trope used to harry the rich and successful in too many milieus already. The trope doesn’t need to be expanded here.

Tipped Wages or Not?

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McDonald’s is insisting that every restaurant—especially fast food restaurants—should be required to do away with tip-based wages and pay servers at least the Federal-level minimum wage. There are a couple of major disingenuosities in the surrounding argument.

McDonald’s Chief Executive Chris Kempczinski:

Right now, there’s an uneven playing field,

because casual-dining restaurants, bars, and other establishments to pay below the typical minimum wage to tip-earning workers. If he thinks so, he should push for getting his restaurant able to similarly pay his workers rather than demanding that others kowtow to his business model.

Kempczinski went on:

If you are a restaurant that allows tips or has tips as part of your equation, you’re essentially getting the customer to pay for your labor[.]

This is an especially blatant bit of disingenuousness. The customer already is paying for the restaurant’s labor. The customer also is paying for the restaurant’s cooking, food and food preparation inputs, rent, management salaries, every cost the restaurant incurs. Those costs are included in the prices the restaurant puts on its menu. Tipping is just a customer-facing line item on the bill.

This is nothing but a regulated business manager venally and self-servingly trying to capture the regulators and impose added costs on his smaller and weaker competitors.

Regulation vs Regulation

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In an article centered on a so-called balancing act by Big Oil in an environment in which the Trump Administration is rolling back a broad swath of climate regulations, the news writers had this:

The industry’s biggest trade groups have said they support effective and reasonable regulations. Nixing the programs, the lobbyists said, would create an impossible choice for the industry—ask the administration to reinstate some rules, or walk back its previous support for some regulations.

This is timidity writ large. If the trade groups and the managers of the groups’ constituent companies really think this, that, or those rules are good ideas, then they should self-regulate along those lines. There’s nothing to stop them; there’s nothing forcing them to render themselves dependent on government diktats.

Lobbyists have signaled to the EPA that creating a regulatory vacuum could invite new lawsuits.

The proper response to those lawsuits is to stop being so desperate to settle and to stop hiding behind Government apron strings. With the climate regulation roll back, there are fewer grounds on which to base a lawsuit, and the proper response to those remaining that are brought is to refuse to settle, push the pace on the trials, and burn the suers to the ground in open court. That’ll be expensive in the early stages, especially as they’re forced by activist district judges to go through the appeals process, but it will reduce long-term legal costs far more by obviating a large number of lawsuits in the aftermath of those early ones.

It’s past time for business managers, especially including those running energy producing businesses, to recall the nature of their management roles.

The central imperative of a management position in the United States is to manage a company in a way that satisfies the company’s owners. There is nothing in that imperative that requires a manager to manage his company in a way that satisfies the demands of Government beyond simply following law. Those managers who are that timid that they need to be told what to do by Government need to be replaced; they’re unfit for their management positions.

This is America. Business managers are free to act on their own initiative; they are not required to wait on Government.

What is their Value, Really?

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What is their Value, Really?

In a Sunday Wall Street Journal article on universities’ penchant for investing their endowments in private equity (as opposed to instruments bought and sold on public exchanges, these are bought and sold in private deals between the university and one or another private (i.e., not traded on an exchange) entity, or rarely a private deal to which a publicly traded entity might also agree.

A few exceptionally talented, or lucky, endowment managers seemingly did very well in this environment. Yale’s late David Swensen got an annualized return of 13% over the course of his management.

But how valuable are those investments, really? The WSJ‘s subheadline reads

Universities and other institutions have built up large private-equity holdings, but they are now lagging behind the S&P 500 and aren’t easy to shed

And this:

And much of what those funds earned for their investors in that time was on paper; endowments and other institutions were getting less and less cash that they could put to work in the booming stock market.

And this [emphasis added]:

…making it hard for managers to get the prices they want for the companies in their portfolios. Meanwhile, institutions have struggled to find investments that hedge against stocks and private equity without further eroding returns—and the problem has gotten worse with the stock market’s latest rally.

The value of any investment is what someone is willing to pay to get it. The initial value of those private equity investments in these endowments is what the endowment managers paid to get the private entity or a piece of it. Now they’re moving to sell some/most/all of these privately held pieces, but there are few to no buyers at those initial prices or anywhere near those prices.

This is Yale’s continued position:

Yale said in a statement that it remains committed to its private-markets strategy. “We trust that sophisticated investors, especially our partners who know us best, understand this,” the school said.

That sounds like the typical arrogance of Know Betters.

What is, in the end, the true value of those privately held pieces? It’s still whatever a buyer is willing to pay for them. And that calls into question two things: an accurate valuation of those entities and the wisdom of relying so heavily on non-publicly traded entities for endowment investments.

Former Yale endowment private-equity manager Tim Sullivan:

One of the reasons we hire these guys is because they know when’s the right time to sell an asset[.]

The problem here is that a potential buyer won’t necessarily agree that it’s the right time to buy that asset.

It’s tough to grow, or even just to maintain the value of, an endowment based on phantom valuations of its holdings.

False Comparison

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In their letter to the Tuesday Wall Street Journal Letters section, Professors Amy Finkelstein, of MIT, and Matthew Notowidigdo, of the University of Chicago, argued for the necessity of Obamacare.

…because millions of Americans “don’t use” their subsidized insurance, they therefore “don’t need” it. Yet as we teach our students every year, this misunderstands the purpose of insurance. Not filing a claim doesn’t mean you didn’t need insurance. We’ve never had to use our oxygen masks during decades of flying, but that hardly means they’re not essential.

The professors, as educated as they seem to be, should know better than to make such a false comparison. Folks die if they don’t have access to those oxygen masks in the realization of the once-in-a-lifetime likelihood of needing one. Folks without insurance always can get at least life saving care, and usually more than that for a variety of non-life threatening ills, in any hospital ER.

The professors also cynically conflate “need” with “useful.” Having insurance against this or that outcome usually is a useful backstop to have, IFF the accumulated premiums paid are worth the Expected [sic] cost of a realized outcome. Underlying the distinction between “need” and “useful” is the individual’s own assessment of those risks and that value. With Obamacare, though, folks are required to buy the insurance, however bad it is, and to do so wholly independently of any cost/benefit tradeoff that actually exists and equally independent of the individual’s assessment of his risk, or of his need. Risk assessment has been taken out of the individual’s hands altogether.