Monthly Archives: August 2010

Government bond market bubble? Wall Street Journal op ed column says Yes

August 19, 2010 By in Current Market Thoughts, Recent Market Action, Stock ideas, Strategy Tags: , , , , , , , , , , Leave a comment

frozen by CNBC

I had turned off my computer late yesterday morning and gotten ready to leave, when I decided I wanted to see how stock trading on Wall Street was progressing.  Rather than wait for my pc to boot up again, I turned the tv on to that financial reality show cum soap opera, CNBC.

Yes, there was the usual cast of buffoonish men and smart women.  They were making lots of inane comments in loud voices, trying at one and the same time to inject meaning and excitement into the random moment-to-moment movement of securities prices as well as to disguise their fundamental lack of knowledge/experience in the markets themselves.

Instead of simply looking at the market data and turning the tv off, I found myself listening with more than one ear to a “debate” about an op-ed column in that day’s Wall Street Journal, titled “The Great American Bond Bubble.”

“Artful’ is probably the word I’d use to describe the proceedings.  A CNBC talking head rambled passionately but incoherently.  Nevertheless, he was framed on the screen in the same group as the third-party bond experts appearing on the show, visually suggesting to the viewer that the Wall Street veterans endorsed his credentials.

One of the guests, a bond strategist from Pimco, said that the fact that the yield on the 5-year Treasury being 1.43% did not mean that bond prices were high.  How so?  …because the 2-year note yields .49% and the 10-year bond 2.63%.  Huh?  The fact that the yields on Treasuries of different maturities are internally consistent with one another says nothing about whether they’re cheap or expensive.   So what this guy said was possible true, but had no bearing on the point.

Another guest strategist–again avoiding the point–said it was outrageous for the op ed authors, UPenn professor Jeremy Siegel and his coworker at WisdomTree fund management, to recommend that investors sell all their Treasuries and buy stocks.

Think what you may about CNBC’s stock market expertise, the channel certainly hasn’t gotten where it is today by focussing on topics investors aren’t interested in.  So though I rarely read the WSJ any more, I thought I’d take a look at the op ed column.

“The Great American Bond Bubble”

The column makes a number of points:

1.  Nominal yields on Treasury bonds are extremely low.

2.  Yields on some inflation-adjusted Treasuries are negative in real terms.

3.  For taxable investors, after-tax returns are even less attractive.

4.  Despite this, investors continue to pour money into bond funds, a state of affairs the authors liken to the Internet stock mania of 1999.

5.  The justification for doing so is that “purveyors of pessimism” (read:  bond fund management companies) assert there are long-lasting “fierce headwinds against any economic recovery”–which the authors compare with the extreme optimism of Internet buffs a decade ago.

6.  Current securities prices–both stocks and bonds–are already discounting the worst possible outcome.  (I may not be doing justice to their argument, but I think this is it.  In fact, what I’m writing may be an improvement on what they say.)  Either the economic situation turns out to be as bad as the pessimists say (think: “new normal”), in which case securities prices don’t move very much; or at the first suggestion that we’ve passed the worst of the crisis bonds fall and stocks rise.

Therefore, “Those who are now crowding into bonds and bond funds are courting disaster.”

7. For income-oriented investors,  “value” stocks, that is, ones with low pe ratios and high dividend yields, are a much better bet.

my thoughts

First of all, it’s important to note that Mssrs. Siegel and Schwartz are both tied to WisdomTree, a fund management company founded by retired hedge fund manager, Michael Steinhardt.  No prizes for guessing what WisdomTree specializes in.  That’s right, value stock and dividend-oriented equity mutual funds and ETFs.  In a feat of linguistic legerdemain, WisdomTree calls its products “index” funds, even though the funds’ contents are selected/weighted according to decision rules devised by Mr. Siegel.  But that’s another story.

Similarly, as I’ve been writing about for some time, bond fund management companies have a similar vested interest in all world economies being pretty awful for an extended period.  It seems to me that this is the only scenario in which bonds, especially government bonds, won’t lose money.  The minute the US economy starts to get back on its feet, the Fed will withdraw the emergency monetary stimulus it is presently supplying and interest rates will rise–sending bond prices falling.  It’s not clear this will be an orderly process, either.

Myself, I think the op ed article makes a good point.  I’m not sure I’d endorse the entire top ten list that Professor Siegel provides.  He is a professor, after all, and not an investor.  I’d prefer companies that don’t have a history of cutting the dividend, as GE did during the financial crisis.  And much of VZN’s cash flow is contained in Verizon Wireless, its contentious joint venture with Vodafone, and therefore not readily available to distribute to VZN shareholders.  I’d also place more emphasis on firms that have been raising the dividend steadily, even if that means accepting a current yield of less than the 4% Mssrs. Siegel and Schwartz cite as average for the names they mention.  So I’d consider INTC, with a 3.2% current payout, or WMT at 2.4%.

There is one big feature that separates bonds from income stocks.  Bonds have a fixed maturity.  If you buy a 5-year Treasury for $1000, then when it matures in 2015 you’ll receive your $1000 back in full.  Not so with stocks.  Their value five years hence could be higher or lower, depending on market conditions.  Just look at the price of any US stock today and compare it with the quote in March 2009 for what is essentially the same economic entity and you’ll see what can happen.

Of course, one might observe that stocks rebounded quickly from this very low level–the yield on the entire stock market was higher than the 10-year bond yield then–and that the last previous instance of such a low was over thirty-five years earlier, in late 1974.  But neither point has made any difference to US investors.

One point is important to realize, however.  The  get-your-principal-back feature applies only to holders of individual bonds, not to holders of bond funds.  The latter are collections of bonds of varying maturities that don’t have a common due date.  So when you redeem your bond fund you have no assurance that you will recover your principal.  If you want your money from a bond fund during a period when the Fed is raising rates, I think there’s little chance of that favorable outcome happening.

For what it’s worth, stocks are subject to two opposing forces during a period of rising rates.  As financial instruments, better returns on a competing instrument (cash) means downward pressure on prices.  On the other hand, the Fed will only raise short-term interest rates if the economy s in good health and corporate profits are rising.  Profit gains tend to push stock prices up.  In the past, stocks have typically made gains during tug-of-war periods like this.


Wal-Mart’s 2Q2011: strong abroad, still suffering from recession in the US

August 18, 2010 By in Current Market Thoughts, earnings conference calls, economics, Stock ideas Tags: , , , , , , , , , , Leave a comment

the results

WMT reported 2Q2011 (fiscal 2011 ends January 2011) before the market open in New York yesterday.  The company earned $.97 a share, up 9% vs.  $.89 a share achieved in the same period of the previous fiscal year.  That was a penny ahead of the Wall Street consensus.  The company raised its full year earnings guidance by $.05 to a range of $3.95 to $4.05.  (2Q2010 was originally reported as $.88, but the installation of a new SAP management control software system has given WMT better knowledge of its inventories, resulting in the restatement.)

details

Three-quarters of WMT’s revenues come from the US.  The other quarter of the firm’s sales, along with virtually all its growth at present, comes from abroad.  The company is very strong in Mexico, and is expanding rapidly in Brazil and China.

Overall sales for the three months for Wal-Mart US were flat for the three months ending July, same store sales down 1.8% and operating incoe doan .2%.

Sam’s Clubs’ sales were up 2% for the July quarter, same store sales (ex fuel) up 1% and operating income up 2.4%.

International sales were up 11% and operating income up 16.8% (on a constant currency basis, both figures would have been about 4 percentage points lower).  Same store sales were up about 6% in China and 3% in Mexico and Brazil.  Japan and the UK were up slightly.

It seems to me that this general picture, aided by cost control, will continue at least for the rest of the fiscal year.

Since Wal-Mart is such a dominant factor in retail in the US, and because about a third of its customer base consists of lower middle class shoppers, Wal-Mart’s US results give some insight to the economic condition of ordinary American residents.

a Wal-Mart’s-eye view of the US

Wal-Mart reported that its business exited the quarter stronger than it began the three months and the traffic was improving sequentially.  But the image the company reveals of its customers’ buying tendencies–Wal-Mart has superb information systems–is one of continuing struggle.

For example, many customers are living paycheck to paycheck.  So Wal-Mart sees a surge in sales on payday, followed by a gradual tailing off until the next paycheck is issued.  Use of food stamps and other forms of government assistance is rising.  Use of the company’s check-cashing services is up by more than 10%.  Credit card usage, now at 15% of sales (30% is about average for retail overall), continues to fall.

Grocery sales are up.  Baking and cooking supplies are, too, as more people shift from eating out to preparing meals at home.  Apparel sales (never a Wal-Mart strength) are down, as are home goods and appliances and electronics.  In other words, necessities are in, discretionary purchases are out.

This may not be a strictly apples to apples comparison.  Wal-Mart performed relatively well during the worst of the recession, helped in part by shoppers trading down from more expensive stores.  Industry evidence is that many of these customers have begun to trade up again.  Still, it’s clear that many Wal-Mart customers are having a very rough time.

Last year, apparently in a bid to woo more affluent customers, Wal-Mart tried two experiments.  It cleared its normally crowded aisles and reduced the number of items sold in many categories–apparently to give a more Target-like look.  It also increased advertising.  Neither experiment worked.  So the company is increasing assortments again, delegating more merchandising authority to local managers and stopping the extra advertising.

On the positive side, Wal-Mart says that after its success in entering the Chicago urban market it has been contacted by a number of large cities asking the company to do the same for them.

the stock

WMT (I own it) is trading at under 13x earnings and yielding 2.4%.  It is generating free cash flow of over $4 billion a quarter and has used $7 billion of that in the first half to buy back stock.  the earnings growth rate should gradually improve, both as international operations become a large part of the whole and as the economy rebounds from the current cyclical low point for Wal-Mart customers.  For an income-oriented investor, I think WMT is way better than a government bond–admittedly more volatile–but way better.


China’s GDP bigger than Japan’s: that’s not the real story

August 17, 2010 By in emerging markets, Portfolio management, Purchasing power parity (PPP), Strategy Tags: , , , , , , , , , , , Leave a comment

China’s #2…

Yesterday morning, the government in Tokyo announced its June quarter GDP totaled $1.28 trillion, slightly below Beijing’s previously announced $1.33 trillion for the same period.  By surging ahead of Japan, China has become the number two economy in size in the world, after the United States, relegating Japan to third place.

This was headline news in financial newspapers and websites around the world–except for the Wall Street Journal, which carried an article about criminals’ use of underwear with secret pockets in it on its website instead.

…at $5+ trillion of GDP

Annualizing China’s second quarter GDP would mean full-year economic value creation of $5.3 trillion, or a little more than a third of what the US will achieve in the coming 12 months.

Conventional measures undervalue developing countries’ economies

International economists have known for a long time that there’s something wrong with the conventional way of comparing GDPs between countries, however.  It isn’t just that the renminbi isn’t freely traded and might be, say, 15% against the dollar if it were–and that therefore Chinese GDP could be almost a trillion dollars higher than the amount reported.  Nor is it that the yen has shot up agains the dollar by about 10% over the past few months, making Japanese GDP a tenth higher than it would otherwise be.

Purchasing Power Parity GDP

The real issue is that the conventional comparison uses currency market exchange rates to convert GDPs into a standard form (US$).  This is a reasonable way to measure the relative value of sectors whose output is traded internationally.  But it’s not a very good method, especially when dealing with developing countries, to assess the value of economic output in non-traded parts of an economy.  You get a better measure of relative size of economies using purchasing power parity GDP, a topic I’ve written about in detail in another post.

Using purchasing power parity GDP, China had a $8.8 trillion economy in 2009 vs. $4.2 trillion for Japan.  In other words, China is already twice the size of Japan, surpassing the latter six or seven years ago.  The Middle Kingdom is not a third the size of the US, but almost two-thirds as big.  And, on the PPP GDP measure, China will surpass the US to become the largest economy on the globe around 2020, not 2030, as forecasters think China might do using the traditional GDP calculation technique.

the real story

What is the real story then?  It’s that the China GDP story is front page news.  To me, it means that US and Europe continue to underestimate the size of the developing economies, and of China in particular.

Both the IMF and the CIA do purchasing power parity calculations, and come up with almost precisely the same results.  According to both, total world GDP last year was about $70 trillion.  The largest economic entities were:

BRIC countries     $16.4 trillion     (23.4% of the world)

EU          $15.0 trillion      (21.4%)

US     $14.3 trillion     (20.4%)

The Eurozone, that is, countries actually using the €, had GDP of $11 trillion (15.7%) last year.  As mentioned above, China had GDP of $8.8 (12.6%) trillion.  NAFTA had GDP of $17 trillion (24.3%).

conclusion for investors

Looked at from the PPP perspective, the world consists of three large economic blocs, all of about equal size:  NAFTA, BRICS and the EU, in that order.  The BRICs, by far the fastest-growing of the three groups, will probably pass NAFTA this year.

Why is this important?

Investors should realize that the MSCI World Index is constructed using the following approximate country weightings:

US + Canada    45%

EU     26%

Japan     8%

Australia, Korea, Taiwan     7.5%

the rest     12.5%.

That looks an awful lot like the conventional-GDP view of the world.  You get a heavy dose of the US, EU and Japan with the traditional indices, but very little of the really fast-growing 25% of the world.

The EAFE index, the standard international index for Americans, is even more skewed than the MSCI World.  Its country weightings:

Europe ex UK     42%

UK     21%

Japan      23%

Australia  9%

everything else     5%.

Again, a heavy dose of the most mature markets, with little else.

What I’ve just written is substantially correct, but a few caveats are in order.

–Most stock markets in developed countries have a healthy number of multinationals, which have established beachheads in the developing world to benefit from the growth opportunities they offer.  So the skewing away from the developing world is not so severe as the country allocation suggests.

–Some developing markets aren’t open to foreigners, mostly out of legitimate concern that their developed market cousins will buy the nations most prized assets on the cheap–which of course is what we’re trying to do.

–Some developing markets can be highly illiquid, as well as requiring a large amount of local “street smarts” for you to be an active stock picker in.

where to get developing markets’ exposure

There are specialized mutual funds with good track records, like the Matthews China Fund, or ETFs, that can give you the exposure you might want.  Remember, though, that these are higher than average risk/reward investments, so be sure you’re willing/able to assume the greater chance of loss.

Smartphones: haves, hads and have-nots

August 16, 2010 By in Current Market Thoughts, Industry Analysis, internet, Stock ideas, Technology, Wireless Tags: , , , , , , , , , , Leave a comment

new cellphone data

A bunch of cellphone industry researchers–Gartner, Nielson, Canalys–have all released data for the June quarter of 2010.  this post is an attempt to put the information into a coherent framework.  Here goes:

almost all the market growth is in smartphones

1.  The global cellphone market continues to grow, by about 14% year over year in the second quarter.  That’s driven almost completely by smartphones, however.  According to Gartner, Inc. sales of smartphones were about 50% higher in 2Q10 than in 2Q09.  Older “feature” phones, which still make up 80% of all units purchased, showed only a 4.5% increase.

Being able to offer an attractive smartphone is the real dividing line between haves and have-nots.  In the case of Korean cellphone company, LG, which has no signature smartphone, average selling prices fell by 27% in the second quarter and its cellphone division lost money.

market share

2.  Market share shifts are the second differentiating factor.

global

On a worldwide basis (Gartner, Inc. figures) the players look like this:

Nokia     41.2%, loss of 9.8 percentage points

RIMM     18.2%, loss of .8 percentage points

Android     17.2%, gain of 15.4 percentage points

AAPL     14.2%, gain of 1.2 percentage points

Others     9.2%, loss of 5.9 percentage points.

The really stunning figures here are highlighted–the emergence of Android and the precipitous drop in Nokia’s share of the market.

Two other things to note:

–shortages of components, particularly high-end active-matrix OLED screens, may have affected sales a bit

–AAPL ran down inventories of older iPhones during the quarter in preparation for launch of the new iPhone4.  The company estimates that it could have sold an extra 250,000 smartphones, were it not doing so.  That would have only nudged its market share up by about .3%, however, not enough to make a significant difference.

the US

3.  The Neilson Company data for the US show a similar story, with the significant exception that Nokia, with a 2% market share, is a non-factor is the domestic smartphone market.  The market share figures:

RIMM     35%, loss of 2 percentage points

AAPL     28%, gain of 7 percentage points

MSFT     15%, loss of 12 percentage points

Android     13%, gain of 11 percentage points

Others     9%, loss of 4 percentage points

MSFT has announced that it is, at least temporarily, exiting the smartphone market, hoping to reenter before yearend.  While it seems reasonable to assume that some market share loss comes from the announcement, I think the causality goes the other way.  MSFT had been steadily losing market share over the past year, long before it decided to regroup.

Neilson also provides data on the most recent quarterly trends on domestic smartphone purchases.  These data paint a somewhat different picture of the market from the installed base figures above:

RIMM     33%, down 3 percentage points

Android     27%, up 10 percentage points

AAPL     23%, down 4 percentage points

MSFT     11%, down 3 percentage points

Others     6%, down 1 percentage point.

Unlike the earlier data, which show the strong taking share away from the weak, these suggest that Android is taking share from all the others.  The timing of the introduction of iPhone4 may have something to do with this.  If so, 3Q10 data should show an unusual jump in AAPL market share in the US.   Nevertheless, this is something to watch closely.

brand loyalty

4.  These are Neilson figures for the US.

Asked what kind of phone they wanted next,

–89% of iPhone users said they wanted to stick with their brand.

–71% of Android owners want to stay with GOG, with 21% thinking of switching to AAPL.

—Only 42% of Blackberry owners, however, intend to be repeat purchasers.  Of the rest, 29% said they’ll switch to iPhone; 21% intend to make a move to Android.

investment implications

have-nots

I don’t see a good investment case for the have-nots.   Value investors may disagree, however.  And it’s true the LG has been extraordinarily resilient in the past.

hads

Of the “hads”, cellphones are too small to be relevant to MSFT’s profits.  It might be a psychological boost for the stock if the company can demonstrate it can make money at any diversification away from the operating system and office productivity software businesses, though (not something I’d bet the form on).

I was a very large holder of NOK in the Eighties and into the Nineties.  I don’t know the company well any more (that I’m not compelled to make the effort to stay current is a statement in itself).  Despite its early entry, as far as I can see, the company doesn’t seem to be able to get the smartphone market right.  It’s competitive strengths seem to lie in other areas–low-cost manufacturing and established distribution networks in emerging markets.  My big worry is that it still has an awful lot of market share left to lose.  Again, value investors will likely disagree.

RIMM is an interesting case.  Its claim to fame is its secure mobile network for business users.  Recent  public demands from India and Saudia Arabia that RIMM give those governments access to its encripted data streams are a made-in-heaven third-party endorsement of RIMM’s security (remember, too, that the major leagues for the espionage business is corporate spying).  By implication, they say those countries have no trouble hacking into other cellphone networks.

So far RIMM is refusing. There may be an innovative solution to this problem.  At some point, however, RIMM may be forced to choose between its corporate core customers and having access to fast-growing emerging markets.

haves

It’s easy to get tied up in knots about AAPL.  It’s up about 25x from the lows of a half-decade ago and is now a cellphone company that happens to make PCs and other consumer devices.

I feel confident that the 25x is not going to recur.  But the company has only one significant rival, Android, in the smartphone market.  That market is growing by leaps and bounds.  One can easily imagine that smartphones end up being 60% of the overall cellphone market, which would mean a tripling in its current size.  Whether AAPL ends up being #1 or #2, it could at least double its share of the smartphone market over the next four or five years.  In other words, AAPL’s cellphone revenue might well advance 6x over the next half-decade.  I don’t think anything like that is factored into today’s price.

I find GOOG harder to handicap.  I’m not concerned about the ORCL lawsuit over Java.  I also think Android will be very successful.  In baseball, if a manager says during spring training that he has four third basemen it really means that he has none.  Well, I have about four different opinions about GOOG.  I’ll leave it at that.



Frank-Dodd Financial Reform Act, the SEC and whistleblowers

August 15, 2010 By in Current Market Thoughts, securities markets, stock market, whistleblowing Tags: , , , , , Leave a comment

The Frank-Dodd Financial Reform Act, section 7203

The recently passed Frank-Dodd Financial Reform Act contains a section, 7203, giving the Securities and Exchange Commission what seem to me to be extraordinary powers to compensate whistleblowers.  There are three aspects to this new authority:

1.  what qualifies as whistleblowing

Whistleblowers must

—voluntarily furnish

—original information

–that results in a successful enforcement action.

2. the amounts paid

The SEC must pay qualifying whistleblowers a minimum of 10% of any settlement of $1 million or more received by the agency.  But the SEC can, if it wants, pay a whistleblower up to 30% of the settlement.

What are the grounds for awarding a big percentage?  Just about anything.  The SEC can pay the highest amount because the information is so crucial, or the case is so important or simply to send a message to other would-be whistleblowers.

The day after the bill was passed by Congress, the SEC announced it was sending $1 million to a whistleblower in the Pequot Capital case.  In case this public relations point was too subtle for some, the agency also told the press that it was eager to hear from high-quality whistleblowers they might not have been able to interest before.  The Pequot whistleblower may be feeling a little put off, though.  Under the new law she could have qualified for up to $8.4 million.

3.  other–BIG–inducements

The whistleblower can approach the SEC anonymously, through his/her lawyer, to negotiate a deal.

The whistleblower need only identify himself/herself to the SEC after the successful enforcement action, just as he/she is collecting a check.  Even then, the SEC can’t reveal his/her identity to anyone, not to the enforcement target nor to other government agencies.

It’s ok that the whistleblower be personally involved in committing the violations being reported.  It’s even fine if the whistleblower is judged guilty in court of an offense–provided it’s a civil offense and not a criminal one.

corporate America isn’t prepared for Frank-Dodd, in my opinion

Although it seems a bit simplistic, my experience of watching companies for thirty years says that managers in a corporation study their superiors very carefully to get cues on how to perform their jobs.  This creates a corporate identity, or fingerprint.

Sometimes this can be comical.  If the boss lives in the suburbs and drives a Mercedes, subordinates will want to live in the same town and drive a Mercedes, too.  If the boss lives in an apartment in the city and takes the subway to work, ditto.  If he (assuming it’s a he) wears blue suits and red ties, so too do the subordinates.  Or they all wear sports jackets and no ties.

Sometimes, it’s not so comical, though. For example, the recently deposed CEO of BP seems to have created a corporate environment where safety rules were ignored.   If the boss has a bad temper and routinely humiliates subordinates in public, lower level managers will feel free to–maybe even compelled to–do so, too.  If he shows his belief that it’s good to stretch the limits of the law in business dealings, subordinates may feel obliged to try to follow him, or even outdo him, in this, as well.

The usual internal venue for complaints about improper work practices–from racial discrimination to violations of securities laws–is the human resources department or the compliance department.  These are the among the least powerful areas of any company.  If you don’t think so, try to name a CEO of a major corporation who used to be the head of either area.

A bad-tempered CEO probably won’t be sympathetic to legitimate complaints of verbal abuse.  One who belongs to an exclusionary social club may not find discrimination in the workplace an important issue.  One who pushes the envelope on compliance with securities laws isn’t likely to be happy if a subordinate says someone in the firm has crossed the line.

The path of least resistance for HR in cases like this is to try to make the whistleblower go away.  As soon as the whistleblower identifies himself by lodging a complaint, he may well have stigmatized himself in the eyes of his colleagues and superiors.  There’s lots of anecdotal evidence to support this conclusion, but I’m not aware of systematic studies.

My point?  Only in the best-run companies is a whistleblower likely to be lauded for his actions.  Of course, such firms are the least likely to allow problems to fester to the point where a formal complaint is necessary.  In poorly run firms, on the other hand, by identifying himself to higher-level management in a formal complaint about work practices, the whistleblower may have effectively ended his career at that firm.  He may also be marked as a “troublemaker” and find it hard to secure employment elsewhere.

Why take that risk in a securities law case if you can go anonymously to the SEC, safeguard yourself from prosecution and collect a huge reward, to boot?

is the SEC ready, though?

The SEC hasn’t exactly covered itself with glory over the past decade.  As I’ve detailed in another post, the story of whistleblower Harry Markopolos’s attempts to alert the SEC to the Bernie Madoff Ponzi scheme has to act as a cautionary tale to any would-be whistleblower.

The picture Mr. Markopolos paints of the SEC is of an institution almost depressingly clueless about the practical functioning of the securities industry.  Much of his time is spent trying to explain basic financial ideas to professional lawyers whom he portrays as having little interest in hearing what he has to say.

Madoff himself has expressed surprise at how easy it was for him to fool the SEC.  The auditors the agency sent to his firm found the fake trading entries in the Madoff books that Mr. Markopolos had pointed them toward.  But they failed to contact the counterparties to check whether the trades were real, instead accepting Mr. Madoff’s word that everything was okay.

If you believe, as I do, that top management sets a tone that quickly permeates through an organization, a change in leadership can address the issue of the SEC’s apparent indifference to actually doing its job.

I think, however, that Frank-Dodd, section 7203, implicitly concedes the point that the SEC doesn’t have enough institutional knowledge of the securities business to uncover fraud without having the help of insiders wanting justice or looking for a big reward.

From the whistleblower’s point of view, this probably means that only easy to understand crimes, like insider trading or misstatements in financial reports, are safe to bring to the agency.  Complex crimes, like Ponzi schemes or dubious derivative trading or after-hours sales of mutual funds, may still be more than the collective cognitive abilities of the SEC management can handle.   The latter group of crimes seem to me to have the most potential for harm.  So if I’m right, the new Frank-Dodd rewards may not be enough to convince whistleblowers to try to bring these crimes to light.