Monthly Archives: August 2012

the Jumpstart Our Business Startups Act (JOBS) and Manchester United

August 10, 2012 By in Asian economic development, Stock ideas Tags: , , , Leave a comment

JOBS

Earlier this year, over the strong objections of the SEC and knowledgeable financial industry observers, Congress passed the Jumpstart Our Business Startups Act.  As the acronym JOBS suggests, the avowed purpose of the act is to “increase American job creation and economic growth…”

The basic thrust of the act is to waive, for any firm with annual revenue under $1 billion,  SEC requirements that a company seeking to go public have strong internal financial controls and audited financial statements.

Another way to describe this kind of legislation is as a “race to the bottom,”  where countries try to boost their domestic investment banking industry by seeing who can loosen listing standards the most.  Thereby, the “winning” country attracts the largest amount of new listings.

Why we want to give investment banks a shot in the arm is a mystery to me.  You might ask Representative Stephen Fincher of Tennessee, the bill’s sponsor, or President Obama, who signed it into law.

a bad idea, in my opinion

I’ve seen this movie before–twice in the UK alone.  It invariably has an unhappy ending as undisclosed and undetected defects in the listing companies come to light.  Trusting investors get their fingers burned.  The country’s stock market gets a black eye.

The only “job creation” that occurs is at the underwriters and the law firms who are involved in litigation when shareholders sue.  Ironically, JOBS would appear to eliminate the latter source of employment.

enter Manchester United, a 134 year-old “emerging growth” company

The latest to take advantage of the JOBS Act is the UK professional soccer club Manchester United, which is going public today on the NYSE, under the ticker symbol MANU.  MANU was founded in 1878, by the way, so it has been “emerging” for a very long time.

Another curiosity.  MANU’s form F-1 registration statement is on file with the SEC.  F-1?  Isn’t a registration statement called an S-1?  Yes, normally it is.  But MANU isn’t an American company.  It’s a UK corporation.

Isn’t the natural home of a UK company the London Stock Exchange??

not London

Yes, but MANU has been owned since 2005 by an American, Malcolm Glaser (who also controls the Tampa Bay Buccaneers).  Mr. Glaser is very unloved in the UK because, as a foreigner, he possesses a national icon.  Going public there was out of the question.  The facts that MANU is heavily indebted, makes virtually no money and has a dual share structure (like the New York Times or Hershey) that preserves the Glaser control probably don’t help, either.

not Singapore

With London out, MANU decided to try to list in Singapore.  That makes some superficial sense, since reportedly two-thirds of its fans live in Asia.  Relative to Hong Kong, however, Singapore is an equity market backwater.

MANU subsequently withdrew its proposal, however, citing poor market conditions.  Speculation at the time was that the firm wanted to have at least one ultra-wealthy “cornerstone” investor that would give the offering added legitimacy, but was unable to find one.

not Hong Kong?

It’s unclear whether MANU approached Hong Kong, although this possibility, too, has been a subject of media speculation.  MANU’s lack of profitability might have made the attempt a non-starter.  Official rejection would have been an acute embarrassment for MANU, given that the Hong Kong regulators allowed Russian miner Rusal to list in 2010.

USA! USA!

Thanks to the JOBS Act and underwriters Jeffries, Credit Suisse and JP Morgan, the NYSE has snagged this prize.  Half the proceeds of the IPO will go to repay part of MANU’s $500 million+ in debt.  The other half will go to the Glaser family.

It will be interesting to see how the stock trades.

thinking about tablets–and ecosystems

August 9, 2012 By in Industry Analysis, internet, Publishing, Technology, Wireless Tags: , , , , , Leave a comment

my tablet

I’ve owned a iPad for several months.  I use it much more than I expected.  I’d use it even more than I do, but the AAPL “walled garden” prevents me.

My only real complaint is that the wi-fi chips AAPL uses in its tablets appear to be relatively weak, so mine (a “new” iPad) often wants to make a cellular connection.  My wife’s (an iPad 2) has the same problem.  Here on my back porch, my Macbook hooks up to our wi-fi without a problem; my iPad can’t make a connection.  Design defect  …or concession to the mobile network operators?

One more thing–I’ve spent much too much time playing Kingdom Rush.

in the schools

The iPad has picked up momentum in areas I hadn’t really thought about.  For instance:

–AAPL commented in its 3Q12 earnings call that it is beginning to sell a ton of iPads to schools.  They’re all iPad 2s, which apparently have hit a price point low enough to trigger mass orders.

–an interesting article in the Financial Times from late July outlines changes tablets are making in the scientific/medical press.  It’s short and worth reading.

professional journals

Its message is that there is a surprisingly quick transition to online delivery going on with professional journals.   For doctors’ publications, the positive points of online are:

-most physicians have and use tablets, especially for reading between patient appointments;

-doctors read close to double the amount of a journal’s content when they access it online rather than in print;

-they appear happy to watch video advertisements imbedded in the online articles; and

-the publisher has precise data to show advertisers about what online ads have been seen.  For print, the publisher has to rely on surveying users–and who’s going to say he doesn’t read the journal from cover to cover?

Googling “tablets and medical journals”

My results were mostly about the perils of sleeping pills.  But I did come across a medical student’s blog post on the merits of various tablets.   Steven Chan’s conclusions are about what you’d expect, with one exception:

–using a tablet is a lot better than carrying files around with you

–if you’re hopeless with tech, get an iPad.  It’s easy to use, but limited by the AAPL “walled garden”

–Android tablets are harder to get up and running but are much more useful

–the iPad is too big to fit into a standard white lab coat pocket.  If you use an iPad you should get a new iPad-friendly model (this is the one I didn’t think about).

my investment point?

It’s about ecosystems.   In a world of cloud storage, where individuals own multiple devices–smartphones, tablets, laptops–that they may want to function for both personal and work tasks, the choice of what products to use becomes less about how cool the individual device is and more about how the device allows one to access, share and save data.

Yes, everyone believes this, to one degree or another.  In a “cloud” world, though, AAPL has two (well-known) weaknesses, I think.  One is its “walled garden” approach, which makes it seem a little like AOL when the WorldWide Web was opening up in the 1990s.  The other is how weak AAPL’s browser and productivity software are.

Again, no secrets here.

What’s interesting, though, is how this leaves the door open for MSFT, even after more than a decade of bungling, to become relevant again.  It has an adequate browser, which seems to be losing its my-way-or-the-highway attitude.  Its productivity suite is the world standard.  More than that, MSFT seems to me to understand the new opportunity its position is giving it, and (for once) to be taking intelligent steps to exploit it.

Anyway, I’m starting to think I may have to take MSFT more seriously as a potential investment, for the first time this century.  If I only thought MSFT had good management…

the Knight Capital Group (KCG) end game: effective change of control

August 7, 2012 By in Preferred Stock, Recent Market Action, Securities regulation, Trading Tags: , , , , , , , Leave a comment

a recap

Last Wednesday morning, KCG started up a new software trading link, whose total purpose still isn’t clear, to the NYSE computers.

The new software went berserk, buying everything in sight–and without regard to price–as soon as it was turned on.  As subsequent media comment has made apparent, stuff like this happens every so often in today’s financial world.  Usually, though, the defective program is shut down within a minute or two.  Not so in the KCG case.  It took–for reasons also not clear–the better part of an hour for KCG to pull the plug.

The company subsequently announced it had lost $440 million due to the malfunction.

big problems

KCG faced a number of related problems because of this.  Specifically,

1.  If the average loss was 10% of the purchase price, KCG had bought $4.4 billion worth of stock that it would have to pay for three days later.   If the loss was 5%, KCG would have to come up with $8.8 billion.  In any event, KCG only had about $400 million in cash on hand.

2.  The software glitch was like a gigantic fireworks display.  Every trader on Wall Street knew KCG was in trouble–and might have difficulty settling (i.e., paying for) the trades it had made.  So selling out of the positions it had accidentally accumulated, without offering substantial discounts, would have been very difficult.  In some cases (see my previous post on KCG), KCG held far too much to be sold quickly.

KCG appealed to the NYSE to cancel the accidental trades, but was mostly refused.  After a similar incident last year, Wall Street drew up a set of rules for when such trades might be broken.  Only six of the 150-odd stocks Knight bought qualified.

KCG solved this issue–apparently on Wednesday–by selling the bulk of the erroneous position to Goldman.

3.  As a market maker, KCG makes money by collecting a fee for matching buyers and sellers of stock.  It’s a little like a bank.  Customers only deal with it if they believe it is financially sound.  And, regulators require that it put aside a little capital to back each trade it brokers during the three-day settlement period.  But the rogue software program had tied up all of KCG’s capital. The loss it generated had also wiped out all its cash.

So KCG couldn’t accept any new trading orders.  And long-time customers wouldn’t place any, for fear of potential problems (too geeky a topic, even for PSI) if KCG went out of business before trades could settle.

the solution

One part was the sale of stock to Goldman, which got KCG out from under the need to come up with the money to pay for the erroneous trades.

The second, reported in an 8-K filing with the SEC on Monday, is the sale of $400 million in convertible preferred stock in KCG to a group of the company’s long-time business partners.

There are two classes of convertible, one with limited voting rights.  Both earn interest at a 2% annual rate.  Each $1000 preferred can be exchanged for 666.667 shares of common, meaning an effective purchase price of $1.50 per KCG share.

According to the 8-K, conversion would leave the preferred holders owning 73% of KCG.

tidying up may still need to be done

The complicated structure of the preferred issue–two classes, each with different voting rights–seems to me to imply that some of KCG’s rescuers aren’t allowed to own a market maker, either because of conflict of interest considerations or market share concerns.

change of ownership has happened, though

…although in a deferred way (which, of course, is what convertibles are all about).  The directors of KCG have agreed to turn over almost three-quarters of the company to their rescuers in exchange for the bailout.

an attractive stock?

I’m not an expert at financials, so I don’t have a professional opinion.

The one think that strikes me is that, pre-crisis, the stock was trading at about $10 a share (down from the 52-week high of $14+ achieved last October).  If we assume that the $400 million injection from the preferreds offsets exactly the loss from the renegade trading software, then the only factor that’s really changed over the past week is that there are 4x as many shares outstanding.  That would imply the equivalent share price today would be $2.50.  But the stock is currently trading at well over $3.   Strange.   Very strange.

the Employment Situation report for July 2012

August 6, 2012 By in employment, Employment Situation report, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , Leave a comment

the report

On Friday August 3rd at 8:30am EDT, the Bureau of Labor Statistics of the Labor Department in Washington released its Employment Situation report for July 2012.  According to the BLS, the US economy added a net +163,000 new jobs during the month–the best showing since February.  The private sector created 172,000 positions;  state and local governments laid off -9,000 workers.

the revisions

As regular readers are well aware, the employment figures come from a BLS survey of large corporations and state/local government bodies.  Respondents have three months to get their data in.  As a result of differences in reporting speeds, each monthly figure compiled by the BLS  is revised twice, once each in the two months following the initial report, before it is considered final.

The May ES figures were initially reported as +69,000 jobs, consisting of +82,000 in the private sector and -13,000 layoffs by state and local governments.  These numbers were revised up in June to +77,000 (+105,000 private, -28,000 government).  The final tally, reported on Friday, is another upward revision, to +87,000 jobs (+116,000 private, -29,000 government).

The June figures were initially reported as +80,000 (+84,000 in the private sector, -4,000 government).  In the July ES, they’re revised down to +64,000 (+73,000 private, -9,000 government).  

Between the two months, revisions clip -6,000 positions from the total in July, all the decline coming from to state and local government layoffs.  (Despite the large May government layoff figure, the rate of shrinkage of state and local government employment is slowing.  Two reasons:  state/local revenues, rising rapidly as the economy recovers, are now approaching their previous 2007 peak; and, balanced budget rules have already been forcing trimming for a number of years.)

what makes this ES important

background

Employment in the domestic economy hit its low point about three years ago.  At that time there were about 9 million fewer people working than at the (overheated) peak of 2007, and maybe 7.5 million people fewer than normal.  Since then, due to a combination of natural healing and the Fed dropping interest rates to an emergency low of zero, the economy has added back over 4 million jobs.

It’s tempting to do simple subtraction and say that there are still at least 3.5 million out of work due to the recession.  It’s not that simple, however.  Students are constantly finishing school and looking for their first post-education jobs.  Older workers retire–though at a below normal rate at present–freeing up positions for new workers to take.

How big is this movement in net terms?  Economists estimate that the US needs to create an average of 125,000-150,000 new jobs each month just to absorb net new entrants into the workforce.

Therefore, the big army of unemployed only starts to get whittled down when the economy generates more than 125,000-150,000 jobs a month.

the recent past

Over last winter, job creation suddenly accelerated to around 250,000 new positions a month.  Wall Street was elated!  The economy appeared to have not only absorbed all the new school-leavers but also reduced the ranks of the long-term unemployed by 10%.  Maybe a 1970s-, 1980s-style (read: faster) recovery was finally underway.  And this during a period when bad weather tends to slow hiring.

Then came the March figures, which were slightly below 150,000 job adds.    …and the April figures   …and the May figures   …and the June figures–all sub-100,000 job creation months.  Wall Street was deflated!

Initially, investors read the apparent slowdown as mild winter weather pulling forward into February construction work that usually comes only in April.  But as the sub-100,000 months began to pile up–and, at the same time the EU economy was turning out to be worse than expected and slowdown in China was deepening–investors began to fear that simple seasonality wasn’t the culprit.  Wall Street began to think that the job figures were signaling the US was beginning to be dragged back into recession by economic woes elsewhere.

At least for the moment–and for good, I think–the July ES has restored seasonality as the most likely reason for the poor job numbers posted during the spring.  We’re back to the idea that the domestic economy is growing just enough to absorb new entrants–but not to make any appreciable dent in the large number of chronically employed.

stock market implications

1.  Having several million “extra” unemployed is a calamity for the unemployed themselves.  It’s also a key long-term social and political problem.  It isn’t necessarily as big an issue for publicly traded companies, however.

The long-term unemployed represent maybe 3% of the workforce.  When working, they represented far less than that percentage of total consumption spending–1% would be a generous estimate.  Corporate profits would be dented severely by a global recession.  But, sad to say, ex materials companies, failure of Washington to ease chronic unemployment won’t make very much difference to S&P 500 earnings.

2.  In the manic, black-or-white, all-or-nothing view of short-term traders, Wall Street is again a safe place to be long.  This doesn’t necessarily mean that stocks are going to go up a lot from here.  But it does, in my view, lower the odds of a protracted slide in the S&P 500.

3.  If, as I think they will, the July ES figures do prove indicative of what August and beyond will bring, it may well also be that the world will see the upcoming US presidential election as not as crucial as it does now.  The belief that neither major party candidate is competent would be less threatening if the economy is, although admittedly slowly, healing itself.  Wall Street would then probably default to its traditional stance that, after all, gridlock is the best one can hope for from politicians.

Again, this doesn’t mean that stocks will go up–or that Washington will do anything for the chronically unemployed.  It does mean, however, that some growth is possible without helpful/needed fiscal policy changes the government refuses to make.  The magnitude of another worry is reduced.