why virtually no one’s at work on Wall Street today

Three reasons:

–what’s the point?  2013 has been the best year for US equities in almost two decades (to the surprise of everyone except the S&P strategy people).  Trading on the final day of the year won’t move the performance needle one way or the other.

–tax-selling of positions with losses has long since been done.  Analogous selling of positions with gains won’t begin in earnest until the new tax year opens on Thursday.  That’s because for taxes the trade is considered done on the date it’s agreed to, not the date it’s settled.

–normal trade settlement takes time.  The length of time varies by market but T+3 is typical.  In the old days, this would mean that on the third day after the trade is agreed to by buyer and seller, representatives of both sides would meet, usually at a custodian bank.  The buyer’s representative would bring a check, the seller’s the stock certificate.  An exchange would take place.  The trade would be finalized and recorded by the bank.  Same thing today, except that everything is done by computers.

Occasionally a trade will fail.  In the old days, the check might be for the wrong amount, or the seller would have the wrong number of shares (or couldn’t get shares out on loan back), or one or the other representative would go to the wrong place.  For bargains struck on December 31st, the issue is that all possible mishaps will occur in 2014, the new year.  It will be harder, more time-consuming, less tidy and costlier to close the 2013 books.  For most firms, the administrative hassle this entails isn’t worth dealing with.  So they encourage their PMs not to make trades near yearend if at all possible.


can activists pay their nominees to target company boards? should they?

Today’s Financial Times points out that 33 major American publicly traded companies have changed their bylaws to forbid board members from taking incentive payments keyed to the firm’s performance from third parties.

What is this all about?

In a sense, this is an aspect of the question of who really owns a company.  In theory, the owners are the shareholders and the company is run for their benefit.  As a matter of practice, most often the top management of the firm is in control.  It is usually happy with the status quo, and doesn’t typically stint on corporate jets, country club memberships and the like for themselves.

That’s where the board of directors comes in.  The board is elected by the shareholders to run the company.  It does so by appointing professional management to actually do the job, while it supervises, sets compensation and approves major decisions.  Control the board and you control the company.

A time-tested way for activist investors (a term which covers a whole raft of characters, from greenmailers and corporate raiders to more respectable operators who simply want to replace incompetent management) to influence the running of a company is through its board.  Activists often wage proxy battles to get their own nominees elected to the board by shareholder vote.  What better way, activists argue, to motivate such nominees to press for improved corporate performance than to pay them bonuses for achieving it?

The idea of activist investors compensating compliant directors potentially strengthens the activists’ hands in the three-way battle for company influence among:  management (which is virtually always backed 100% by individual shareholders, regardless of performance), institutional investors (who want strong stock performance but who suspect activists) and the activists themselves.

Personally, I think suspicion of activists is often warranted.  After all, look at what Bill Ackman did to JCP.  He erased a third of that firm’s revenues and all of its profits, and then sold his stock quickly–with board approval–at much more favorable prices than ordinary shareholders were able to achieve.  Thanks a lot.

So far, activists haven’t had much success with their pay-for-performance strategy, mainly because the incentivized nominees have lost in their board elections. But managements apparently see this tactic as enough of a threat to be quietly closing the door to it.

To me, the most interesting question is why activists feel the need to motivate their hand-picked board nominees with sizable amounts of cash.  From their rhetoric, it appears the answer is that their successful nominees quickly get used to receiving  hundreds of thousands of dollars for attending a few meetings a year, plus free use of the company’s jet fleet, free lunch   …and find the prospect of living the good life up much less appealing than they did when they were standing outside with their noses pressed up against the glass.

music: download vs. streaming

The Wall Street Journal had a short article on Christmas Eve about the music business.  I can’t see any way to use its contents to buy or sell a particular stock today.  But I thought it was interesting, anyway–and it has some bearing on the issue of owning vs. renting, which I think it a key way in which the internet is changing the world.

Here are the facts, obtained by the WSJ from a “major record company”:


The firm in question can identify how many individuals access its content, both by downloading albums/individual tracks from services like iTunes, and by listening on services like Pandora or Spotify.  In the latter case, the music company gets a miniscule payment from the service–much less than a penny–whenever a subscriber listens to a track.

For this music company, a downloader/CD buyer in the US generates $14 in yearly revenue.  A premium streaming service subscriber (still a very small number in the US) is worth about $16.

In Sweden, where over 60% of the population uses streaming services (3x the proportion in the US), a streamer is worth $17.75 a year; a downloader generated under $4.  Although it doesn’t explicitly say so, the Journal seems to me to be clearly suggesting that this is where the world is headed.


As you’d expect, downloading is very strong during the initial release of an album, when marketing spending is highest.  Streaming, on the other hand, usually builds slowly.

“Many” albums “eventually”–no quantification of number or time-frame–make more money from streaming than from downloads.

The sense I get is that albums fall into three groups:

–blockbusters, where initial download sales are very high and where streaming begins to contribute more than half of total revenue within a few months

–successes, where download sales are acceptable and where cumulative streaming revenue ultimately surpasses download sales–but only after a number of years.

–duds, where download sales are mostly a function of marketing hype and where both revenue streams dry up as soon as marketing spending ceases.


There’s really not enough data to be sure, but…

…as usually is the case in the physical world, renting looks like its ultimately more profitable for the owner of the property than selling, even when the transactions are done in bits and bytes

…the current mad rush to create new streaming services seems to validate the Pandora/Spotify model

…the value of the music company backlist has been severely underestimated

…the fact that the Journal many albums achieve streaming success, not “must” suggests there are lots of duds that can be the focus of cost-cutting.

long-term market themes (iv): Millennials vs. Baby Boomers

In a population of roughly 300 million in the US, about a quarter consists of Baby Boomers, born in the years immediately following WWII.  Another quarter are Millennials, born in the 1980-90 period.

During virtually my entire career, the economic behavior of Boomers has had the most important demographic impact on the stock market.  But the leading edge of this group is already entering retirement–and being gradually pushed off the Wall Street stage by Millennials who are just entering the workforce in force.

This phenomenon is already having an impact on the stock market, I think.  But we’re probably only in the early stages of what will be an increasingly important change.

Two thoughts:


1.  The standard economic toolkit for dealing with recession is to shift economic power away from savers (Boomers) and toward spenders (Millennials).

To some degree, this influence has been offset in the first post-Great Recession years by the difficulty Millennials have had in finding jobs as they finish school.  But employment is becoming progressively easier to come by.  And we know the Fed is planning on keeping an emergency recession-fighting regimen in place for at least the next few years.

Speaking in over-simple terms, the emergency plan of any central bank is to make interest rates negative in real terms.  During the emergency (we’re now ending year five) the elderly and the wealthy, who tend to save rather than spend and who have a strong preference for fixed income, lose out in a serious way.  Their wealth diminishes in real terms as they receive interest payments on their  savings that are less than the amount that inflation subtracts from their purchasing power.

Younger, less affluent people, on the other hand, get free lunch.  They can borrow at very low rates, sometimes less than the rate of inflation.  In the latter case, they get free money.  They can also easily be in the situation where, say, the condo/house they buy goes up in value, while the real value of their mortgage shrinks’

By taking money away from savers and putting it into the hands of people who have a strong tendency to spend, the government spurs economic growth.  Not fair, maybe, especially to Boomers, but that’s the way the system works.

Advantage:  Millennials.

the longer term

2.  Younger people want different things from what their parents have.

Some of this is, depending on your perspective, either the perversity of youth or boldly striking out in a new direction.  My parents lived in the suburbs, so I’ll live in the city.  They have PCs and flip phones (ugh!), so I’ll use tablets and smartphones–and I’ll become a social media guru.  They read newspapers, I’ll use the internet…

There’s also a stages of life component to this.

–Twenty- or thirty-somethings buy houses, furniture…, cars and suits (or other work clothing).

–Sixty-somethings buy jewelry and cruises.  They downsize their houses and move to low-tax warm-weather locales.  Or maybe they retire to the vacation house they bought ten years ago.

For my entire investment career, the changing purchasing patterns of Baby Boomers have been perhaps the most important factor in figuring out how to play the Consumer Discretionary sector–which is arguably the single most important one for a portfolio manager to outperform the S&P 500.

I think it’s still possible to hitch your star to the Baby Boom and outperform.  But not for much longer, as the Boom wanes and Millennials wax.