Investor Assessments of Political Events

Although the various investors in the financial markets doubtlessly pay great attention to important political events, such as were a state in the E.U. to default on its bonds, I suspect that market analysts overstate the importance of more commonplace political events. For example, The New York Times reported in late September 2012 that investors were shifting their portfolios to reduce risk out of uncertainty regarding the upcoming American elections and the ongoing negotiations in Congress to avoid the huge budget cuts and tax increases set to begin automatically at the beginning of 2013 and run for a decade. Additionally, fears that E.U. leaders might hesitate on moving forward with the bailout program oriented to indebted states were prompting investors to be more risk-averse. Generally speaking, analysts were “anticipating that politicians may not act until forced,” both in the U.S. and E.U., “setting the markets up for weeks of angst.” In my view, this account is overstated.

 Does expertise on these make one an expert on politics?  

The full essay is at "Investor Assessments."

Source:

Nathaniel Popper, “Fearing Fiscal Cliff, InvestorsCash In and Seek Safety,” The New York Times, September 28, 2012. 

Executives and Directors Planning to Unload Shares: A Front for Insider-Trading?

The U.S. Securities and Exchange Commission (SEC) initiated preset-trading arrangements known as 10b5-1 plans in 2000 so corporate executives and nonexecutive directors would have a way to announce their plans to sell shares. According to John Nester, a spokesman for the SEC, the 10b5-1 plan was devised “to give executives a way to sell some shares of their own companies despite being exposed to nonpublic information.” Therefore, the plans would have to be set up when the executive or director does not possess inside information, so as to obviate any potential charges of insider trading. The question I address here is whether the plans were subject to abuse by non-executive directors. By abuse, I mean the exploitation of a conflict of interest.

The full essay is in Institutional Conflicts of Interest, a book that is available at Amazon.

Making Business More Interesting: Beyond the Jargon and Figures

From a historical perspective, I suspect that what “counts,” or is recognized, as discourse on business has consecutively narrowed. An enterprising scholar in the field of business and society, which itself has narrowed to managerial tools and ideological demands (under the subterfuge of knowledge), might compare the media’s coverage of business firms beginning to sell electricity, the telephone, and the auto-carriage (i.e., automobile) in the early decades of the twentieth century with reports a century later on firms bringing out life-changing products like smartphones and other applications of computer technology. Not having been around when electricity was making houses brighter and telephones as well as cars were fundamentally changing human interaction and mobility, people following the business news on Facebook, Twitter, Apple, Google, and Microsoft do not have the historical perspective necessary to assess how broad or narrow the coverage is. 

I contend that what is considered business news (and discourse) is artificially constrained, in that coverage is biased toward the companies themselves (most particularly in CEO antics and financial numbers) at the expense, or opportunity cost, of attention on exciting new products. Put another way, the public discourse on business need not be so reductionist. The trajectory is not good for business or society. I contend that broadening (i.e., rather than replacing one media obsession with another) the coverage in business news to include, and, indeed, emphasize, substantive information on, as well as discussion of, the exciting new uses and wider implications of the companies’ respective technologically advanced products would render business news as well as business itself much more interesting, especially to people in the wider society. In this essay, I sketch how a product-centric approach would look in the business media; hopefully, the sheer difference between this alternative and the status quo reporting will provide a sense of how much journalistic discretion is involved in what we watch and read in business news.

CNBC and Fox Business News provide much material for analyzing the business media, and can be taken as illustrative of the default that had taken hold by the 2010s. The devil is in the details, so I want to concentrate on a particular example and reason inductively to generalize to the business media overall.

An interview taking place on CNBC. The choice of questions may be more important than the answers. (Image Source: Inside Cable News)

On “Squawk on the Street,” a program on CNBC, the anchors interviewed Harvey Spevak, the CEO of Equinox (a company in the fitness industry), answered questions on January 17, 2014. I want to focus on the importance on the questions. One of the show’s anchors asked Spevak about his company’s plan to offer genome analysis as a service to customers who would like to know how they respond generally to exercise. Rather than follow up with a question to illicit what customers would learn about the way they react to exercise, the journalist asked if the service was “just a marketing gimmick.” I submit that probing the service if only to assess its staying power with consumers would have been more useful to not only investors and stock analysts, but also people who would not be interested in watching and hearing a cacophony of numbers presumptuously assuming the high ground as “king of the hill” of business news.

One implication from the interviewer’s choice of follow-up question is that investor interests, assumed to be exclusively bottom-line financial, trump consumer and entrepreneur (or even competitor) interests. Such reductionism is unnecessary, and the numbers orientation may not actually be in the interests of the investors and financial analysts, not to mention CNBC’s ratings.

The interview then turned to company’s foray into wearable fitness technology. Here, the interviewer had little interest in making the products concrete for prospective customers and the wider public; he was satisfied with the Spevak’s vague description, which ended with, “It’s science.” The journalist made the choice to follow-up instead by asking what profits the CEO expected the company would make on the wearables, and, moreover, whether an IPO might come anytime soon. Potential investors (and stock analysts) would be better equipped to evaluate a future IPO were the CEO to have discussed what how the wearables could benefit users (i.e., what the products can do) as well as how the products might change our daily lives and society itself. The anchor then turned his guest to the subject of online advertising, hence inadvertently feeding the obsessive mentality in the American media generally by treating advertising as an end in itself rather than a means of making potential and even existing customers aware of products and services.

All too often, information and public discourse on products a leap ahead technologically (and hence seemingly unfathomable) are relegated to “print” reports of product announcements, such as of Google’s new contact lens that measures glucose levels. People with diabetes would quite naturally be very interested in how the new product would likely impact their daily lives. A huge segment of potential viewers and readers could be drawn in by any media outlet willing to stay on the announcement rather than run to vague considerations of profitability and stock charts.

Does not the true value (and significance, not to mention the excitement) of products coming out of leaps in technology or hitherto unrealized applications of existing technology lie in the stuff we can do with the new toys? As a writer, I get excited when I come up with a novel point or perspective to share with others because I have experienced what it feels like to have my perspective “opened up” from reading a unique piece. I am not thrilled in reading about grammar or composition tips, on the other hand; I do such “mechanical” reading as a means of improving my ability to communicate to readers. 

Public discourse on business too often obsesses on the means—even taking them to be ends in themselves­. Consequently, interest is typically confined to a narrow segment (i.e., the financial wonks). Ironically, Wall Street would be better served with the media giving more attention to the new products and their societal implications, with the expected financial consequences being secondary rather than excluded in yet another manifestation of tunnel vision. Reports and commentary on novel products themselves (as well as innovative ways of business) do indeed fall within the domain of business discourse. In fact, I would say the reorientation is more in line with the true significance of business (i.e., making and providing products that consumers want to use). Tapping into this core of business, while still attending to the financials, would, I suspect, attract a broader array of viewers and readers in the wider society beyond the business world. As an added bonus, business practitioners, investors, and even stock analysts might find their own interest piqued. A stock analyst excited as much (or more) about a novel product as charts and figures may do a better job in assessing a company’s value, and thus likely stock trend.

Of course, in order for more of the general population to realize that the true significance of business is actually more interesting, the business journalists would have to wean themselves and their interviewees off the snazzy jargon, nearly devoid of any real meaning and yet ubiquitous in the business world. The artificial excitement over such words or phrases as “champion,” “coach,” “growing leaders,” “driving” (not as in driving a car), “drivers,” and “leveraging” (beyond its oversold application to debt) is misguided in that the obsession and related excitement (out of vacuous boredom?) distract everyone from the true font of excitement in business. Additionally, the weirdness in both the sheer obsessiveness on particular words—flavors of the month—and the misuses themselves, and the artificial narrowing of what counts as business that enables knowing and enjoying the “language” to function as the passkey keep people outside the business world from becoming excited about business rather than laughing at its inhabitants’ discourse. Perhaps the practitioners and journalists who play in the business world figure, quite unconsciously of course, that business as they understand it is not really very exciting, and, therefore, that few if any people in the wider society would be likely to get excited about business anyway.

Congressional Ethics: Investing on Insider Info

To what extent should members of Congress be permitted to adjust their investment portfolios in line with general information on the economy gained as part of their legislative work? Whereas insider trading refers to information that is not available to the public on a particular company, the trades at issue as the U.S. headed toward a possible financial crisis pertained to diversified portfolios.

To take one example, John Boehner (R-Ohio), who would become the Speaker of the House after the 2010 Congressional elections, met U.S. Treasury Secretary Henry Paulson for breakfast on January 23, 2008. According to the Washington Post, “Boehner would later report the rearrangement of a portion of his own financial portfolio made on that same day. He sold between $50,000 and $100,000 from a more aggressive mutual fund and moved money into a safer investment. Boehner is one of 34 members of Congress who took steps to recast their financial portfolios  . . . after phone calls or meetings with Paulson; his successor, Timothy F. Geithner; or Federal Reserve Chairman Ben S. Bernanke, according to a Washington Post examination of appointment calendars and congressional disclosure forms. The lawmakers, many of whom held leadership positions and committee chairmanships in the House and Senate, changed portions of their portfolios a total of 166 times within two business days of speaking or meeting with the administration officials.”

The paper points out that the financial moves by the members of Congress were permitted at the time under congressional ethics rules.  Some ethics experts suggested that lawmakers should refrain from taking actions in their financial portfolios when they might know more than the public. In my view, we can assume that lawmakers will know more than the general public on matters relevant to investment decisions; the question is whether those decisions ought to be placed in blind trusts.

Lawmakers are going to know more than the public; merely sitting through hours of hearings will accomplish that. Indeed, part of the rationale for having a representative rather than a direct democracy is that representatives can be in a position to be better informed on the economy because lawmaking is at least in principle their full-time endeavor while they are in office. Essentially, the electorate delegates the popular sovereignty to the representative to focus on the lawmaking role.

Furthermore, human nature being what it is, we cannot but expect the lawmakers to have protected their investments by reducing the level of risk after learning that the U.S. economy could go over the cliff on account of being over-leveraged on subprime mortgages and over-securitized on them plus the related securitized insurance swaps. Adjusting their portfolios based on “insider information” on an upcoming stimulus plan is based on more particular information and thus more problematic even though it is not on a particular company. Regardless of the specificity of the information, however, any private gain from the public service is rightly generally regarded not only as unfair, but also inappropriate and unseemly.

At the very least, for lawmakers to use even the inevitable information they have on the general condition of the economy for private gain detracts from the notion that public service is a duty rather than an opportunity to enrich oneself. In this regard, having citizen lawmakers are preferable to careerists. However, even doing one stint in the U.S. House of Representatives could be financially lucrative, so even with term limits, the question of whether lawmakers should be able to adjust their investment portfolios would be relevant.

Although it is undoubtedly impossible to stop virtually any private benefit from accruing to members of Congress, their management of their own wealth should be separated from their public service where possible. The instrument of a blind trust makes this possible in the case of investments, assuming that direct and indirect communication with the managers of the trusts is preempted effectively. The trusts could even be mandated for several years after the lawmaker vacates public office.

More generally, the opportunistic orientation evinced by several lawmakers in January 2008 suggests that they may have viewed their respective offices less as stemming from a sense of a duty oriented to public service than as being an opportunity for personal gain. Rather than electing citizens who yearn for the office, perhaps we ought to seek out those who have reservations in place of ambition, yet would serve out of a sense of duty if called. In other words, whoever in the two parties gets people to run for the offices ought to be suspicious of people whose sense of duty seems all too comfortable and convenient to come out a sense of obligation. In other words, if it is easy to convince someone to run, then he or she probably is not the best person for public service.

Source:

Kimberly Kindy, “Lawmakers Reworked Financial PortfoliosAfter Talks with Fed, Treasury Officials,” The Washington Post, June 24, 2012.