Clear Indexes Ideas

Seeking Only Good Companies

The media has focused a lot of attention on the number of companies going private via the private equity community compared to the number of firms going public. This is best measured in number of companies and in total market cap. This ratio of going private and public runs in cycles and there is no doubt that private equity is affecting the marketplace. However, at its current pace, it would take years for private equity to reduce the number of public companies to the point that investors become concerned at a lack of good opportunities. We are aware that this topic makes for dramatic headlines. It also screams that the private equity market believes that the public market is under-priced, and that bodes well for the stock market.

What is of concern to us is the very short memory of certain lawmakers and, even more concerning, the SEC. They want to cut back on or even repeal the 2002 Sarbanes-Oxley Act which has cleaned up balance sheets, installed new reporting processes, greatly improved corporate governance, and has been the catalyst behind most of the restatements by public companies during the last five years. No law is perfect, but from an investor perspective, this one rocks.

A frightening battle cry of the law makers and public servants trying to repeal or water down Sarbanes-Oxley is that too many firms are publicly listing their shares in London and other exchanges simply to avoid the cost and hassle of complying with Sarbanes-Oxley.

Late in April Greg Ip of Dow Jones published a report in the Wall Street Journal after reviewing raw data and academic analysis.

In a new study, they [three academics] conclude there is no evidence the much-criticized 2002 Sarbanes-Oxley Act, which beefed up corporate accounting and financial disclosures, among other things, increased London appeal to foreign companies at New York expense. The study looked at thousands of companies that either listed, or did not list, their stocks on various U.S. and London markets from 1990 to 2005.

The research also found that investors are still willing to pay a sizable premium for foreign-company shares listed in the U.S., in return for meeting tough U.S. regulatory standards. Foreign-company stocks in London receive no similar premium, they said.

The first implication from the study cited above is that a frequently made argument, that Sarbanes-Oxley has decreased the competitiveness of the U.S. in world financial markets, does not hold true.

The second implication from this study is perhaps more important: meeting tough regulatory standards is good for stock valuations. After the scandal-plagued market meltdown from 2000 through 2002, the regulatory environment from Sarbanes-Oxley has greatly improved transparency and trustworthiness. This in turn has helped drive the investment environment over the past four years of consistently strong stock returns with low volatility. After all, when companies are required to be more upfront about their financials, it logically follows that there are fewer and less severe negative surprises. The conclusion is clear: far from being a burden on Corporate America, Sarbanes-Oxley is actually a benefit to U.S. companies.

The article goes further and discusses the cyclical nature of new listings.

The researchers also say the decline in new foreign listings on U.S. stock markets since 2001 is not due to regulatory overkill. Rather, today there are simply fewer foreign companies that fit the historic profile for listing abroad: namely, larger, faster growing and less indebted companies from countries with stronger legal protections. Relative to historical patterns, the U.S. attracted more foreign companies since 2001 than would have been predicted, while London attracted slightly fewer.

All of our evidence is consistent with the theory that there is a distinct governance benefit for firms that list on the U.S. exchanges, say the authors, Andrew Karolyi and Rene Stulz of Ohio State University and Craig Doidge of the University of Toronto. There is no evidence this benefit has weakened over time.

Our hats are off to these researchers for confirming with their data what we as investors have believed to be true all along: that Sarbanes-Oxley has been a source of benefit, not loss, to the U.S. economy.

The biggest proponent to loosening Sarbanes-Oxley is Christopher Cox of the SEC. He should know better and is not serving investors or the U.S. markets. For now, as stewards to institutional investors we will watch and chime in before we find ourselves once again in an Enron/Worldcom world.

In conclusion, there are plenty of good firms to purchase in the public markets. In fact the best firms do not mind complying with the laws that protect investors, and they trade at a premium for doing so.

As money managers utilizing multifactor models, we believe the cleaner the data into our models, the more accurate the results. So our affection for the law is both self serving and investor protection friendly.

Hey Traders, "The Times, They are a Changing"

The stats show that the economy and the stock market perform better with a Democrat in the White House. That is not where we are as a result of this election.

So far health care stocks have been hit, along with defense and other industries that traders who seem awfully prejudice, are hitting as an over-reaction to the election results.

The Democrats have already publicly stated that they will not cut off one cent to our troops. They have also stated that they want to set a timeline to bring them out of Iraq. That doesn't exactly mean that they are all coming home.

We are, as our President and the Republicans say "in a new world." The Democrats want to solve the airport mess (board airplanes), inspect cargo and implement numerous other safety measures in and around homeland security. They do not as I read it want to hand the keys to the country over to the terrorists.

There is new leadership at the Pentagon. Perhaps, some of the multi-billion dollar projects that are just plain failures will be canceled and new high tech projects, ones that will provide our military a strategic advantage will advance. Or maybe, the work will shift to other useless projects in districts that matter to the Democrats in 2008. My hope is that positive results will come from advanced R&D.

Take a step back traders…perhaps healthcare coverage for everyone under 25 means more spending and the care providers will lobby, I mean work with government to find solutions we can afford and are profitable.

Perhaps stem cell research will create medical breakthroughs. Maybe government spending on research for things like global warming and alternative energy will occur and the academic/industry/government partnership will join with venture capital and create new industries we haven't even thought of yet. With that new wealth, IPOs and innovation will once again sweep the nation, beyond video sharing.

When President Kennedy announced the goal of putting a man on the moon in this decade back on May 25, 1961, even he probably didn't understand the chain reaction of innovation and discovery that would set the course of our technological advantage and research and development that is still felt today.

Let's not stay the course. Let's innovate. Let's cut these guys some slack in Congress and the White House and see what they've got. It may not be all that bad. Traders, watch your shorts and know when to cover, you may be surprised.

So, to quote the Bob Dylan song a second time; "come Senators, Congressmen please heed the call," your country awaits you.

Additional information: Two timeless Dylan verses from 1964.

Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won't come again
And don't speak too soon
For the wheel's still in spin
And there's no tellin' who
That it's namin'.
For the loser now
Will be later to win
For the times they are a-changin'.

Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled
There's a battle outside
And it is ragin'.
It'll soon shake your windows
And rattle your walls
For the times they are a-changin'.

Wrong Politics

The fact that science is questioned is the basics of science. When science is negated and explained away by zealots, it makes it easy to see "who the backwards third world country" really is.

I am a spiritual person and have never had a problem reconciling faith from science. They coexist in my world.

When the two collide it can make for great academic and spirited debate. This has been brought to an extreme. The risks are many and real: civil liberties, military might, global competitiveness, debtor nation versus leader nation.

Historically the United States has lead the world in patents, innovative processes and game changing breakthroughs in computer science, medical science and manufacturing.

On November 2, Luke O'Brien of Wired Magazine lays out what I thought was impossible in a country that is always moving forward. I need to share excerpts as a call to arms. Its title is: Science Prays for Midterm Mercy

Put away the petri dish. Turn off the Bunsen burner. When mid-term election results start to roll in next Tuesday, few groups will be as glued to the television as America's scientists.

In a country grousing for new leadership, the elections will be a referendum on an unpopular president and a chance for science-friendly candidates to hang out a shingle on Capitol Hill. The change could prompt government action on a range of issues.

Two of the biggest scientific topics in congress are Stem Cell Research and Global Climate Change. Both offer enormous potentials for the human race. Both require ethical navigation and balance in implementation. The country that gains early leadership in these fields will probably lead the world in medical science and the future of energy. With China having 16 of the 20 worst polluted cities in the world, this isn't just our fight. Energy independence and safe, renewable energy are not just hot topics, they represent the future and we do not want to see the US left behind.

Two of the biggest skeptics on global warming are also two of the most influential politicians in Washington: House Energy and Commerce Committee chairman Rep. Joe Barton (R-Texas) and Senate Environment and Public Works Committee chairman Sen. James Inhofe (R-Oklahoma), who has called human-induced climate change the "greatest hoax ever perpetrated on the American people."

The Bush administration has also resisted action on global warming, claiming that the federal government has no authority to curb greenhouse gas emissions from vehicles and industry. But the Supreme Court will rule next fall on whether the Environmental Protection Agency has jurisdiction to regulate air pollutants under the Clean Air Act.

I have written before about safe, clean nuclear energy. This is again where scientists need to take charge and set the right path for efficient nuclear energy. Energy generation that is so safe, that I would have a plant located in my backyard. Currently no electric generation is that safe. Coal, gas and oil pollute the air and pose terrorist risks. Hydro-electric plants, which are limited, are the only current material clean sources of electricity.

With the Bush administration pushing for a new generation of nuclear plants (the current ones account for around 20 percent of U.S. electricity generation), the opportunity exists for what Bledsoe calls "a grand deal," in which conservatives agree to mandatory emissions limits and liberals sign off on new nuclear power.

The data, and I will spare you to comparisons of what we spend monthly in Iraq where we were promised to pump enough oil to not have Iraq be a burden on the American tax payer or our national debt.

Federal spending for physical science research and development has stagnated for nearly a decade. In the last five years, annual funding for the National Science Foundation, which supports engineering and all fields of fundamental science, has gone up a mere $1 billion to $4.3 billion in 2006. Life science funding, though markedly higher at $28 billion annually, has also leveled off.

Unless you're a scientist for the Department of Defense -- particularly its high-risk Darpa -- you're out of luck. Military research rakes in more than $70 billion a year.

Now for a dose of reality, that it needs to be understood that innovation creates jobs and new wealth.

"The underlying reality here is that U.S. growth comes from innovation," said William Bonvillian, director of MIT's Washington office.

A major report by the National Academies of Science called "Rising Above the Gathering Storm" recommended that the United States focus not only on improving math and science education in schools but also on increasing the federal investment in science and engineering research by 10 percent annually over the next seven years. The report called for specific attention to be paid to physical sciences, advocating for a Darpa-like research group in the Energy Department.

The report also spurred a bipartisan bill, co-sponsored by Senate majority and minority leaders Bill Frist (R-Tennessee) and Harry Reid (D-Nevada), called the National Competitiveness Investment Act. It encompasses many of the recommendations in the "Gathering Storm" report and may be the most important piece of science legislation the next Congress will consider.

Are we a nation who wants to lose its competitive edge? Bringing free trade and prosperity is what I believe is our best weapon to compel the "other guys" to think twice about shooting. When their kids are healthy, educated and stomachs are full it is a lot harder to be enraged. We cannot provide help to the rest of the world or even our own people if we lose our innovative and competitive edge.

Further; if we lose our innovative and competitive edge because we do not focus our vote we also lose any semblance of being a "thoughtful democratic nation." Please vote tomorrow. Before you do, ignore the commercials and the media noise. Invest your time at http://www.vote-smart.org/official_congress.php.This web site contains voting record. See how your congressperson or senator has voted. That is the bottom line, not what party they are in. Do they show up to vote? Do they vote they way you want them to? Are they your representative and voice? Will they work hard to keep this country great?