The Law and Other Anomalies

The SEC has announced that at its July 10 meeting (tomorrow!) it will take up implementation of the JOBS Act provision to allow in effect public advertising of private placements.  This provision was included in the Act in an effort to foster financing of emerging companies and is so highly controversial that the SEC until now has failed to establish long-overdue procedures and regulations to permit implementation.  The text of the SEC announcement is set forth below; stay tuned.

SEC announcement:

The Commission will consider whether to adopt amendments to eliminate the prohibition against general solicitation and general advertising in certain securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act, as mandated by Section 201(a) of the Jumpstart Our Business Startups Act.

With the stock market charging ahead, how should you be investing your money?

At a program presented May 15^th by Boston Private Bank & Trust Company, while noting that each portfolio should reflect that investor’s goals, time horizon and risk tolerance, the panel suggested some generally salient issues to be considered:

• Is the classic allocation of 60% stocks/40% bonds still wise?  Is 70/30 the “new normal?”  While reviewing history suggests that 60/40 returns averaged a healthy 9% per annum, recent trends suggest that the classic allocation may not enjoy similar future results.
• Analysis is complicated by inclusion of riskier investments into recent macro allocations, making historical comparisons difficult.
• Bond returns are low, but as always  provide a counter-balance to equity risks.
• Recent developments suggest the end of a strong cycle for commodities.  This does not necessarily mean negative returns, and commodities now may provide strong diversification.
• While about 80% of reporting S&P companies beat earnings estimates in the first quarter, less than half did it by beating gross revenues; this may foretell a need for greater selectivity.
• Real estate is strong and is part of many portfolios; REITs permit diversification coupled with both yield and liquidity.
• An historical argument was made in favor of dividend-paying stocks for total return and indication of company quality.
• If you are looking to retire, a careful portfolio analysis should be undertaken; draw-down rate from a portfolio is intimately related to how long a portfolio will last.  Drawing lightly in early years may be key.
• The $64 question is, where is the market going?  Aside from history telling us that there will be corrections and cyclical “pull backs,” fundamental indicators became more confusing in April and should be consulted as leading indicators; the regional Feds shortly will be announcing results, which are important measures of these fundamentals.

Nothing startling here; basic analysis by a traditionally oriented asset management team.  One overall impression: asset allocation and selection within asset classes are seen as heavily informed by history, which reveals some remarkably constant dynamics.  This fact alone might well lead an investor to look for a professionally managed portfolio, which I am sure would not be a bad result for the advisory community, including Boston Private.

Two pending cases in the United States Supreme Court, to be decided by the end of this June, involve issues of racial justice.

One case challenges the affirmative action plan for admissions at the University of Texas.  Many lawyers thought that several years ago a five-to-four Supreme Court decision upholding the University of Michigan admission plan resolved all these kinds of cases.  Apparently not.

The Michigan plan, approved by the Court, stated that universities could utilize race as one factor, although not the determinative, in establishing standards for admission.  The justification was that the university had a legitimate interest in creating a diversified student body, believing that such diversity created a better educational experience.

The University of Texas had in effect a “top 10% rule” which automatically admitted to its Austin Campus the top 10% of graduates in all Texas public high schools.  Since many Texas high schools werede facto racially segregated, this resulted in substantial student body diversity.  Texas now was intending to graft on top of its 10% rule a provision, affecting the recruiting of the balance of its entering class, using the Michigan system (race being one but not the only factor).

The case may even be thrown out; the plaintiff, a white student claiming she was discriminated against, has already graduated from another college and the only remedy she is seeking is the return of her application fee (a fee which the University of Texas never refunds in any case, whether or not an applicant is admitted or denied admission for any reason whatsoever).

The second case, Shelby County against (United States Attorney General) Holder, involves Section 5 of the 1965 Voting Rights Act, which identifies certain states as having bad racial history.  Any change in the voting laws of those listed states cannot be given effect unless the United States Department of Justice approves.  The Congress has five times extended the Act but has never once amended the list of states which are subject to this mandatory review.  The plaintiffs argue with some cogency: is it really possible that in the last forty- plus years, since the enactment of the original Voting Rights law, there has been no change whatsoever in any of the states subject to this pre-clearance procedure?

Does not a failure to make specific findings on a state- by- state basis, identifying anew those states which still require such scrutiny, prove that Congress is simply renewing the statute without a rational federal interest which would justify intrusion into state election laws?

How do you turn around a large company?  According to Mohamad Ali, Chief Strategy Officer at Hewlett Packard, by first attacking costs and then strategically reinvesting the enhanced cash flow in profitable product initiatives.  You also divest your extraneous parts, but you do that over a long period of time.

Ali, who has spent many years in strategic planning at IBM, told a breakfast meeting of the Boston Chapter of the Association for Corporate Growth some war stories about the crises faced by IBM in the ‘90s and into the 2000s.

Ali has worked at several companies doing the same thing: guiding them through corporate transformations.  It is not surprising that all these companies are in some phase of computer technology; aside from being Ali’s substantive sweet spot, computer-related companies have faced a constant need for transformation, as technological and consumer changes occur often and are abrupt in this space.

Ali has a “transformation playbook” which has some simple sequential steps. The first always is: “take cost out of the system.”  That gives you cash and if you don’t have cash, you have no flexibility for products, sales or M&A.  You also have to take a look at governance structure to make sure that that structure matches the new configuration of your businesses.

This transformation playbook apparently is in use today at HP.  Having gone through four CEOs in four years, and having purchasing Palm and other companies without measurable affirmative effect, HP did attack cost and has been working on products in markets that it missed historically, including tablets.

We are early in the HP “transformation” and Ali is of course optimistic as to the ultimate results, speaking glowingly of product innovations.  It remains to be seen whether HP’s “transformation playbook” will produce any silver lining.

It seems that the Rolling Stones will roll into Boston Garden this June.  Balcony seats are far north of $400 each; floor seats are officially priced at $600 but if you go on line you will see single seats (not even in a suite) priced up to $5,900.  But don’t blame TD Garden; they are the venue, but the tour promoters fix the price.

At the April 11^th breakfast meeting of Association for Corporate Growth/Boston, TD Garden President Amy Latimer attempted to share some of the background of TD Garden as a business.

Ticket prices for all events, whether the Bruins or the Celtics or the Circus or the twenty-five or so concerts that play the Garden each year, are fixed by, and paid over to, the teams or promoters.  It seems that TD Garden makes its money out of a rental of the Garden, and its ownership of the food services.  Aside from employees having to work very long and odd hours (most events go into the night and are typically attended by much of the staff), TD Garden sounds much like any other large business: their departments include HR, legal, sales and marketing.  Indeed, Latimer advises that TD Garden is very much like any business but with a couple of exceptions:

• “We do not control our product” which is to say they receive a quixotic mix of concerts and cannot guaranty the quality of the athletic contests; and
• Much of their schedule is filled at the last minute, which requires flexibility in every part of the organization, but particularly marketing and ticket sales.

Changes for the future at TD Garden?

• They are moving toward “variable pricing” which is to say that tickets will be priced not only based on location but also on the quality of the team being played, the day of the week, etc.
• Printed tickets will be a thing of the past; admission will be by identity card with bar code, and if you provide a code to a client as your guest, you will also be able to “load” value into the card so that you can treat your guest to food and merchandise without being present.
• After an almost twenty year delay, TD Garden claims to be moving forward on the development of the open parking lot in front of the Garden, planning office space, a hotel, perhaps a grocery, and a new front door to enter the Garden (the currently used side doors, shared with commuters, were originally conceptualized as only serving the train station).
• TD Garden is working like crazy to install not only cell phone service but also WiFi capability.  Among other things, that capability will drive a variety of apps including replays, food ordering for delivery to your seats, and merchandise ordering.