Euphoria

The legal community was euphoric Tuesday on word stock exchanges listing your shares, public companies, aren’t immune from lawsuits claiming rules favor high-speed traders.

Bloomberg reported (news breaking so no updated link yet but case history is here) that a federal appeals court has overturned a lower ruling protecting exchanges from suits brought by investors and brokers claiming they were disadvantaged in markets through exchange practices ranging from data feeds to complex order types giving fast machines an edge.

The lawsuits hinge, I’m gathering, on a requirement in the Securities Act that exchange rules not discriminate against any constituency.

It’s something public companies should recognize. You’re an exchange constituency. If investors and traders have an expectation of advanced services, what about public companies?  You’re still calling people to ask why shares are up or down. You could do that in 1932, before the Securities Act passed Congress.

It’s conceivable that 2018 could be a great year for public companies in the way 2017 has been a great year for investors. Few (save Carl Icahn and some others) imagined on Nov 7, 2016 stocks were about to soar.  Euphoria now seems to abound like pot shops here in Denver on what we call the Green Mile from Alameda to Evans south on Broadway.

For companies it’s terrific when shares soar too (though LFIN, which debuted the 13th at roughly $5 and announced the 15th it was buying some blockchain outfit and then promptly roared to $130 and $4 billion of market cap without any revenue and via 21 volatility trading halts, is not exactly the sort of soaring that’s sustainable).

What’s needed more than slamming into the ceiling of all-time high Shiller PE ratios (not there yet but closing) is better disclosure.

Since 1975 not one thing has been modified in 13F investor disclosures. Back then we had rotary phones, human beings executed trades, and on May Day that year an obscure investment firm formed in Malvern, PA, calling itself The Vanguard Group.

Step forward to today and investors are still reporting holdings 45 days after quarter-end while Vanguard manages trillions, markets relentlessly morph, and high-speed firms rent 100 shares of your stock, trade it 5,000 times, volume is 500,000 shares, you think it’s big holders, and at the end of the day they own nothing.

Seem appropriate to you, this mismatch?  It’s decidedly not euphoric that public companies have been left out. One could say discriminated against?  Hm. SEC, are you listening?

So maybe in 2018 we can fix it. No need for Congress to act. Dodd-Frank did that in 2010 by creating a mandate for monthly short-position disclosures. Should long positions be disclosed 45 days after quarter-end? Or instead how about disclosing both long and short positions monthly?

That’s still well slower than machines but it would get us into the 21st century. How about it, SEC? Is this the Era of Transparency or is it just the Era of Euphoria?

Speaking of which, will euphoria last? So long as money pumps into Exchange Traded Funds, which don’t create any new shares of public companies but instead create shares of ETFs that reflect dollars chasing the same shrinking set of public companies that currently exists, yes. That’s a euphoric condition.

It’s also inflation. The reason the market behaves like Shangri-La is because the entire market is leveraged like a…well, like a currency that expands far more rapidly than the underlying economy.  Federal Reserve, are you paying attention?

Past all that, I think there’s plenty of reason for euphoria not only about better disclosure in 2018 but in the current season. Good things are happening economically.  There’s a lot of eggnog ahead.  Bowl games to watch while consuming adult beverages.  Chestnuts roasting on an open fire.

But euphoria wears off. We’ll talk about that next year.  Have an awesome holiday season!