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INITIAL CLAIMS: FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK?

Takeaway: Strong claims data will beget strong NFP numbers between now and year end. A detailed analysis of this morning's Claims & GDP data below.

The strength in the domestic labor market remains impressive, to say the least. 

 

The 4-week rolling average in both the non-seasonally adjusted and seasonally adjusted Initial Jobless Claims series continued to accelerate in the latest week.  The strengthening continued despite the true up in the data stemming from technology upgrades in CA and NV that had positively impacted the figures over the last few weeks. 

 

As it relates to next week's payroll data, bloomberg currently has consensus estimates for nonfarm payrolls marked at 175K.  This compares with 169K for august and 3-month and 6-month averages of 148K and 160K, respectively. 

 

With strength in Initial claims accelerating over the last month and the seasonal distortion in the data now shifting to a tailwind, we think the balance of risk is to the upside vs expectations, as they sit currently, over the next few months.   

 

Below is the breakdown of this morning's claims data, along with a detailed analysis of the historical relationship between Claims and Nonfarm Payrolls, from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - NFP Seasonality

 

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Should We Care about the Tail or the Dog?

We would make two points with respect to this morning's labor market data. 

 

First, the data is exceptionally strong. For perspective, SA rolling initial jobless claims are now at levels last seen in April 1999 and January 2006. Recollect the market environment in both those periods. Consider the chart below.

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - JS 1

 

Second, since the market seems obsessed with the NFP report that will come out next Friday, here are a couple thoughts on how claims do/don't relate to NFP.

 

a) The first chart below looks at the time series data back to the start of 1999. Rolling initial claims are in red on the left axis while private payrolls are in blue on the right axis and are inverted to make the relationship more apparent visually. We think that the visual makes it quite obvious that there is a relationship between these two series.

 

b) The second chart below shows the same data but on a scatterplot. The RSQ is somewhat low at 0.528, but nevertheless the relationship is still quite clear, we think. The blue series is monthly data from 1999 to Present, while the green box is the most recent data for August 2013. Just by coincidence, the most recent data pair was almost exactly on the pin of the regression line. This month's claims data, for reference, would suggest private payrolls of 195k for September, by the way. Unfortunately, the standard error is significant. It is too large to have much conviction in the accuracy of the estimate. 

 

c) The final point worth making is that these two data series are cointegrated. The best definition I could find online for cointegration is the following: "The old man and the dog are joined by one of those leashes that has the cord rolled up inside the handle on a spring. Individually, the dog and the man are each on a random walk.   They cannot wander too far from one another because of the leash.  We say that the random processes describing their paths are cointegrated." - Link. We ran an ADF test (augmented dickey fuller) to see whether claims and NFP are, in fact, cointegrated and the p-value was 0.038. In other words, there is a 3.8% chance they are not cointegrated, and a 96.2% they are. Cointegration matters because it means that as claims go, eventually private NFP will go, just as the man with the leash will ultimately determine where the dog on the leash ends up.

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - JS 2

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - JS 3

 

 

The Data

Prior to revision, initial jobless claims fell 4k to 305k from 309k WoW, as the prior week's number was revised up by 1k to 310k.

 

The headline (unrevised) number shows claims were lower by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.75k WoW to 308k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -17.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -16.2%

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - JS 4

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - JS 5

 

 

 

2Q13 GDP:  Final 2Q13 GDP largely a non-event.  A review of the highlights below:

 

Net Exports:  the upward revision to the advance GDP estimate (advance estimate was 1.7 vs the 2.5 prelim/final)) was driven primarily by the positive revision to net exports.  

 

Generally, we view GDP upside stemming from the balance of external trade as equivocal from an analytical perspective.  Relative import declines are positive from an accounting convention perspective but, from a macro perspective, import growth is generally associated with positive economic growth. 

 

While debt financed consumer (end) consumption of imports could be viewed negatively, an increase in capital equipment and raw material imports is supportive of domestic production and ultimately a net positive for national income. So long as the rise in imports didn’t come at the expense of resource utilization domestically, it’s constructive for domestic economic activity. 

 

Consumption:  Growth in Consumption was down sequentially in 2Q13, decelerating on a QoQ basis and providing a smaller positive contribution to GDP on the quarter. 

 

Given the soft, real disposable income growth observed thus far in 3Q13 (due to the combination of furloughing and continued job loss at the federal level and ongoing, muted wage inflation broadly) and the flat savings rate, were not expecting material acceleration in consumer spending in the very near term.  

 

Weak Dollar policy out of the fed and the prospective flow through to commodity inflation presents another headwind to an acceleration in consumption growth from here.     

 

Domestic Demand:  Real Final Sales (GDP ex-Inventory Change), Gross Domestic Purchases (GDP including imports, excluding exports) & Real Final Sales to Domestic Purchasers (perhaps the cleanest read on total domestic demand as it measures GDP including imports but excluding both exports and Inventory change) all accelerated strongly sequentially.

 

Investment:  Growth in Private investment was revised lower by 70bps in the 2nd revision, but still very strong for the quarter at +9.2%.   

 

Government:  Government expenditure growth remained negative on the quarter but was less of a drag than in 1Q13.  Government spending grew -0.4% in 2Q (vs -4.2% in 1Q), contributing -0.07% to GDP (vs -0.82 in 1Q).

 

Inflation:  The GDP Price Index and Core PCE inflation were revised lower with both coming in at 0.6%.  With Core PCE being the Fed’s preferred read on inflationary pressures, the disinflation currently prevailing remains supportive of the committee’s dovish policy lean.    

 

INITIAL CLAIMS:  FORESHADOWING A BIG PAYROLL BEAT NEXT WEEK? - GDP Summary 2Q13F 092613

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

Christian B. Drake

 

 


McCullough: Where I Stand Now

Takeaway: We are less sanguine on the market and macro economic picture.

The Bernanke Fed's decision not to taper throws a monkey wrench into the markets and economy. We are consequently less sanguine on the overall macro picture going forward.

 

McCullough: Where I Stand Now - monkey

 

Some Additional Thoughts

  • This is the first 2013 US stock market “correction” that I will not buy
  • Bernanke has confused the entire growth picture
  • Expectations of the Fed getting out of the way were critical to American confidence and growth prospects
  • Bernanke's gravity bending experiment is killing confidence
  • US Dollar is starting to look like hell again
  • All-time highs in growth vs slow growth stocks may be in as well
  • Still thinking year-to-date low for Fear (VIX) is probably in
  • We remain short the MLP Kinder Morgan (KMP) in #RealTimeAlerts.

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MKC: Not Much to Love About Spices

Quick-hit update: still not much to like about MKC

 

Today’s Q3 2013 release was very much an extension of last quarter’s call:

  • The quarter did arrest the last 5 straight quarters of revenue declines with sales growing at +4%, versus +1.9% last quarter, but 3% of it was driven by its acquisition of Wuhan Asia Pacific Condiments (WAPC) in May 2013
  • The company expects to deliver +7% sales and eps next quarter, which we think is a stretch (despite an easier Hurricane Sandy comp)
  • We expect the weakness that management cited in quick service restaurants (QSR) and geographically in China and USA, and a lagging industrial business to continue into year-end despite slight offsets as we move into a heavier buying season around the holidays and an increased $10MM marketing spend
  • Our macro call is that Bernanke is pulling the confidence cord in issuing his “no taper” call which we expect will translate to subdued confidence into year end. With Europe seeing only slight improvement off of low levels, China still at depressed levels (compared to recent year comps) and slowing, and Latin America (mostly Mexico for MKC) a mixed picture, we’re not comfortable that the macro will be playing at MKC’s back
  • Also, spice consumers remain very sensitive to price and typically purchase last minute: the company has not taken up price (or perhaps been willing to) in 2 years. It is planning to implement a 3 cent price increase next quarter – we’ll have to see how the consumer reacts
  • The stock has underperformed its peer group over recent months, and we don’t expect this trend to inflect. We’ll let the chart below of our levels on MKC do the talking: it is bearish over its immediate term TREND:

MKC: Not Much to Love About Spices - zz. mkc

 

Matt Hedrick


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY

Takeaway: Strong claims data will beget strong NFP numbers between now and year end. We remain bullish on the consumer lenders: COF & BAC.

Should We Care about the Tail or the Dog?

We would make two points with respect to this morning's labor market data. 

 

First, the data is exceptionally strong. For perspective, SA rolling initial jobless claims are now at levels last seen in April 1999 and January 2006. Recollect the market environment in both those periods. Consider the chart below.

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 9

 

Second, since the market seems obsessed with the NFP report that will come out next Friday, here are a couple thoughts on how claims do/don't relate to NFP.

 

a) The first chart below looks at the time series data back to the start of 1999. Rolling initial claims are in red on the left axis while private payrolls are in blue on the right axis and are inverted to make the relationship more apparent visually. We think that the visual makes it quite obvious that there is a relationship between these two series.

 

b) The second chart below shows the same data but on a scatterplot. The RSQ is somewhat low at 0.528, but nevertheless the relationship is still quite clear, we think. The blue series is monthly data from 1999 to Present, whiel the green box is the most recent data for August 2013. Just by coincidence, the most recent data pair was almost exactly on the pin of the regression line. This month's claims data, for reference, would suggest private payrolls of 195k for September, by the way. Unfortunately, the standard error is significant. It is too large to have much conviction in the accuracy of the estimate. 

 

c) The final point worth making is that these two data series are cointegrated. The best definition I could find online for cointegration is the following: "The old man and the dog are joined by one of those leashes that has the cord rolled up inside the handle on a spring. Individually, the dog and the man are each on a random walk.   They cannot wander too far from one another because of the leash.  We say that the random processes describing their paths are cointegrated." - Link. We ran an ADF test (augmented dickey fuller) to see whether claims and NFP are, in fact, cointegrated and the p-value was 0.038. In other words, there is a 3.8% chance they are not cointegrated, and a 96.2% they are. Cointegration matters because it means that as claims go, eventually private NFP will go, just as the man with the leash will ultimately determine where the dog on the leash ends up.

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 17

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 18

 

 

The Data

Prior to revision, initial jobless claims fell 4k to 305k from 309k WoW, as the prior week's number was revised up by 1k to 310k.

 

The headline (unrevised) number shows claims were lower by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.75k WoW to 308k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -17.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -16.2%

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 1

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 2

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 3

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 4

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 5

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 6

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 7

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 8

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 10

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 11

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 12

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 13

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 19

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 14

 

Yield Spreads

The 2-10 spread fell -8 basis points WoW to 228 bps. 3Q13TD, the 2-10 spread is averaging 234 bps, which is higher by 63 bps relative to 2Q13.

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 15

 

INITIAL CLAIMS: REMEMBER APRIL 1999 OR JAN 2006? THAT'S WHERE CLAIMS ARE TODAY - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure

Takeaway: The trend of smaller bond fund outflows continued in the most recent week but still both taxable and tax-free bond funds booked outflows

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Equity mutual fund inflow decelerated week-to-week to $3.4 billion for the 5 day period ending September 18th, down from the $5.2 billion inflow the week prior but remained well above last year's weekly average

 

Fixed income mutual fund outflows improved sequentially W-o-W but still resulted in a $2.6 billion withdrawal by investors, an improvement from the $6.7 billion draw down last week

 

Within ETFs, passive equity products experienced the largest weekly inflow in at least 2 years, with $25.8 billion coming into the equity category. Bond ETFs also had positive trends, although on a much smaller scale, with an $850 million inflow in the most recent weekly period


 

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 1 revised

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 2 revised

 

 

For the week ending September 18th, the Investment Company Institute reported a deceleration in equity fund flow trends although with fund flow still positive for stocks and an improvement in fixed income mutual fund flows, however with bond trends simply booking a smaller outflow. Total equity fund flow totaled a $3.4 billion inflow which broke out to a $3.3 billion inflow into international equity products and a $44 million inflow in domestic stock funds. These trends decelerated from the prior week's total equity fund inflow of $5.2 billion. Despite this slow down in stock fund flows, the year-to-date weekly average for 2013 now sits at a $2.6 billion inflow for total equity mutual funds, a substantial improvement from the $3.0 billion outflow averaged per week in 2012.

 

On the fixed income side, outflow trends continued for the week ending September 18th with the aggregate of taxable and tax-free bond funds combining to lose $2.6 billion in fund flow. The taxable bond category specifically shed nearly $900 million, the smallest weekly outflow in 6 weeks and a vast improvement from the $2.8 billion loss last week. Tax-free or municipal bonds continued their sharp outflow trends losing another $1.7 billion in the week ending September 18th, an improvement from last week's $2.7 billion outflow but none-the-less the 11th consecutive week over the $1.5 billion outflow mark. Franklin Resources (BEN) continues to have the most exposure in our coverage group to declining Municipal bond trends with over 10% of its assets-under-management in the tax-free category. The 2013 weekly average for fixed income fund flow has now drastically declined from 2012, now averaging a $521 million weekly outflow this year, a far cry from the $5.8 billion weekly inflow averaged last year.

 

Hybrid funds, or products that combine both fixed income and equity allocation, continue to be the most stable category bringing in another $1.5 billion in the most recent weekly period, an improvement from the $1.2 billion inflow the week prior. The year-to-date weekly average inflow for hybrid products is now $1.6 billion for '13, almost a 100% increase from 2012's $911 million weekly average.

 

 

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 3

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 4

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 5

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 6

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 7

 

 

Passive Products - Largest Weekly Equity ETF Inflow In Our Dataset:

 

 

Exchange traded funds experienced wildly positive trends on the equity side and mildly positive trends in fixed income for the week ending September 18th. Equity ETFs gained $25.8 billion, the biggest weekly inflow in our data set with balanced inflow into international, sector focused, and large-cap products. Including this week's inflow, 2013 weekly average equity ETF trends are averaging a $3.4 billion weekly inflow, an improvement from last year's $2.2 billion weekly inflow average.

 

Bond ETFs also had a mildly positive week with an $850 million inflow, which was a slight decline from last week's $1.4 billion subscription. Including this sequential drop in the most recent period, the 2013 weekly bond ETF average is now just a $388 million inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow from 2012.

 

 

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 8

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 9

 

 

HEDGEYE Asset Management Thought of the Week: The Market is Tapering the Long End Itself:

 

While the U.S. central bank continues to peg its bond buying programs to backward looking forecasts, the bond market continues to taper the long end of the curve itself and has pushed the 10 year Treasury yield up from a low of 1.6% in May to its current level of 2.6% this week. Hedgeye's Macro Team has introduced the thought that the continued accelerating improvement in year-over-year weekly jobless claims will eventually be reflected in the monthly Non Farm Payroll (NFP) numbers (despite different bias' in these data-sets) and that next week's NFP print for September on Friday, October 4th may finally prove out a closer relationship between these two employment variables. Thus, the 10 year Treasury yield may again spike up to recent highs on renewed Fed tapering expectations. In the event of a back up in 10 year rates again, we continue to observe the correlation between 10 year Treasury yields and Franklin Resources (BEN) stock which has strengthened over recent weeks. This investment manager with a large exposure to Municipal bond trends and Global Bond flows has been trading on the trajectory of long term yields under the thought that as bonds sell off, the fixed income and retail nature of BEN's assets-under-management levels will be negatively impacted. When we first spotted this developing correlation, the R-squared between BEN and the US10YR was 0.32. The R-squared currently is 0.50 and continues to bear watching especially if U.S. macro economic data continues to improve.

 

 

ICI Fund Flow Survey - Continued Weakness in Munis...BEN has the Most Exposure - ICI chart 10

 


 

 

 

Jonathan Casteleyn, CFA, CMT

 

 

 

 

 

 

Joshua Steiner, CFA

 

 


The SEC Tweets – Caveat Emptor

The Jumpstart Our Business Startups (JOBS) Act took effect this week and the SEC tweeted an Investor Alert focused on the lifting of the ban on advertising and “general solicitation” on qualifying private placements.  This provision has been the focus of criticism from the likes of former SEC chairman Arthur Levitt – a staunch and effective proponent of investor protection – and professor William Black, a financial crime expert who was responsible for uncovering Congressional fraud in the Savings & Loan scandal.

 

The SEC Tweets – Caveat Emptor - bulltweet

 

The JOBS Act is intended to make it easier for small start-up businesses to raise money, especially using private placements.  Flexibility afforded by the Act includes exemption from requirements of SEC registration for qualifying companies, including exemption from making certain required regulatory disclosures in connection with an IPO, and a longer five year phase-in of the already reduced small-company requirements of Sarbanes Oxley (those pesky rules Congress introduced to prevent the massive accounting fraud that sunk companies like Enron and WorldCom).  The JOBS Act also increases both the number of shareholders and the amount of capital that can be raised privately, giving start-up companies a longer runway before they have to register with the SEC.

What Could Go Wrong?

The SEC Alert highlights certain risks of investing in private placements, including the possible loss of your entire investment – a pretty common outcome with smaller private offerings – and the lack of a liquid market, which means you may have to hold your investment forever – another common result.  Remember that a private placement by definition does not trade, meaning you can’t get your money out at all until there is an IPO.  The reduced filing obligations under the Act mean companies will provide less information.  The Commission says “companies have more discretion in what information to disclose to you” and emphasizes “Pay particular attention to any risk factors that are described,” with the very strong implication that companies can get away with sweeping stuff under the carpet, and that therefore any risks they feel compelled to disclose must be really risky.

 

Isn’t there any protection left to the individual investor? you ask.  Well, in order to take your money, the company still has to verify that you are an Accredited Investor.

Should I Feel Better Now?

Regulation D, which governs private placements, identifies certain investors as “Accredited,” meaning they are deemed both sufficiently sophisticated, and financially suitable to assume the risks of a private placement investment.  The list includes banks, insurance companies, mutual funds, registered investment advisers… and individuals with $200K in annual income ($300K jointly with spouse) or $1 million in net worth.  This financial standard was introduced in 1982.  Since then, lots of things have changed – but the financial test for Accredited Investor has not. 

 

You don’t have to have a PhD in economics to reckon that a million dollars in 1982 is different from a million dollars today.  Thankfully, the value of your primary residence is excluded from the calculation, but other stuff is included – like your 401(K) and your IRA accounts – meaning that “net worth” is not at all the same as “cash.”  In other words, you could be Accredited, be a millionaire, and still have a hard time making your mortgage and tuition payments.

 

Just for a lark, we ran $1 million 1982 dollars through the CPI Inflation Calculator on the Bureau of Labor Statistics website, which says that the 2013 equivalent is $2,423,595.85.  This means that even under the old Reg D restrictions the number of Accrediteds has grown tremendously.  Accrediteds now represent a higher percentage of the general population but they are a lot less rich than when the standard was introduced.  Being a millionaire just ain’t what it used to be, a reality that everyone gets except Congress and the government agency charged with protecting the investing public.

 

Are you worried yet?

 

While easing the path to investment capital sounds positive and pro-growth and overall beneficial to America, direct-to-investor advertising is not an unmitigated societal good.  It makes us think of direct-to-consumer marketing of pharmaceuticals – outlawed in every country but New Zealand and the US – which is often viewed as an end run around regulation, designed to make people clamor for new drugs they may not need, or for off-label uses of existing drugs.

 

In the age of Facebook and Twitter, direct solicitation is inevitable, so it is legitimate to view the JOBS Act as Congress trying to get in front of an unstoppable event and to start making regulations around it.  But one of the Act’s most important and up-to-date objectives has so far gone nowhere; open crowdfunding of start-ups was supposed to be implemented by the end of last year.  The SEC hasn’t even begun drafting rules covering crowdfunding, perhaps waiting to first view the carnage from Open Season on retail investors.  A lot of firms invested in crowdfunding technology, and many have shifted to launch their own private placement platforms – sort of “speed dating for retail investors” – in order not to lose out completely on their investment.

Unstoppable?

There was massive press hype in the lead-up to the Facebook IPO.  So much so that Goldman Sachs, Facebook’s bankers, withdrew lucrative private tranches it had just offered to its partners and to key investors.  Goldman was concerned that the SEC would construe all the media attention as “constructive advertising” and charge Goldman under Reg D.  After the fact, the SEC said they would not have gone after Goldman over the final private pieces of the Facebook offering – but there is no way of actually knowing what the Commission might have done.  The Act now makes it moot.  You are now really, truly, and completely on your own.  It’s a no-brainer to predict that the initial stages of advertising and marketing private placements directly to investors will see substantial damage to individuals’ net worths before the dust settles.  We urge you not to be counted among the fallen. 

Of Things To come…

One bright point in all this is our fantasy of what mass advertising for high-risk private placements will look like.  We imagine a television commercial with scantily-clad women swooning over a supremely confident guy in an expensive sportscar.  “What sort of man buys private placements?” asks the announcer.  One look tells you all you need to know.  The 30-second spot will leave you panting for the kind of success that only private placements offer.  “Chernham & Burnham Private Bankers, Ltd.,” croons the announcer.  “Let us handle your privates.”

 

Looks like Wall Street is going to be fun again after all.  Watch yourselves.

 

By Moshe Silver

 

Moshe Silver is a Managing Director at Hedgeye Risk Management and author of Fixing a Broken Wall Street.


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