Wednesday, August 31, 2005

Newseek = News Weak

[Disclaimer: Lately ArcaNews has felt like a watchdog for mis-information. This is not the mission of ArcaNews, but it's only fair to look at things objectively. That said, there are truly some good articles about NYX and the changing US equity marketplace. Most recently, Stocks, Futures, and Options ran this interview with Marshall Carter, the NYSE chairman. Here sources are named, and the content is enlightening. A refreshing departure from the crap that's been printed and blogged about here at ArcaNews recently.]

In May of 2005 Newsweek retracted an idiotic, nameless source article which alleged that the US desecrated the Quran. To be sure, that article and its subsequent retraction is a message of zero-credibility, but lots of glitz for Newsweek. Now these bozos have printed a story with anonymous sources speckled throughout, full of quotes that are conceived by Charles Gasparino to support his non-sophisticated diatribe about the potential (albeit, liklihood) that the NYSE will raise its fees. It's really not worth going into how idiotic the whole Higgens-and-his-pals crap is. That's already been covered here. But it is worth noting how absolutely bone-headed the editors are for letting this story go through. This rant is about the notion asserted by News Weak's Charles Gasparino, that raising prices is a bad thing.

Take the US steel industry for an easy-to-follow example of what happens when innovation fosters efficiency while prices for goods sold increase.

In this analogy, Nucor (NYSE: NUE) implemented a disruptive technology known as the "mini mill." This incredible innovation enabled steel to be produced in an incredibly efficient manner.
This method of steel production created turbulance in the centuries-old steel making process. The historic process called for expensive and expansive plants, complex and expensive union dealings, and layers and layers of costs that loaded the costs of goods sold. NUE created a method to keep the cost of goods sold incredibly low, while maximizing its top line.

Flat-rolled steel (for example) sells for a price that fluctuates. Typically when flat-rolled steel prices go up, the producers benefit from an increase in revenue. When a firm can raise prices they, in turn, increase their revenues. The economic value added ("EVA" as its called) is impacted by the top-line (i.e., revenue). When the firm benefits, so do their shareholders. Just look at how NUE's done since 1985:

To determine net operating profit ("NOP"), revenue is a key variable. So, when revenue is maximized, NOP is maximized. When NOP is maximized EVA is maximized. When EVA is maximized, shareholder value is maximized. Briggs & Stratton is another illustration how concentrating on EVA has rewarded shareholders. Look at their chart here:

Getting back to pricing: Most of the time, when prices go up, the firms (and their stakeholders) that collect the higher prices make out. Especially when their cost of goods sold ("COGS") is flat or decreasing. The key here is employing solid management that understands price equilibrium, contribution margins, and how to set pricing at a level that's acceptable to customers. Setting prices is a relatively complicated process where sound management is essential.

So, bringing it back to the NYSE and the potential price increases. As an NYX shareholder it's good news, not bad news, that prices may go up. To be sure, economies of scale are being leveraged and COGS are indeed remaining flat or decreasing. This translates to higher EVA, and generally speaking, a more profitable firm.

Now back to this silly article from News Weak. Charles Gasparino speculates that raising prices is a bad thing. He fabricates quotes and offs them on nameless officials. In addition to a lesson in irresponsibl reporting, Gasparino could use a lesson in price equilibrium, and basic supply and demand elements. (For example, National Public Radio, a highly-respected news outlet, prides itself on only using named sources for stories).

The NYSE will not raise prices past a point of equilibrium. They employ many smart economists that understand this balancing act, and again, as an NYX shareholder, there is re-assurance that management will increase EVA, and subsequently shareholder value and raising prices is a step in that direction. The proverbial "glass half full" scenario has ArcaNews and News Weak looking at the same glass. To create drama, News Weak looks at the glass as half-empty.

In reality, reasonable price increases is part of business. In fact, its an essential part of business. As NYX becomes a public and for-profit enterprise they owe it to their stakeholders to maximize value. Price increases (not just for listing fees, but for data feeds, etc,) will happen, but it's hardly worth an article in News Weak.

To be sure, this story in News Weak won't necessitate a retraction and scores of people won't be hurt like the Quran story managed to do, but come on, write something worthwhile.


Anonymous Anonymous said...

Amen! Well put.

11:32 PM  

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