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.

Thursday, August 18, 2005

70/30, 80/20, 90/10, 100/0 -- Split of ownership doesn't matter

All the conjecture about what the proper split should be regarding ownership in NYX is laughable. Plenty of folks on Y! message boards and countless articles have addressed this issue. The bottom line is: When you look at the facts (specifically the S4 filed with the SEC recently) there isn't a thing about the split of ownership that matters to AX shareholders.

Here's what it says:
"In the proposed merger, Archipelago stockholders will be entitled to receive one share of NYSE Group common stock for each of their shares of Archipelago common stock." (Source: 3rd paragraph on page 2 of the S-4).

For AX shareholders the split has absolutely no impact on the transition of AX shares to NYX shares. It's not like AX holders are looking at getting 30% of an NYX share -- 1 AX share = 1 NYX share -- no matter what the split is.

To be sure, the split matters to folks that own seats and are looking at getting their stakes purchased before NYX is a public company. For AX shareholders there is no consequence to how the deal shakes out. But for the record, Thain and the majority of seatholders are fine with the 70/30 split. Of course it raises eyebrows since AX is a newish company and the NYSE has been around for two centuries, but beyond a brow raise, and some absolutely idiotic posts in the AX bleachers (read: Y! message boards), the details matter not.

Gotta believe that the smart money has been buying on the recent dips (which most likely are attributable to stock which could be sold for the first time since it IPO'd last year at around 11 bucks). Interestingly enough, over the past few days the last trades have happened at around 8:04 PM EST which indicates west coast trades -- like folks connected to the Pacific Exchange, perhaps.

The nay-sayers have to exist -- that's what makes a market. The key is keeping your eye on the ball, and keeping the crap about the split and its ramifications in perspective. There's no question that it's been a long strange trip since last August. . . But (I think I speak for folks that have been [and are] long AX) at least we're enjoyin' the ride! Again, for AX shareholders, the degree to which the ownership splits doesn't matter whatsoever. That's a fact that is supported in the S4!

Thursday, August 11, 2005

WSJ reporter could use ride on the short bus!

The Wall St. Journal's reporting is losing its
reputation for quality articles as evidenced by the
knucklehead "story" written by Aaron Lucchetti today.

This guy actually was allowed to publish an article
with absolutely no substance. Let me expound.

Lets start with facts.
2/3 vote is needed for the NYX deal
to be approved by the NYSE members. That comes to 910
votes saying "yeah" to enable the deal to go through.

Luchetti writes, "Mr. Urstadt, a real-estate executive
who bought his seat in 2004, will cast only one vote
of 1,366. But his group, a loose confederation of
investors and retired traders, includes about 200 or
300 NYSE members."

First, the difference between 200 and 300 seats is
significant. That's a 33% differential. Pretty
sloppy reporting, if you ask me. Why he can't he
print the factual number is beyond me, and how editors
approve this crappy journalism is even more baffling.

Lets just say that this turkey, Urstadt, has constituents that own 300
seats: 1366-300 = 1066. . .those votes are hardly
enough to counter the seat holders who are giddy
from the increased intrinsic value of their (NYSE
seat) investments.

Next, what in the world is news worthy about, "Thomas
Caldwell, the chairman of the members' association who
controls more than 20 seats, said yesterday he'd like
NYSE seatholders to own more than 70% of the company,
but doesn't feel as strongly about it as Mr. Urstadt."

20/1366 doesn't amount to anything.

This article is pathetic at best and underscores the problems
the WSJ is having with keeping their reputation where
it once was (in the old days of printed news).

Wednesday, August 03, 2005

NYSE seat fetches $3mm today; Sets all-time record!

Today a NYSE seat was sold for a record $3mm -- breaking a six-year record, and marking an 85% increase in seat value since the deal of the century was announced on 4/20/2005.

Given this all-time record value of a NYSE seat, thought it'd be fun to reflect on some of the follies that have gone down since that magical day in April. Let's start with Ken "longone" Langone.

This grouchy curmudgeon has been pretty quiet lately. To be sure, his protest impacted AX in the short-run, but sure enough, the weighing machine has prevailed in the long run as today's sale and Arca's share price reflects. Each day that Q1 2006 nears, it is becoming clearer that this deal will not only go through, but be awesome for NYX seat/shareholders.

Next up, Charlotte Chamberlain from Jeffries. Look through the archives here at ArcaNews to gain some insight to her pathetic trading calls. You may recall, on 4/22/2005 she pontificated about why Arca would underperform. AX closed at $29 and change that day. Even better was her call on 11/11/20o04. On that day, while Putnam and his team were creating methods to enhance shareholder value, she downgraded the stock. AX closed at $18 that day. Why Jeffries wants to damage their credibility by letting Chamberlain publish anything related to electronic financial services is beyond me.

And who can forget Sandler O'Neil's Rich Reppetto. On 4/22/2005 he downgraded AX to an unusual "sell." O'Neil's customers who took his advice and shorted the stock are probably still licking their wounds. The stock closed at $29 and change that day.

Then there's Fane Lozman's ridiculous law suit. Lozman was a business partner of Jerry Putnam's back in 1995. Things didn't work out and Mr. Putnam went his own way - and has done fairly well. Lozman is yet another example of sour grapes becoming litigious.

Speaking of being litigious, William Higgins has been pretty quiet lately, too. His beef with NYX is that the deal is not fair for NYSE seat holders. Today's deal should pretty much quail this ridiculous notion. If the deal were not good for seat holders, then why does the value of their seats hit an all-time record today? And why is the value today 85% higher than it was prior to the merger announcement?

There will always be nay-sayers, but that's what makes markets. Thing is these boneheaded perspectives are not only way off the mark, but there's enough history and facts now to really damage the aforementioned folks' credibility.

The Financial Times and other rags like the WSJ have certainly tried to cast a shadow of doubt that this deal will go through. They've published articles stating that the SEC is looking at the merger closely. Surprise, surprise! The deal only represents the future structure of the US equity markets.

If analysts (and their sponsors/employers) could be downgraded, it seems that Chamberlain/Jeffries and Repetto/Sandler O'Neil are "Strong Sells." Thing is a downgrade implies a once bullish (or neutral) stance. Not sure any of the folks cited in this posting have ever had value -- save for being incredible contrarian indicators.

As I've said before. A 7-year old can be as right as the folks that are part of this rant. When you are wrong you are wrong. And today's record NYSE seat sale is a good reminder of just how wrong these clowns were!

Monday, August 01, 2005

Arca in the Big Leagues!

In the spirit of summer and the great American pastime, thought it'd be fun to compare the AX/NYSE merger with the American League/National League merger at the turn of the last century.

In this analogy The American League represents Archipelago Holdings. So to understand where I'm coming from it helps to look quickly at the evolution of the American League and subsequently of Major League Baseball:

The American League developed from a minor league, the Western League, that aspired to major league status, was formed on January 29, 1900, expanded in 1900-1901 into major cities, and changed its name.

The Western League of Professional Baseball Clubs was a minor league baseball league founded in 1893, and focused in the Midwest. In 1900, league president Ban Johnson converted it into the American League and it achieved major league status in 1901.

To be sure, ArcaEx was a minor league venue during its first couple of years as a regulated stock exchange (and the first fully-electronic, regulated, stock exchange in the US). Jerry Putnam, AX's CEO is like Ban Johnson, the "Western League's" leader. Following this comparison, In 2005, Arca CEO Jerry Putnam and NYSE CEO John Thain converted AX to the NYX.

The NYX and NASDAQ make up the US equity markets the same way the American League and the National League make up Major League Baseball. The American League is considered the more progressive of the two leagues as the Designated Hitter instead of Pitcher batting shows.

The NYX will certainly be considered progressive as they shape the future of the US capital markets, and most likely the future of bourses throughout the digitally connected world economy.

Barclays' move of 20 iShares from AMEX to NYX is like Gallapagos turtles evolutionary migration. In the US capital markets, the migration pattern of the companies that live in this environment (read: are traded here) is towards deep pools of liquidity.

But don't take my word for it. Here's what
Lee Kranefuss, CEO of BGI's Intermediary Business says about this migration, "As a leader and innovator in the ETF marketplace, we're pleased to partner with ArcaEx, a leader and innovator in the securities market. ArcaEx's strict price-time priority order matching levels the playing field for all participants and has made it the market of choice for investors in many of the iShares products."

And finally, Dow Jones wrote this today -- a great article that goes deeper into the notion of companies wanting to be listed where there's liquidity.

The Deal with the Deal

The S-4 that Arca/NYSE ("NYX") sent to the SEC on 7-21-2005 is extensive so here are some highlights from the filing. Hopefully this'll answer questions regarding AX-to-NYX shares, post-merger. This deal has all the makings to be the most significant merger ever to happen in the US capital markets.

Hope this helps:
  • How many NYX shares will be registered
Paraphrased from the S-4:

The number of shares of common stock, par value $0.01 per share, of the registrant (“NYSE Group Common Stock”) being registered is based upon the sum of (i) the product obtained by multiplying (x) 48,815,000 shares of common stock, par value $0.01 per share, of Archipelago Common Stock estimated that will be outstanding, on a fully diluted basis, immediately prior to the mergers by (y) an exchange ratio of 1.0, plus (ii) the product obtained by multiplying (a) 1,366 memberships in the New York Stock Exchange, Inc. outstanding immediately prior to the mergers, by (b) an exchange ratio of 80,154.95, which is a maximum estimated exchange ratio assuming that there are only 46,925,000 shares of Archipelago Common Stock on a diluted basis for purposes of calculating the exchange ratio."

Without the legal mumbo-jumbo, the formula for determining the number of NYX Common Shares there'll be looks like this:
48,815,000 x 1 + (1,366 x 80,154.95) = 158,306,662 NYX Shares.
  • What is the $39.595 'Proposed Maximum Offering Price' I've heard about?
The proposed offering price is $39.595 and is used solely for the purpose of calculating the registration fee, the proposed maximum aggregate offering price per unit is $39.595, which is the average of the high and low prices of AX on 7-19-2005.

They had to come up with a figure to use in order to determine the registration fee. A common misunderstanding is that this will be the price of NYX when it goes public.

  • How many shares of NYX will my AX shares convert to?
Since this is such a common question lets just quote the S-4. Here's exactly what it says, "In the proposed mergers, Archipelago stockholders will be entitled to receive one share of NYSE Group common stock for each of their shares of Archipelago common stock." (Source: 3rd paragraph on page 2 of the S-4).

Free Web Counters