Editor’s Picks of the Week

Is Going Public Out of Style?
CFO magazine May 2011

As of February 2011, there were approximately 5,000 companies listed on the major exchanges. That’s a 2 percent drop from 2009 and a 42 percent drop from a high of 8,823 in 1997 according to data from Grant Thornton.

It’s possible that companies are looking for other funding alternatives so they don’t have to deal with the reporting and disclosure requirements of public companies. And Sarbanes-Oxley is often cited as a deterrent because of the process and audit costs required. In fact, about 11 percent of companies that withdrew following IPO application blame it on costs.

Or there may be other market forces at work, for example:

• Reduced fees have made it less lucrative for investment banks to support small-company IPOs. That makes it harder for small companies to grow when they need funding.
• Public companies might be bought out by private equity firms or management.
• Or they may be acquired by or merge with private companies.
• Others are delisted from the exchanges often because their stock has fallen below minimum trading prices.

The number of IPOs has not been enough to replace the number of companies that go private, even though some of them do go public again in the future. According to Grant Thornton, it would take more than 500 IPOs every year for the number of public companies to grow.

The trend also affects the United States’ reputation for being the place to go to raise capital, especially when stock exchanges in other countries such as China continue to grow.

Treasury Secretary Timothy Geithner held a press conference in March to look at the problems small businesses face to get funding. The Treasury Department is examining ways to help including approximately $1.5 billion going toward the State Small Business Credit Initiative so state officials can work with the private sector to stimulate lending.

And Securities and Exchange Commission chairperson Mary Schapiro is also looking at ways to make it easier for small business to raise money by expanding exemptions and finding new ways to raise capital.

Rep. David Schweikert (R-Ariz) is sponsoring the Small Company Capital Formation Act of 2011 to increase the money companies can raise in public markets from $5 million to $50 million and allow them to trade securities on the over-the-counter (OTC) market without registering with the SEC.

Government Fire Sale
Yahoo.com May 13, 2011

Many municipalities are up to their eyeballs in red ink, and they are selling public assets to bring money into their coffers.

The mayor of Newark, NJ sold 16 city buildings including the Newark Symphony Hall renowned for its architecture. The New York Transit Authority may sell its Madison Avenue headquarters.

And many state legislators want to make it possible for investors to buy other municipal properties such as power plants and prisons.

Selling government property is a way to make up budget shortfalls, and many are in favor of the approach. The hope is that private owners will have the funds to upgrade and bring life to municipal areas. And private ownership will add to property tax revenues.

However, there are critics who feel these sales are misguided. They don’t think the government should let go of valuable assets for a one-time payment. They are concerned about the cost of leasing or renting alternate facilities.

Governments have other large economic issues, such as underfunded employee pension funds, to deal with. They promised employees retirement benefits, but then didn’t put aside enough money to cover them. The Associated Press cites the Illinois pension fund as a prime example because only 45 percent of promised pensions have been funded while actuaries recommend 80 percent.

Government officials are running out of options to avoid increasing taxes.

Fed Will Have to Act Sooner
MarketWatch.com May 13, 2011

According to two RBS Securities economic forecasters, the U.S. economy is operating far below its potential — creating an output gap. But the output gap doesn’t mean that inflation is under control.

The two economists, Michelle Girard and Omair Sharif, believe the Fed will have to think seriously about the inflation picture in a few months. And the Federal Reserve will be forced to tighten monetary policy in the near future.

Fed officials are following an output gap model. According to that model, a sustained inflationary cycle cannot get going unless wages rise with prices. When wages don’t rise, consumers facing higher prices for essentials just spend less on other things. If that happens, higher prices can work against growth.

Because of high unemployment and other factors, wages have not been rising. Girard and Sharif say their research shows that it’s not the level of the output gap that matters for inflation. The gap just has to be closing for prices to go up. And by looking at core inflation, which excludes food and energy prices, it is clear prices are rising.

The RBS forecasters believe that core inflation will hit the Fed’s 1.5 percent to 2 percent target range for overall inflation by the end of the year.

At Weiss Research, we have found that the smart money is betting U.S. inflation will continue to accelerate for years to come. In fact, the profits have already begun flowing! And short-term corrections in oil, gold and other tangible assets are creating massive profit opportunities for individual investors. So make sure you read Mike Larson’s latest report for details!