If you executives and investor-relations professionals had a dime for every time you heard that question on the phone or voice mail recently, you’d be like the rich guy Dudley Moore played in the 1980s movie “10″ who said, “I wish I had a dime for every dime I have.”
We’ve mentioned here that both your good and bad stuff will get more attention now. Markets are inefficient, risk-management is expensive, and rational money is staying out. If your debt becomes a bigger weight because of the decline in your equity’s value, you’ll pay for it. If you’re making transactions that press you against lending ratios, you’ll suffer. If there are any reasons at all that your neighbor in the peer group offers better safety – maybe your efficiency measures are weaker, your market is more susceptible to competition, etc. – your rational money may flee.
But if you’re the one who stands out, excellent! Congratulations! That means you’ll be the one in 100 that stands out, right?
No mystery, no big insight. Still, at least half the general equity value lost since July is due to factors you couldn’t control. Let’s take a look at why so you’ve got ideas for answering that first question. First, why are equity markets now more inefficient? There are three factors: a) fewer strong players; b) poor risk-management; c) constant interference.
To market inefficiency, most underestimate the effect of the demise of the “Investment Bank” on equity markets. We’ve reversed 75 years of layered, banking history in less than one turn of the calendar. Little (no offense) Lazard is now the biggest securities firm regulated by the Securities and Exchange Commission. Big players from Goldman Sachs and Morgan Stanley on down have become commercial banks regulated by the Federal Reserve. They must depend now on deposits and ratios to provide service, not borrowing or purchasing balance-sheet assets. The free flow of capital for investment purposes has been disrupted. The loss of Bear Stearns, Lehman Bros., and Merrill Lynch, shakes up the balance of power, regardless of how they are or will be reconstituted. In sum, trading infrastructure is weaker. That means spreads widen and stocks go down.
Second, the inability to modulate risk to investments produces discounts on stocks. All of them. With big insurers having trouble, fewer banks as counterparties for various contracts that reduce portfolio risk (from caps and collars to far more complicated structures), and more competition for a much smaller set of risk-reduction products, prices for portfolio insurance go up. And stocks go down.
Finally, we have the good-intentioned ill winds of global, governmental tampering that keeps the value of things from being set by the only force that can do so: bargain hunters. What’s more, governments printing money and buying it up in order to spend it supporting crucial economic cogs will ultimately depress the value of currencies – and everybody knows it. As long as bottom feeders fear currency and regulatory uncertainty, there will be no defined bottom. Spreads widen. Stocks go down.
So when you get that call from the retail broker breathlessly asking, “Hey, how come the stock’s down?” you could reply:
“Let’s see, there are no investment banks left. The cost to pension funds for insurance on their portfolios is astronomical. Your government keeps printing money and changing rules. Any more questions?”
Don’t worry, we’ve still got a twinkle in the collective eye. But these things sure don’t make the IR job easy, do they?
