Macroblog

June 13, 2006

Inflation Fears From Highly Placed Sources

Yesterday I made note of an opinion piece by Kevin Hassett, wherein said Mr. Hassett opined that the seeds of today's monetary policy challenges were sewn sown during the considerable period of time that the Federal Open Market Committee held the federal funds rate at 1%, and nurtured by the too-measured pace at which that accommodation was removed during the last year-and-a-half of Alan Greenspan's tenure.  (The Hassett article was also noted by Claus Vistesen -- hat tip to Edward Hugh for bringing Claus's blog to my attention.)

Today, David K. Smith informs us that the main man at the Bank of England is also concerned that global inflationary pressures may be baked in the cake. The Skeptical Speculator has the key details:

... Bank of England Governor Mervyn King says that "global interest rates may have been too low for too long".

"During the fastest three-year period of world economic growth for a generation, monetary policy around the world may have simply been too accommodative," said King in a speech to business leaders in Edinburgh. "Even though the monetary stimulus around the world is now being withdrawn, its effects are still being felt."

Oh yeah.  Comments yesterday by at least one Federal Reserve official were generally interpreted as hawkish.

All eyes, then, on today's U.S. Producer Price Index and tomorrow's Consumer Price Index reports.

UPDATE: Tim Duy has a terrific round-up of commentary within and without the Federal Reserve, including links to many items I should have linked to (and would have, had only real life not intruded on my blogging).

• June 13, 2006 in
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March 6, 2006

A Former Fan Turns On Sarbanes-Oxley

Bob Greifeld, president and CEO of Nasdaq, writes in today's Wall Street Journal (page A14 of the print edition):

I have been a sometimes lonely but consistent supporter of the principles of Sarbanes-Oxley, despite the crescendo of corporate criticism it has engendered. I have supported SOX for two basic reasons. First, it is a tough but essential step toward restoring investor confidence through greater transparency, accountability and improved corporate governance. Second, based on our experience at Nasdaq, I was convinced that, after the initial legislative shock wore off -- particularly regarding the costs of Section 404 -- that the benefits of SOX would prove compelling and unassailable. I expected that its onerous reputation would diminish with time.

I was dead wrong on the second point. Anguish over SOX in this country is not abating; if anything, sentiment has hardened and the perception gap abroad is now wider than ever. As the CEO of a U.S. stock market, I am in frequent contact with a broad spectrum of business leaders, many of whom list on our exchange. When it comes to SOX, their message is clear: The burden of compliance is onerous, the cost is significant, and it falls disproportionately on smaller companies that are least able to pay. Our research has shown that the burden on small companies, on a percentage of revenue basis, is 11 times that of large companies.

This reaction seems like a particularly bad signal:

In my travels to countries like China, India and Israel, I meet with the new generation of international entrepreneurs who are building businesses and dreaming of the day they can take their companies public. The constant refrain I hear is that when it comes time to do an IPO, they will be reluctant to list on American markets. They will look elsewhere to raise capital, and the main reason they cite is SOX.

The culprit according to Mr. Greifeld is, not surprisingly, the infamous section 404:

SOX is important; by and large, it works. We have had three years to assess its strengths and problems. Perhaps 90% of complaints have their genesis in 20 lines of text. We lay the widespread misperception about the cost and difficulty of compliance at the feet of the famous Section 404. So the time has come to address those 404 concerns without diluting the essential investor protections that are the true legacy of SOX. Specifically, we should adopt the recommendations of the SEC's Advisory Committee on Smaller Public Companies, which has proposed an exemption from 404 for companies with less than $128 million in market cap and revenues under $125 million. Companies with up to $787 million in market cap, as long as they had revenues less than $250 million, would receive partial exemption. The companies exempted account for only 6% of U.S. market cap, which means 404 would still apply fully to 94% of equity market capitalization.

Nasdaq strongly supports the committee proposals for smaller public companies.

I've often wondered how much Sarbanes-Oxley, section 404 specifically, has to do with this picture (updated from past posts):

I wonder about one more thing.  How much of the historically high cash-flow to investment ratio is accounted for by the 6% of businesses that the Nasdaq folks would not exempt from 404.

• March 6, 2006 in
  • SarbanesOxley
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May 31, 2005

Going Dark

This report, from The Business Journal of Portland, has a familiar ring:

Three years after businesses adopted the Sarbanes-Oxley Act's accountability standards, the reverberations are being felt on the bottom line.

Proxy statements filed by 20 Oregon public companies showed that audit and tax fees increased by an average of 57 percent. The audit fees, made necessary by the stricter Sarbanes-Oxley rules, comprised the lion's share of the increases.

Similar reports abound: Here, here, here,and  here, for example.  All of this certainly helps to explain this picture:

• May 31, 2005 in
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May 31, 2005

A Sarbanes-Oxley Portrait

Has Sarbanes-Oxley been effective?

Some say, in broad terms, the answer is yes.  This comes from a report by the CFO Executive Board:

... most corporate executives and directors have told us they believe that most of the Act was worthwhile. It improved governance and financial reporting “hygiene,” it strengthened Board oversight and it improved the focus on corporate ethics and compliance. The market evidence supports their conclusion. The economic recovery did not stall, the stock markets returned to higher levels and the dramatic net outflow of cash from U.S. mutual funds that began in early 2002 reversed and quickly returned to a net inflow.

But maybe it was the thought that counted:

Critically, most of these benefits appeared soon after the passage of the Act, well before most of the new regulations were crafted and implemented, and far before virtually anyone – particularly investors – understood the requirements and ramifications of Section 404.

Apparently, the actual implementation of the legislation has not had much of an impact on public consciousness.  According to a November 2004 Rasmussen Reports survey conducted on behalf of Hudson Financial Services:

Eighty percent of U.S. workers and 76 percent of employed investors have never heard of the Sarbanes-Oxley Act of 2002...

Among working investors, defined as owning at least $5,000 in stocks, bonds and mutual funds, only seven percent indicated that Sarbanes-Oxley had increased their confidence as an investor. Likewise among this group, only seven percent said it had increased their confidence in the leadership of public companies.

From the CFO Executive Board document:

Heightening the frustration experienced by executives is the lack of evident investor interest in Sarbanes-Oxley implementation. Stock price reaction to material weakness disclosures has been tepid, and companies face few, if any, questions on Section 404 from investors. In fact, two-thirds of finance executives report that they have received zero questions on the topic from investors at key events

What are the costs?  The CFO Executive Board document claims:

April 2005 survey data indicates that senior financial executives (Chief Financial Officers and Controllers) expect to spend as much as a quarter of their time on continued Section 404 implementation in 2005, and as much as a fifth of their time on that activity in 2006. Unfortunately, senior management distraction by Section 404 does not end with Chief Financial Officers and Controllers. Responses indicate that up to 10 percent of other senior executives’ (e.g., CIO, COO, General Counsel) time was devoted to Section 404 in 2004.

• May 31, 2005 in
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