Randomly Noted

Reading the minutes of the rate-setting Federal Open Market Committee’s meeting of Aug. 10, one is struck by the two uses of the word “anticipated.”

In both cases, the minutes, released today, talk of anticipations by Federal Reserve policymakers that were not being met. Both those thwarted anticipations are on the downside for the recovery and the resumption of more usual economic conditions in the U.S.

Example one: “members generally judged that the economic outlook had softened somewhat more than they had anticipated, particularly for the near term, and saw increased downside risks to the outlook for both growth and inflation.”

Example two, which follows shortly afterwards. “Members generally saw both employment and inflation as likely to fall short of levels consistent with the dual mandate for longer than had been anticipated.”

The dual mandate is to maximize employment andto keep inflation under control. Ususally that means keeping inflation from rising. Now, the tougher concern is that the inflation rate is too low.

In the wake of the Securities and Exchange Commission’s party line decision to allow big investors increased power over director nominations, the reactions have been as predictable as the long, long-coming decision appeared inevitable.

The “adoption of the proxy access rule by the SEC is an important advancement of the principles of investor protection,” said Rob Feckner, president of the board of administration of the California Public Employees’ Retirement System, better known as CalPERS. It is the biggest public pension fund in the country and exactly the type of institution that will benefit from the rule.

“We commend the SEC for its thoughtful, fair rule, and we are confident that with its use it will be considered a win-win for business and investors,” he said.

On the other side, the Business Roundtable said in part: “Far from effective reform, this ruling will allow special interest groups to pursue narrow agendas and exacerbate the market’s short-term focus, adding more uncertainty than workable solutions at a fragile time in our country’s economic recovery.”

The Business Roundtable is made up of chief executives of many publicly traded companies.

The rule allows shareholders who own at least 3% of a public company for three years to nominate up to 25% of a board of dirrectors. Those directors’ nominatiosn will be carried with board-nominated candidates on the proxy materials sent out each year to holders by companies. It gives big investors a low-cost way of nominating directors and increasing their ifluence with executives at their portfolio companies.

Investors looking for a play on the commercial real estate market but don’t have the stomach for defaults and declining property values may have an interesting alternative on the horizon. The company is Velocity Commercial Capital and it filed to go public late last week. It’s relatively small but that’s what makes it attractive.

The company originates or buys small business commercial real estate loans. All are first lein. And the largest loan it will get involved with is $3 million. The average loan value in its portfolio is $391,000.

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The statement itself didn’t say much: “Today, in accordance with Article 17 of the Bank of Japan Act, the Chairman of the Policy Board decided to call an unscheduled Monetary Policy Meeting as follows.”

Clearly, the currency markets think this emergency meeting by the Bank of Japan will lead to a policy change to try to weaken the yen. The strong currency hurts the export-based economy. The markets are expecting an easing of monetary policy. Stay tuned.

Federal Reserve Chairman Ben Bernanke made a much-anticipated speech this morning and didn’t break the news the world wanted to know: what would trigger a significant new round of quantitative easing measures by the U.S. central bank.

“At this juncture, the Committee has not agreed on specific criteria or triggers for further action…” Bernanke said. The committee is the rate-setting Federal Open Market Committee.

In general, at a very sensitive point in the economic life of the nation and world, Bernanke chose his words carefully, seeming to understand the weight they carry. His complex sentences at times were reminiscent of his predecessor, Alan Greenspan.

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Journalists often say, somewhat jokingly, that if you find three things moving in the same direction you have a trend. Well, I have two that have recently crossed my transom heading in the same direction, so maybe that’s enough for a column.

The theme that connects the two disparate dispatches (tied arbitrarily by originating in the geographical midwest of the U.S.) is that they attribute some portion of stubbornly high U.S. unemployment to structural problems in the job market, rather than simply the result of a near-flat economy, worrisome outlooks and the costs involved in adding full-time employees.

The newer of these two recent missives was released Wednesday by the global temporary worker firm, Manpower Inc. The firm’s findings, based on a first calendar quarter survey of more than 35,000 employers in 36 countries, included a global shortgage of skilled, blue-collar workers. Despite all the idle workers out there, Manpower cites an “acute” shortgage of skilled production people in the U.S., Germany, France, Italy and other nations. 

Separately, earlier this month, one of the newer Federal Reserve policy officials talked about a skills mismatch that might account for as much of one-third of the 9.5% U.S. unemployment rate.

Narayana Kocherlakota, who took over as the president of the Federal Reserve bank of Minneapolis in October 2009, said that based on a breakdown in the relationship between job openings and the unemployment rate, we are apparently experiencing an employment mismatch. “Firms have jobs, but can’t find appropriate workers,” he said, as noted previously in this column. “The workers want to work, but can’t find appropriate jobs.”

While Manpower Inc. narrowed its own jobs mismatch to skilled industrial workers, Narayana Kocherlakota wasn’t as specific, though he did employ the catchy quote that the Fed “does not have the means to transform construction workers into manufacturing workers.” He said super-easy Fed interest rate policy had created conditions in which manufacturing plants want to hire new workers.

Among the broad categories Kocherlakota cited for the problem were geography, skills and demography. Back at Manpower Inc., the firm settled on skills and the dubious psychological space occupied by skilled blue-collar work  in many developed nations, including the U.S.

“Inadequate training and negative sterotypes relating to skilled trades are further fueling a dangerous shortage of skilled workers,” said Manpower Chief Executive Jeffrey A. Joerres in a press release. “Employers and governments need to bring honor back to the skilled trades.”

If you accept these theses, the free market concept of supply and demand hits some bumps in the world of labor. If more people want to buy houses in Connecticut, the prices of houses in the state will go up. But if Connecticut employers need more machinists, they don’t appear to be packing up in Alabama or Texas and heading north.

Maybe they can’t sell their houses. Maybe they don’t want toleave their friends in Alabama. Or maybe, as the Manpower survey suggests, there aren’t enough skilled workers anywhere in the developed world because non-economic factors such as status has pushed more and more people towards white-collar work.

Or maybe the market hasn’t worked hard enough. If wages doubled for the skilled workers needed, reflecting their slim supply, somehow, one suspects, despite all the impediments, that supply would rapidly grow.

Well, it finally happened.

After years of debate (the chairman of the Securities and Exchange Commission estimates 30 years), false steps and legal action, the SEC today approved the right of large shareholders who have held their stakes a good while to nominate directors at U.S. public companies. The names of those candidates, along with the people chosen by boards with whom they will compete for directorships, will be carried on proxy materials paid for and distributed by the companies.

It’s called “proxy access,” and it provides a reasonably free ride to the big public pension funds and some other sizable institutions to put up their own nominees to sit on companies’ boards of directors.

The vote, as expected, was three to two, with the two Republicans dissenting. The recently passed Dodd-Frank financial reform law gives the SEC power to do this, though some opponents still may lodge legal challenges.

As with any long-debated rule or law, the potential consequences of the action tends to grow with the length of the debate. In a couple of months or so, the rule will be in place, at least for larger companies. Then we’ll see whether this is a stampede or a trickle. Whether it fundamentally changes how boards work and interact, or whether it only comes into play at companies where there already is great discord or known issues.

I have, over the years, been clear on my view. This isn’t needed. What is needed is mandatory ‘majority rules’ voting for directors. An increasing number of companies are adopting it. That means shareholders, large and small, dissatisfied with directors’ actions, can vote them out.

With proxy access you do a few things. You give more power to large institutional shareholders, who have shown themselves in recent years quite capable of making a ruckus about top management when they feel the need, even without proxy access.

Some of those large institutions, such as large public pension funds, or union-associated funds, may well have agendas that go beyond the long-term maximization of profits for all shareholders. Political or labor oriented agendas, pushed by one or more shareholder-nominated directors, can be disruptive to companies’ health, make each director election a campaign and generally be distracting to all.

Also, you are giving more power to one class of shareholders (large) over another (small).

 The details are important. They are reasonable. To nominate a director you have to own 3% of the shares for three years. Holders can get together to reach the 3% threshhold. You can’t nominate more than one-quarter of the board. The smallest companies are exempt for three years.

The era of proxy access is finally upon us. The only thing you can count on is that there will be consequences that right now no one foresees, as is usually the case.

Call him the stock market senator. The fix-the-plumbing stock market senator, to be more precise.

Sen. Edward “Ted” Kaufman, the Democrat from Delaware who is filling out the term of Joe Biden after Biden ascended to the vice presidency, has distinguished himself with his knowledge, concern and vigor about the inner workings of U.S. stock trading. He’s now getting some media attention because of it.

There likely are some in the high-frequency trading community and other pockets of Wall Street pleased with the prospect that Kaufman’s term is winding down and that he won’t run for election when his Senate seat comes up in November of this year. He’s keeping the heat on them, as he is on the Securities and Exchange Commission.

Kaufman’s year-long interest in the current state of stock trading reached a high-point with an early August letter to SEC Chairman Mary Schapiro in which Kaufman makes a series of reform recommendations.

Usually, when legislators send letters to regulators, they are looking for answers because something is affecting their constituents or a media report has shed light on a problem in an area where they have an interest because of committee membership or otherwise.

The Aug. 5 Kaufman letter to the SEC bears no resemblance to such documents. Besides showing an acute understanding of the myriad and obscure workings of today’s stock trading - dark pools, high-frequency trading, excessive messaging and the like – Kaufman has eight pages of proposals.

The “flash crash” of May 6, when stocks gyrated wildly and breathtakingly dropped at warp speed in a few minutes of an otherwise uneventual Spring mid-afternoon, has to a degree borne out Kaufman’s pre-dated concerns. He’s questioning the whole thrust of market developments of recent years.

“The proliferation of exchanges and other market centers that has increased fragmentation, the substantial rise in volume executed internally by broker-dealers in dark pools, excessive messaging traffic, the dissemination of proprietary market data catering to high frequency traders, and order-routing inducements all may be combining in ways that cast doubts on the depth of liquidity, stability, transparency and fairness of our equity markets,” he wrote to Schapiro.

Among Kaufman’s specific suggestions: register high-volume, high-frequency traders with the SEC; raise the standards for becoming a market center (there are more than 50); examine whether too much order flow is being hidden from ‘lit’ markets in dark pools; and essentially rethink the whole structure to emphasize truly liquid markets.

The SEC, of course, has quite a bit on its plate. The Dodd-Frank financial reform bill handed over some important new powers. Indeed, just today, the SEC is expected to vote for a controversial plan to make it easier for large shareholders to nominate directors whose candidacy must be carried in company distributed materials.

Kaufman, who earned a master’s of business adminsitration from the Wharton School at the University of Pennsylvania, told the SEC it is at a historic juncture.

Will it be a “regulator by consensus,” which Kaufman described as one that only moves “when it finds solutions favored by large constituencies on Wall Street?” Or, in his view, something more.

You can agree or disagree with Kaufman’s recommendations. It’s hard to disagree with the notion that what we call the stock market has morphed into a complex web of interactions that few truly understand. And it’s good to see a legislator who knows his stuff before he speaks his mind.

Add a new player to the smartphone market.

Dell unveiled the Aero earlier today and the key question will be what points of differentiation the new phone offers. It will run on Google’s Android software and that means users of this phone will have access to abut 40,000 applications. And it costs $99 if you sign-up for two years with AT&T. That’s the same price for buying the iPhone 3Gs (the older version) and Apple says its iPhone has more than 200,000 apps.

One big difference seems to be that the Dell phone will suport Adobe flash, which powers a lot of internet video. Apple has no plans to incorporate Adobe flash into its phones or tablets.

The prospectus label from SanDisk's 2006 bond offer

SanDisk today sold to investors a $1.5 billion convertible bond offering that interestingly has links to a similar offer it floated in 2006 – proceeds from the new offer can be used to buyback some of that older bond issue.

Shareholders undoubtedly hope that there isn’t another link with that four-year-old offering.

Back on May 9, 2006, , SanDisk’s shares closed at $63.35. Hours later, the $1 billion SanDisk convertible bond offering was priced and was brought to market the next day.

The stock hasn’t hit $63.35 since. And they are hoping one-day does not make a trend. Before the most recent convertible was priced last night, the stock traded at $41.90. It closed today at $41.50.