One of the reasons stocks have been so erratic is Federal Reserve chairman Alan Greenspan’s attempt to cool off the market by raising short-term interest rates. This set off an odd pattern in which stocks would swoon on the prospect of an increase, soar when the increase was only a quarter of a point, then swoon again, presumably in contemplation of the next increase. The topper was Greenspan’s Delphic utterances last month that left lots of people nervous and confused. All this made for a weird summer. As did the New York Stock Exchange’s decision to start converting itself from a member-owned nonprofit institution into a for-profit outfit with publicly traded stock.
The stock exchange first. When the financial histories are written, the NYSE’s decision to convert to a for-profit, publicly traded company will go down as a seminal sign of the quick-buck mentality that ruled the fin de siecle markets. Chairman Richard Grasso says converting the 207-year-old nonprofit institution will allow the Big Board to raise capital to compete with other markets. True. But it so happens that a conversion would also shower billions of windfall bucks on the exchange’s current seat-owners and let Grasso and other executives supplement their pay with stock options. If all goes as the NYSE board hopes, the conversion would take place next year, and NYSE stock would trade on–you guessed it–the New York Stock Exchange.
It would be a cheap shot to say this is a sign of the market’s peaking. But you have to worry when an upscale financial icon goes to the mass market for money. Rockefeller Center, for example, proved a disastrous investment after the Rockefeller family graciously sold the investing public a piece of the action in 1985. More recently, last May Goldman, Sachs, Wall Street’s last big private investment-banking partnership, let public investors buy into the firm. Such a deal. The stock closed Friday well below the $70b it fetched at the close of its first day of public trading.
The Big Board’s proposed conversion raises plenty of public-policy questions here–including how a for-profit institution that collects fat listing fees squares its profit lust with the need to kick out ailing and sleazoid companies–but let’s go straight to the question of money. And grumpiness.
One of the major frustrations of successful chief executives who lack stock options is watching other CEOs make bazillions on their options. Call this'90s phenomenon can’t-stand-it-itis, a disease that frequently attacks through the subconscious mind. Convert your employer to a company with public stock, and suddenly you can get options and a shot at making major, major money.
And for NYSE seatholders, converting into a for-profit company means it’s windfall time. That’s because seatholders would get NYSE stock essentially as a freebie. How so? Because even after the Big Board converts, seatholders would retain their right to trade on the floor of the ex-change. And they could use, sell or lease out those rights, as they do now. The stock is pure gravy. A nice little going-away bonus if the NYSE, as many people expect, ends up competing with electronic exchanges by evolving into an institution that uses computers and the Internet more, and leaves less of the pie for its seat-holders. (Grasso denies this is a motivation.)
How much stock would each seat get? Here’s the math. A conservative estimate of the NYSE’s value in the stock market is $3 billion. That’s based on the exchange’s most recent annual profit ($101 million) and a stock price-to-earnings ratio of 30, about the level of the Standard & Poor’s 500 Index. The exchange has 1,366 seats. But we’ll be sports, and assume that each seat gets only 1/1,500th of NYSE’s stock–we’ve got to allow for stock options, you know. Divide $3 billion by 1,500, and each seat gets $2 million of stock. That’s not much compared with a Net billionaire, but it beats a sharp stick in the eye. And $2 million is a good piece of change considering that the last seat to change hands fetched only $2.65 million.
And now to Greenspan, whose Aug. 27 speech to a group of monetary economists was unusually opaque, even for him. Quips David Blitzer, chief economist of Standard & Poor’s: “Before that speech, Greenspan’s approach to the stock market was like the weather–everybody talks about it, nobody does anything about it. Now we see that he’d like to do something about it, but he doesn’t know what.” Greenspan spooked markets by suggesting that elevated asset prices–such as high stock prices–might be justified but make the economy more difficult to manage. He said the Fed will do nothing to support asset prices unless the financial system is threatened.
According to people who can channel Greenspanspeak into English, it may also have been an unusually grumpy speech. Greenspan is said to still be smarting from the public reaction to his Dec. 5, 1996, “irrational exuberance” speech–the Dow, then under 6500, swooned briefly, but soon took off–and from the perception that when he cut interest rates three times last fall, he was acting as the patron saint of the stock market. Greenspan cut rates last fall to forestall a collapse in the world’s bond markets, some of which were grinding to a halt because of financial fallout from Russia’s default on its debt. The world being what it is, optimists misinterpreted his actions. Stocks, which had been down more than 20 percent from their peak, soon regained all that and more.
Greenspan said that the economy is more tied to the stock market than it used to be. Huge tax payments from capital gains have balanced federal and state budgets; spending generated by the so-called “wealth effect” has kept the economy humming. And lenders have made huge loans to stock owners. Even so, Greenspan said, the Fed will do nothing to support stock prices unless a banking panic develops. But can stock prices plummet without threatening financial institutions’ soundness? Who knows? Everything’s maddeningly unclear. The way Greenspan wants it.
What’s the bottom line here? Simply this. That for all the weirdness of the past few months–and the Y2K childishness and millennium madness that still await us–we long-term investors should keep fundamentals in mind. The rules are the same as ever. Have a long-term goal and stick to it. Remember that stock prices are at historically high levels, and could fall suddenly and sharply. If you can’t afford losses, get out of the market. Trying to sell ahead of price dips and buy at bottoms is a great way to make your broker, electronic or human, rich. And an even better way to make yourself poor.
