Felix Salmon on 'Wall Street's Dead End'

http://www.futureofcapitalism.com/2011/02/felix-salmon-on-wall-street-dead-end

Felix Salmon of Reuters has an op-ed piece in the New York Times that makes a number of faulty points. He writes:

The glory days of publicly traded companies dominating the American business landscape may be over. The number of companies listed on the major domestic exchanges peaked in 1997 at more than 7,000, and it has been falling ever since. It's now down to about 4,000 companies, and given its steep downward trend will surely continue to shrink.

The "number of companies listed" statistic doesn't necessarily show what Mr. Salmon says it does. Suppose that the number went from 4,000 to 7,000 because many of the 7,000 companies merged with each other to become even larger and more dominant, and that the current 4,000 listed companies have three times the sales and three times the market capitalization they did in 1997.

More:

Innovative American companies like Apple and Google may be worth hundreds of billions of dollars, but most of them don't pay dividends or employ many Americans, and their shares are essentially speculative investments for people making a bet on how we're going to live in the future....What the market is not doing so well is its core public function: allocating capital efficiently. Apple, for instance, is hugely profitable and sits on an enormous pile of cash; it is thus very unlikely to use its highly rated stock to pay for any acquisitions. It hasn't used the stock market to raise money since 1981, and there's a good bet it never will again.

Mr. Salmon may think he knows better than Steve Jobs what to do with Apple's cash pile, but one message sent by the run up in Apple's stock price in recent years is that investors have a good deal of confidence in Apple's management. The willingness of investors to buy stock in Google and Apple notwithstanding the lack of a dividend signals that the investors trust Apple management and Google management as better custodians of the cash than the investors themselves.

More: "To invest in younger, smaller companies, you increasingly need to be a member of the ultra-rich elite."

In fact the SEC's rules defining accredited investors have for quite some time been individual net worth of $1 million or more or "income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year." That may be "rich" but it's not "ultra-rich," and, because of inflation (the thresholds are not indexed to inflation), it's moving increasingly in the opposite direction — you need to be less rich, in real terms, to invest in younger, smaller companies than you once had to be. (Though there's some talk of taking home value out of the $1 million test, if not for angel investments than at least for hedge funds.) If Mr. Salmon wants to lower these thresholds or eliminate them, I'd be cheering alongside him, but there's a risk that such a change would come with more red tape in the guise of "consumer protection."

by Ira Stoll  |  Feb 13, 2011 at 11:00 pm Related Topics:  Capital Markets Regulation, Definition of 'Rich', Google receive the latest by email: subscribe to the free futureofcapitalism.com mailing list