Posts filed under “Markets”

How Much Does Sarbanes-Oxley Cost?

There’s a meme circulating now amongst the sloping forehead crowd that Sarbanes-Oxley costs exceed $1.4 trillion dollars. The way that was calculated was the drop in stock market market capitilization during July 2002 when the legislation was passed.

Somehow, SOX gets the entire responsibility for that July 2002 sell off; Even more amusing, SOX gets none of the credit for any subsequent rise in market capitilization since then — it simply gets ignored; Further, this researcher thinks that the only factor impacting market action was Congressional legislation — and not all legislation, just SOX. (Recall we previously addressed that  analytical foible in Single vs. Multiple Variable Analysis in Market Forecasts).

That’s quite a neat analytical trick (putting aside false assumptions, and a more or less total ignorance of what actually drives markets).

I have no stake, and less of an opinion, in Sarbanes Oxeley. But I have zero tolerance for intellectual dishonesty. So let’s take one more review this bit of misdirection:

How Much Did Sarbanes-Oxely Impact Markets?

Market Action Leading up to the Legislation’s Debate and Passage (1/99-12/02)
Click for larger chart


Source: BigCharts

Market’s Performance Since Sarbanes Oxley (7/02-6/05)
Click for larger chart

Source: BigCharts


The charts prove how ridiculous the assertion is that SOX cost the market’s a over a trillion in cap:

a) intelligent and experienced investors know that no single factor can take credit for what the markets do;
b) The prior trend pre-SOX was a long and relentless slide down;
c) Nasdaq was in the process of bottoming around the same time;
d) the Nasdaq has doubled since Sarbanes Oxley passed!

Let me again reiterate my long standing belief that no single variable accurately predicts market behavior as discussed here: Single vs. Multiple Variable Analysis in Market Forecasts.

Further, as I discussed extensively in Lose the News, headlines do not drive markets, as the news reporting tends to be rearward looking and already discounted by markets.

Additionally, I point you to Gary B. Smith’s  analysis of major events, which supports the argument that even extremely significant news events — The Pearl Harbor attack, the Assassination of JFK, and the September 11th Terrorist Attacks — do little than temporarily roil the markets for a relatively short period of time. After the immediate impact of these events, markets subsequently resume their prior, pre-event course. 

Lastly, have a look at the WSJ’s "Numbers Guy". Carl Bialik took a look at SOX. Not surprisingly, he found the analytical rigor of this study wanting:

The $1.4 trillion in market losses [Rochester accounting graduate student Ivy Xiying Zhang] identifies came almost
entirely during three periods, all in July 2002: the Senate’s debate of
the bill from July 8-12, during which time President Bush delivered a
speech backing corporate reforms; a period from July 18-23 when the
House and Senate wrangled over competing versions of the bill; and a
period from July 24-26 when the Senate and House reached agreement. The
market tanked in that second period, reflecting about three-quarters of
Ms. Zhang’s estimated losses.

If are all really, really lucky, than perhaps Ms. Zhang will be on the other side of our trades in the future. Let’s hope she knows more about accounting than she does about how the markets work.   


How Much Is It Really Costing To Comply With Sarbanes-Oxley?
Carl Bialik
WSJ, June 16, 2005,,SB111885041027560378,00.html

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On Line Trading: A Business Plan for the future

I originally wrote this about 6 months ago, but never got around to doing anything with it. Since then, we’ve seen E*Trade bid for Ameritrade (only to get rebuffed) while Ameritrade approached T.D. Waterhouse about a merger. I imagine others in the discount online brokerage space are engaged in similar manuevers.

Its all wasted energy.

Why? Think about Clorox, Kleenex, Post-its — these are commodity products that have differentiated themselves through branding from their competitors. Even specific brands of Premium gasoline are known to auto afficianados  (Amoco Ultimate and Sunuco 94 are the most liked).   

Even commodity products can distinguish themselves from the competition in a commodity field."

Competing on price doesn’t work; Your peers just engage in a price war. Bulking up doesn’t work; There’s still many competitors who will step in to fill the void. And while E*Trade spends almost $100 million per year on advertising, their competitors (collectively) spend even more.

There’s a better solution: Its called Differentiation. 

I’ve thought about this for some time now. I’ve always followed E*Trade closely, because that’s how I got into this business. Well over a decade ago, a friend was running a branch office of E*Trade in NY — they were a proprietary trading house before they rolled out on-line trading. He brought me into the biz as a trader (hence my focus on capital preservation and technicals/internals).

We know there’s a price war, and that discount on-line trading is merely a commodity business. There’s significant customer churn. To break out from the back requires something significantly distinguishing from the other firms. Size isn’t what’s required, a better business model is. Something that is value-added for the customer, gives them a reason to pick you versus the other guy.

Here’s a way for an online trading house to distinguish themselves:

Since they popularized online trading, E*Trade has built tremendous brand recognition. But its come at a cost: Spending north of $86+ million in advertising over the past fiscal year, one must ask if the company is truly maximizing their return on advertising dollars.

It has become a crowded marketplace, but the firm that differentiates itself from the rest of the online brokers — Schwab, Ameritrade, Brown, ScottTrade, etc. — garners a huge advantage.

Of the full list, I believe Schwab and E*Trade are best positioned to put such a plan into full effect, with Ameritrade a close third.

After considerable thought (and using what little expertise and experience I posses), I have put together a series of ideas as to how an online broker can do this. When discussing this with a colleague, he made the astute observation that the ideas were alphabetical: A-B-C-D-E-F.   (Talk about pattern recognition!)

This was purely coincidental, but because of it, I present the list — not in priority form — but in alphabetical order:

A)   Advertising (pundit)
B)   Blog
C)   Commentary
D)   Database
E)   Education
F)   Fund

Here are the details of each:

A.  Advertising

Given the astounding amount of money each of these players spend on advertising (E*Trade’s $86M is an example), I do not think the companies are getting as much for their money as they could. An editorial presence in print, radio, internet and, of course, TV would extend the advertising dollars and dramatically improve ROI.

In my own work, I garner millions of dollars in PR for my firm — TV, Radio and Print. My motivation are not PR — I do it because I enjoy participating and furthering the debate — but that is surely the main reason my firm pays me a salary (btw guys, I want a raise).

Where is E*Trade’s talking head? Its astounding to me they dont have one — Schwab and Ameritrade do. It would extend and further the huge advertising outlay they make. The platform alone guarantees at least moderate coverage.

I figure for about a million a year (plus or  minus) — the Chief Investment Strategist position, staff, office, research, etc — they could add close to a 50% increased return on their massive ad outlay.

That’s the first layer; consider each of the following topics (B – F) as supporting the PR/Branding/Marketing aspect of the firm:

B.  Blog (Web logging)

Blogging is a great way to provide a readership with an overview of topical issues related to current media. By frequently posting short, interesting blurbs related to a given topic — i.e., the macro-economy, market moves, releases, etc. — a readership develops, drives traffic, and stays within a given website.

I’ve maintained a weblog in various forms — most recently The Big Picture — since  after 9/11. Since moving it to Typepad, readership and traffic have grown nicely. According to one traffic ranking site, The Big Picture consistently ranks in the top 100 web blogs. This is out of millions of blogs, with no advertising budget, staff, or research dollars.

There are a few examples of where a business’s website added a known blogger and drove their own traffic and reader retention much higher. The best example I know of is Washington Monthly, which integrated Kevin Drum’s CalPundit blog into their front page. But other companies have been using them for a variety: see  Jupiter Research and Microsoft as examples of different applications of Blogging to a corporate need.

E*Trade needs to hire a talking head, start a blog (with some editorial assistance and a small blogger crew), make their site stickier and actually be useful for their clients. Further, you
can use it to attract new clients who are not reached thru newspapers or TV ads.

On a ROI basis, I’ll bet a good blog utterly kicks TV advertising’s ass.

On-line brokers need a stickier site, a reason for customer and non-customers alike to hang around their — perhaps even open an account.

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Category: Markets, Trading