PrefBlog

The recently appointed SEC Commissioner Robert J. Jackson Jr. (a Trump appointee), had some interesting things to say about The Middle-Market IPO Tax:

A lot has changed since 1999: I was humbled by the dot-com crash, advised the Treasury during the financial crisis, and became a law professor. And in the two decades since I left Wall Street, our markets have been transformed by technology. Today stocks trade with dizzying speed and our markets move faster than ever.

But some things have remained the same. You see, when I was a banker, we charged a standard fee for a middle-market IPO: seven percent. We would negotiate a reduced price for large, high-profile companies, where the client’s bargaining power produced a better deal. But for middle-market companies, our fee was always seven percent. Whatever industry the company was in, whatever its growth profile, however qualified its management team was, if they were a smaller firm, they always paid seven percent.[4]

Back in 1999, I assumed that technology and competition would eventually lead bankers to give middle-market companies better pricing on IPOs. That’s why, when I arrived at the SEC, I asked my team to dig into the data to see how middle-market IPO pricing has changed. We’ll get into what we found in a moment. But the short version is that nothing has changed: middle-market entrepreneurs still have to pay 7% of what they’ve created to access our public markets.
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As the figure below shows, from 2001 through 2016, we found that over 96% of midsized IPOs featured a spread of exactly 7%:[14]
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From 1975 to 1991, one out of two U.S. public companies were worth less than $100 million in inflation-adjusted dollars. But public companies of that size are vanishing: today that fraction is less than one in four.[20]
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Today, private markets provide a much more competitive alternative. Those markets are larger and more robust than ever—and can support a company’s growth well into the later stages of its life.[22] In short, when public markets were the only game in town, companies were more willing to pay the IPO tax. Today, that tax can lead many middle-market companies to choose to stay private—with significant implications for the broader economy.
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But for two reasons I think the middle-market IPO tax poses real risks for our economic future. First, it’s bad for smaller companies because it puts them at a significant disadvantage. Without a realistic alternative to private capital, middle-market firms can be forced to accept less favorable terms when raising money. If we reduce the 7% middle-market IPO tax, private capital providers will face increased competition from public markets—improving financing terms for middle-market businesses.

Second, the middle-market IPO tax is bad for ordinary investors. When the tax causes our most exciting young companies to raise private capital rather than go public, retail investors are left out of a significant part of the Nation’s economic growth.

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PerpetualDiscounts now yield 5.43%, equivalent to 7.06% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 4.0%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 305bp, a slight (and perhaps spurious) narrowing from the 310bp reported April 18.

There was a a bit of a milestone passed today in the Treasury market:

Stocks tumbled as a rout in the shares of industrial and technology companies sent indexes spiraling lower amid a raft of earnings and renewed selling in the bull market’s biggest winners. The 10-year Treasury yield pierced 3 percent for the first time in four years.

The Dow Jones Industrial Average fell for a fifth day, the longest losing streak since March 2017. The sell off accelerated after industrial bellwether Caterpillar Inc. said that the first quarter was its “high water mark” for the year. The Nasdaq 100 Index slumped 2.1 percent, with Alphabet Inc.’s rise in capital spending sending its shares lower 4.5 percent.

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Amidst all the nastiness about pipelines and deep, meaningful debate regarding whether Trudeau is photographed too often, it’s nice to know that some things are going right in our country:

No one tracks exactly how many ditch their skilled visas for the permanent residency Canada offers, but during the first year of Trump’s presidency, the number of tech professionals globally who got permanent residency in Canada ticked up almost 40 percent from 2016, to more than 11,000.
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In 1967, Canada became the first country to adopt a points-based immigration system. The country regularly tweaks how it rates applicants based on national goals and research into what makes for successful integration: A job offer used to come with 600 points, but now it’s worth just 200. Other factors like speaking fluent English or French—or, even better, both—have been given more weight over the years. Country of origin is irrelevant.

In 2016, Canada increased national immigration levels to 300,000 new permanent residents annually. Last year, in consultation with trade groups, it created a program called the Global Skills Strategy to issue temporary work permits to people with job offers in certain categories, including senior software engineers, in as little as two weeks. Since the program started in June, more than 5,600 people have been granted permits, from the U.S., India, Pakistan, Brazil, and elsewhere.

There was a chaotic close for preferreds today, with TXPR going from 705.02 at 3:58pm to a closing level of 701.28. I presume this is due to MOC imbalances driven by pseudo-portfolio-managers saving valuable time on the TXPR index rebalancing by using the “Market on Close” feature at the Toronto Exchange – after all, it wasn’t merely Friday, it was Friday 4/20 and they urgently needed to get out of the office!

Look at CU.PR.G, for instance … volume of 262,607 on the day with, as far as I can tell from the TMX free web page (damned if I’m going to spend any money on this nonsense) only 100 shares trading at 21.45 prior to the close and then … wham! A closing quote of 21.12-57 and a closing price of 21.14 compared to the virtually identical CU.PR.F at 21.49-62, closing price of 21.53.

I’ll be paying more attention to this in the future … there might be an opportunity to make a few bucks with a few stink-bids and stink-offers, but it’s pretty chancy stuff.

The strength of US institutions was on display again today, as the New York Fed published a blog post titled Will New Steel Tariffs Protect U.S. Jobs?:

We argue that the new tariffs are likely to lead to a net loss in U.S. employment, at least in the short to medium run.
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Research on markup adjustments more generally shows that a 10 percent increase in competitor prices leads to a 5 percent increase in domestic prices. With a 25 percent tax on imported steel, local steel producers can increase their markups and prices, and still stay competitive relative to foreign-produced inputs. This is the so-called protection that tariffs confer.

However, firms that are dependent on steel and aluminum inputs—both importers and non-importers—will face higher prices. Downstream domestic producers will have to increase their prices or reduce markups, which makes them uncompetitive relative to competing imports. Similarly, U.S. exporters that need steel or steel-related inputs will face higher input costs and will have to either increase export prices or reduce their profit margins. These effects could lead to lower employment in these steel-intensive industries and possibly plant shut downs. Researchers estimate that the number of jobs in steel-intensive industries, which they define as industries with steel inputs of at least 5 percent of total, is around 2 million—for example, manufacturers of auto parts, motorcycles, and household appliances.

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I can’t imagine either Poluz or Carney authorizing the publication of anything like that! Canada is poorly served by its bootlicking class.

The 10-Year Treasury yield increased by 4bp today, which some blame on the commodity markets:

The recent weeks of sanctions, tariff dust-ups and tight oil supplies that jolted commodities prices higher have now got equities and Treasuries investors on the run, according to Weeden & Co.

Unlike in February, when optimism over global growth sent Treasury yields higher, this time it’s the price pressure from rising metals, Weeden’s Michael Purves wrote in a note to investors Thursday.

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Five year Canada yields were higher as well, closing at 2.16% … this should have been good news for FixedResets but, perversely, they got hit today along with everything else.

PerpetualDiscounts now yield 5.41%, equivalent to 7.03% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.95%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 310bp, a slight (and perhaps spurious) narrowing from the 315bp reported April 11.