New York – A novel study approaches the prediction of financial statement manipulation not from traditional accounting-based models, but from psychology and deception detection research. FactSet Research Systems and Glass Lewis & Co., two of the independent research firms tracked by Integrity provided key material for this study.

Psychology and deception detection research find that the language of true narratives differs from the one of false narratives. David Larcher and his team at Stanford University analyzed the linguistic features in CEOs’ and CFOs’ quarterly earnings conference calls to identify financial statement manipulation.

Larcher’s report, titled Detecting Deceptive Discussions in Conference Calls, identifies trends in the language of deceptive executives:

“We find that answers of deceptive executives have more references to general knowledge, fewer non-extreme positive emotions, and fewer references to shareholders’ value and value creation. In addition, deceptive CEOs use significantly fewer self-references, more third person plural and impersonal pronouns, more extreme positive emotions, fewer extreme negative emotions, and fewer certainty and hesitation words”.

FactSet Research provided the electronic transcripts of quarterly conferences while Glass Lewis & co. provided the restatements used by the researchers. Using these documents the researchers created models to predict deception in financial statements.

Main assumptions in the study include that the executives under scrutiny know whether financial statements have been manipulated, and that they have not rehearsed the language used in the calls. Nevertheless, the authors express that “overall, our results suggest that linguistic features of CEOs and CFOs in conference call narratives can be used to identify deceptive financial reporting”.

We released a new Integrity ResearchFocus® report today on Commission Sharing Arrangements (CSA) which showed a remarkable swing from our previous study released in January 2009.  In the current study, agency brokers dominated the commission management responses from 214 buy side firms surveyed in the first quarter of 2010.  In the previous study, based on a survey in the fourth quarter of 2008, all nine of the Integrity Top Picks were full service investment banks.

Agency brokers clearly benefited from the recent financial crisis as execution counterparties, and this carried over into commission management.  The challenge now will be for them to retain this market share as the bulge brackets come back, and one important battlefield will be research.  You can count on us to keep you informed on how the battle fares.  In the meantime, here is the press release for our new CSA study.

New York, NY (PRWEB) August 18, 2010 – Agency brokers garnered 9 of the top 15 positions in Integrity Research Associates latest survey of users of commission management services, conducted in the first quarter of 2010. Full service investment banks, which were the first to promote the benefits of Commission Sharing Arrangements (CSAs), received the remaining 6 spots.

“Execution only brokers gained share during the financial crisis, and commission management was no exception,” commented Michael Mayhew, Chairman of Integrity Research and co-author of the study. “The challenge will be to preserve their recently won market share as the bulge firms rebound.”

The survey, conducted during the first quarter of 2010, polled users of commission management services from 214 investment firms, including hedge funds, mutual fund groups and pension funds. A key component of commission management offerings are CSAs, which allow investors to consolidate trading with best execution counter-parties while directing commission payments to other sources of investment research.

The majority of respondents (52%) expect more unbundling of commissions between execution and research over the next twelve to twenty-four months. Traditionally, investment managers paid for proprietary investment banking research with bundled commissions, typically averaging between $.04 and $.05.
Increasingly, investors are using CSAs to reduce their commission payments, opting for ‘cost plus’, which adds a research component to the base execution rate, yielding a rate in the $.02 to $.03 range.

“A side benefit of CSAs is increased transparency for what is being spent for execution versus research,” said Ana Blanco, analyst and co-author of the study. “As CSA adoption grows, investors are placing greater emphasis on proactively managing their spending on research.”

CSAs have gained in popularity over the last five years, and now account for 30% of research commission payments on average among respondents to the survey. The average equity commissions paid by survey participants was $26.2 million.

Respondents typically use 5 CSA providers, although some large investment firms use 12 or more. On average, 25% of commissions directed through CSAs are allocated to independent research providers that are not affiliated with investment banks.

The top three factors for choosing CSA providers, other than execution quality, are customer support/service, back office quality/trade reconciliation, and counterparty risk/financial strength.

The 99-page Integrity ResearchFocus® report details the survey findings including CSA/CCA usage patterns, comparative analysis and ratings of the seventeen most prevalent CSA providers, and Integrity Research’s 2010 Top Picks for Overall CSA Provider, North America, Global, Europe, and Asia. The report includes profiles on the top 20 CSA providers included in the study. The report is used as a “buyers guide” for investment professionals and other users of commission management services. For additional information, go to www.integrity-research.com/cms/csareport/ or contact Matt Bannister at 646.786.6851  or Jim Kempski at 646.786.6865.

About Integrity Research:
Integrity Research Associates, LLC is an information and solutions provider specializing in alternative investment research. Its institutional investor clients use Integrity’s services to find non-traditional, non-consensus research providers and monitor existing ones. Integrity ResearchSelect® provides confidential, customized searches tailored to investors’ requirements. Integrity covers over 3,600 research firms in the U.S., Europe and Asia. Additional information about Integrity can be found at www.integrity-research.com.

New York – A recent commentary from the TABB Group offers a bleak outlook for equity commissions, the currency that pays for most equity research.  According to TABB, equity volume will continue to fade as asset flows and holdings of equities decline.  This is not welcome news for research providers which saw commission payments plummet 40% or more over the last eighteen months.

TABB Director of Research Adam Sussman released a commentary “Equity Volumes are Going Nowhere Fast”,  which predicts that average consolidated daily volumes will move down to $7 billion or less in the coming months.  To emphasize his point, yesterday’s consolidated volume was below $6 billion for the first time in a long time (admittedly during the August doldrums.)

One reason for Sussman’s gloom is that cumulative net equity fund flows have actually worsened even as the market staged a strong rally from January 2009 until April 2010.  TABB sees a growing lag between an uptick in the economy, how people invest their money, and when that gets translated into higher equity volumes.

Source: The TABB Group

The article cites a recent study by Vox Pop Investing, an innovative UK research firm that combines customer polling with investment recommendations (previously highlighted by Integrity to its clients). Using their marketing expertise and applying this to the state of the individual investor, Vox Pop found that the number of consumers that owns stocks has shrunk from more than three-quarters of the population to less than two-thirds.

TABB does find a silver lining, which is the higher US savings rate generating close to three-quarters of a trillion dollars per year in savings. At some point, that money will make its way into the market. The problem is that TABB doesn’t believe that will be anytime soon.

For research firms, this translates into more of the same.  From our discussions with providers, commission payments were hit hard in 2009 and have rebounded slightly in 2010.  At the low ebb, commissions were down 40% or more, and have started to rebound, in some cases now only 15% off pre-crisis levels.  Asset managers we speak with are not sanguine about the outlook however.  One broker liaison confided, “People constantly ask us when commissions will get back to pre-crisis levels.  The answer is probably never.”  The recent TABB commentary provides support for this view.

This is the final part of a three-part special analysis on a variety of economy-related concerns. Integrity Research selected a group of five investment strategists and economists from our database of over 3,600 research providers and asked them their opinions on some of these topics. Information about the respondents can be found at the end of this article.

Today we display the analysts’ opinions on payrolls levels and on risks that investors might be overlooking.

How long do you think it will take for non-farm payrolls to return to pre-recession levels?

Jason DeSena Trennert (Strategas): Unfortunately, we think it’s rather unrealistic for nonfarm payrolls to return to pre-recession levels (about 138 million workers) anytime soon.  It is likely that our consumption binge over the past several decades means that the structural level of unemployment could stay above 8% for quite some time.  That’s the bad news.  The good news is that profits as a percentage of GDP are so high that U.S. companies are probably at a point at which they have to start replacing some of the workers they laid off during the recession.  The bottom line is that we would suspect the unemployment rate to be lower a year from now but it is unlikely to reach pre-recession lows until the American economy fundamentally restructures.

Keith McCullough (Hedgeye Risk Management): When it comes to forecasting the unemployment rate, the only leading indicators that matter in our macro models are weekly consumer sentiment and jobless claims data. Mostly everything else is a concurrent to lagging indicators, at best.

The output of the Fiat Republic’s core marketing message of keeping rates of return on hard earned savings at ZERO percent for “an extended and exceptional” period of time is that there will be many unintended consequences associated with that never proven strategy.

One of the core outputs has been structural unemployment. Currently, over 45% of the unemployed have been looking for a job for 27 weeks or more. This is almost double the percentage of the prior top (early 1980’s)! In order to get unemployment to drop below 9% we’d need to see weekly jobless claims drop, sustainably, into the 370,000-395,000 range for at least 3-6 months.

Connie Everson (Capital Markets Outlook Group): Payroll employment can take years to recover, to our frustration, especially in a sluggish growth environment.   At least there has been some private job growth, and a majority of industry groups are reporting at least some gains, although it is a weak number.  Private sector nonfarm payrolls grew by just 71,000 in July, and a downwardly revised 31,000 in June.

Mike Englund (Action Economics): We see mid-2013 as the likely date that payrolls rise back above the 137,951,000 peak from December of 2007.

Conrad DeQuadros (RDQ Economics): On reasonable estimates of economic growth, nonfarm payrolls are unlikely to return to pre-recession levels for three to four years.

What is the biggest unexpected risk which investors might be overlooking?

Jason DeSena Trennert (Strategas): Frankly, after meeting with our institutional clients around the world, it’s hard to believe there are many risks about which people are not considering – the financial crisis and a 24-hour news cycle has investors worried about the widest range of potential risks than at any time in my 20-year career and perhaps since 1945.  It’s not often that investors would see the odds of both inflation and deflation, for instance, as roughly equal. Having said that, I am watching the recent increases in agricultural commodity prices carefully.  In retrospect, the doubling of rice prices in 2008 and the subsequent food riots in Egypt and Vietnam were important warning signs that China was likely to slow their growth.  At this point, it appears as if the increase in agricultural prices is simply a relative shift in inflation, but if it continues it could present a risk to the global recovery.

Keith McCullough (Hedgeye Risk Management): The biggest bubble that remains across all asset classes globally is that in which professional politicians in Washington live – US Treasuries. Every day that short term US Treasury yields hit record lows is another day closer to the US crossing the proverbial Rubicon of abused privilege.

From here, US Treasury yields either approach those of Japanese Government Bonds or they put in a long term bottom and blast every yield chaser to smithereens. This time the unexpected shouldn’t be unexpected.

Connie Everson (Capital Markets Outlook Group): Austerity measures.  The shift towards austerity will weigh on economic growth.  That’s the opposite of the way bears talk about sovereign debt, a perception that debt is a problem that requires immediate action.  That is our major risk.

Mike Englund (Action Economics): War in the Middle East remains the greatest potential risk to the global economy, given the likely sensitivity of oil prices to any conflict that might close the Persian Gulf, alongside the broader set of risks associated with continued large gains in commodity prices through this cycle led by ongoing rapid growth in the Pacific Basin.  Surging commodity prices remain a sizable drain on U.S. and European household purchasing power, and deteriorating government finances in the face of stalling growth in aggregate demand would provide a bad combination for the global market’s sovereign debt solvency concerns.  In short, it would be difficult for U.S. and European policymakers to steer a successful policy course over the coming years if debt-to-GDP ratios were rising while aggregate demand was suffering from surging commodity prices, whether those price gains are due to a conflict around the Persian Gulf or rising global demand overall.

Conrad DeQuadros (RDQ Economics): Investors are too sanguine about the current stance of monetary policy.  Massive excessive bank reserves may do little harm while the credit multiplier is impaired, but the financial system is healing and we are skeptical that the Fed will reduce monetary accommodation in a timely manner.  Overly accommodative policy fueled the financial crisis of 2008 and we are concerned that monetary policy risks creating another significant imbalance.

Additional Information About the Respondents (please contact Integrity for more information on any of the providers mentioned below)

Jason DeSena Trennert is a managing partner and chief investment strategist at Strategas. With offices in New York, Washington and Geneva, Strategas Research Partners, LLC is an investment strategy, macro-economic and policy research firm. Strategas’ principals were formerly senior members of ISI’s research team. Strategas’ primary product is geared toward offering investment strategies to buy-side clients. In this regard the strategists interface with the economics and policy groups to project corporate profits, valuations, and style trends. In addition, the firm provides custom research to clients.

Keith McCullough is the CEO at Hedgeye Risk Management. Hedgeye Risk Management LLC (formerly Research Edge) maintains a hedge fund perspective in its research outlook. McCullough who was previously a portfolio manager at Magnetar Capital and Carlyle-Blue Wave, provides daily macro-oriented commentary in a blog format. The firm does not maintain a specific coverage list, focusing on sector coverage instead. McCullough screens from the top down, and has his analysts work on names that fall within their sphere of coverage. The firm has a restricted client business model for “white glove” analyst access, although distribution of research commentary is not restricted.

Keith McCullough runs his research product like an investment portfolio, putting out over a dozen macro “trades” on a typical day. Supported by junior analysts, he posts commentary and recommended transactions (long and short) on a variety of markets and asset classes, including equities, currencies, commodities and credit markets.

Connie Everson is a partner at Capital Markets Outlook Group.  Capital Market Outlook Group is an independent economic strategy firm that specializes in finding leading macro indicators for turning points in the stock and bond markets. The firm caters to clients at investment companies, mutual funds, pension funds, endowments, foundations, insurance companies, and corporate management across North America and Europe. Principals at the firm welcome client contact. CMOG is a two partner strategy firm. CMOG also predicted the start and end of the 2000 stock market peak and 2007 credit crises.

Mike Englund is the principal director and chief economist at Action Economics.  Action Economics, LLC provides independent and objective commentary and analysis of the global economy and central bank developments to support trading decisions in the global fixed income and currency markets.  The partners of Action Economics spearheaded the early innovations of real-time market commentary with the development of MMS International, the industry leader of its time. After managing its award-winning content for over two decades, this team of seasoned economists and analysts has taken real-time market analysis to a new level.  The company’s product contains highly actionable commentary and insights that have raised the standards for the real-time information industry.

Conrad DeQuadros is a founding partner and senior economist at RDQ Economics.  RDQ Economics is an independent global macroeconomic research firm focused on U.S. economic fundamentals and monetary policy. RDQ’s research method takes a classical economic approach and uses monetary principles. This method is used to anticipate changes in the stance of monetary policy and of movements in economic growth and inflation. John Ryding and Conrad DeQuadros are the founders of RDQ Economics, and together have 26 years of experience on Wall Street and 12 years of experience in central banking at the Federal Reserve and the Bank of England.

For more information on any of the respondents or how to contact them, please contact Nathan Bragg at Nathan.bragg@integrity-research.com or (646)786-6854.

This is the second part of a three-part special analysis on a variety of economy-related concerns. Integrity Research selected a group of five investment strategists and economists from our database of over 3,600 research providers and asked them their opinions on these topics. Information about the respondents can be found at the end of this article.

Today we display the analysts’ opinions on the possibility deflation and on possible regulatory actions. Our next posting will present their opinions on employment and risks that investors might be overlooking.

In a recent WSJ article, some big name investors stated their fears over the possibility of deflation.  What probability do you think there is that deflation will occur in the U.S. in the next 12 months?

Jason DeSena Trennert (Strategas): In the great inflation/deflation debate, we are decidedly on the side of inflation over the long-term, let’s say the next 5 years.  This is simply derivative of our view that inflation is the most politically expedient (and perhaps even the most wise) choice for the policymaker faced with only the stark alternatives of inflation and deflation.  In the next 12 months, our best guess is that disinflation will continue to be the dominant economic force.  There is of course a growing unease at the slow pace of the recovery which may prompt policymakers to do something, anything, to revive the economy.

Keith McCullough (Hedgeye Risk Management): It’s critical to first define “deflation” before we mistake it for disinflation. We look at inflation and deflation both sequentially (month-over-month) and on a year-over-year basis. If prices are up year-over-year, we call that inflation. If prices are down year-over-year, we call that deflation. Seeing disinflation, or a sequential slowdown in year-over-year inflation, is not deflation.

It’s also important to understand that all inflation, like politics, is local. With Fiat Republics mimicking the US fiat currency model around the world, we are going to see long term global inflation perpetuated by the debasement of local currencies. If we send you a chart of long term inflation (going back to the year 1500 in the Reinhart & Rogoff data), the breakout in the median inflation rate for all countries (using a 5-year moving average) is crystal clear.

Altogether, the upshot of our view on “deflation” is that it’s a very newsy and fear-mongering word that insulates the monetarist view of why risk-free rates of return should be ZERO percent. Japanese style deflation is a reality, but it’s been perpetuated by both quantitative easing and local real-estate pricing that needed 15 years to disinflate. US deflation, if it occurs in 2011, will be born out of the bubble in prices that still needs to disinflate.

Connie Everson (Capital Markets Outlook Group): Also a low probability, since we are in the midst of a recovery.

Mike Englund (Action Economics): We believe the probability of real deflation occurring in the US is quite low, say 25%.

Conrad DeQuadros (RDQ Economics): We believe that the risk of deflation is very low.  There has been one episode of deflation in the U.S. in the last 80 years and it was caused by a Fed-engineered, massive contraction in bank reserves.  The Fed currently has monetary policy on a highly accommodative setting and will in all likelihood maintain this policy for a long time (given past performance, probably too long).  Deflation in Japan was allowed to set in as the central bank tightened policy after the bursting of the Nikkei and real estate bubbles, took many years to ease policy, and almost a decade to begin quantitative easing.  The Fed (and other central banks) responded entirely differently to the 2008 financial crisis and the monetary environment is not conducive to deflation.  We believe the parallels with Japan suggested by some commentators are misguided.

What do you believe the likely course of action will be in the coming months for the US central bank and/or the government as a whole?

Jason DeSena Trennert (Strategas): There must be a certain sense in which the Fed must feel as if it’s already given “at the office.”  After all, they have tripled the size of their balance sheet since Bear Stearns failed.  There has been some talk in recent weeks of additional quantitative easing but one wonders about the wisdom of adding gas to the tank when the spark (bank lending) is a mile away.  The Fed was certainly creative in their path toward easing and one might expect them to be more creative in the months to come in their efforts to revive money growth – perhaps raising the Fed Funds rate and increasing the size of the balance sheet at the same time to provide some disincentive for banks to hold excess reserves.  I’d like to see the Administration come up with some supply-side efforts to provide the basis for capital formation – perhaps a tax holiday on repatriated profits – but it doesn’t seem as if the White House is philosophically predisposed to such policy measures. Calls for more fiscal stimulus might be the default for the President but that may be getting more difficult to pull off politically.

Keith McCullough (Hedgeye Risk Management): The most likely course of action in the coming months, in terms of both fiscal and monetary policy, will be CYA in nature. Professional politicians chase polls – and the polls are calling for less of what hasn’t worked – debt and spending.

On the fiscal side, we think the polling momentum will continue to side with the antithesis of “government spending is good.” In the latest WSJ/NBC poll, the only issue that frightens Americans more than terrorism is the deficit. As complex a mathematical issue as the deficit may be, Americans have proven to be proficient in chaos theory. They get the deep simplicity that’s driving this issue. Keynesian style spending needs to be slowed.

In terms of monetary policy, we think that Bernanke will continue to deliver on the promise of his tenure. He is paid to pander to the political winds in Washington and scare the living daylights out of Americans that the alternative to any reasonable rate of return on US savings accounts needs to be prioritized in order to avoid his historical studies of “great depressions.” The only depression we see is in his fiat policy of debauching the US Dollar.

Connie Everson (Capital Markets Outlook Group): We believe short rates will remain low for longer than any of us can imagine.

Mike Englund (Action Economics): Both fiscal and monetary policymakers want to appear fully committed to maximum stimulus for the economy given the magnitude of the downturn, yet both groups are loath to do more beyond the massive stimulus already in the pipeline.  For fiscal policy, the electoral climate has shifted dramatically over the past year with regard to tolerance for further government spending that is not funded by equal-and-offsetting cut-backs in the existing stimulus legislation, leaving Democrats hesitant to do more, and Republican’s comfortable focusing on excessive spending already in the pipeline.  For monetary policymakers, hawks are already concerned about the long-term inflation implications of a highly accommodative policy that will be difficult to fully unwind quickly, and doves would like to avoid split votes on the FOMC, leaving “open mouth policy” as the best route for accommodation over the near term.

Conrad DeQuadros (RDQ Economics): The Fed will most likely keep monetary policy unchanged, and thus very accommodative, until at least the second half of 2011.  We are hopeful that the November elections bring about reform of Federal government spending and taxation, most importantly preventing (or at least delaying) the increase in taxes that will result from letting the 2001 and 2003 tax cuts sunset.

Additional Information About the Respondents (please contact Integrity for more information on any of the providers mentioned below)

Jason DeSena Trennert is a managing partner and chief investment strategist at Strategas. With offices in New York, Washington and Geneva, Strategas Research Partners, LLC is an investment strategy, macro-economic and policy research firm. Strategas’ principals were formerly senior members of ISI’s research team. Strategas’ primary product is geared toward offering investment strategies to buy-side clients. In this regard the strategists interface with the economics and policy groups to project corporate profits, valuations, and style trends. In addition, the firm provides custom research to clients.

Keith McCullough is the CEO at Hedgeye Risk Management. Hedgeye Risk Management LLC (formerly Research Edge) maintains a hedge fund perspective in its research outlook. McCullough who was previously a portfolio manager at Magnetar Capital and Carlyle-Blue Wave, provides daily macro-oriented commentary in a blog format. The firm does not maintain a specific coverage list, focusing on sector coverage instead. McCullough screens from the top down, and has his analysts work on names that fall within their sphere of coverage. The firm has a restricted client business model for “white glove” analyst access, although distribution of research commentary is not restricted.

Keith McCullough runs his research product like an investment portfolio, putting out over a dozen macro “trades” on a typical day. Supported by junior analysts, he posts commentary and recommended transactions (long and short) on a variety of markets and asset classes, including equities, currencies, commodities and credit markets.

Connie Everson is a partner at Capital Markets Outlook Group.  Capital Market Outlook Group is an independent economic strategy firm that specializes in finding leading macro indicators for turning points in the stock and bond markets. The firm caters to clients at investment companies, mutual funds, pension funds, endowments, foundations, insurance companies, and corporate management across North America and Europe. Principals at the firm welcome client contact. CMOG is a two partner strategy firm. CMOG also predicted the start and end of the 2000 stock market peak and 2007 credit crises.

Mike Englund is the principal director and chief economist at Action Economics.  Action Economics, LLC provides independent and objective commentary and analysis of the global economy and central bank developments to support trading decisions in the global fixed income and currency markets.  The partners of Action Economics spearheaded the early innovations of real-time market commentary with the development of MMS International, the industry leader of its time. After managing its award-winning content for over two decades, this team of seasoned economists and analysts has taken real-time market analysis to a new level.  The company’s product contains highly actionable commentary and insights that have raised the standards for the real-time information industry.

Conrad DeQuadros is a founding partner and senior economist at RDQ Economics.  RDQ Economics is an independent global macroeconomic research firm focused on U.S. economic fundamentals and monetary policy. RDQ’s research method takes a classical economic approach and uses monetary principles. This method is used to anticipate changes in the stance of monetary policy and of movements in economic growth and inflation. John Ryding and Conrad DeQuadros are the founders of RDQ Economics, and together have 26 years of experience on Wall Street and 12 years of experience in central banking at the Federal Reserve and the Bank of England.

For more information on any of the respondents or how to contact them, please contact Nathan Bragg atNathan.bragg@integrity-research.com or (646)786-6854.

Integrity Research has noticed a growing number of news articles citing economy-related concerns ranging from deflation possibilities to sagging employment numbers. We wanted to hear the opinions of people who focus on these topics for a living, so we selected a group of five investment strategists and economists from our database of over 3,600 research providers. We asked these experts questions about the US economic and inflation outlook. Their interesting answers will be presented in this space in three groups.

Today we display the analysts’ opinions on the possibility of double-dip recession. Tomorrow, we will present their opinions on the possibility of deflation and on possible regulatory actions. The last group will include their answers on employment and risks that investors might be overlooking.

The five analysts who participated in our discussion on these issues are:  Jason DeSena Trennert, managing partner and chief investment strategist at Strategas; Keith McCullough, CEO at Hedgeye Risk Management; Connie Everson, partner at Capital Markets Outlook Group. Mike Englund, principal director and chief economist at Action Economics; and Conrad Dequadros, founding partner and senior economist at RDQ Economics. Additional information on the respondents can be found at the bottom of this article.

What probability do you attribute to a double-dip recession will occur in the U.S. in the next 12 months?

Jason DeSena Trennert (Strategas): We think the odds are rather low, perhaps about 20%.  There are good reasons to fear a double-dip, but in our view not enough good reasons to make it the “base case.”  Generally speaking, double dips are caused by policy errors (Japan 1997) or deliberate policy choices (US 1982).  I doubt we’re going to choose to “clear the decks” to restructure the economy – the U.S. really doesn’t “do” austerity these days.  Of course, the chances of a policy error (say a VAT tax next year) are not zero but again not likely.

Keith McCullough (Hedgeye Risk Management): On July 1st, as part of a recent report we published, we cut both our Q310 and full year 2011 GDP estimates for the US to 1.7%. At the time, these US economic growth estimates were about ½ the Bloomberg consensus estimate. Now we’re starting to see both the sell-side and the Fed gradually cut their estimates, but not by enough.

A “double-dip”, by our definition, isn’t what our estimates currently imply. That said, the current bias in our estimates remains to the downside and we’d handicap the probability of our going there (calling for 2 consecutive quarters of negative US GDP growth) at 33% in the next 12 months. The probability of seeing at least 1 quarter of negative GDP growth in 2011 is closer to 66%.

In other words, if US Housing prices “double dip” and drop 15-20% from here we’d say the probability of US GDP growth going negative for 2 consecutive quarters will go up from 33% – and quickly.

Connie Everson (Capital Markets Outlook Group): There is a low probability of a double dip.  Economic activity is reverting to a sluggish pace, but this is not the start of a double dip recession.  It’s still a positive growth rate and, prior to  June, the economy was measuring an extremely healthy growth rate.  There are also bright spots in the picture, the manufacturing sector would be one, and euro zone core exporters are another.  They are benefiting from a weaker euro.

Mike Englund (Action Economics):  We see the probability for a double dip recession as being 25%. Inventories reversed course rapidly over the last four quarters from a remarkably deep auto bankruptcy-induced $162 billion real liquidation rate in Q2 of last year to a $76 billion accumulation rate in Q2 of this year.  And, inventory-to-sales (I/S) ratios have bounced in May and June, as the sharp inventory reversal has now left production modestly outpacing sales, and with inventory levels that are actually high relative to the historic secular down-trend in I/S ratios.  Because inventory growth may stall in Q3 and Q4 by enough to potentially push one of these GDP growth rates back into negative territory, given the lean 1.1%-1.3% growth rate for real final sales over the last two quarters, we see at least some risk that the markets will deep the growth path a “W” shaped expansion, or a “double dip.”

Conrad DeQuadros (RDQ Economics): Although there are some signs that the pace of the recovery may have slowed, we believe the risk of a double-dip recession is small.  Recent softer manufacturing data likely reflect a reduction in the impetus from inventories but now capital spending appears to be leading the recovery.  Trends in consumer incomes, business profits and balance sheets, and global growth are inconsistent with a double-dip.  Indeed, domestic final demand was stronger in the second quarter than in any quarter since 2006 Q1, so the recovery has momentum.  We expect that we will continue to see moderate economic growth.

Additional Information About the Respondents (please contact Integrity for more information on any of the providers mentioned below)

Jason DeSena Trennert is a managing partner and chief investment strategist at Strategas. With offices in New York, Washington and Geneva, Strategas Research Partners, LLC is an investment strategy, macro-economic and policy research firm. Strategas’ principals were formerly senior members of ISI’s research team. Strategas’ primary product is geared toward offering investment strategies to buy-side clients. In this regard the strategists interface with the economics and policy groups to project corporate profits, valuations, and style trends. In addition, the firm provides custom research to clients.

Keith McCullough is the CEO at Hedgeye Risk Management. Hedgeye Risk Management LLC (formerly Research Edge) maintains a hedge fund perspective in its research outlook. McCullough who was previously a portfolio manager at Magnetar Capital and Carlyle-Blue Wave, provides daily macro-oriented commentary in a blog format. The firm does not maintain a specific coverage list, focusing on sector coverage instead. McCullough screens from the top down, and has his analysts work on names that fall within their sphere of coverage. The firm has a restricted client business model for “white glove” analyst access, although distribution of research commentary is not restricted.
Keith McCullough runs his research product like an investment portfolio, putting out over a dozen macro “trades” on a typical day. Supported by junior analysts, he posts commentary and recommended transactions (long and short) on a variety of markets and asset classes, including equities, currencies, commodities and credit markets.

Connie Everson is a partner at Capital Markets Outlook Group.  Capital Market Outlook Group is an independent economic strategy firm that specializes in finding leading macro indicators for turning points in the stock and bond markets. The firm caters to clients at investment companies, mutual funds, pension funds, endowments, foundations, insurance companies, and corporate management across North America and Europe. Principals at the firm welcome client contact. CMOG is a two partner strategy firm. CMOG also predicted the start and end of the 2000 stock market peak and 2007 credit crises.

Mike Englund is the principal director and chief economist at Action Economics.  Action Economics, LLC provides independent and objective commentary and analysis of the global economy and central bank developments to support trading decisions in the global fixed income and currency markets.  The partners of Action Economics spearheaded the early innovations of real-time market commentary with the development of MMS International, the industry leader of its time. After managing its award-winning content for over two decades, this team of seasoned economists and analysts has taken real-time market analysis to a new level.  The company’s product contains highly actionable commentary and insights that have raised the standards for the real-time information industry.

Conrad DeQuadros is a founding partner and senior economist at RDQ Economics.  RDQ Economics is an independent global macroeconomic research firm focused on U.S. economic fundamentals and monetary policy. RDQ’s research method takes a classical economic approach and uses monetary principles. This method is used to anticipate changes in the stance of monetary policy and of movements in economic growth and inflation. John Ryding and Conrad DeQuadros are the founders of RDQ Economics, and together have 26 years of experience on Wall Street and 12 years of experience in central banking at the Federal Reserve and the Bank of England.

For more information on any of the respondents or how to contact them, please contact Nathan Bragg at Nathan.bragg@integrity-research.com or (646)786-6854.

New York – Morgan Stanley was fined $800,000 by FINRA for inadequately disclosing conflicts of interest in research reports and analyst appearances.  The settlement covered improper disclosures dating back to 2006. It’s déjà vu all over again for Morgan Stanley which had to settle similar charges in 2005.

Of course the genesis of the rules is from the Global Research Analyst Settlement (GRAS) sought by Elliot Spitzer in 2003.  In turn, self-regulatory bodies NYSE and NASD, the SEC and Congress developed rules around research disclosures and conflicts of interest including: NYSE rule 472, NASD 2711, Reg AC and the Sarbanes-Oxley Act, respectively. The following three paragraphs are from the “Introduction and Summary of Regulation Analyst Certification” (full report).

“During 1999, the Commission and Congress began to closely examine research analysts’ conflicts of interest. We were particularly concerned that many investors who rely on analysts’ recommendations may not know, among other things, that favorable research coverage could be used to market the investment banking services provided by an analyst’s firm, and that an analyst’s compensation may be based significantly on generating investment banking business. Moreover, news reports stated that some analysts had issued reports that did not reflect their true beliefs and communicated to institutional investors views that differed materially from those expressed in their research reports. Regulation AC, together with other efforts, is intended to address these issues.

On May 10, 2002, we approved rule changes filed by the NYSE and NASD governing analyst conflicts of interest. On December 31, 2002, we noticed for comment a second set of proposed rules filed by the NYSE and NASD to further address research analyst conflicts of interest. These self-regulatory organization rules are part of an ongoing process on our part and that of the NYSE and NASD to address conflicts of interest affecting the integrity and objectivity of research by securities firms. Regulation AC is intended to complement other rules governing conflicts of interest disclosure by research analysts, including NYSE Rule 472, NASD Rule 2711, and the anti-fraud provisions of the federal securities law.

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (“SOA”). Section 501 of the SOA requires that rules governing analyst conflicts be adopted within a year of enactment, including rules: limiting the supervision and compensatory evaluation of securities analysts; defining periods in which brokers or dealers engaged in a public offering of a security as underwriter or dealer may not publish research on such security; and requiring securities analysts and brokers or dealers to disclose specified conflicts of interest. The Commission voted to propose Regulation AC on July 24, 2002, before the passage of the SOA. 7 In the Proposing Release, the Commission noted that it would abide by the directives of the SOA as it continues to address analyst conflicts of interest issues, including with respect to the possible adoption of Regulation AC.”

The violations indicate that there are still serious problems with the sell-side analyst research model as far as living within the rules of Reg AC. Additionally, the fact that Morgan Stanley brought the violations to the attention of the SEC, indicates that the SEC continues to have difficulty imposing the rules on its books. And finally, the fact that there were 6,836 deficient disclosures means one breach of Reg AC only costs about $117. Economically, it seems to be a lot cheaper to pay the fine than to fix the problem.

New York – A recent article in Investment News sees irony in the SEC’s intense scrutiny of 12(b)-1 fees while paying scant attention to soft dollar commissions.  In our view, the SEC’s priorities are determined by realpolitik considerations which will continue to keep soft dollars on the back burner.

Investment News, a publication primarily targeted to financial advisors, ran a feature last Friday, “SEC targeting 12(b)-1 fees – but soft dollars fly under the radar” which contrasted the SEC’s interest in 12(b)-1 fees—a topic near and dear to its readership which receives benefits directly or indirectly from the fees—with soft dollars.

The article quotes Edward Siedle, founder of Benchmark Financial Services Inc: “Soft dollars are the exception to the basic rule that fiduciaries are not allowed to use client assets for their own benefit.  It’s never been clear that soft dollars benefit investors.” Described as a pension consultant, Siedle is a lawyer who provides litigation support for actions against investment managers, as well as due diligence and ‘forensic investigations’ of asset managers.

The article also quotes Russ Kinnel, Morningstar’s director of research, who complains about the level of soft dollar disclosure.  “They [mutual funds] disclose the commissions and whether some of that is soft-dollar money.  But the problem is that it’s in dollar terms and pretty well-hidden.”

Bill George, who has also contributed to this blog, is also quoted commenting on disclosure, “People can make all kinds of claims about what they’re using soft dollars for, but if you don’t disclose specifically for what, you can’t tell.”

While we support improved disclosure of soft dollar commissions, the reality is that the SEC has a very full plate.  Its first priority is recruiting additional staff with the additional funding it has received from Congress, followed closely by converting Dodd-Frank legislation into regulation.

The division most involved in parsing the Dodd-Frank legislation is the Division of Trading and Markets, which is also the division which typically takes the lead on soft dollar regulation.  The exception being the pending disclosure guidelines for fund trustees, which is the purview of the Division of Investment Management, which, as Investment News points out, is focused on 12(b)-1 fees and thanks to Dodd-Frank the registration of hedge funds.

So, unless some unwitting SEC examiner stumbles across a major soft dollar abuse, it is likely that soft dollars will continue to be a backwater issue for the foreseeable future.

New York, NY – As we reported last week, agency broker Lighthouse Securities closed its doors as the firm was unable to meet payroll.  While market participants explain that there were many reasons for the firm’s failure, one issue that many feel impacted Lighthouse, as it has hurt  other agency brokers, is the buy-side’s unwillingness to execute more business with firms that don’t also provide research.

According to a recent report published by Boston-based consultancy, Tabb Group, institutional investors will pay brokers approximately $15.3 billion in equity commissions in 2010, up slightly from the $14.9 billion in commissions paid in 2009, and the $17.2 billion generated in 2008.  

Despite the fact that equity commissions are expected to rebound slightly in 2010, it is unclear that agency brokers will experience any of this rebound.  Not only are buy-side firms increasing their use of low touch execution venues like algorithms and ECNs, but traditional sell-side banks are recapturing some of the market share they lost in the wake of the Lehman Brothers failure.

In fact, a number of agency brokers have told us recently that asset managers are explaining reduced execution volumes because the brokers don’t provide them with research or access to the new issues calendar.  Others have noted that large sell-side firms have been aggressively targeting mid-tier buy-side accounts that they never bothered to serve in the past. 

Either way, many agency brokers have found that their business has been squeezed in 2009 and again in 2010.  This is one reason that a number of agency brokers and ECNs have started focusing their energy on research in recent months.  Below we have listed just a few of the recent moves that various agency brokers have made to enhance their research offerings.

• In January, 2010 Hudson Holdings, the publically traded parent of execution provider Hudson Securities, announced that it was acquiring boutique investment bank and research provider Next Generation Equity Research for an undisclosed sum.
• In March, 2010 BTIG, announced that it was expanding its business by adding a fundamental equity research group division initially focused on the telecommunications, media, cable and satellite industries .  The firm hired research industry veterans Richard Greenfield and Walter Piecyk to head up the effort.
• Also in March, Instinet announced the launching of a new corporate access service called Meet the Street^TM, thus joining Liquidnet, BNY Convergex and Capital Institutional Services (CAPIS) in recent launches of corporate access products.  This initiative is in addition to the Instinet Access^™ alternative research platform.
• In June, 2010 Capital Institutional Services (CAPIS) announced that it had added Zelman & Associates to it Alliance platform.  Through this platform, CAPIS provides buy-side clients a number of independent research products, from broad based platforms to sector specialists, channel check services, corporate access and bespoke research providers.
• In early July, 2010 Greenwich-based Weeden & Company announced that it had formed an exclusive trading and marketing partnership with independent research provider, Sector & Sovereign.  This initiative is in addition to the hires that have taken place in recent years, as Weeden has quietly transformed its agency brokerage business by adding analysts and building a more traditional boutique investment banking firm.
• Later in July, Investment Technology Group, Inc. (ITG) announced the hiring of Jamie Selway as a Managing Director to provide ITG clients with analysis of market structure and potential developments in the regulatory environment. This follows ITG’s move in late April when it announced a strategic partnership with Disclosure Insight, an independent firm specializing in providing forensic research.  ITG made an undisclosed investment in Disclosure Insight and plans to market the firm’s research to its buy-side clients. 

The big question that remains is whether the various research initiatives described above will help these agency brokers and ECNs to capture more buy-side execution business, and whether they can do so at higher commission rates?  We will keep an eye on these developments over the coming months and keep you, our readers, informed.

On a recent blog post on Google Squared and Wolfram Alpha, Penny Herscher, CEO of FirstRain, commented:

The key issue for business people is whether the system (search and analysis) they are using understands their world or not. John Battelle has written about the web is moving from intentions to insights and technologies continue to develop, like Google Squared, to create structure out of web data. But to get useful structure you have to make an assumption about the end domain. Just put “Cisco” or “networking” into Google Squared and you’ll see the problem.

The win for end users – especially business and research users – is when the system knows the end domain and can create business structure (and so useful insights) from the web.

Ms. Herscher expands on these thoughts here: The Latest Web Search Development: From Intentions to Insights. An excerpt follows:

Bing and more recently Google have introduced contextual information to their searches as a way to make more sense of the web and better meet the expectations of users. Even so, Bing and Google are still operating in a web that represents a database of intentions — and the new intentions are social and status updates.

In the business world, people are interested in different signals and so require more sophisticated search capabilities than Bing or Google. I believe the compelling “little signal” in the business world is what has changed and it is generated by the detection of what I call events, which are patterns, connections and anomalies of interest to business decision-makers. What has changed about a business and it’s market is a powerful signal. When detected by sophisticated search capabilities, it can transform the web from a database of intentions to a database of actionable business insights.

Detecting the “what has changed” signal by finding, sorting and making sense of relevant events requires a new class of search technology called intelligent business search. Intelligent business search turns the unstructured, messy, duplicative and rich content available online into an analyzable data set of business ideas, relationships, facts and trends. It derives the implied business structures of companies, industries, management, markets and the relationships that connect them. And it applies trend and anomaly detection to discern what may be emerging, unusual or material.

Link to full article on The Huffington Post