The Sun Also Rises

Boca Raton, Fla.--Nov. 6. It's the best of times and the worst of times for the securities industry, said Marc Lackritz, the president of the Securities Industry Association. In kicking off the SIA's annual meeting this morning, Lackritz said that, on the bright side, the industry is on track to earn record profits in 2003 and investor optimism has reached a four-year high. And, while retail investors

Boca Raton, Fla.--Nov. 6. It's the best of times and the worst of times for the securities industry, said Marc Lackritz, the president of the Securities Industry Association. In kicking off the SIA's annual meeting this morning, Lackritz said that, on the bright side, the industry is on track to earn record profits in 2003 and investor optimism has reached a four-year high. And, while retail investors do view Wall Street with a jaundiced eye, they are largely "pleased" with their own brokers and financial advisors.

The bad news? "Unremitting stories of scandals, misdeeds and alleged wrongdoing have shaken the public's trust in us as well as our confidence in ourselves," Lackritz said in his opening remarks to the SIA's 32nd annual meeting held at the gaudy Boca Raton Resort & Club. "As we work to recover, rebuild and revitalize from our industry's recent storm, the most urgent task we face is restoring the public's faith in our markets and our industry."

He called on the assembled investment house executives to continue to "root out questionable behavior" and to take responsibility for reforming their business practices. "The good news is that the task of eliminating bad behavior in our firms and by our colleagues is in our hands," Lackritz said. Of course, no specific mention of was made of crusading New York Attorney General Eliot Spitzer's or Massachusetts' Secretary of the Commonwealth William Galvin's role in that process.

That Lackritz made his remarks during a veritable tropical storm --- one that drenched the stretch limos and flooded parts of the two 18-hole golf courses here at the Boca Raton Resort & Club --- was not lost on the 480 attendees. But when the talk was over --- John Schaefer, COO of Morgan Stanley's Individual Investor Group, Fed Chairman Alan Greenspan, Wharton Prof. Jeremy Siegel followed --- the rain had stopped and the sun peaked out, albeit very weakly and briefly.

Lackritz went on to praise the member firms for managing the bear market well. "We've managed expenses effectively, while revenues have started to grow again across almost all product and service lines." Lackritz said that revenues are expected to reach $154 billion in 2003, up 3.4 percent from 2002. He also says that most firms are hiring again after a painful and bloody two-year period of cost cutting that saw 11 percent of the securities industry workers lose their jobs. "The good news is that the economy, the markets and our industry are on their way back"

The SIA estimates that industry profits will reach $22 billion, more than triple last year's $7 billion and higher than the previous record of $21 billion in 2000.

Lackritz praised the industry for helping enact Bush's tax-cut package and for improvements in "business continuity" efforts that allowed the capital markets to open last August despite the nation's largest black out. Lackritz also urged Congress to allow employees to get professional investment advice on firm-sponsored retirement savings plans.

In his remarks, outgoing SIA president John Schaefer blasted conflicts of interest that even now may plague the industry. "Consider what investors are regularly reading," he said. "Arbitration cases, class action lawsuits, Congressional hearings and regulatory actions that question if the playing field is level for everyone." He continued, "Many of the wounds have been self-inflicted." He then implored the member firms to "leave no stone unturned in weeding out conflicts and bad behavior." Of course, Schaefer bravely offered, "I am not holier than thou. My own firma and business have room to improve and we are working hard to do just that." Schaefer did not have to remind the audience that his firm, Morgan Stanley, is under investigation for its compensation grid, which pays FAs more for placing clients in MS proprietary funds.

The SIA, established in 1972, represents some 600 securities firms (investment banks, brokerages and mutual fund companies).

Greenspan said that the economy is improving, that productivity jumped at an "astonishing" rate and that inflation is under control. But, Greenspan noted that in just five years the "first cohort of the baby boom generation will reach 62, and "in about 2008 the proportion of the working-age population that will retire is projected to begin escalating." He warned in remarkably clear language (for him), "Almost surely, the social security and Medicare benefits that are promised under current law to future retirees cannot be financed with existing tax rates." That will have notable negative effects upon the economy, Greenspan stated. His solution? Government "outlay restraint."

Jeremy Siegel, the Wharton School professor and author of the best seller, Stocks for the Long Run, said that low interest rates, a sharply improving economy and improved productivity will allow stocks to enjoy an average annual return of perhaps 9 percent. In fact, "stocks are in a sweet spot," Siegel said. He reckons that the price-earnings multiple on S&P 500 should be about 20 or 21 against 2004 core earnings estimates. Currently, the S&P is trading for about 18 times 2004 estimates of $53.10 in core earnings. "We're in the middle of fair market value," he said. But Siegel warned: If the Democrats send Howard Dean to the White House, all bets are off since Dean and the Democrats have vowed to repeal Bush's tax plan.

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