This past week I noted in the Financial Times that NYSE Euronext (NYX) has sounded the alarm for another retreat. Apparently it is working with US regulators to ease its listing requirement* of a minimum $1 share price in order to protect itself (and overall market confidence) from a wave of delistings. As of Sunday, 86 companies or about 4% of NYSE listed stocks may not meet this requirement. If one also includes its listings trading at or below $2 per share, which may already be trapped in this bear market’s capital sucking vortex, then the danger list increases to 191 companies or about 8.75% of its listings. (Note that this NYSE stock list excludes preferred stocks and exchange traded funds.)
At Hillbent, a lot of research work is focused on price-volume analysis (for asset classes, indexes, sectors, industry groups/ETFs, and individual stocks/securities) and its impact or projected impact on the market direction. One of my basic tenets for price-volume analysis is that contrary to popular belief, falling prices on less volume is not the best of a bad situation, but instead reflects the most bearish of all relationships. For the sake of brevity (and also the fact that I am only sharing summary conclusions from a proprietary premium research report), the net effect on stocks that are currently eligible for delisting or spiraling towards this direction has been an extreme contraction in average daily trading volume relative to past historical periods.
Obviously, the liquidity risk of owning a stock vulnerable to delisting increases with each passing day and decline in its share price. Since a decrease in volume indicates the absence of interested buyers, it does not take as much selling pressure to drive down the market in a stock. Also, factor in the SEC’s elimination of the uptick rule for shorting stocks and its lax enforcement against naked shorting. These three conditions facilitate sappers attacking the equity market’s key stress points, i.e. specific stocks and industries, and the result is a recipe for how to implode a capital market that would rival even the best structural demolitions expert teams.
So now, the question becomes - is this contemplated measure between the NYSE and its regulators the equivalent of sending in the bomb squad to neutralize another potential disaster? Last year, the exchange saw the aggregate market cap of its parent group’s listed companies contract at $14 trillion, a number roughly equivalent to the annual US GDP. A testament to our nation’s economic strength and endurance is the fact that thus far we have survived an onslaught of proportionately greater economic devastation than the 911 attacks. However, financial markets, just like our fiat currency, are built upon confidence, and therefore I do not think the market could psychologically endure the warranted or unwarranted delisting of so many potential household names. NYX has a vested interest, considering that the aggregate average daily volume of the 86 issues potentially eligible for delisting equals about 151mm shares and that the 191 companies eligible or heading towards delisting standards represent an aggregate average daily volume of 507mm shares or roughly 9% of the NYSE’s average daily trading volume. That’s a lot of commissions revenue that can be preserved with a simple wink and a nod from the SEC.
Now all of the above may be interesting information, but the real purpose of this report is not to emphasize how bad things are, but to proactively look for contrarian ways to profit from the existing market condition and upcoming regulatory changes which will mitigate the risk of delistment for hundreds of stocks. Yes, I happen to think that the SEC will accommodate the NYSE’s request to ease its listing requirements. The Nasdaq OMX (NDAQ), its rival, has already suspended its minimum bid price and market cap requirements and on a relative basis is handily outperforming NYX (see chart #1). Earlier this year, regulators granted the NYSE temporary reprieve from maintenance of a $25mm minimum market cap over a 30-day period by reducing it to $15mm. Currently, 493 or about 22.5% of NYSE listed stocks trade at $5 or less per share. Remember, as price falls and volume contracts, it does not take as many sellers to push down prices. Mitigating the liquidity risk for potential delisting will be a big step in the right direction. If only we could get the cronyistic regulators to place their heads back on their shoulders, we could also rescind the uptick rule and see stricter enforcement of naked short selling. (I look forward to the day when I can write a report on this event.)
Against this backdrop and upcoming announcement, I would anticipate NYX to exhibit more positive performance. In addition to this, I have also provided a short list of 18 companies (see chart #2) that are worth monitoring over the upcoming weeks with regards to this event. Each company has a minimum Hillbent proprietary composite grade of "B" or higher and a short interest ratio of 5 or greater. Am I making any guarantees on this list? Absolutely not! But, I suspect that removing the potential risk of delistment should improve their liquidity (which is not to be confused with fundamentals). It’s a starting point and I strongly encourage readers to dig deeper into some of these names and share opinions and conclusions of their personal research results. One way or another, we will all get through this together.