For a Price, Investors Can Get In on a Confidence
For $4,650 a year, the University of Michigan will tip you to a number that moves stock and bond markets.
That’s what the university charges J.P. Morgan Chase & Co., UBS and 100 other firms to listen to a conference call as it discloses its consumer-confidence index every month.
The University of Michigan’s consumer index is the only U.S. economic indicator that’s sold to insiders before the public sees it. The tax-supported state university first sells the survey to those it calls sponsors -- brokerages or companies that can turn their advantage into a quick profit.
“These numbers move markets, and only some people have access to them,” said Mercer Bullard, a former assistant chief counsel at the Securities and Exchange Commission. “This is a serious regulatory issue that undermines confidence in markets.”
In October, when the Michigan index fell more than traders expected, the price on the benchmark 10-year Treasury note jumped. A trader on the conference call who immediately bought $10 million in Treasuries, then sold as others reacted to the news, would have profited by more than $20,000.
A survey released Friday showed that confidence rose in December to the highest level in four months. The preliminary sentiment index rose to 87 from 84.2 in November. That suggested the economy may accelerate next year, and the benchmark 10-year Treasury note fell more than a quarter of a point, or $2.50 per $1,000 face amount, pushing its yield up about 4 percentage points to 4.06%.
The University of Michigan is “selling information so that traders with a bigger pocketbook can take advantage of smaller traders,” said Robert Shiller, a Yale University professor and economist. “It’s not the kind of business that the ideal of the university suggests.”
The Federal Reserve, the Conference Board and more than a dozen federal and nonprofit organizations release market-sensitive news without charging for it. Unlike the University of Michigan, all take steps to avoid selective disclosure.
The Federal Reserve Bank of New York posts money-supply data under an embargo in a secure area on its Web site. The Fed gives the news media half an hour to digest the news before its scheduled release at 4:30 p.m. New York time on Thursdays.
“We don’t favor one group of investors or one audience over any other,” said Peter Bakstansky, the Fed’s spokesman in New York. “The first principles are principles of fairness.”
The Conference Board, a private business group, publishes its own confidence index on the last Tuesday of the month. The media are given access to the information 30 minutes before its release at 10 a.m. EST, said Randall Poe, the nonprofit group’s communications director.
“To release it instantly would be to give preference to whoever got it first,” he said. “It would be unfair. We operate under the principle of trying to create an even playing field.”
The Institute for Supply Management, a nonprofit trade group for purchasing managers, issues a survey on business conditions through Business Wire, an electronic news release service. It moves at 10 a.m. EST on the first business day of the month.
“We want to make sure everybody gets it at the same time,” said Norbert Ore, head of the group’s business survey committee. “Timing is worth a good bit in the marketplace. There’s an inherent advantage in information somebody can glean about the economy or markets that others don’t have.”
The University of Michigan, by contrast, makes every effort to selectively disclose its latest data. It excludes the media from its list of subscribers and vows legal action against subscribers who share reports, threatening to bar their access.
The university’s Institute for Social Research, which computes the index from monthly consumer surveys, says expenses dictate its sales policy.
“The subscriptions pay for the cost of the survey, but just barely,” said Richard Curtin, the survey’s director since 1976. “By keeping the data secret for a little while, we can earn some money to keep the survey going.”
Last year, the surveys cost $824,100, according to the institute’s budget figures. Its revenue from brokerages, companies researching consumer-buying habits and government agencies totaled $989,500, earning the institute a profit of $165,400.
The University of Michigan got $899 million in state and federal funds for the fiscal year ending next June 30. Its mission statement said such funds oblige it “to make available to the citizens of the state and nation that portion of its specialized knowledge which provides the necessary background for social decision.”
Still, university officials say there’s no contradiction between the university’s obligations to the public and its sale, and disclosure, to investors of specialized knowledge such as the consumer index.
“The research is enabled by the sponsors who fund it,” Julie Peterson, the university’s vice president for media relations, said in an e-mail statement. “Therefore, it seems appropriate that the sponsors would have access to the research findings before they are shared with the public more generally.”
University President Mary Sue Coleman didn’t respond to repeated phone calls and e-mails seeking comment about the fairness of the sales policy.
Later, after declining to answer questions from a reporter who visited her office, Coleman said she was comfortable with the university’s position.
“We’re just not going to make her available for an interview,” Peterson said.
The consumer surveys, the oldest in the country, have been conducted since 1946 in Ann Arbor, Mich., the university’s home. Curtin employs four full-time researchers and 30 part-time workers who telephone 500 households and ask questions about job prospects, spending plans and personal finances in trying to gauge where the economy is heading.
Those who want a free, widely available survey should offer alternative means of financing it, Curtin said.
Although the institute guards the release of its news, the index number still moves on newswires “within a minute” of the conference call, Curtin said. “And I’m not talking a figurative minute -- I mean a literal minute.”
The university doesn’t let the news media subscribe to its survey, but news services manage to listen to the conference calls and distribute the information.
That minute, however, is enough for traders to profit from bets based on the conference call, usually held at 9:45 a.m. New York time on the second and fourth Fridays of the month.
“All our traders have to do is hit a button to put a bid or an offer into the screens,” said Stephen Stanley, senior economist at RBS Greenwich Capital Markets Inc., which subscribes to the survey. “If they have information that somebody on the other side of that keyboard doesn’t have, they can make a profitable trade in a matter of a few seconds.”
The university’s disclosure practices don’t violate U.S. securities laws, said Karl Groskaufmanis, a partner in Fried, Frank, Harris, Shriver & Jacobson, a Washington law firm.
“The information is getting into the market fairly quickly,” he said. “But the fairness issue is still there.”
Just how useful the Michigan survey is in divining the economy’s direction is an altogether different matter, according to some economists.
Federal Reserve Chairman Alan Greenspan said in July that he watches spending, not confidence, to judge consumer behavior. “Our interest is actually what people do, not what they say,” he said in discussing the economy before Congress.
“The consumer confidence surveys are of minimal predictive value,” said Alan Krueger, a Princeton University economist. “I wouldn’t see any economic harm if they were shut down if they couldn’t raise funds to release them in a more equitable and fair way.”
