Shameless Behavior – Even by Wall Street Standards

Bloomberg reported recently that GAMCO gave Chairman Mario Gabelli a 30% raise from 2009 to 2010 to an astounding $56.7 million. How did shareholders fare last year? They made 3.9% including dividends while the Russell 2000 index posted a 21% gain.

Gabelli’s pay dwarfed the compensation of other, better known CEOs managing 5 – 10 times the assets.

If that wasn’t audacious enough Gabelli’s greed extends this year to pumping up his AUM through rights offerings for his closed-end funds. A letter dated March 21, 2011 spelled out the details for holders of his Gabelli Global Multimedia Trust as follows:

Primary Subscription Rights:

·         The fund proposes to issue one transferable right for each share of its common stock held on the record date. Three rights will be required to purchase one additional common share at the subscription price (free of commission for registered shareholders).

·         Over-Subscription Privilege: The over-subscription privilege permits all record date shareholders who have fully exercised their primary subscription rights to subscribe for any additional unsubscribed shares, if available. In addition, under certain circumstances, the Fund may issue additional common shares to satisfy over-subscription requests in excess of the common shares available for the over-subscription privilege.

Subscription Price:

The subscription price will be $7.00 per share, which is below the current market price and below the net asset value (NAV) of the Fund.

The Fund’s 10-year annualized return- a whopping 1.1%.

* Source: Barron’s March 28, 2011 – data as of March 25, 2011

What GAMCO is doing is coercing the shareholders of its closed-end funds into buying more shares of stock or suffering a guaranteed dilution of their currently held share values.

Any record-date shareholder who doesn’t exercise his rights will face a loss of NAV due to the issuance of new shares at below both market value and NAV. The over-subscription privilege adds insult as it allows others to swoop in and buy shares at discount levels far beyond their own assigned number of rights. They can do this by asking to buy any shares reserved for shareholders who don’t use their own rights. GAMCO management also can simply issue as many shares as there is demand for – regardless of rights outstanding- as outlined in the text above.

The big winner in all this? GAMCO, of course. They get huge inflows of new money into closed-end funds that can never be redeemed. This is a crime against shareholders that is, unfortunately, all too legal.

Dr. Paul Price www.BeatingBuffett www.OptionsProfits.com

Many will debate the wisdom of Schwab’s purchase of OptionsXpress but the logic is obvious if you understand the biggest problem associated with brokerage firm mergers. What factor is that? Buying up existing clients of other firms only works out long-term if you can hold on to the accounts post-merger.

When the OptionsXpress customers are transferred to Schwab’s books they will be focuses on two major things in deciding whether to stay put or flee to another brokerage house. The first concern is their ability to continue trading on the same familiar platform with the same features they’d been accustomed to using. The second big question is whether they will be paying more in commissions and fees under the new umbrella.

Because OptionsXpress is geared to option trading their platform is superior to Schwab’s in most ways. Schwab is likely to keep OXPS’s systems in place and let its own customers benefit from the improved features. No problem with point #1 then in terms of having OptionsXpress clients stay with the merged company.

Schwab is among the more expensive discount brokers for both stock and option trading. They give a higher level of service than most and charge more than others as well. Their standard fees are as follows…

At $8.95 flat for stocks and $9.70 minimum for the first options contract they are much more expensive than TradeStation, InteractiveBrokers, TradeKing, and most other deep discounters. If they had acquired any of their lower-priced competitors the traders they picked up in the merger would likely have fled to avoid the higher Schwab commission rates.

The good news for Schwab and OptionsXpress clients? OXPS is one of the few discounters that was charging even more than Charlie for both stock and option commissions. Here are their posted rates…

In fact, if you were not an ‘active trader’ according to OXPS’s definitions, your stock trading was at a flat rate of $14.95 and from 1 – 10 options contracts cost a flat rate of $14.95 per trade.

When OptionsXpress customers are moved over to the new parent company they will have cheaper trading than currently and should have no complaints. This is what really makes this particular acquisition look so good for Schwab. They have an excellent chance of holding on to almost all the transferred accounts through better service, keeping the best of each platform and the prospect of slightly lower costs for the new Schwab clients than they were paying before.

This looks like a cost effective move for Schwab that should work out well over time.