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Race to the bottom

IP — Thu, 02 Sep 2010 20:50:05 +0000

Booz & Co.’s Strategy & Business has a summary of a recent paper on CEO compensation. It’s public knowledge that it has skyrocketed in the last 20 years or so, but this paper searches for a driver – and finds it in “compensation benchmarking” (fee or subscription required). You could also call it “The grass is always greener” effect. It was always intuitive to picture CEOs looking at (selected) peers earning inflated packages and hiring compensation consultants who, surprise surprise, would dial up the numbers, aided by complacent Boards (usually made up of, you guessed it, peer-company CEOs).

Nothing new, but always nice to emphasize.

The year to “Throw Momma From The Train”

IP — Wed, 01 Sep 2010 17:25:17 +0000

Buffett, Soros, Bill Gates (and his father) have also written and talked about it – some of them since the original 2001 repeal proposal. Now Bob Rubin and Julian Robertson co-author an op-ed in the Wall Street Journal calling for the return of the Estate Tax, at least in the 2009 model. What’s more, they want it to be effective since January 1st, 2010. Their paragraph on the “powerful philosophical underpinnings” of the Estate Tax seems to be there just to please the WSJ’s target readership, but the real motivation – and we can’t help but agree that it is strong enough to demand attention by the US Congress – is that “[The USA] is losing revenue that, with its stressed fiscal conditions, it can ill afford to forego”. For a quick, “real-life” examples of the proposed Estate tax reinstatements for 2011 check out this June 12th NY Times article. The mention to 2010 as “the year to ‘Throw Momma From the Train’” alone is worth the read.

Common-sense CEO

IP — Tue, 31 Aug 2010 21:56:13 +0000

Quick post: short interview with Kapser Horsted, CEO at Henkel, the german consumer and industrial products company. While you can just click on the link and enjoy, we’ve highlighted two excerpts inside. He’s frank and most of his quotes are quite direct and of the “no-hubris” type.

One:

Kasper: “I never read cc e-mails.” What do you mean by that? “When I see on an e-mail “cc Kasper,” I delete it. I don’t read it.” Why? “Because it’s a waste of time. If they want to write to me, they can write to me. People often copy me to cover their back.”

Two:

How do you hire? (…) I always ask the question, what would you do if you won 10 million bucks?”

UK code and Brazilian governance

IP — Mon, 30 Aug 2010 15:53:56 +0000

The August 2010 issue of Capital Aberto magazine has an article (in English) about the new UK Stewardship Code, designed to (take a deep breath) “enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities by setting out good practice on engagement with investee companies to which the FRC believes institutional investors should aspire.”

Our partner and Head of Investor Relations, Elsen Carvalho, was interviewed and shared our take on the code, and his full comments are inside.

Our view, expressed by Mr. Carvalho, are as follows:

“Companies are committed to the long run and to their entire shareholder base. Attending to an investor’s wishes is not always in the company’s best interests, even if that investor holds a significant stake”, observes Elsen Carvalho, a partner at the Investidor Profissional asset manager. He also raises doubt as to the extent to which increasing the volume of information reported to clients, as suggested by the code, will create a more transparent market. “Good information means useful information”, he assures. He believes that the intentions behind the proposed increase and standardization of accountability are good, but excesses could be harmful. “Ultimately, too much information could be used as a distraction from what really matters.”

Greece should learn from Brazil – kind of

IP — Thu, 26 Aug 2010 14:29:15 +0000

The Financial Times had a piece about Greece’s woes on August 24th – and how Brazil’s fiscal policy presents an alternative. We feel it’s our duty as Brazilians to inform the FT that they’re basically right: Greece can borrow pages from the playbook of 2002 Brazil (or Lula, since the article mentions him). 2010 Brazil’s fiscal policies, however, should not be copied. What a difference a few years make.

‘Black swan-proof’?

IP — Wed, 25 Aug 2010 12:30:49 +0000

Relatively clueless weekend articles by the Wall Street Journal. This one, ‘Preparing for the next Black Swan‘, is downright scary in the number of supposedly “heads I win, tail you lose” hedging/ ‘black swan-proof’ strategies currently pushed to customers – increasingly retail customers on top of the institutional ones. To be clear: we’re all for capital preservation, and our company’s success is built more on the back of risk aversion than of risk-taking. However, the article doesn’t do nearly enough to highlight that hedging instruments or strategies, especially untested ones, have not only flaws (have we already forgotten counter-party risk in 2008?) but most importantly costs, sometimes hidden, and in no way are these costs of a fixed nature.

This has all the tell-tale signs of a fad… The scariest bit is the description of an instrument sold by a big bank: “(…) It is designed to post small returns in most markets, (..) but in very dramatic times, that bet gets amplified.” Well, good luck with that when the next storm breaks.

Stanley Druckenmiller shuts down Duquesne

IP — Mon, 23 Aug 2010 15:47:36 +0000

Mr. Druckenmiller has over 30 years’ experience, his Duquesne Capital manages $12 billion and since 1986 never had a down year (although it is down 5% YTD). Letting the article highlight another impressive feat: “Druckenmiller has run Duquesne since 1980, even while working for two other organizations, mutual-fund manager Dreyfus Corp., from 1986 to 1988, and Soros Fund Management, where he was chief strategist from late 1988 to 2000. Both Soros and Dreyfus Chairman Howard Stein wanted Druckenmiller badly enough to let him continue managing his own fund.” The Soros years include the famous “British pound trade”. So why quit? Interestingly, he’s “frustrated by his failure in the past three years to match returns that had averaged 30 percent annually since 1986.” Why, in his opinion, did it happen? “ ‘Managing more than $10 billion seems to challenge my long-term standard’ for investment performance, Druckenmiller said.”

A fund manager’s mandate is all about investment performance and not AUM growth – the opposite is not just wrong, it can also be self-defeating.

China’s economies

IP — Sat, 21 Aug 2010 00:34:48 +0000

Economies, in the plural, since two recent articles have dealt with the “unofficial” sides of the Chinese Economy. First there was a Bloomberg article on Chinese banks getting the order to move their off-balance sheet stuff to the books. The “not-meant-to-be-funny-but-still-funny” part goes like this: “They want to strengthen their monitoring of the systematic risk related to off-balance sheet management of bad debts,” said Wang Qing, Hong Kong-based economist at Morgan Stanley. “In the near term, the impact on banks’ earnings will be quite limited.” It makes us wonder who still trusts short-term bank earnings in China. We suggest a “translation” to the funny part inside, along with the second article.

Repeating the sentence: “They want to strengthen their monitoring of the systematic risk related to off-balance sheet management of bad debts.”

The translation to that sentence could be: “they know they have been lending recklessly (oh the power of incentives…), don’t have a clue about the true size of the mess and are praying for the inefficiencies of the economy/ transmission channels to dampen the multiplier/ domino effect of this huge but untraceable/irreconcilable collective irresponsibility – and yet want to sound ‘in control’ and ‘knowledgeable’ about it as long as they can”.

The second article is a LEX on China’s “grey” economy, mentioning research by Credit Suisse (which can be found here). In it CS researches China’s “real” wealth distribution, and surprise surprise, it looks more like South than North America. Why? Because incomes may be as much as 90% higher than official stats – please note that stats can be used to tell any story, we know nothing of what sample they used, the questions they asked, etc.

Would the real China please stand up?

Oi’s corporate finance strategy

IP — Tue, 17 Aug 2010 15:33:54 +0000

Interesting way to improve funding costs (story in Portuguese – we found no mention in Oi’s website), while also pleasing the banks involved. Oi, the Brazilian telecom giant, also happens to own a lot of real estate – for instance the spots in which they have antennas. It’s transferring 263 properties to an SPC, for which Oi will pay rent. At the same time the SPC raises money to pay for the property by selling these rent receivables as CRIs, the portuguese acronym for “certificates of real-estate receivables”. The flip side for banks is that they get to invest their savings accounts regulatory requirements in a “better-quality” CRI. For Oi, through the cost of this debt and the tax benefit of paying rent, they get to secure a lower cost of funding than that achieved in their recent (May ’10) bonds issue. Here’s a note (again in Portuguese) on CRIs becoming more common.

Two small updates

IP — Fri, 13 Aug 2010 15:23:42 +0000

The first one regards AB-InBev and the fact that it’s still hard for “foreigners” to fully grasp it. Yesterday’s LEX column on the company has flattering but less than enlightened comments and puts way too much weight on the P/E ratio. Here’s a quick way to find ABI-related posts on Buysiders.

The second one is about Netflix. A quick search on Buysiders will yield a lot of material on the company, and this story in the NY Times sheds some (more) light on the company. It’s about creative destruction stimulated by the company itself. It doesn’t guarantee Netflix will win as the technology shifts continually challenge its business model, but it gives the company a fighting chance. Again, such a shifting business model is probably not the best playground for investors, but Netflix is still worth tracking for all the other reasons.