• A Few Words on Executive Compensation
    Posted by on May 8th, 2013 at 3:00 pm

    The topic of executive compensation receives a lot of attention in the financial media, and I think much of it is misguided. As an investor, I’ve looked at countless companies, and I can’t remember an instance where the level of executive pay has steered me away from the stock.

    From my experience, investors are perfectly willing to put up with just about anything from a CEO as long as the stock is rising. Of course, that’s a big “as long as.”

    There seems to be a built-in cynicism with many investors, and they’re predetermined to believe that the executives are looting the company at their expense. Human nature being what it is, yes, Enrons do exist. However, I prefer to focus on high-quality companies so the management has almost certainly proven themselves to be efficient by the time I look under the hood.

    A few years ago, I was at the Wharton Economic Summit and one professor said that if we magically chopped the pay of every CEO by 25%, it would have almost no impact on market valuations. It’s simply not that big a portion of expenses.

    I’m also afraid that many companies have reformed themselves backward. Since large cash payments don’t look good for senior managers, especially for a money-losing company, we’ve moved to a world of stock options. That had the added benefit of managers having, to borrow a tired phrase, “skin in the game.” But for me, as an investor, I hate the endless watering down of shares.

    Plus, stock options aren’t the independent variables they’re made out to be. They’re great to use for companies with rising share prices. Hey, it’s free money! Here are some more grants! But when the shares start dropping, it’s not so much fun.

    Executive compensation also distorts how much management really has at stake. I’m obviously a big fan of AFLAC and the company got tons of great press for their say-on-pay measure. Sure, that’s nice, but how important is it really? The Amos family has a fortune tied to shares of AFLAC. What Dan Amos takes in each year as CEO is probably pretty small compared to what he and his family have at stake. Mind you, I’m not criticizing him. I’m just saying let’s look at the big picture. He’s already rich and if next year’s pay is $3 million or $6 million, it won’t impact his life very much.

    The problem is that any metric a board uses to base executive compensation will create problems. If they say that the CEO will get a bonus of, say, $5 million if ROE for the year hits, say, 18%, then the CEO will do whatever it takes to make the accounting work. The same for EPS or revenue growth – it doesn’t really matter. The benefit for the board is that their decision seems far more rational and dispassionate than it truly is. Well, it’s not.

    If I had my way, the board would be in complete control of executive pay and they would decide by fiat each year. No formulas or stock options. Simply, here’s how well we think you did, and that’s that. For untested companies I see the drawbacks, but for successful ones, I think it’s better for everyone, especially shareholders.

    Which brings me to another point. While I’m not so bothered by executive pay, I am bothered by the lack of independence of corporate boards. Their job is to represent shareholders, and far too many are lackeys for kingpin CEOs. It’s taken me a long time to reach this point but I don’t believe any CEO should be on the board of directors. None. Just cut the two entities entirely. CEOs should not be media celebrities.

    Jamie Dimon at JPMorgan Chase is a perfect example, and I say this as someone who has JPM on their Buy List. Mr. Dimon should be CEO or on the board, but not both. My preference is to see him leave the CEO suite.

  • Cognizant Beats and Guides Higher
    Posted by on May 8th, 2013 at 10:02 am

    The S&P 500 has now risen for 11 of the last 13 days. We had more good news this morning as Cognizant Technology Solutions ($CTSH) reported impressive results. For Q1, CTSH earned $1.02 per share which was eight cents better than estimates. Going into the earnings report, I think some traders were expecting a big miss after seeing what happened to CTSH’s competitors. Revenues rose 18.1% to $2.02 billion which was just ahead of estimates.

    Cognizant’s guidance was also good. For Q2, they see earnings at $1.06 per share which is seven cents above Wall Street, and they expect quarterly revenues of $2.13 billion which is $20 million above consensus.

    For all of 2013, CTSH expects earnings of $4.31 per share which is well above consensus of $4.05 per share. For revenue, they expect $8.60 billion which just below the Street’s forecast of $8.63 billion. The company is also expanding its stock buyback program.

    The stock gapped up to $68 right after the opening, then pulled back, and is climbing again. CTSH is currently up 3.8% today.

  • Warren Buffett in 1962
    Posted by on May 8th, 2013 at 9:18 am

  • Morning News: May 8, 2013
    Posted by on May 8th, 2013 at 7:19 am

    China Reports Stronger April Trade Growth

    European Telco Revenues Drop As Price Wars Heat Up

    PBOC Signals Resumption of Bill Sales as Capital Inflows Rise

    ING Will Accelerate Sale of European Insurer as Profit Rises

    U.S. Brings Charges In First Criminal Case For Consumer Agency

    Hedge Funds Rush Into Debt Trading With $108 Billion

    Toyota Full-year Net Profit Triples to $9.7 Billion

    Deutsche Telekom Earnings Top Estimates on German Wireless

    Stanchart Sees Q1 Profit Decline On Increased Costs

    Whole Foods 2nd-Quarter Profit Rises; Raises Outlook, Announces Stock Split

    Yahoo CEO Mayer Said to Seek Ways to End Microsoft Search Deal

    Symantec Forecasts Weak Results As Yen Depreciates

    Solid Sales, and Criticism, for Latest Version of Windows

    Phil Pearlman: Reflexivity and the Employment Numbers

    Howard Lindzon: The ‘Eclectic Opportunist’…and My Tesla Investment/Trade

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  • Strong Earnings at CA Technologies
    Posted by on May 7th, 2013 at 10:44 pm

    For the first time ever, the Dow closed above 15,000. This was the 17th-straight Tuesday rally for the index. The Dow closed today at 15,056.20. The S&P 500 rose 0.52% to close at 1,625.96. This was also another all-time high close.

    The cyclicals once again led today’s rally. Interestingly, the tech-heavy Nasdaq was only up 0.11% today while the Nasdaq 100 was slightly negative.

    Our Buy List did well today thanks largely to DirecTV ($DTV). The good earnings report propelled the shares to a 6.9% gain today. Bed Bath & Beyond ($BBBY) finally broke through $70 per share today. That hasn’t happened since September.

    After the bell, CA Technologies ($CA) reported fiscal fourth-quarter earnings of 68 cents per share. This was well above Wall Street’s forecast of 55 cents per share.

    “While we were able to achieve GAAP and non-GAAP diluted earnings growth for the year, we know we can do better to drive new sales and revenue performance,” said Mike Gregoire, CA Technologies chief executive officer. “When I look at the significant assets at CA Technologies, I believe there is an opportunity for us to improve our performance by stronger focus on product innovation, leveraging customer relationships and better execution in new customer adoption.

    “The traditional ways we’ve looked at systems, data, applications and security are being challenged by disruptive technologies like Mobility, Cloud, SaaS and Big Data. Businesses have higher expectations from IT, demanding far greater speed and agility and anytime, anywhere secure connectivity. These are areas where CA has expertise and can help,” he continued. “To better meet this customer demand, today we announced a plan and corresponding charge of approximately $150 million for fiscal year 2014 that will enable us to rebalance our resources to drive greater innovation and collaboration in product development and greater efficiency and better sales execution.”

    For 2014, the company expects to earn between $2.35 and $2.43 per share. Wall Street had been expecting $2.53 per share, and the stock is down after-hours. However, I’m not sure if CA’s forecast includes the $150 million charge mentioned above. By my calculation, that’s 33 cents per share pre-tax.

  • The Battle at Ebix
    Posted by on May 7th, 2013 at 3:56 pm

    There’s an interesting battle going on at the company Ebix ($EBIX). Goldman Sachs recently offered to buy the company for $20 per share and the board said yes. Some shareholders are fighting back claiming the price is far too low. I have to agree. The price is too low.

    Even putting the valuation argument aside, there should be far greater pushback from investors on these types of mergers. I don’t believe the majority of acquisitions are to the benefit of shareholders (for either party). The Sprint-Dish merger seems to be an obvious mistake. With Ebix, they have to wait 45 days for a counter-offer. I doubt one will come. Who wants to piss off Goldman?

    The Ebix story gets more interesting because the company is being investigated the SEC due to “accounting issues.” Yeah, that’s not good.

    Interestingly, the first event that took down shares of Ebix was a posting at Seeking Alpha two years ago under the name Copperfield Research. Since then, it’s been one long headache for Ebix. There have been accusations and denials, and I can’t keep it straight.

    Sorry to sound conspiratorial, but this sounds like a good time for a board to sell out at any price. If Ebix is private, then who cares about their accounting, right? My assumption is that Goldman is a lot less dumb than they are evil.

  • Note to Some Intrepid Journalist
    Posted by on May 7th, 2013 at 2:58 pm

    It’s not exactly a secret that Janet Yellen will most likely become the next chairman (chairperson?) of the Federal Reserve. Yellen has a long and distinguished career which includes stints at the Fed, the Council of Economic Advisors and many years in academia, first at Harvard and later at Berkeley. She’s also married to George Akerlof, a Nobel Prize-winning economist.

    Here’s a listing of her articles and academic papers going back nearly forty years. It’s an impressive body of work. She was addressing the topic of long-term unemployment long before that became a topic of conservation among policy elites.

    There is, however, one paper that Yellen wrote that seems quite different from much of her other work. In 1996, she and Akerlof wrote, “An Analysis of Out-of-Wedlock Childbearing in the United States.” I believe that’s the only time she has addressed that subject in depth.

    Abstract:

    This paper relates the erosion of the custom of shotgun marriage to the legalization of abortion and the increased availability of contraception to unmarried women in the United States. The decline in shotgun marriage accounts for a significant fraction of the increase in out-of-wedlock first births. Several models illustrate the analogy between women who do not adopt either birth control or abortion and the hand-loom weavers, both victims of changing technology. Mechanisms causing female immiseration are modeled and historically described. This technology-shock hypothesis is an alternative to welfare and job-shortage theories of the feminization of poverty.

    At the time the paper was written, that was a hot topic. There was a lot of talk about the root causes of poverty and what to do about welfare. That year, Bill Clinton signed the Welfare Reform Act. Well, 1996 was a long time ago and now we know a lot more about effects of out-of-wedlock births.

    I haven’t read the paper, but I’m curious…were they right?

  • DirecTV Crushes Earnings
    Posted by on May 7th, 2013 at 9:58 am

    Excellent news today for DirecTV ($DTV). The company absolutely demolished its earnings report. For Q1, DTV earned $1.43 per share which was 33 cents better than Wall Street’s forecast. The earnings were higher than all 18 forecasts made by analysts on Wall Street. Revenues rose 7.6% to $7.58 billion which was $50 million better than estimates.

    Once again, Latin America was the key to DTV’s success. Subscriber count grew by 583,000 in that region and there are now 16 million subscribers in Latin America. They’re not doing so badly in North America either. DTV added 21,000 subscribers in the U.S.

    I’ve often highlighted DTV as a company that does share repurchases right. Last quarter, they bought back $1.38 billion worth of their shares. The stock closed yesterday at $57.96. It’s been as high as $61.50 this morning, which is a 6.1% gain. Right now, it’s hanging in at $60.36, which is a 4.1% gain.

  • Morning News: May 7, 2013
    Posted by on May 7th, 2013 at 6:44 am

    IMF’s Lagarde Urges All Euro Members To Push For Banking Union

    China Names Yuan Convertibility Plan as Goal This Year

    Senate Passes Online Sales Tax 69-27 But You Can Avoid It For Now

    King Coal Losing Crown as U.S. Gains Energy Independence

    HSBC Says Quarterly Profit Almost Doubles on Cost-Cutting

    Munich Re First-Quarter Profit Jumps Led by Reinsurance Revenue

    Facebook Still Worth Probably No More Than $25 A Share: Barron’s

    Commerzbank Posts Second Quarterly Loss on Staff Reductions

    Baidu Buys PPS Online Video Business to Contend With Youku Tudou

    YouTube Is Said to Plan a Subscription Option

    Facing Black Market, Pfizer Sells Viagra on Web

    DirecTV Spurns Dish’s View That Wireless Is Satellite-TV Savior

    Jeweler Agrees To Plead Guilty In KPMG Insider-Trading Case

    Edward Harrison: How Bond Market Vigilantes Force Rates Higher

    Cullen Roche: What’s Unique About Monetary Realism?

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  • The Strength of Consumer Stocks
    Posted by on May 6th, 2013 at 11:24 pm

    Here’s an interesting chart. This is the Morgan Stanley Consumer Index ($CMR) divided by the S&P 500.

    sc05072013

    The CMR is heavily defensive although it’s not an exact match for a defensive index. The consumer names have performed very well this year, although since April 19th, their relative performance has suffered a dramatic turn back. It’s unusual, but not unheard of, for defensive stocks to lead a rally. The post-election rally seems to have continued in stride with a quick change in leadership. The change occurred just after the big plunge in gold.