3/10/08…the three chirpers
March 10, 2008
TB’s Quote of the Day: “The best lack all conviction, while the worst are full of passionate intensity. Surely some revelation is at hand.” - William Butler Yeats. Thanks to Steven Sears in Barron’s for bringing the quote to TB’s attention. Particularly true when Gene Epstein in the same issue titled his column “Even Money on Recession.” Now that is sticking your neck out, right folks? I’d take that bet though, TB
TB is sure you have all heard of The Three Tenors (Pavorotti, Carreras, and Domingo). Well, on Friday we were treated to three chirping CEO’s (Prince, O’Neal and Mozilo) on CNBC…there is likely to be much more chirping from the latter as the FBI is now taking on the investigation into fraud…that would be securities fraud since top execs of Countrywide apparently knew the default rate on the mortgages they created would be much higher than disclosed. Think of how sweeping a statement that is since the holders of those loans once securitized can also sue for securities fraud and you can bet the cash registers (archaic) are starting to ring at law firms all over the country.
TB has been highly critical of CNBC as a source of financial news and especially its coverage of non-relevant events in times of market stress (but is that any different than our three candidates for President who would rather talk about anything else but the economy?…or the big Sunday talk shows who have only discussed the economy in passing over the past three weeks seeing campaign strategy as being of much more interest to the average American. As for CNBC and its diehard permabull, Kudlow, on two days when the market was down about 200 points they devoted about an hour to the NY Giants victory parade and the Roger Clemens testimony on use of steroids…both human interest stories but not related to the markets. Perhaps it was a service that they did that as they seem to have nothing of import to add despite parading portfolio manager after portfolio manager before you to tell you how to invest your money safely…just do as we did…please…as we are fully invested!
But Friday was unique and riveted TB to it even as the market was again down more than 200 points. You had two ousted CEO’s and one founder of a foundering company, each flanked by the chairman of their compensation committee in a truly revealing situation.
First came Citi’s Chuck Prince…a prince of a fellow…you could almost hear the strains of Someday My Prince Will Come in the background. He was candid and while he said that he had no knowledge of the problems he accepted full responsibility as it happened on his watch. TB tends to accept that since even former Treasury Secretary and then director of Citi, Robert Rubin, said he didn’t understand all those subprime derivatives. But then he blundered as he pointed to his success running the company since 2001…Oh Chuck, please, you took over the reins from Sandy Weill and to TB’s mind the die was already cast. Those great earnings in 2005-07 were largely due those securities you didn’t understand or have knowledge of…but to be fair if you are to be held accountable you should also get the accolades. What he ignores is all the name changes for Smith Barney and other affiliates, and not one but two reorganizations announced at the end of 2006 and early 2007…CEO’s love one time charges! Then the head of his compensation company, former AOL CEO Parsons spoke boilerplate.
Next up, Merrill’s Stan O’Neal to the strains of “My Way.” His bio ranged from being raised by parents who could barely afford rent to buying and eventually paying off their home (how many baby boomers can say they did that?), and he worked on GM’s assembly line while working his way thru college, eventually working as an analyst for them before moving on to Merrill. He talked of the hardships of running Merrill in the wake of 9/11 with them taking space in whatever buildings they could find. He also talked about Merrill’s policy of requiring execs to invest at least 15% of their compensation in the company so their interests were aligned with the shareholders…sort of like in a partnership but a corporation is a far cry from a partnership when it comes to aligning interests. He too, was credible pointing out the fact that in spite of the recent stock weakness the price is still above where it was following 9/11…surprisingly +20% since then…32% with reinvested dividends. More boilerplate from the head of his compensation committee.
Then to “That’s Life,” came Angelo Mozilo…although TB could hear the Godfather theme in the background. He talked about being the son of immigrants and clawing his way up. How he founded Countrywide 40 years ago to help people afford to buy a home. TB was wiping away the tears. Then his head of the compensation committee provided more glowing words and boilerplate.
All was good until a black woman, a representative from Washington D.C. started asking questions. Like Columbo, she kept mispronouncing names and words, and just as they were relaxed at this buffoon she let them have it with both barrels, asking why Mozilo up the rate of his stock sales (diversifying his assets ahead of retirement), and then questioning his selling stock as the company was doing a stock buyback (coincidental and he would never harm shareholders). The head of the compensation committee said that he had notified the board and they had no problems with his plan. As for the stock buybacks they had analyzed all options and decided this was in the best interests of the shareholders…just as Cinderella’s stepmother was trying to do what was best for her. By now, TB was on the edge of his chair as he is vehemently opposed to buybacks vs. dividends and what better proof of this is there than Countrywide? Will all shareholders please stand up and applaud this team for looking after their best interests…OK, now sit back down, because here is the best part: she then asked why the board retained Towers, Perrin to do a compensation study and then hired another firm do it over again? Ah, this is the meat of it. He said they could not reach agreement with the founder (Mozilo), so they advised him to ’hire’ an attorney and a compensation consultant of his own. That sounds sensible, or was until her next question: who paid for it? Quietly, “the company” (read the shareholders…this is a page right out of Steven Ross’ playback when he was running Warner Communications the company that ‘merged’ with Time Inc. and to TB’s way of thinking destroyed the company…ask Mr. Parsons of the problem AOL unit. She then asked the other compensation committee heads if they would have allowed their CEO’s to accelerate their sales of stock, especially during a stock buyback period…wow, that was fun as they were caught off guard and pretty much speechless as no one wanted to cast the first stone.
One important note: the GOP’er’s questions were almost apologetic that these poor men must be subjected to this while the Dem’s played the bad cop role. But TB wants you to remember that the reason we got stock options as the principal compensation was due to Dem furor over CEO salaries! Now they want to fix it…again! One topic that came up was over the comment one of them made that you have a choice as a shareholder: if you don’t like management you can always sell your stock. Is this what the market is? Another of the compensation committee heads said that they have shareholder resolutions so their interests can be considered. The history of these is pathetic…in most cases when they are passed management chooses to ignore them. The last point on this is what is in the best interests of a shareholder? Time was when those interests were closely aligned…when people bought and hold. The last TB saw was that the average holding period for a stock is about 11 months. If that is the case, and TB believes it is even shorter now, how can the board say that a stock buyback is in the best interests of investors? Furthermore, they do not retire the stock in most instances and most of it ends up right back in the market thru…stock options. Also, dividends are measured on a per share basis and those are not usually increased by the percentage of the stock buyback if at all, so the company actually pays out less in dividends in terms of dollars. If you still think buybacks make sense…especially in the case of Fannie Mae, Freddie Mac AND Countrywide where they borrowed the money to buy back the stock this makes no sense…be sure to read the cover article on Fannie Mae in Barron’s…which also applies to Freddie Mac in TB’s opinion.
So what we have here is contempt of shareholder…not all shareholders as the short term hedge fund buyers were rewarded by the buybacks. This was a sad revelation into how your money is managed by companies. Over the weekend, we also heard a lot of bad hedge fund news. Margin requirements are being raised (TB believes they started shortly before the February mid-year for those big four brokers triggering the selloff which they normally would allow to happen). TB feels that a year from now the number of hedge funds decimated with only the most successful ones surviving…but that can be misleading too as due to their volatility should you invest in a successful fund that might now be destined to take a big hit? Amaranth and Peloton stand out. TB feels that many grew so fast that their internal controls on risk are inadequate. Take that commodities fund that had no limits on the size of trades a trader was doing and was only looking in aggregate…that is inexcusable…especially in commodities!
A sign of heightened concerns over the market to TB is the number of emails he received from readers over the weekend…which is normally none…and the articles forwarded, all of which TB read, along with hundreds of pages of articles and Barron’s from cover to cover. It was enlightening but not fun and will spend the rest of the week trying to sort it all out and include in commentaries. Thank you all.
What does it say about a country that in selecting a president in a race that is essentially a dead heat (they are all within 3% of one another, which is the margin of error), between the two Dems AND McCain, the voters say their biggest concerns are healthcare and the economy and we get nothing of substance from them on the latter? Global financial institutions are in the worst condition since the Great Depression, and credit has been abused, as has homeowners equity which fell to 47.5%, the lowest since 1945 when all those zero down FHA/VA loans were being made to stimulate the economy. This will not be an election won by the top 1/10 of one percent or even the top 1-2% of incomes. That is both a blessing and a curse. While TB feels that the Bush tax cuts should have been reversed several years ago he cannot endorse the Dems plan to raise them now, inequities aside. That would only worsen the situation…but such is the legacy of supply side economics which has trickled down on America for the past 25 years in a classic display of smoke and mirrors. The road back will be bumpy at best and watch out for those hidden sinkholes which could easily swallow us up. It’s scary…but interesting!
The revelation that Fidelity Funds accepted gifts and travel from brokers should not come as a shock, not in an industry that paid higher than necessary commissions to do soft dollar business so that you the shareholder paid for their Bloomberg’s etc. That plus the industry’s 12b(1) fees to brokers (American Century on some of its funds eliminated the 12(b)1 fees and just added them to their own!), or the use of ETF’s for indexes in some of the high fee index funds…in one case charging 100 basis points plus the 20bps on the QQQQ’s makes a total of 120bp’s…for the Nasdaq index? But what was disappointing was that wizard Peter Lynch was implicated in the gifts and travel investigation. This is truly sad. No wonder ETF’s have become so popular…TB will be discussing this phenomenon and the theory of ‘defensive’ stocks tomorrow.
Have a great day!
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC March 10, 2008
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