May 28, 2014
- The $10 million men: Are CEOs really being rewarded for their performance?
- Back to basics: Chris Mayer on how to tell when a CEO will really deliver
- March of the activists: A staggering number that’s exploded 25-fold in two decades
- Cue the “Antichrist” emails: Guenthner on yesterday’s big gold drop
- The war on frequent-flier miles… headlines ripped from the pages of a novel… the upside of all those regulations… and more!
Well, their pay increases are staying ahead of the inflation rate.
That’s our cheeky interpretation of a survey that reveals median pay for the CEO of a large publicly traded company crossed the $10 million barrier last year — up 8.8%, to $10.5 million, according to The Associated Press.
Actually, that was one of two CEO-pay surveys that came out yesterday. The Wall Street Journal did the other. It finds median CEO pay rising 5.5%, to $11.4 million. Each study ran the numbers a little differently, so only five guys show up on both top 10 lists…
Uh… Notice there aren’t any bank CEOs on there? They used to dominate these lists, but they’ve been lying low since the Panic of 2008 and the bailouts. Heh…
“Companies have been happy with their CEOs’ performance, and the stock market has provided a big boost,” says Gary Hewitt, director of research at the corporate governance research firm GMI Ratings.
“Does executive pay correlate with stock performance?” asks our Chris Mayer.
Leave it to Chris to interject with an impertinent question. Party pooper…
“In other words, do companies pay their executives more when their stock price goes up and less when it goes down?”
The answer from the $14.5 billion-strong money manager ValueAct is no. “ValueAct is a famous activist investor,” says Chris. “Meaning it takes a position in a company and then tries to use that influence to change something about the company. One of the things it looks at it is how CEOs get paid.
“For most, how they get paid has little to do with shareholders. ValueAct did a study and found almost no correlation between CEO pay and shareholder return. When ValueAct gets involved in a company, this is something they try to fix.”
Example: Valeant Pharmaceuticals. Some years back, ValueAct forced CEO Michael Pearson to buy $5 million in stock. Then he had to perform: If he delivered less than a 15% shareholder return over the following three years, he’d be the worst paid CEO in the market. But if he delivered more than 40%, he’d be the best paid.
Pearson delivered an 85% return.
This morning, Valeant is strong enough to up its recent bid for Allergan, the maker of Botox.
“That’s the power of a good pay scheme,” says Chris. And it underscores the importance of the “O” in the CODE criteria he uses when screening stocks.
“O” stands for owner-operators. You want executives and directors with skin in the game, meaning a fat ownership stake. They prosper only if you prosper. No “hired gun” CEOs for Chris, thank you.
The ultimate in owner-operators for Chris is the late Ken Peak. He launched Contango Oil & Gas in 1999 at age 54. “Peak invested his life savings of $400,000 and raised $5 million in seed capital,” says Chris. “Peak paid himself a modest salary — only $150,000 from 1999-2009. When he got a bonus, he used it to buy stock. He owned 19% of the company.
“The stock went from a split-adjusted 20 cents in 1999 to $45 per share in 2010. That turned every $1,000 invested into $225,000!”
Peak prospered because his shareholders prospered… and some of them along the way were Chris’ readers, we hasten to add.
[Ed. note: Chris recently made a notable exception to the “O” criteria. The opportunity is simply too good to pass up… and it emerged from the rubble of the 2008 crisis. You can multiply your returns fivefold… while reducing the amount of money you put at risk by up to 80%.
“For every $18 you invest,” says Chris, “it could give you back $94.” He reveals the secret behind “Executive Dividends” when you follow this link.]
The major U.S. stock indexes are in the red this morning. The S&P is taking the smallest hit as we write, down four points from yesterday’s record close, to 1,907.
Small caps are once again leading the way down, the Russell 2000 off more than a half percent, to 1,135.
Hot money is flowing from stocks into bonds. A rally in Treasuries has sent the yield on a 10-year note down to 2.46% this morning — the lowest so far this year.
“What an astounding figure,” says our microcap specialist Thompson Clark, returning our attention to activist investing.
Thompson was recently in attendance for a panel discussion about activist investing at the New York Society of Security Analysts. “One interesting data point came from Paul Hilal of Pershing Square Capital. Pershing has been an activist investor throughout its entire existence. They’ve ridden the wave of increased shareholder activism that really shows no signs of stopping. You might be more familiar with Hilal’s more famous partner — Bill Ackman.
“Paul cited the number of 13-D filings over time. These are made by large investors with the SEC if they plan to engage in conversation with management. The number of 13-D filings over time is a good indicator of activist growth.
“In 1994, there were just 12 13-D filings. In the whole year.
“According to Paul, in 2014 alone, there have been over 300.”
Thompson is eyeing a sleepy company where an activist hedge fund is set to shake up the board and the executive suite at a shareholder meeting three weeks from now. “After doing a lot of digging, I think the activists will win the fight. The potential upside they cite is huge — over 100%.”
For access to all of Thompson’s high-potential recommendations, look here.
Like a bug that’s already been stomped, gold is getting ground into the pavement for good measure today.
After tumbling $30 yesterday, the Midas metal is down another $6, to $1,256. Recall Greg Guenthner of our trading desk said recently $1,280 was the red line — below that, a serious breakdown was in view.
“I suspect the yellow metal will make a move toward its December lows near $1,200 in short order,” Greg writes in this morning’s Rude Awakening. “Price action is nasty — so steer clear of gold and gold miners. Don’t expect this sharp drop to recover anytime soon.”
Hmmm… Might we expect a new round of “Antichrist” emails?
Look out: The IRS might be changing its tune on frequent-flier miles.
In 2002, the IRS declared it wouldn’t pursue you for income taxes on frequent-flyer miles or hotel loyalty points earned on company-paid business trips.
But the tax treatment for the airlines and hotels might be about to change. “Currently,” explains the Tax Foundation’s Joseph Henchman, “airline and hotel companies award miles and points to their customers and record it on their books as a liability. Tax is not due until the transaction is finalized when the customer redeems them (or the points expire).”
Now comes word the IRS is considering “changes to loyalty program accounting methods” during 2014. The details are fuzzy, but the travel industry’s trade associations are worried enough to send a letter to Treasury Secretary Jacob Lew.
“Frequent-flier mile fanatics got a wake-up call on the issue back in 2012,” Reason’s Ira Stoll reminds us, “when Citibank sent IRS Forms 1099, documenting ‘miscellaneous income,’ at a rate of 2.5 cents a mile, to customers who had signed up for an American Airlines-branded credit card and gotten 40,000 AAdvantage miles as a bonus. It was an unpleasant surprise to cardholders who thought they were getting a free trip, not an unwanted extra tax bill.”
Stoll suggests envy might be one factor behind any coming changes: “Government ethics rules dictate that frequent-flier miles racked up by government employees flying on government business are government property, so the pleasure of a point-based vacation is unknown to many bureaucrats.”
“I swear I almost thought your item about the potential conflicts in the South China Sea,” a reader writes, “was taken directly from a novel by Larry Bond published in May 2013 titled Shattered Trident.
“If you haven’t read the book, you need to. I would almost bet Larry Bond is a ghost name for Dave Gonigam because he is so closely aligned to your comments and concerns.
“As a retired 30-year naval officer, when I read Shattered Trident, I could actually envision much of the details of the book actually happening. Now you have convinced me they will. Both of you consider the weakened state of the United States under the current administration as an opportunity for China to ‘fill the vacuum,’ with no ‘willing’ (capable) adversary to stabilize the area.
“Our national security plan to shift to the Pacific Rim is hollow with the current weakened state of our military and, even more importantly, the economic crisis this administration has exacerbated — or should I say accelerated — to weaken the nation even more.
“I am confident the events in the South China Sea are going to be a huge player in our economy in near future.”
The 5: Credit where it’s due: Our own Navy veteran Byron King is the prime source of any insights we shared yesterday about the state of play in the South China Sea.
Glancing at the novel’s synopsis on Amazon, we see it starts with the Chinese torpedoing a Vietnamese merchant ship. Then it spirals into a huge war because everyone gets tripped up by their entangling alliances.
Gee, isn’t that how World War I began 100 years ago?
“As a major airline captain,” a reader writes on the subject of armed federal agents, “I get a list of every law enforcement officer who is armed on my flight.
“It is amazing to see all the agencies carrying weapons, to include: the Forest Service, Post Office, Air Force OSI, FBI, Secret Service, Agriculture Department, DEA, ICE, Treasury, IRS, Commerce, Marshals, Air Marshals, BIA, BATF and every other ABC department.
“My personal favorite is Social Security — they need weapons to corral those pesky seniors.”
“I said it before, and I’ll repeat,” a reader writes on the subject of GDP: “Every dollar the government spends — much of it to restrict and control the private sector — is taken from the private sector in the form of taxes, fees and IOUs that will someday need to be repaid, even if in what amounts to counterfeit money.
“Why, then, is government expenditure considered to be a plus in GDP, instead of a liability? It seems to make no sense.”
“So people are griping about regulation costs to the American people of $1.8 trillion,” a reader follows up from yesterday’s episode.
“I fail to see a reason for anguish. Imagine if, poof, the government removed all regulations and that amount was suddenly released into an unshackled economy. Can you say HYPERINFLATION? The tidal wave of freed-up incomes would drive prices into the stratosphere! The government is regulating us for our good. We should be grateful for each and every maladroit intrusion into our economy.”
The 5: That’s surely the best satire that’s hit our inbox in months — bravo!
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Our airline captain reader above forgot to include the FDA in his laundry list of agencies with armed law enforcement officers.
Two years ago, Sen. Rand Paul (R-KY) proposed an amendment that would have forbidden FDA agents from carrying guns and raiding farms without warrants.
It went down in flames, 78-15.
Seriously, what is the FDA so afraid of that it needs armed agents carrying out its orders? And why do 78 senators share in the FDA’s paranoia?
We can’t prove it… but we suspect you’ll find part of the answer at this link.