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Finance Executive Comp - a New Solution

The whole question of executive compensation, moral hazard, and agency conflict has been getting a lot of press, as well it should. Executives at a range of firms were (until recently) compensated with equity, which has limited risk and unlimited return. Equity return itself is generally premised on incremental increased earnings - if you made $1 this year, you better make $1.10 next, or we will bludgeon your share price into "value" territory. So all executives, since they were paid in restricted stock, were heavily incentivized to increase gross returns to the bottom line, even if the marginal returns for each dollar of activity was declining or in some cases negative. Example - your firm made $100mm of $1bn in sales. Pretty good. Suppose now you borrow Another $900mm to double sales - will earnings be $200? No. There are interest expenses, among others. But earnings will jump. This is a... Continue reading
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China Demographics: The New Timebomb

I was discussing Asian demographics last night with an old colleague, and the issue of NE Asian fertility (or lack thereof) arose. Japan is 1.2, and the looming "Gray Dawn" there will present serious challenges. However, Taiwan's rate is 1.1. So where does that put Taiwan? China is usually this elephant in the room, and their demography is no exception. China's fertility rate is currently 1.7, but the effect of the one-child policy, and the expected 70% increase in the burden of elderly on the workforce by 2040 is expected to place more downward pressure on this number. Could demography snuff out China's growth before it even gets started? Will the need for pharmaceuticals, nursing care, doctors, nurses, etc. so overwhelm China that it cannot focus on growth? A detailed article on Wikinvest spells out the consequences of the current situation. It is usually assumed that 80% of GDP growth comes... Continue reading
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What does it take to run (and possibly save) huge institutions? ....EGO

A PBS documentary about the Merrill- Bank of America merger. Its interesting, and dramatic, but the backdrop to it is.....ego. Thain - "I demand to get paid...and I want my buddies to get paid as well....or no deal...even though I have no leverage" Lewis - "I want to run the largest financial entity in the world" Thain was guilty of plain hubris. Lewis the same. We saw it with Citi and Sandy Weill. We saw it with Japanese banks in the 80s. We have seen it with various hedge funds. ....It will never end.... Continue reading
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Oil: The Calm before the Storm?

A story in The Economist last week outlined the current state of the oil industry: - Running out of storage capacity. If this is maxed out, fire sale prices on the spot market. - 4.5mm bpd of spare capacity (vs <1mm in '06) - Countries like Venezuela running out of cash. - Days reserves >60 vs an average of 50. So why think oil is going to run again? As they said in Econ 101 - Inelastic demand. If incremental demand picks up in BRIC countries, and there is a reasonable increase in demand from developed ones, then we are right back to where we started, and there is no end in sight. So how to play this? Master Limited Partnerships (MLPs). MLPs are companies formed for tax purposes whereby 90% of income is requried to be paid back to shareholders. Obviously the operating costs of these assets are fixed, so... Continue reading
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Funds of Funds to start buying closed HFs in 2ndary market

From a story about how some Funds of Funds are being formed to specifically bid for locked up Hedge Fund portfolios. This warms my cynical heart. The premise of a functioning capital market is there will be bids. The reasons for our current debacle relate in part to the lack of bids for what was AAA collateral in the form of CDOs, CLOs, RMBS etc. Now some prescient fiduciaries are raising money to bid on funds w/ long lockups, or that have otherwise halted redemptions. 15-20% discounts? than the closed end fund situation. This will persist. Who was buying Hedge Funds? Well.....people with either very poor memories, or those too young to remember what happens when asset markets turn into a self-liquidating tailspin. We might have staved off the collapse of banks, but they are all behaving now as if it were 1958, and everybody is Mr.  & Mrs. Jones,... Continue reading
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