A new age for Wall Street... Carlyle Group hates you... A rough 2011 for Einhorn... What makes white white... A great interview with Richard Maybury...
The age-old argument for Wall Street compensation, at least since 2008, is, "If you don't pay your talent top dollar, they'll leave." Before the subprime crisis, nobody cared how much money bankers made. Now, huge bonuses are a PR nightmare... In addition to cutting holiday parties and urging employees to be discreet with personal spending, Wall Street is now shutting off the top. Bonuses were down around 20% last year. Of course, it's still a huge sum of money... And banks still pay out nearly 50% of revenue in compensation.
This week, Morgan Stanley announced it was capping cash bonuses for 2011 at $125,000. The firm's top executives, including CEO James Gorman, received zero cash. The bank will also defer an average of 75% of the payouts, up from 40% two years earlier. The New York Times published a story last week about the permanent impairment of Wall Street compensation, titled "The Dawn of Lower Pay on Wall St." It discussed Morgan Stanley's new compensation. It also noted how the weak economy means firms no longer having to worry about employees leaving after a disappointing bonus.
Wall Street ebbs and flows with the economy like every other industry. But to say its days of egregious compensation are over is ridiculous. Once the economy rips again, bonuses will be back up. And that's all Morgan Stanley is betting on... By deferring compensation, the bank can spread the costs over years. And as revenue picks up, the costs are more hidden. Plus, the bank is only capping "cash" bonuses. The majority of most bankers' pay is in stock, anyway. It's a nice PR move, but that's pretty much all it is.
One way to get shareholders off your back about compensation... Strip them of any say. That's what private-equity giant Carlyle Group will do when it goes public in the near future. The firm's new shareholders will not be able to vote to elect directors. Instead, its three founders will control the firm. Carlyle will not appoint a committee of independent directors to supervise executive pay, as is the norm for most public companies. Nor will Carlyle hold annual meetings for stockholders.
And if the public owns less than 10% of the company, Carlyle can buy all the shares back. According to its initial public offering registration statement, "A holder of common units may have his common units purchased at an undesirable time or price." And to top things off, the firm has no fiduciary duty to shareholders.
Longtime readers may recall what we wrote when another private-equity giant, Blackstone Group, went public in 2007...
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Chief Executive Stephen Schwarzman and his partner Peter Peterson started this company in 1985 with $400,000. They've worked hard for 22 years. And they're no dummies. They've seen a top in the credit markets before... and this time they're cashing out – S&A Digest, June 13, 2007 |
Blackstone went public at $35 a share. Shares trade for less than $16 today (and dropped as low as $4 in 2009). The Carlyle situation is no different (except that its shareholders will be even worse off than Blackstone's).
Greenlight Capital, the multibillion-dollar hedge fund run by David Einhorn, recently released its annual shareholders letter. Greenlight, like most other hedge funds, had a rough 2011. The firm's flagship fund returned 2.9%. Einhorn's biggest winner was his short of First Solar, which fell from $130.14 to $33.76. He said it was "one of the most profitable shorts in the history of the Partnerships." Impressive, considering he's the guy who called Lehman Brothers' collapse.
Shameless plug: Stansberry's Investment Advisory readers also made a fortune shorting First Solar, which Porter first started writing about in early 2008.
Einhorn also made money buying credit default swaps (insurance that pays out in case of default) on European sovereign debt. Einhorn remains bearish on Europe and expects more losses on sovereign debt. He's also worried about Asia. He wrote...
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On the other hand, Asia appears to be in much worse shape than it was at this time last year and could be a drag on the world economy going forward. Very few people trust any of the economic data coming out of China, making it difficult to gauge the situation there. Some of the smartest people we know have very dim views. The Chinese have been a leading growth engine for the last two decades and are largely credited with leading the world out of the recession in 2009. A change in their economic circumstances could really upend things |
Overall, Einhorn is still bullish. He said he's more net long equities than he's been "in some time." He owns "cheap stocks of good businesses, largely in the United States." In other words, Einhorn's buying Dan Ferris' World Dominators...
As the name implies, World Dominators are the best companies in the world. They're able to raise their prices to compete with inflation. And they relentlessly increase their dividends. Buying and holding these companies is one of the best and easiest ways to get wealthy. And we think the World Dominators will rally this year as more people seek exposure to equities and healthy yields.
Dan currently has four World Dominators trading for less than their buy-up-to-prices in the Extreme Value portfolio – including one of Einhorn's favorite stocks. To find out more about Extreme Value and access this list of World Dominators, click here.
Einhorn still owns a lot of gold and gold-mining stocks. His largest positions (in descending order) are Apple, General Motors, gold, Market Vectors Gold Miners, and Microsoft. In the latest issue of Stansberry's Investment Advisory, Porter recommended his favorite way to play gold this year. It's part of his five-step strategy for protecting your portfolio against the dollar's demise... To learn more about Porter's service and his five-step portfolio protection plan, click here.
As I write, I'm sitting in St. Maarten with New York hedge-fund manager Austin Root. His firm North Oak Capital invests long and short across all capital structures.
Root's firm was seeded by the legendary Julian Robertson of Tiger Management... Hedge-fund managers like Root, with whom Robertson invests, are called "Tiger Cubs." And they're usually great at their jobs... Chase Coleman earned 45% last year... making his fund, Tiger Global, the top-performing hedge fund of 2011. I asked Root for his opinions on the market today...
He said his biggest positions are in what he calls "safe cyclicals." They're companies that are perceived to be cyclical, but they have excellent supply/demand dynamics and pricing power. For example, he's bullish on titanium dioxide (TiO2). It's the pigment that makes paint and coatings white...
Root said the supply/demand for TiO2 is tight right now... Every producer is sold out. And no new supplies are coming in. Five companies control the world's high-quality TiO2 production. Chemical giant DuPont is the leader. The product is made at 1,000-acre, $1 billion plants. The technology needed to produce TiO2 is closely protected and difficult to reproduce. (China does produce it, but it's low-quality.) Plus, it takes five years to build one of these plants... And that's after getting government clearance, which is difficult.
All of this leads to the TiO2 producers receiving premium prices for their products. Root's favorite stocks in the sector are Tronox and Kronos. They're the two "pure plays." He says, "So long as the world doesn't collapse, you're gonna make great money."
After my chat with Austin, I checked out Bloomberg... One of the top headlines on the website was "DuPont Profit Tops Estimates on Paint Pigments." Higher prices for TiO2 offset falling sales in other DuPont businesses... It was the $45 billion company's best-performing product.
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New highs (as of 01/23/2012): Pretium Resources (PVG.TO), Westport Innovations (WPRT), BLADEX (BLX), Intel (INTC), and Microsoft (MSFT).
Lots of blowback from Ron's e-mail yesterday. As always, send your comments to feedback@stansberryresearch.com.
"I am an Alliance member and subscribe to several other newsletters (Oxford Club, Chris Weber, Gary North and others) and I appreciate the fact that you put together a summary of the newsletters under your control and give an objective review of their success or lack there of during the past year. I have not heard of anyone else doing this.
"At 65 and retired I have to be careful how I invest my money. I believe in the Casey statement of 1/3, 1/3, 1/3 and I try to live close to those guidelines. I keep several WDDG's in the portfolio and I keep several of Mike Williams' recommendations also.
"I have recently (with great caution) started selling PUTs on selected stocks I would not mind owning if they were PUT and am happy with the cash infusion they bring along every couple of months. So far , so good!
"I pay careful attention to Mike Williams and Doc's articles as they offer 'clear and practical' support to someone in my age bracket but I also am learning to work with options as Porter has suggested and I really like the Jeff Clark video's for teaching others how to understand and work with options.
"The Alliance memberships is well worth the money from my viewpoint." – Paid-up subscriber Jim Marshall
"'Socialism saved your white ass,' Where do you find these morons?? I do like Dan's response; I just can't believe you have subscribers this stupid. Amazing. It is entertaining however." – Paid-up subscriber Craig.
"You really cannot reply to someone like this, but one thing about 'liberals' I have noticed over the past 30 or so years, as their huge spending programs have driven us ever deeper into debt, and have not improved the 'poverty' figures, is that, as this fact becomes more apparent to the average American, they will not argue logic or results. They can only resort to name calling and personal attacks ('your lily-white ass') is an example.
"He is not capable of coming to terms with Greece, etc., etc., and yes, even the USSR. But maybe, in a sane moment, he can grasp the reason why the Euro is falling in relation to the dollar? I've given him a clue. Bless his little heart." – Paid-up subscriber Frank Ellis
Regards,
Sean Goldsmith
Philipsburg, St. Maarten
January 24, 2012