According to a new study by Harvard University, Lehman Brothers Holdings Inc. and Bear Stearns Cos. executives made US$2.5 billion from 2000 to 2008, a sign pay polices may have encouraged risk-taking that doomed the companies.

 

The top five officials at Lehman, which filed for bankruptcy in September 2008, received US$1.03 billion in cash bonuses and proceeds from equity sales during the period, according to the report, The Wages of Failure, released yesterday by Harvard Law School’s Program on Corporate Governance. Bear Stearns’ top executives made US$1.46 billion in the years before JPMorgan Chase & Co. agreed to buy the firm in 2008.

 

Losses the executives suffered when the firms failed were outweighed by payouts in the preceding eight years, the study said.

 

Source: Bloomberg

 

 

Bank of America Merrill Lynch sees better profits ahead and more upside in U.S. stocks over the next twelve months.

 

David Bianco, head of U.S. equity strategy at BoAML, raised his 12-month S&P 500 target to 1275 from 1200, after raising his 2010 normalized EPS estimate to $79 from $76.

 

He said the financials, energy and technology sectors, all almost equally responsible for almost the entire EPS raise.  

 

“We remain over-weight all three of these sectors and expect strong appreciation. Excluding Financials & Energy, we forecast 2010 EPS up 12% and 2011 up 8%,” he said in a note to clients.  

 

Over the next month or so, Mr. Bianco expects the S&P 500 will continue to advance and hit 1100 by the end of this year. 

 

“S&P at 1100 would be trading at 15.5x 4Q09 annualized EPS of about $70, which given current 10yr Treasury bond yields is very undemanding,” he wrote.

 

Source: Financial Post

 

The Financial Times reported today that  Microsoft Corp. and News Corp. have held early talks about a plan that would see the latter being paid to ‘de-index’ its news Web sites from Google. Apparently the impetus for the discussions came from News Corp., but a person familiar with the situation said Microsoft has also approached other online publishers about removing their sites from Google’s search engine.

 

Microsoft’s advances puts significant pressure on Google to start paying for content, which could bring down its share of the search engine market. In the battle for online dominance, Microsoft may come out victorious if the new name of the game is based on purchasing the best content – Microsoft is currently sitting on over $35 billion in cash while Google has ‘only’ $20 billion.

 

Good time to be an online publisher…

 

 

From Reuters…

 

U.S. chocolate maker Hershey Co is considering launching a bid of at least $17 billion for British chocolatier Cadbury Plc as it seeks to trump a hostile offer by Kraft Foods Inc, a source familiar with the matter said on Friday.

 

Hershey has lined up deal funding from Bank of America and JP Morgan Chase & Co to make a solo offer for Cadbury, but is also still weighing a joint bid with Italy’s Ferrero Spa, the source said.

 

The interest from Hershey could add new pressure on Kraft to sweeten its $16.5 billion offer, which Cadbury rejected last week as derisory.

 

“It’s still very fluid and there are multiple prongs to this,” the source told Reuters on condition of anonymity. “It’s still very early. But they need at least $17 billion to top Kraft.”

 

Citing people familiar with the matter, the Wall Street Journal reported on Friday afternoon that the impetus for the Hershey bid comes from the charitable trust controlling the company.

 

The trust is pushing Hershey Chief Executive David West to compete with Kraft’s offer, but wants to structure a deal so that it remains in charge of Hershey, the report said.

 

Officials for the Hershey Trust were not immediately available for comment. Hershey, Kraft and Cadbury declined to comment.

 

A solo Hershey bid would be the most transformative move the company has made in its 100-year history. The company’s market capitalization stands at $8.3 billion, while Cadbury is valued at $18.1 billion.

 

“Given that they generate 85 percent of their sales form the domestic market, gaining access to Cadbury’s platform would be highly advantageous,” said Erin Swanson, analyst at Morningstar, noting Cadbury’s presence in emerging markets.

 

She added that Hershey would be able to expand its candy and gum business. But a deal would mainly aim to capture new growth as there is little overlap between the companies’ businesses and therefore slim opportunity for cost savings.

 

THE BID

 

Hershey’s offer could include at least $10 billion in cash from Hershey and $2 billion in new Hershey shares, plus $3 billion to $5 billion from outside investors in exchange for equity in Hershey, according to the Journal.

 

That would trump the $6.74 billion in cash indicated in Kraft’s cash and stock offer for Cadbury, though Kraft has secured $9.2 billion in financing and could raise the cash component of its offer.

 

The Young Raging Bull’s Take

While Cadbury would complement Hershey’s existing business better than Kraft’s, it would undoubtedly be a risky venture that could put the chocolatier in a precarious financial position after all is said and done. This is largely due to the fact that Cadbury is more than twice the size of Hershey! Although sources have cited Hershey would use equity for the deal, I still think it’s going to put too much of a financial strain on them – harming shareholders in the process.

 

Hershey should just let Kraft have them…if history has shown us anything, it’s that most major mergers and acquisitions don’t work – meaning there’s a good chance Kraft will screw it all up in the end, benefiting Hershey’s business in the process.

 

Just my two cents.

 

The Financial Post ran this a few days ago and I meant to get it up, but didn’t have a chance. Nevertheless, here it is now! It appears the advent of extremely low interest rates and lack of new supply is spurring another housing bubble in Canada…

 

The Canadian housing market may look like a bubble, but low interest rates, a relative shortage of new supply and mortgage innovation should keep it going for some time to come.

 

Instead of looking at affordability calculations or house prices on their own, it is far more telling to see how the value of housing assets compares to various benchmarks. Economists at Scotia Capital suggests a price-to-earnings proxy that involves comparing prices to rent, where rent is the equivalent income stream to housing as corporate earnings are to equities. This compares the choice of owning versus renting.

 

This metric is at an all-time high, as is the proportion of renovation spending as a share of income. Meanwhile, the fraction of unoccupied and/or unsold condos is at levels seen in the early 1990s.

 

Much of this may be explained by the relative absence of new product coming to the market in the bellwether single homes segment, according to Scotia. In fact, total housing starts are well off their mid-200,000 peak from 2007-2008 with the latest annualized reading at just 157,000.

 

“That relative shortfall of new product has partly fed frothy activity in the resale segment,” the economists said, adding that Canada remains off-cycle compared to most other major markets in terms of mortgage innovation. New products like longer amortized mortgages, insured investor mortgages, and little-down mortgages only came to market in the past two or three years after mortgage insurance restrictions were liberalized.

 

“Now that last Fall’s pent-up demand has been released, the three forces of low interest rates, transferring future sales to the present via mortgage innovation, and modest new supply can keep Canadian housing markets humming for some time yet before the eventuality of a softer market on rising rates in a future relative demand vacuum set in.”

 

Despite the economic downturn, housing is still doing relatively well – or picked up at least. From personal observations, an increasing number of houses in my area of Toronto are being sold and some for prices that leave a look of bewilderment on your face. According to the Toronto Real Estate Board, existing home sales in the city in the first half of November were up by 84% compared with the same time last year and average home prices have surged 10% to $415,066. And it’s not just Toronto, but all across Canada. In fact, the strength in the market has prompted the Canadian Real Estate Association to upgrade its forecasts: home sales nationally are expected to rise by 6.2% by the end of the year, which is a significant jump from previous forecasts which predicted flat sales. Sales are also expected to increase by 7% in 2010, up from an earlier forecast of 5.2%.

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Bubble? I wouldn’t discount the possibility, unless we begin to see interest rates rise.

 

Billionaire investor extraordinaire Warren Buffett, on his tour of NY, told an audience of Columbia University students last night that the worst of the financial global crisis is over. Moreover, he said that stocks have bottomed out and look pretty decent. His advice was not to pass on something attractive today – a suggestion which has undoubtedly helped Buffet amass his fortune over the years.

 

Buffett was also joined by Bill Gates, who agreed with his optimistic sentiments.

 

The Dow Jones industrial average stormed to its highest level in more than a year during today’s trading session…

 

 

 

I recently began rereading one of my all time favorite investment books – Full of Bull by Stephen T. McClellan. McClellan’s a national best-selling author, writer and former Wall Street investment analyst with over 32 years of experience covering high-tech stocks. Full of Bull was his most recent book, where he outlines the ins and outs of Wall Street and provides strategies and tactics for investors. The main premise of the book, as stipulated by the subtitle, is “Do what Wall Street does, not what it says, to make money in the market.” And he certainly shows you how.

 

In Chapter 3, “Strategies in Quest of the Ideal Investment,” he offers several investment axioms adapted from his 1984 best seller Shakeout that protects investors from the snares and pitfalls lurking behind every corner.  As far as I’m concerned, they are time-tested and true and definitely worth reviewing…

 

1. It never rains bad news, it pours
2.  The first drop in profits is never the last
3.  When insiders sell, you should too
4.  Beware of stock price fixation
5.  The bigger their egos, the harder they fall
6. Turnarounds are usually too little, too late
7. If you read it in the morning paper, it’s too late
8. When management says things are bad, assume they are terrible
9. If you don’t understand a company’s business, management may not either, and the more likely a screw up will happen down the road
10. New digs are a bad sign

 

 

Interesting piece from the CBC…

 

Canadians who watched smugly as American regulators cracked down on big executive bonuses, thinking that we do better here, may have to think again.

 

A recent study suggests 12 of the companies in Canada’s TSX 60 index have corporate governance issues that make them a serious risk to investors. Another 10 companies are called a moderate risk.

 

The study was done by The Corporate Library, a Portland, Maine,-based firm that rates the risks of investing in 3,300 North American companies and for a fee provides its findings to big investors such as pension and mutual funds.

 

The 60 companies in the index are big, blue-chip firms, banks and resource companies predominate, that represent 73 per cent of the value of all shares traded in Canada. That means the chances are good that many Canadians hold some of them directly or through their pension or mutual funds.

 

Corporate governance refers to the policies and procedures followed by those who sit on corporate boards of directors and who are supposed to hold executives’ feet to the fire in order to protect the interests of shareholders.

 

The study looked at everything from compensation to how independent directors were from executives. It found several cases where compensation policies did not align the interests of executives with those of the shareholders. One example: discretionary bonuses, those paid even when the company didn’t reach performance targets.

 

“That is something that we picked up in a number of the TSX 60 companies,” Kimberly Gladman, director of research and ratings, told CBC News. She wouldn’t disclose which 22 companies raised warning flags. Someone would have to pay her firm $850 US to find that out.

 

Companies paid more discretionary bonuses than usual last year as the downturn cut into company performance, Gladman said.

 

She found directors gave reasons that amounted to “‘because you’re such a great person, you did such a good job, or you really made a good effort,’” even though the company didn’t make its profit targets.

 

The Corporate Library would prefer to see bonuses tied to several measures of performance such as minimum profit or revenue and that are only paid if the goals are met.

 

“We don’t think that good governance necessarily makes you money, but bad governance costs you money,” said Gladman, who comes from a background in the socially-responsible-investment industry. That means funds that try to achieve both high financial returns and social good.

 

The Corporate Library has even hired an outside firm to measure that. That firm found that investing in the companies in an American index the Russell 1000 minus those the Corporate Library identified as having poor governance, would have earned a 2.5 per cent higher return in each of the five years from 2003 to 2007.

 

American regulators have been focused on executive compensation as never before, scrutinizing thousands of financial institutions on how much they pay their managers. Federal Reserve chairman Ben Bernanke has blamed excessive bonuses for encouraging risk-taking behavior that led to the financial crisis.

 

Here the concern is not with bonuses encouraging risky behavior, but rather those unrelated to performance of any kind, or “pay for pulse.” Those are bonuses that kick in on a certain date, regardless of performance, and which executives collect if they just hang long enough.

 

Beth Hamilton-Keen, senior portfolio manager at Calgary-based Mawer Investment Management Ltd., disagreed that corporate governance policies alone say much about investment risk.

 

“My reaction is that that’s an overreaction,” she said, adding that it would be “very risky.

 

“It’s too narrow, there are too many things you could miss. A company can have great corporate governance in place but just not be profitable.”

 

Mawer has $6.5 billion assets under management which makes it a medium-sized player among Canadian money managers and, with a third of its clients being charitable foundations and not-for profits, takes a conservative approach to investing.

 

When it assesses companies as investments, it looks primarily at profitability and management experience.

 

“Corporate governance isn’t a short cut to identifying good, profitable, companies,” Hamilton-Keen said.

 

Continuing poor corporate governance could be a symptom rather than the cause, she said, an indicator of a broader problem with managerial acumen. And in that case, “we generally vote with our selling feet. If we don’t like the environment that the company’s heading into or the direction that the management’s taking the company, we’ll sell the company.”

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There’s a good chance the big banks are part of the 12 posing as a serious risk to investors. Although more conservative than their U.S. counterparts, Canada’s banks nonetheless engage in similar sketchy activities – I wouldn’t be surprised if all of them are in there.

 

For a complete list of TSX 60 constituent companies click here.

 

 

The Labor Department reported today that the U.S. unemployment rate climbed to 10.2% in October, topping the 10% mark for the first time in 26 years.

 

Nonfarm payrolls dropped by 190,000 in October, bringing to total number of jobs lost in the recession to 7.3 million. It was the 22nd straight decline in payrolls. Large losses were seen in manufacturing, construction and retail. Health care and temporary-help agencies added jobs.

 

The report was worse than expected. Economists surveyed by MarketWatch were forecasting a rise in the unemployment rate to 10%, with 150,000 lost payroll jobs.

 

The unemployment rate of 10.2% was the highest since April 1983.

 

Unemployment rose by 558,000 to 15.7 million, the government said. Of those, 5.6 million had been out of work longer than six months, representing a record 35.6% of the unemployed.