Archive for April, 2008

• The Joys of Living in Washington
  Eddy Elfenbein, April 9th, 2008 at 1:02 pm

  I went out for lunch just now and my entire house started to rumble. What was it?

  (more…)

• Passing Along Without Comment
  Eddy Elfenbein, April 9th, 2008 at 11:35 am

  I apologize for including the first few tedious paragraphs but they’re needed for the surprise coming at the end.

  Climate change tops list of risks to insurers
  Potential climate change is the greatest strategic risk currently facing the property and casualty insurance industry, according to an Ernst & Young report. Demographic changes and catastrophic events follow closely behind.
  For the study, Strategic Business Risk 2008, Ernst & Young and Oxford Analytica interviewed more than 70 industry analysts from around the world to identify the emerging trends and uncertainties driving the performance of the global insurance sector over the next five years.
  The Top 10 risks identified were: climate change; demographic shifts in core markets; catastrophic events; emerging markets; regulatory intervention; channel distribution; integration of technology with operations and strategy; securities markets; legal risk; and geopolitical or macroeconomic shocks, a release says.
  Many of the risks are interlinked, a company release notes, and raise questions about how these risks will change what companies offer customers, the way that they offer their services and where.
  The analysts identified five additional emerging risks (not part of the Top 10) that have the potential to become as significant during the next five years.
  These include: over reliance on model-based risk management; threats to industry reputation; losing the war for talent; increasing exposure to global regulatory heterogeneity; and the possible emergence of entirely new risks.

• Betting to Improve the Odds
  Eddy Elfenbein, April 9th, 2008 at 10:58 am

  The New York Times looks at how companies are using predictions markets in corporate decision making. I’m a fan of predictions markets and I like to follow some contracts at Intrade.com and Tradesports.com.
  I look at these markets as like a parlor game. They’re fun and interesting. Still, there are some drawbacks. First, to be truly effective, the markets must have many participants and it should be very liquid. Secondly, these markets are subject to the kind of biases that all markets are.
  For example, at Intrade.com, the contract for Ron Paul to win the GOP nomination is currently 1.3/1.5. I can tell you right now, that Ron Paul does NOT have a 1.3% chance to win the GOP nomination.
  His chances are, in fact, ZERO. As in ZERO POINT ZERO. In sophisticated circles, this is known as a Blutarsky. In absolute zero, where all atomic movement ceases, that’s Ron Paul’s chances. No way. Never. In a million years, still wouldn’t happen. Bottomline: The dude ain’t gonna win.
  So if markets are efficient *cough cough* why isn’t his contract going for zero? The answer is that it’s a market that’s influenced by partisanship. There are some folks who will buy the contract to boost their candidate’s profile. In November and December, the Paulster’s contract came very close to hitting 10 cents.
  I’m not sure if you can short contracts at Intrade, but if you can, there’s a profit opportunity. This is similar to how sophisticated sports bettors know to go against teams from big cities. The partisanship distorts the market.
  Another aspect about predictions markets is that I don’t think they’re properly named. They’re really not predictions markets, but odds setting markets.
  It’s become fashionable to look at how the markets got something wrong, are thereby, declare them a failure. The markets simply set the odds low for something that eventually came about. Would we ever say the same about financial markets? Going by today’s share price, Google’s IPO price could be called mis-priced. Did that mean that the stock market failed? Not at all, the price adjusted with more information.

• The Death of the Stand-Alone Business Section
  Eddy Elfenbein, April 9th, 2008 at 10:21 am

  The Columbia Journalism Review looks at the disappearance of stand-alone business sections in newspapers. Here’s a look at some recent departures:
  
  I’ve spend most of my life reading the Washington Post, and from what I recall, the daily business section was simply attached on to the end of the sports section. I think that’s how I first got interest in following stocks. It’s not that big a jump from box scores to stock tables.
  I don’t see any reason to get nostalgic about stand-alone sections. The amount of business is overflowing. Without pornography and stock quotes, I doubt the Internet would ever have gotten off the ground. CNBC, the Wall Street Journal and a zillion other sites cover business pretty thoroughly. My major quibble isn’t the amount of news, it’s that the news is often not in proper context, and that’s where blogs can play a key role.
  I do reserve the right to get nostalgic about reading the stock tables in the daily paper. You had to scroll through hundreds off quotes to find out how well you did. One of my first roles as a broker was simply giving people live quotes during the day. And then there were those awful factions!
  On second thought, maybe I won’t get too nostalgic.

• Some Hesitation on the Say on Pay Bandwagon
  Eddy Elfenbein, April 9th, 2008 at 8:56 am

  Holman Jenkins has an article today in the WSJ on Aflac (AFL) and their “say on pay” provision which allows shareholders to have some input on executive salaries. As many of you know, I’m a huge of Aflac and I think it’s an outstanding company. Most people know it for the duck, but few realize just how profitable it is.
  Say on pay has generated a great deal of positive press for Aflac, and for that, I’m grateful. However, I think “say on pay” might be a bit overrated and I’d be leery of seeing it become the next shareholder fad.
  What’s often overlooked is that Aflac is a closely held company with much of the shares resting in the hands of the Amos family. Dan Amos, the current CEO, is the son and nephew of the Aflac’s founders. The effect of this is that a very small portion of Mr. Amos’ wealth is tied to his yearly salary. Instead, he owns nearly 10 million shares, which makes him about two-thirds the way to being a billionaire. In other words, he can easily afford to have his pay the subject of shareholder debate. It’s almost a trivial amount compared with what he makes as an owner.
  Jenkins writes:

  Media outlets have fallen all over themselves since Aflac’s adoption of “say on pay,” but they seldom find room to include Mr. Amos’s actual views on executive compensation. For one thing, he doesn’t think every company should be required by law to adopt “say on pay.” He took up the idea himself only because it was brought to him by activist investor shop Boston Common Asset Management, and then only because he figured more “transparency” might improve the atmospherics around executive compensation and help “calm down” public neuralgia.

  Amos is right—not every company should be required. I’d add that many companies shouldn’t do it voluntarily. A good example might be a small-cap tech company going through a corporate restructuring. The best way to lure an experienced outside CEO with could be to pay well above the going rate. Given the legal and technical challenges a company like that faces, a “say on pay” proviso might not be in the companies’ best interest.
  I’d prefer to see the subject of executive compensation shift to how much value the executives have “at risk.” That would be far more accurate and I think it would deflate much of the current hysteria directed at executive pay.

• Motorola Exec Won’t Cut His Hair Until Stock Price Rises
  Eddy Elfenbein, April 8th, 2008 at 3:11 pm

  This is pathetic:

  At a meeting of Motorola Inc. executives in May 2000, Patrick Canavan loudly announced that he wouldn’t cut his hair until the company’s share price matched its all-time high of about $60 reached earlier that year. (The figure reflects a subsequent stock split.) Growing a ponytail represented “a symbol of confidence in the company,” recalls Mr. Canavan, then its senior vice president for corporate governance.
  Nearly eight years later, Motorola shares are languishing more than 80% below Mr. Canavan’s target. He’s twice lowered the goal, and employed some financial hair-splitting to avoid shears. When it’s wet, his hair now stretches halfway down his back.
  Mr. Canavan first lowered his goal to $28 in 2003. With Motorola’s stock around $23 in September 2005, Mr. Canavan agreed, at the urging of then-Chief Executive Edward Zander, to reduce the target again, to $25. He announced the change in an email to Mr. Zander, titled “Hair Today, Gone Tomorrow.”
  When Motorola shares topped $25 several times in early fall 2006, Mr. Zander says he walked into Mr. Canavan’s office and declared, “C’mon, we gotta go cut your hair.” The CEO threatened to fetch a ladder and let colleagues take turns snipping the tail.
  Mr. Canavan balked. “It did not feel right to grow hair for almost seven years, then cut it” after a short-lived stock-price bounce, he says. In another email, he assured Mr. Zander that he would fulfill his pledge if Motorola’s share price stayed above $25 through its Jan. 19, 2007, release of full-year earnings. But Motorola’s stock plunged in early January after the company said it would miss profit targets.

• Earnings Preview: Bed Bath & Beyond
  Eddy Elfenbein, April 8th, 2008 at 9:53 am

  Bed Bath & Beyond (BBBY) is set to report its earnings tomorrow. Here’s part of a preview from AP:

  BY THE NUMBERS: Bed Bath & Beyond said it January that it expects to earn 64 cents to 67 cents per share in the fourth quarter, which ends March 1. Analysts polled by Thomson Financial predict earnings of 65 cents per share on revenue of $1.96 billion.
  ANALYST TAKE: Matt Nemer of Thomas Weisel Partners LLC said he is concerned about Bed Bath & Beyond’s bedding and textiles segment, which potentially accounts for up to 40 percent of its revenue.
  “Continued weakness in the category could pressure the top line, and promotional activity could further impact margins,” the analyst wrote in a Friday client note.
  Home furnishings and accessories retailers are being pressured as the housing market sags and consumers curb discretionary spending due to worsening credit problems and high energy costs.
  Nemer anticipates a quarterly profit of 64 cents per share on sales of $1.95 billion.
  Deutsche Bank North America’s Mike Baker said Bed Bath & Beyond’s margins are being squeezed as it deals with higher advertising and postage and paper costs. The company has had to send out more coupons to stay competitive in the latest economic environment, he said. Bed Bath & Beyond is also fighting rising depreciation and a shift toward lower-margin hard goods.
  WHAT’S AHEAD: Nemer anticipates Bed Bath & Beyond will provide a weak fiscal 2008 forecast, due to the current economic climate and management’s cautious view of the market. He estimates 2008 earnings at $2.11 per share.
  Analysts predict full-year net income of $2.15 per share.

• Mouse Increases Demand on Tiger
  Eddy Elfenbein, April 7th, 2008 at 9:11 am

  From the NYT:

  Yahoo on Monday reiterated its rejection of a takeover offer from Microsoft, again calling it too low.
  The company was responding to a letter from Microsoft that threatened to lower the price of its buyout offer and take it directly to Yahoo shareholders.
  Although Microsoft’s offer was initially valued at $31 a share, a drop in the price of Microsoft shares has reduced the offer to just more than $29 a share.
  Microsoft’s chief executive, Steven A. Ballmer, raised the pressure on Yahoo’s directors on Saturday in a letter warning that Microsoft would begin a proxy fight seeking to oust them if the two companies did not reach a negotiated deal in the next three weeks.
  “Our board’s view of your proposal has not changed,” Yahoo said in a statement. “We continue to believe that your proposal is not in the best interests of Yahoo and our stockholders. Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo. Furthermore, as a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal.”
  The statement added: “We consider your threat to commence an unsolicited offer and proxy contest to displace our independent board members to be counterproductive and inconsistent with your stated objective of a friendly transaction. We are confident that our stockholders understand that our independent board is best positioned to objectively and knowledgeably evaluate our company’s alternatives and to maximize value.”
  Senior executives from the companies have met on two occasions since Microsoft made its offer public on Feb. 1, but they have not entered formal negotiations. Yahoo rejected Microsoft’s offer, saying it “substantially undervalues” the company.

• Inside Sadr City
  Eddy Elfenbein, April 4th, 2008 at 6:49 pm

• What Happens to Bear’s Lacrosse Team?
  Eddy Elfenbein, April 4th, 2008 at 10:31 am

  If you have any experience with Wall Streeters, you know that these are the most competitive people you’ll ever meet. With the decline and fall of Bear Stearns, we now must ask what will happen to its lacrosse team.

  Among the remaining questions hanging over Bear Stearns Cos. is this: What happens to its lacrosse team?
  On ultracompetitive Wall Street, lacrosse-loving traders are keenly watching the fate of the battered firm’s squad. Bear Stearns vanquished rival Lehman Brothers Holdings Inc. in triple overtime and then upset Credit Suisse First Boston last summer to win bragging rights in the Street’s inaugural Gotham Lacrosse tournament.
  “I had a couple buddies [at Bear Stearns] who gave me a hard time,” says Chad Burdette, Trinity College ’06, who is now at Lehman’s private investment-management division and is the Lehman team’s informal manager. “I guess I got the last laugh now,” he jokes.
  Lacrosse, a contact sport in which players fling a rubber ball from a net attached to the end of a stick, long has been part of Wall Street’s culture. It’s popular in the New York area and at many prep schools and Ivy League colleges. According to one old joke, the only way to get a job on Wall Street is to have high test scores or play lacrosse.
  “Specifically with lacrosse, people hiring on Wall Street have a lot of respect for athletes,” says Bear Stearns’s Pete LeSueur, Johns Hopkins ’05 and an Academic All-American. “There’s definitely a strong correlation between being able to handle pressure as a trader and being able to handle pressure as an athlete.”