Let's Hear it For Weak Leaders!

This exchange, between blogger Barry Ritholtz and renowned investor Felix Zulauf, caught my eye:

Ritholtz: In the US, we only have politicians who tell people what they want to hear, and very few who say “Here’s some medicine, it’s going to be uncomfortable, but you got to suck it up because the alternative is far worse.”

Zulauf: That is the case everywhere, but I’m hoping that can change. It doesn’t change just by saying things. You get strong leaders only after a period of pain and hardship. You don’t get them in a world of high prosperity.

--The Big Picture blog

So, let's hear it for weak leaders.

The Lincoln's and Roosevelt's only appear when times are really tough.

Forecasting Gobbledygook from Barry Ritholtz

Which Way Stocks?
"Up, Down, or Sideways"
(I think that about covers it)

Blogger Barry Ritholtz ("The Big Picture") is not exactly shy about criticizing Realtor foibles (I think it's got something to do with his mother being one).

So it certainly seems fair to point out some of the fence-straddling, cover-all-bases gobbledygook investment managers like Ritholtz (his other hat) periodically spew.

See if you can discern what the normally pull-no-punches Ritholtz thinks stocks are going to do from this excerpt:

The conditions for a major reversal are not conclusive. That doesn’t mean it cannot happen, it just means that at this moment, making decisions with imperfect information, we put the odds of a hefty drop of 20+% at about 25%.

Given that liquidity is still so abundant, we expect the pullback to be somewhat contained, but deeper than the prior 3 wobbles (June, September, January) since the rally began. We could see a deeper than 10% pullback. Depending upon conditions and internals, our expectations are that we will be buyers into a 10-20% correction. From current levels, we do not expect to revisit the lows.

If the correction fails to materialize, and the market rallies aggressively, with firming internals, we will reconsider our posture. We are always willing to redeploy cash higher into a possible melt up.

I still expect a 25% correction at the end of this rally. I am unable to say with any degree of conviction that the current market turmoil is that major move down.

--Barry Ritholtz, "Market Changes Tone During Correction"; The Big Picture (5/5/10)

Got all that?

Can you say, "hedge your bets??"

How about, "I haven't a clue."

Personally, I prefer the answer J.P. Morgan gave when he was asked what stocks were going to do: "they're likely to fluctuate."

Ritholtz: CEO's Paid for Volatility, Not Performance

Making the Janitor's Annual Salary . . . Every 3 Hours!

The inimitable (and frequently bombastic) Barry Ritholtz, author of The Big Picture blog, has a great post today dissecting absurd CEO compensation titled "American Pastime: Overpaying CEO's."

His piece basically picks up where my post last Thursday ("Parsing Occidental CEO Ray Irani's 'Excellent Performance'") left off.

If you don't have time to read my post, here's a one sentence summary: Occidental's Ray Irani got paid more than $1.5 billion since 1990 for deftly outperforming the overall stock market by . . . less than 2%!

In fact, once you scrutinize Occidental's board of directors and how they got there, it would be more accurate to say that Irani paid himself that money.

The only thing I omitted from my post was a stunning little factoid explaining why galloping exec comp seems to have slowed down in recent years.

Namely, sometime in the last decade, The Conference Board, which represents CEO's at the largest publicly traded companies, successfully led an effort to redefine the ratio of CEO pay to that of the rank-and-file.

So, whereas for decades the ratio had been "top-to-bottom," i.e., comparing the CEO to the janitor, in recent years it has been redefined as the CEO's pay relative to the average worker's pay.

Ergo, you get an instant, big contraction in the ratio.

As a result, instead of (accurately) reporting that exec comp has ballooned from 30:1 to something like 1,000:1 in the last 30 years or so, the mainstream media ("msm") now universally reports that the ratio is "only" 400:1.

How . . . 1984-ish.

Ritholtz on Exec Pay

But I digress.

Once you navigate the assorted F-bomb's and "colorful language" in a typical Ritholtz post, his underlying arguments and logic are unassailable:

Five Steps to Shareholder Wealth Transfer

1. The Board of Directors, usually cronies of the CEO (often hand picked by him) forms a compensation committee. To appear “objective,” the committee hires an outside compensation consultant.

2. The compensation consultants are themselves well paid whores, who rather than turning tricks outside the Holland tunnel, offer up absurdly generous comp package. They deliver what they are paid to: They provide cover for the boards to make an otherwise indefensible giveaway of shareholder monies in the form of cash and stock options. It is typically called “Pay for Performance,” but that is a horrific misnomer, as we see in step #3. The comp committee approves the consultants’ nonsense, forwards it to the Board, who rubber stamps it.

3. Here’s where things get interesting: If the stock price rallies, the exec can exercise and cash out, risk free. If the stock price falls, the exec requests a new round of options — or even easier, asks for a repricing of the old ones.

4. After the options are repriced, the exec simply waits. Whether the market rallies or falls . . . you simply go back to step three. Repeat until stock options are in the money. There is no risk or outlay of cash on the part of execs.

5. True “performance” is not a factor. Stock prices can rally for a vast range of reasons having nothing whatsoever to do with management or CEO performance. The market can rally, a sector can come into favor, or even when the Fed can cut rates.

This is not pay for performance, it is pay for stock price volatility.

Actual performance would look at factors such as peer profitability, sector performance, SPX index gains. Bonus payments and stock option exercise should be for gains OVER AND ABOVE these factors — but sadly, rarely if ever are.

--Barry Ritholtz, The Big Picture

Ritholtz's policy prescription is equally blunt, on target -- and politically far fetched (which he readily acknowledges).

Read the full post for the particulars . . .

Next!

On to Financial Reform!

With Health Care now out of the way, we can get to what I consider to be the more important issue: Reforming Wall Street and the banking sector . . . Essentially, I am advocating a “Do Over.” Reverse the past 3 decades of radical deregulation. The alternative is an even bigger financial crisis, and sooner than you imagine. The next time around, I plan on watching it all unfold from St. Barts.

--Barry Ritholtz, The Big Picture

My sentiments, exactly.

The only thing I would substitute in Ritholtz's quote is "Palm Springs" for "St. Barts" (I prefer the desert -- and U.S. soil!).

P.S.: stray tidbit -- St. Bart's was named after Christopher Columbus' younger brother, Bartolomeo.

Dispatches from NY

Barry Ritholtz Talk

I'm in NY the next few days, mainly to serve as a chaperone to a few kids (at least they're my own!).

However, I did manage to break away to hear Barry Ritholtz, of The Big Picture blog (see, my Blog Roll) at a midtown Barnes & Noble. Or, more accurately, see him sign his new book, Bailout Nation -- family responsibilities came first, and I got there at the tail end.

I still caught one good tidbit, though.

Ritholtz speculates that the reason why JP Morgan Chase has held up so much better than Citigroup is that its CEO, Jamie Dimon, was the one-time heir apparent at Citigroup, before being passed over.

Privy to all the excessive risk-taking at Citigroup, Dimon made sure that JP Morgan Chase steered clear (relatively speaking).

P.S.: Showing up late meant I didn't get to engage Ritholtz on a topic nearer and dearer to my heart: why he heaps so much scorn on Realtors (to be fair, his shots at NAR, the National Association of Realtors, are all too often on the mark -- unfortunately).

"Bank Runs," Circa 2009

No "Run on the Banks?" Define, "Run"

It's true that depositors haven't raced to withdraw their money from the nation's -- indeed, the world's -- largest, so-called "money-center" banks the last 18 months or so (basically, the ones considered "too-big-to-fail"). That's largely a credit, literally, to deposit insurance -- administered in the U.S. by the FDIC.

However, that doesn't mean there hasn't been a run . . . in the world's stock markets, by (and on) their shareholders.

In a devastating post, "Bank Market Caps, Then & Now," financial blog The Big Picture graphically depicts the collapse in value of the world's 18 largest banks since the second quarter of 2007. The list includes not only such storied names as Citigroup and Bank of America, but the "Citigroup's" and "Bank of America's" of the U.K, Germany, France, and Spain -- international entities such as HSBC, Santander, BNP Paribas, and Credit Suisse.

To date, the average drop in value exceeds 80%. And that excludes the fate that befell shareholders at AIG, Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros., etc., whose drops ranged from 95% to 99%-plus.

All this is against the backdrop of an historic stock market rout, and increasing speculation that the new Obama administration is close to embracing the "Swedish model," or temporary nationalization, to deal with the ongoing financial crisis.

Until now, the U.S. has been focused on preserving some semblance of private ownership through the various, tortured iterations of bank bailouts, debt guaranties, TARP, etc.

Judging by the leading banks' rapidly shriveling market cap's, the equity markets clearly anticipate full-blown nationalization . . . soon.