CEOs Are Paid Fortunes Just to Be Average | Bloomberg View

From Barry Ritholtz:

Verizon’s purchase of Yahoo! for $4.83 billion, while an interesting exercise in combining content, networks and mobile services, highlights the broken norms for paying executives of U.S. corporations…….Yahoo Chief Executive Officer Marissa Mayer will walk away with more than $200 million for doing little more than keeping the seat warm for the past four years.

Research has shown that external influences account for the majority of a given company’s share price. A rule of thumb is that the company itself is only responsible for about a third of its price movement. The market gets credit for about 40 percent, while the performance of the company’s industry drives another 30 percent.

There are of course exceptions. Apple’s incredible share run-up on the iPod, iPhone and iPad is hard to match.

….Share price isn’t a very precise way of compensating for value delivered. Indeed, share price may be one of the worst ways to judge an executive’s performance….

There should be ….. reform in corporate pay policies; executives who deliver returns that match the market or industry should be compensated like low-cost service providers. It’s long past due that this happens.

Barry raises an interesting point. Why not pay executives for outperformance, above the market, in the same way that fund managers are paid performance fees for outperforming the index?

But there is another issue related to stock options. Executives are betting with other people’s money. If the bet comes off and the stock outperforms, they cash in their share options. If the bet doesn’t come off, the shareholders suffer and the executives walk away scot-free. They will be more inclined to take risks if they have no skin in the game.

The investment bank I worked for in the nineties had a far more sensible approach. Executives were loaned large amounts at attractive interest rates for the purpose of buying shares in the company. When the stock price rose they became extremely wealthy. But if the price had fallen, they were accountable for the loan. It certainly made executives more risk-averse — they thought and acted like shareholders. Not a bad idea in the banking industry.

Source: CEOs Are Paid Fortunes Just to Be Average – Bloomberg View

Privatisation has damaged the economy, says ACCC chief

In a blistering attack on decades of common government practice, Australian Competition and Consumer Commission chairman Rod Sims said the sale of ports and electricity infrastructure and the opening of vocational education to private companies had caused him and the public to lose faith in privatisation and deregulation.

“I’ve been a very strong advocate of privatisation for probably 30 years; I believe it enhances economic efficiency,” Mr Sims told the Melbourne Economic Forum on Tuesday. “I’m now almost at the point of opposing privatisation because it’s been done to boost proceeds, it’s been done to boost asset sales and I think it’s severely damaging our economy.”

Mr Sims said privatising ports, including Port Botany and Port Kembla in NSW, which were privatised together, and the Port of Melbourne, which came with conditions restricting competition from other ports, were examples where monopolies had been created without suitable regulation to control how much they could then charge users……

Deregulating the electricity market and selling poles and wires in Queensland and NSW, meanwhile, had seen power prices almost double there over five years, he said.

I have also been a strong advocate of privatising state assets, but Rod Sims raises some important concerns that need to be addressed.

There is a strong trend in capitalist economies away from free enterprise and towards privatised “monopolies”. Investors place a great deal of emphasis when evaluating stocks on a company’s “economic moat” or competitive advantage. Both of which imply the ability to restrict competition. While this may maximize revenue for the individual economic unit, it is harmful for the economy as a whole.

Which brings me back to Mr Sims’ point. Higher prices paid for infrastructure services destroy the competitiveness of the economy as a whole, with profound implications for exports and productivity.

Source: Privatisation has damaged the economy, says ACCC chief

Gold & support at $1300

The daily chart of Gold shows consolidation forming between $1310 and $1335 per ounce. Respect of the $1300 support level would signal a healthy up-trend. Reversal without touching the support level would reveal buyers’ eagerness.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

Please note

I have resigned as a director of Porter Capital Management Pty Ltd (“Porter Capital”) and Porter Private Clients Pty Ltd (“Porter Private”) as I find this interferes with my primary business (Incredible Charts). In future, I will no longer publish newsletters under the banner of Research & Investment nor issue investment updates for them.

I no longer work under the AFSL and would like to remind readers that any advice in these newsletters and on the website is provided for their general information and does not have regard to any particular person’s investment objectives, financial situation or needs. Accordingly, no reader should act on the basis of any information contained herein without first having consulted a suitably qualified financial advisor.

Gold, the Yuan & Donald Trump

China’s Yuan continues its slide against the Dollar, with USDCNY testing resistance at 6.70. The current retracement is likely to respect support at 6.60, offering a target of 6.80*.


* Target calculation: 6.70 + ( 6.70 – 6.60 ) = 6.80

A depreciating Yuan is likely to drive demand for gold as well as hard currencies. Rising political uncertainty — in Europe, the Middle East and the US — is expected to add fuel to the fire. Strong polling by Donald Trump alone could drive gold to its long-term target of $1550/ounce*. Expect retracement to test the new support level at $1300/ounce. Respect is likely and would signal an advance to $1400/ounce.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

Disclosure: Our managed portfolios are heavily overweight gold stocks.

The Beach Boys: Good Vibrations

The genius of Brian Wilson. Studio session:

The Cancer of Advocacy Journalism

From John Schindler, formerly a professor of national security affairs at the U.S. Naval War College, where he taught courses on security, strategy, intelligence, terrorism, and military history. Before joining the NWC faculty, he spent nearly a decade with the National Security Agency as an intelligence analyst and counterintelligence officer.

Over the last week, the American media has begun, belatedly, to examine a story in Rolling Stone magazine last month which asserted that a horrific gang rape occurred at the University of Virginia, at a named fraternity. The story was light on specifics, not naming the victim or the perpetrators except in vague terms, but its depiction of gang rape was vivid and hard to forget.

I have no expertise in such matters, but my old counterintelligence sense told me that a lot of this didn’t add up……

Source: The Cancer of Advocacy Journalism

How to Survive & Profit in Today’s Markets

We have observed over a number of years that many investors follow an erratic path to trading/investing. Without clear objectives, they jump from one system to another, and one time frame to another, with no plan or process.

This is attributable to lack of a solid foundation. A deep understanding of the basics of technical analysis, how markets work, and how to manage investment risk — together with confidence in your ability — are all essential to manage your investments effectively.

The biggest risk you take is investing in the stock market without a solid understanding of how it works.

I have enlisted the help of Tony Porter to present training courses for Incredible Charts. Tony is an experienced investment manager with whom I have collaborated for some time. We are on the same wave-length when it comes to Technical Analysis and Trading.

How to Survive & Profit in Today’s Markets is not an A to Z of Technical Analysis, nor of Technical Indicators. We bypass a lot of conventional thinking and focus on core skills — technical analysis, fundamental analysis, macroeconomics, trade management, money management, and self-discipline — needed to survive and profit in today’s markets.

Colin Twiggs & Tony Porter

Colin Twiggs & Tony Porter

The course is run in two parts, each of 6 weeks duration, and will be conducted through printed notes, online exercises and weekly online seminars run by Tony and/or myself.

You will find details at How to Survive & Profit in Today’s Markets.

Register Your Interest

Numbers are limited to 12 per course, and we need to contact participants to arrange course scheduling.
So please register your interest early.

Yours Sincerely,

Colin Twiggs


The expectations of life depend upon diligence; the craftsman that would perfect his work must first sharpen his tools.

~ The Analects of Confucius

The Italian bank crisis – the one graph version | The Market Monetarist

I love Lars Christensen’s work. Simple but elegant. This is a bit wonkish for an investment blog but he makes a very important point which applies to far more than just Italy.

Today I was interviewed by a Danish journalist about the Italian banking crisis….. He asked me a very good question that I think is highly relevant for understanding not only the Italian banking crisis, but the Great Recession in general.

The question was: “Lars, why is there an Italian banking crisis – after all they did NOT have a property markets bubble?”

That – my regular readers will realise – made me very happy because I could answer that the crisis had little to do with what happened before 2008 and rather was about monetary policy failure and in the case of the euro zone also why it is not an optimal currency area.

Said, in another way I repeated my view that the Italian banking crisis essentially is a consequence of too weak nominal GDP growth in Italy. As a consequence of Italy’s structural problems the country should have a significantly weaker “lira”, but given the fact that Italy is in the euro area the country instead gets far too tight monetary conditions and consequently since 2008 nominal GDP has fallen massively below the pre-crisis trend.

That is the cause of the sharp rise in non-performing loans and bad debt since 2008. The graph below clearly illustrates that.

I think it is pretty clear that had nominal GDP growth not fallen this sharply since 2008 then we wouldn’t be talking about an Italian banking crisis today. There was no Italian “bubble” prior to 2008 and there are no signs that Italian banks have been particularly irresponsible, but even the most conservative banks will get into trouble when nominal GDP drops 25% below the pre-crisis trend.

Market monetarists advocate that central banks should maintain smooth monetary growth consistent with a nominal GDP target. Current central bank response is lagged because they have to wait for inflation and employment numbers — which is about as effective as driving your car down the highway while looking in the rear view mirror to see where you are headed. Even then, they focus on the wrong numbers, inflation and employment, when the root cause is monetary growth and nominal GDP.

Source: The Italian bank crisis – the one graph version | The Market Monetarist

Ever heard of Aram Khachaturian?

You may not recognize the name of this great Armenian composer but you may recognize his music.


This beautiful piece of music is perhaps most famous for its incredibly evocative use in 2001: A Space Odyssey. It was also heavily borrowed from by James Horner for his soundtrack to Aliens.

Alex White on BREXIT

Alex White, Head of Country Analysis at The Economist Intelligence Unit: “We see an EEA- deal as highly likely…..we are reasonably optimistic about the breakup.”

Michael Pettis: Brexit could speed breakup of the Euro

On secular stagnation: “I don’t see growth picking up until you either redistribute income downwards — which is politically quite difficult and slow — or developed countries which are credible borrowers engage in massive infrastructure spending — which would be a great idea but politically difficult — so I’m afraid secular stagnation is going to last several more years.”

On BREXIT: “I’m not to optimistic that the Euro will be around in 10 years…BREXIT could speed up the process if England does well.”

On future crises: “It’s always the same thing: a huge switch from New York to Washington (in American terms) where policy begins to dominate the whole process…because the solutions to the problems are political solutions, not really economic or financial solutions…”

Steve Keen: Australian mortgage debt levels are “outrageous”

Steve Keen has a number of detractors who knock him for his incorrect forecast of collapse of the Australian housing bubble. But he was wrong for the right reasons…. the Australian financial system, based on highly-levered mortgages, is a house of cards. It was only rescued post-GFC by massive stimulus in China, resulting in a mini-boom in the Australian Resources industry.

Steve is at the cutting edge of economic theory. He and Richard Koo (The Holy Grail of Macroecomomics) were at the forefront of identifying the role that debt plays in the Aggregate Demand equation. We should take heed of his warnings.

“Our models predicted it [the GFC] couldn’t happen. It did happen. We therefore shouldn’t trust our models.”

“…What drives house prices is acceleration in mortgage debt…..Australians avoided collapse of the bubble by continuing to lend but mortgage debt is now 1.1 times GDP which is outrageous.”

Jim Jefferies – Gun Control | from BARE Netflix Special

Highly relevant in today’s political climate.

Turn the sound off if bad language offends you😉

Major banks’ credit rating outlook cut to ‘negative’

From Clancy Yeates:

Australia’s banks face the threat of higher funding costs, after Standard & Poor’s downgraded the big four’s credit rating outlook to “negative”, a direct result of its action on the government’s top-notch rating.

….the banks’ credit ratings are automatically raised by two notches because S&P assumes they would receive government support in times of financial stress. Action on the government’s rating therefore tends to flow directly into the banks’ ratings.

“The negative outlooks on these banks reflect our view that the ratings benefit from government support and that we would expect to downgrade these entities if we lower the long-term local currency sovereign credit rating on Australia,” Standard & Poor’s said.

While the warning does not reflect changes in the banks’ financial performance, analysts say that if it leads to a downgrade in the actual credit rating of banks, it could push up bank funding costs all the same.

….”While Australian banks enjoy relatively high credit ratings and are deemed to be in the top quartile of global capital requirements, the frequent use of offshore wholesale funding markets is likely to result in higher funding costs.”

The big four raise about 30 per cent of their funding by issuing bonds in wholesale funding markets, so the cost of this debt can have a significant influence on the sector…..

To avoid moral hazard, with banks taking unnecessary risk at the taxpayer’s expense — a case of heads I win, tails you lose — Treasury and the RBA should commit themselves to the Swedish example. Banks that require rescue should forfeit control of their assets by issue of a controlling equity stake to the government. That would significantly curtail management and shareholders’ willingness to take unnecessary risks. And create a strong incentive to increase capital buffers. Not just to comply with APRA rules, but to make their businesses as bullet-proof as possible. Conservatively-run banks would be a major asset to the economy.

What APRA needs to focus on is instilling the right culture in banks. Rather than management focused on incentives to grow the business, there should be more emphasis on protecting the business and ensuring its long-term survival.

Source: Major banks’ credit rating outlook cut to ‘negative’

ASX 200: Banks weigh on the index

The ASX 200 encountered resistance at 5300 and is likely to test support at 4900/5000, with breach of the lower trend channel and declining 13-week Money Flow warning of selling pressure. Breach of support at the recent low of 5050 would confirm.

ASX 200

The Banks are weighing on the index, with APRA warning of further capital increases and concerns over a slowing housing market, particularly apartments. The ASX 300 Banks Index is testing primary support at 7200. Breach would offer a target of 6400*. Weakness in this sector is likely to affect the entire market.

ASX 300 Banks

* Target calculation: 7200 – ( 8000 – 7200 ) = 6400

S&P 500: Expect strong resistance

The S&P 500 is testing resistance at 2100, while declining 13-week Twiggs Money Flow warns of medium-term selling pressure. Expect strong resistance between 2100 and 2130 but reversal below 2000 is now unlikely.

S&P 500 Index

CBOE Volatility Index (VIX) at 15 indicates calm is restored after the last two turbulent weeks.

S&P 500 VIX

Gold surges as the Pound and Yuan fall

The Yuan is sliding against the Dollar, with USDCNY breaking through resistance at 6.60. Expect further capital flight, both from residents and offshore investors. Borrowers will also seek to repay Dollar-denominated loans and replace them with facilities in the local currency, adding further pressure on the Yuan.


The PBOC has been encouraged by fading prospects of further rate rises from the Fed, with 10-year Treasury Yields falling to a new all-time low of 1.37 percent, compared to 1.40 percent in 2012.

10-Year Treasury Yields

….And the Pound falling to a 30-year low.


Falling currencies and lower long-term interest rates are both good news for gold bugs, with spot gold surging to $1370/ounce. Expect retracement to test the new support level at $1300/ounce. Respect of the band of support at $1280/$1300 is likely and would signal another advance, with a target of $1400/ounce*.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1200 ) = 1400