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

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

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

More capital ‘likely’ for banks: APRA

From Clancy Yeates:

APRA on Monday updated a study that showed the common equity tier 1 (CET1) capital ratio of Australia’s major banks were now in the top quartile of banks internationally – a key target set by the 2014 financial system inquiry……APRA said the banks’ average CET1 ratios were 13.5 per cent of assets at December 2015, up from 11.7 per cent in June 2014.

The comparisons are significant because the 2014 financial system inquiry (FSI), chaired by former Commonwealth Bank chief executive David Murray, said that in order to be “unquestionably strong”, the banks’ capital position should be among the top quartile globally.”

….Echoing previous comments from APRA chairman Wayne Byres that capital requirements would rise “somewhat higher”, APRA said global banking regulators were likely to settle on rules later this year that would ratchet up how much capital banks must set aside. This will probably affect Australian lenders, too.

….It said the final shape of these rules would not be known until late this year, and it would be “prudent” for banks to plan for “the likelihood of strengthened capital requirements in some areas”.

While increased capital requirements may reduce bank profitability and slow lending growth in the medium-term, an increased capital buffer is critical for long-term sustainability of the industry and the broader economy. The pay-off banks should see is lower risk premiums for both deposit and liability funding, more stable growth and higher equity valuations.

Source: More capital ‘likely’ for banks: APRA

Why Brexit Is Good For Iron Ore, China | Hellenic Shipping News

Brexit gives a further reason to buy Asian and emerging markets stocks, according to CLSA‘s chief equity strategist Christopher Wood. Wood raised emerging markets to Overweight this morning.

First, Brexit is good for commodities such as iron ore and steel, thereby boosting Asia’s material stocks. This is because a …..cheaper pound and euro that resulted from Britain leaving the European Union, provides an excuse for more monetary and fiscal easing. “Infrastructure stimulus in the G7 world should give some sort of bid to the commodity complex on a global basis,” wrote Wood.

Indeed, commodity traders in China agree. Iron ore futures jumped 5.2% this morning, hard-rolled coil (steel) soared 4.5%…..

Second, Brexit relieves pressure on the People’s Bank of China, which is trying to liberalize its exchange rate while keeping capital outflow under control. The deep slump in the British pound gives the PBoC another excuse to guide its yuan fix lower.

Indeed, the PBoC’s yuan-dollar fix is at a 6-year low this morning, even though the pound still tumbled 8.7% against the yuan in onshore trading.

Third, Wood raised emerging markets to Overweight “given the increased negative outlook on European equities, given the political uncertainties raised by Brexit and given the negative consequences of even more negative interest rates and more negative bond yields for European banks.”

Wood continues to see gold price soaring …..G7 central bankers are crazy, in Wood’s view.

Source: Barron’s

Source: Why Brexit Is Good For Iron Ore, China, Emerging Markets | Hellenic Shipping News Worldwide

IEX Group Gains Approval for Stock Exchange | The New York Times


America is getting a new stock exchange from the most prominent critics of high-frequency trading.

After months of delays and a brutal lobbying battle that divided Wall Street, the IEX Group won approval on Friday from the Securities and Exchange Commission to become the nation’s 13th official stock exchange.IEX is run by the people at the center of the Michael Lewis book, “Flash Boys: A Wall Street Revolt,” which profiles the early efforts of the IEX team to create a trading exchange that would be somewhat shielded from high-frequency traders.

Other exchanges and trading firms had urged the S.E.C. to reject the IEX application to become an exchange.

Opponents of IEX, including the other stock exchanges, have argued that the structure of the new exchange will add unnecessary new complexities into an already complex stock market, and potentially end up hurting small investors.

…..The most novel and controversial feature of the IEX exchange is a so-called speed bump that would slow down trading slightly to throw off traders that rely only on speed.

The speed bump slows trades down by only 350 microseconds — or millionths of a second — but that is an eternity in a stock exchange universe in which computers can buy and sell stocks in nanoseconds — or billionths of a second.

The Nasdaq, and other existing exchanges, have said that the IEX’s speed bump will violate rules mandating that exchanges make their prices available to all parties at the same time.

Judging from the barrage of objections from other exchanges, they see IEX as a threat. Not as a threat to small investors as they so eloquently argued in their submissions — and whose interests they have ignored for years — but a threat to the billions of dollars in fees they receive from high-frequency traders for privileged co-location and access to stock exchange data feeds. Why would any investor want to trade on an exchange that encourages HFT when there is another exchange that offers a level playing field?

Source: IEX Group Gains Approval for Stock Exchange – The New York Times

Who is/isn’t buying Australian stocks?

Two interesting charts from Tim Baker at Deutsche Bank. Foreign investment in ASX equities, avoiding banks and resources, has slowed to a 5-year low.

Foreign Investors in ASX

Super fund investors have lost their enthusiasm for bank deposits, as interest rates tumble, and are allocating more to equities.

Super Fund Investors

Hope isn’t a strategy

Cautious optimism has evaporated after poor recent polls favoring a BREXIT. I hope that sanity prevails but, as the saying goes: “Hope isn’t a strategy”.

Better to have a Plan A and a Plan B to cope with the two alternatives. But if enough investors decide their money is safer in the bank, then expectations of a fall are likely to become a self-fulfilling prophecy.

The S&P 500 does not appear unduly alarmed but a sharp fall on 13-week Money Flow warns of selling pressure. Reversal below 2000 would warn of another test of primary support (1820 to 1870).

S&P 500 Index

Dow Jones Industrial Average shows a similar picture. Breach of medium-term support at 17400 to 17500 would warn of another test of primary support at 15500 to 16000.

Dow Jones Industrial Average

A CBOE Volatility Index (VIX) spiked to 20, indicating increased market risk. Long-term measures remain unaffected.

S&P 500 VIX


Germany’s DAX retreated below medium-term support, warning of another test of primary support. 13-Week Money Flow below zero suggests a primary down-trend.


The Footsie broke support at 6000 warning of a test of 5500. Reversal of Money Flow below zero would suggest a primary down-trend.

FTSE 100

* Target calculation: 6400 + ( 6400 – 6000 ) = 6800


The Shanghai Composite Index continues to range between 2700 and 3100.

Shanghai Composite Index

Japan’s Nikkei 225 Index broke support at 16000 and its lower trend channel, warning of another decline.

Nikkei 225 Index

* Target calculation: 15000 – ( 18000 – 15000 ) = 12000

India’s Sensex remains bullish, with a short retracement below 27000. Bearish divergence on 13-week Money Flow would end if the descending trendline is penetrated.



The ASX 200 broke medium-term support at 5200, warning of another test of primary support at 4750. Expect support at the former level of 4900 to 5000 but it is questionable whether this will hold. Combination of a seasonal sell-off and BREXIT fears are going to test buyers’ commitment.

ASX 200

The Banks Index fell sharply and breach of support at 7200 would offer a target of 6400*.

ASX 300 Banks

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

Health Care is experiencing a strong sell-off, led by CSL. This is a good long-term stock but exposure to the UK/Europe has spooked the market.

ASX 200 Health Care

Why BREXIT matters

From The Guardian, June 14th:

Support for leaving the EU is strengthening, with phone and online surveys reporting a six-point lead, according to a pair of Guardian/ICM polls.

Leave now enjoys a 53%-47% advantage once “don’t knows” are excluded, according to research conducted over the weekend, compared with a 52%-48% split reported by ICM a fortnight ago.

….Prof John Curtice of Strathclyde University, who analyses available referendum polling data on his website, noted that after the ICM data, the running average “poll of polls” would stand at 52% for leave and 48% for remain, the first time leave has been in such a strong position.

If the UK votes to LEAVE, we can expect:

  • A sell-off of UK equities. GDP is expected to contract between 1% and 2%. A Footsie breach of support at 6000 would signal a test of 5500, while breach of 5500 would offer a target of 5000 (5500 – [ 6000 – 5500 ]).

FTSE 100

  • UK housing prices fall.
  • A sharp sell-off in UK banks in response to falling GDP, equities and housing — threatening contagion in financial markets.
  • BOE rate cuts to support the UK economy.
  • A sharp fall in the Pound due to uncertainty, lower interest rates and lower capital inflows.


  • The Euro falls in sympathy, as confidence in the EU dwindles.
  • The US Dollar strengthens, causing the Fed to back off on further interest rate rises.
  • Volatility surges across all markets.
  • Gold spikes upward.

Hat tip to The Coppo Report

BREXIT: Stocks to watch

From Bell Potter:
Australian stocks with more than 80% of revenue derived from UK/Europe:

  • Macquarie Atlas Roads
  • Hendersons


  • Ansell
  • Amcor


Stocks with 40% to 50% of revenue derived from UK/Europe:

  • Cochlear
  • CSL

Stocks with 30% to 40% of revenue derived from UK/Europe:

  • Resmed
  • Brambles

Australian media a China stooge | MacroBusiness

By Houses and Holes:

From FT: When Liu Qibao, China’s propaganda minister, visited Sydney last month and signed a raft of deals with Australia’s top media companies, few paid much attention. But the fruits of that trip — a supplement produced by China Daily, the Communist party’s English-language mouthpiece, appearing in such bastions of free speech as the Sydney Morning Herald — lay bare the growing reach of China’s multibillion-dollar propaganda machine as it seeks to win hearts and minds across the globe. ….China Watch, the new monthly pullout in Fairfax Media newspapers, marked its inaugural issue with favourable coverage of China, including an article backing Beijing in its stand-off over contested waters in the South China Sea.
…..Controversy stoked in Australia by Beijing’s deals with Fairfax, Sky News Australia and several other local companies proves the point. Critics point to the harder edge of Beijing’s propaganda machine, with journalists imprisoned and many foreign media websites blocked at home. Some warn that publishing Chinese propaganda alongside other news could undermine their newspapers and hand Beijing commercial influence over the way Australian journalists report on China. ….Fairfax dismisses these concerns, saying China Watch is clearly labelled and no different to other advertising content. “Our commitment to providing independent, quality journalism — including on matters relating to China — remains absolute and unchanged,” it said.

Welcome to the whorehouse Downunder.

Media independence is subject to one overriding and unspoken rule: DON’T BITE THE HAND THAT FEEDS YOU. Advertisers with multi-million dollar budgets are not criticised. And journalists who ignore that rule will find themselves looking for a job. The silence of the media on health issues related to cigarette smoking, when tobacco giants were spending billions of $ on advertising, is the most obvious example but food giants like Monsanto still hold considerable sway over mainstream media. Would China be treated any differently?

Source: Australian media a China stooge | MacroBusiness

How the RBA killed Australian wages | MacroBusiness

Good summary of Australia’s predicament from David Llewellyn-Smith:

…..A lot of this is to be expected in a post-mining boom environment. I mean, we seriously overdid it:

This is why I obsess over lowering the dollar. It absorbs an huge amount of the deflationary pain in repairing one’s competitiveness rather than doing it internally vis-a-vis Europe’s PIIGS.

That is also why authorities have made such a hash of the adjustment by at first denying the mining bust was happening and then inflating debt and asset prices to offset it when they found themselves behind the curve.

They thus levitated the dollar throughout, hammering tradable wages harder than otherwise and spilling it out more widely now. Worse, we now have the debt overhang to deal with and another adjustment to face in non-tradable sectors related to households once the post-mining boom adjustment abates.

Pity we didn’t listen to Prof. Warwick McKibbin in 2012 when he warned: “…the central bank should ‘lean against the wind’, that is intervene to slow down the extent of appreciation of the exchange rate.”

Source: How the RBA killed Australian wages – MacroBusiness

Gold strengthens as Dollar weakens

Long-term interest rates continue their decline, with 10-year Treasury yields testing support at 1.65 to 1.70 percent. Breach would signal a test of the all-time (July 2012) low of 1.40 percent.

10-year Treasury yields

Gold rallied in response, breaking initial resistance at $1250/ounce to signal a test of $1300.


The Chinese appear to have resumed selling foreign reserves to support the Yuan, with USDCNY running into resistance at 6.60. PBOC sale of reserves would weaken the Dollar, boosting demand for Gold. Failure to support the Yuan is unlikely, but would increase safe haven demand for Gold from Chinese investors.


The Dollar Index, representing predominantly the Euro and Yen crosses, fell sharply. Breach of support at 93 would confirm the primary down-trend earlier signaled by 13-week Momentum below zero.

Dollar Index

The Australian All Ordinaries Gold Index broke through 4500 to signal another advance, with the weakening Australian Dollar adding further impetus. Gaps between trough lows (orange line) and preceding highs (brown line) indicate strong buying pressure.

All Ordinaries Gold Index

Disclosure: Our Australian managed portfolios are invested in gold stocks.