February 24, 2007
Forbes on Fox Saturday Morning-2/23/2007
(2/24/2007) This weekend I will join my friends at Forbes on Fox to discuss the impact of Hillary's policy wish list on the economy and markets, celebrity pay and tax policy, the government role in corporate mergers, and merger stocks to keep an eye on. The show airs at 11AM in New York and 8AM in Los Angeles as part of Neil Cavuto's Cost of Freedom Saturday morning block of shows. I hope you can join us.
JR
Posted by John Rutledge at 2:42 AM | Comments (1)
February 22, 2007
CNBC Kudlow & Company
Tonight (Thursday, 2/22/07) I will join Larry Kudlow on CNBC's Kudlow & Company. The show airs live from 5PM-6PM Eastern time.
Toight we will discuss gold and commodity prices, inflation/growth/bond yields, the housing/subprime loans, technology stocks, and the world oil market. Hope you can be there.
JR
Posted by John Rutledge at 3:08 PM | Comments (2)
February 7, 2007
Manufacturing Productivity
Heard about the demise of the U.S, manufacturing sector? Take a look at the following chart, which shows an index of total U.S. manufacturing output since 1987. Wow!
If you want an even bigger WOW look at the U.S. manufacturing sector's productivity performance, measured by output per man-hour of work, over the same period, in the chart below.
The difference is Information Technology investments that have radically decreased the time it takes to get products produced and in customers hands.
JR
Posted by John Rutledge at 10:48 PM | Comments (3)
Budget Shocker! The Deficit is Falling.
Received today from my friend Dan Clifton, a new report from Steve Moore's guys at the Club for Growth.
Deficit $115 Billion Lower Since May 2003 Tax Cut
Congressional Budget Office (CBO) estimates for January tax and spending numbers shows the federal government incurred a $41 billion surplus in the month of January. Accordingly, the 12-month budget deficit has dropped to $188 billion, the lowest level since September 2002. The year over year deficit is now down by 38.6 percent - the second consecutive month of a 30 percent reduction. The year over year deficit has now declined by 18 percent or more for 22 consecutive months. Interestingly, the employment numbers have been revised upward by 40 percent for the same consecutive 22 months which is driving higher income tax revenues. Hmmm.
In the past 24 months the deficit has declined $201 billion (51.6%).
The CBO's most recent estimate is that the deficit will fall in the $200 billion range, based on tax revenues growing 5.6 percent for this fiscal year. But over the first four months of the fiscal year, tax revenues are up 9 percent compared to the same period last fiscal year,and lately tax revenues have accelerated in the February through May period due to the surge in non-wage income from capital gains, dividends, and small business income. If tax revenues increase 9 percent this year he deficit will likely finish the fiscal year at $150 billion, roughly 1 percent of GDP.
And remember, all this has happened while both Republicans and Democrats in Congress have been ladling out the earmarked pork and the President has been searching for the Holy Grail in the middle east. Imagine if we has even a teaspoon of spending discipline!
Growth is the only budget policy that ever works.
JR
Posted by John Rutledge at 10:25 PM
Moral Compass Book Review
The New England Journal of Medicine's February 8 edition is out today with a review of an interesting book, Moral Minds: How Nature Designed Our Universal Sense of Right and Wrong, by Marc Hauser.
Marc Hauser's groundbreaking book advances a new theory of moral judgment, synthesizing a great deal of work in neuroscience, psychology, and ethology, as well as the author's own recent experimental work. Hauser aims to demonstrate that morality is innate in the way that language is innate: not in its precise content, but in its form. Just as, according to Noam Chomsky, each child comes into the world with a brain wired for language acquisition, so is each of us born ready to acquire a moral system.
Interesting.
JR
Posted by John Rutledge at 10:10 PM
How big is your plane?
The following item appeared in today's AM edition of the National Journal's CongressDaily:
HOUSE LEADERSHIP: Pelosi Says She Did Not Ask For Change To Bigger Plane.
Bigger plane? I don't even have a smaller plane. I thought she worked for me.
Sure doesn't take long for those leadership perk habits to set in, does it?
JR
PS: This is not a knock on Democratic politicians. They are still amateurs in the abuse department compared with the Rebublican leaders they ousted. It's a knock on Congress, the only whorehouse in America that loses money.
Posted by John Rutledge at 9:43 PM | Comments (1)
February 6, 2007
137 million Internet Users in China
On January 23, 2007, China Internet Network Information Center (CNNIC) published "the 19th Statistical Survey Report on Internet Development in China".
The report shows that by the end of 2006, the Internet users in China reached 137 million, accounting for 10.5% of China's population. The Internet penetration in Beijing exceeded 30% for the first time. The total amount of domain names in China increased remarkably. Over 1.8 million .CN domain names had been registered. The registration increased 64.4% in just one year. 75.9% of Chinese Internet users or 104 million people use broadband connections that include xDSL, Cable Modem and leased line. The scale of mobile phone Internet users has also expanded with the total number reached 17 million. Comparing to the same period last year, China's Internet users increased by 26 million. The growth rate was 24.3% compared with (18.1%) in 2005.
Total domain names in China now touched 4,109,020, which is 1.16 million more than 6 months ago, averaged at 200 thousand net additions per month. The .CN domain name reached 1,803,393, which are 706,469 or 64.4% greater than the same period last year. The .CN today ranks fourth among all ccTLDs and brings China's Internet into the .CN era.
By the end of 2006, China has 4.47 billion webpages and 122,306 GB of webpage contents, the annual growth rates of these two are 86.3% and 81.7% respectively. Along with vast growth of these domestic Internet resources, the total websites and IPv4 addresses in China also grow rapidly and reached 843 thousand and 98 million respectively.
China is making massive investments in its communications network so that China's companies can compete in the high-paying global market for professional services. The opening of China's capital markets on December 5 means that US financial companies are now able to set up shop in China. It also means that Chinese companies are now free to grow by selling information services to customers around the world.
The country with the most advanced information networks will drive productivity and costs in the coming decades. We are ahead for now, but they are investing more and growing faster. We need government policies that encourage new investments in infrastructure. It is the central nervous system for the entire economy.
JR
Posted by John Rutledge at 12:10 AM | Comments (1) | TrackBack
February 4, 2007
Chinese Academy of Sciences Honorary Professor
This is so cool! I received an appointment 2 weeks ago to be an Honorary Professor of the Chinese Academy of Sciences (CAS). You know I am a geek; why else would I be a member of the neurology book of the month club? Now I have a place to talk with people about my crazy ideas to integrate economics, finance, and non-equilibrium thermodynamics into something that actually works--as opposed to macroeconomics and modern portfolio theory.
This is a photo of a happy me receiving my appointment certificate from Cheng Siwei, Dean of the Graduate University of the Chinese Academy of Sciences Management School (GUCAS). As I wrote earlier today, Cheng Siwei's day job is vice chairman of the Standing Committee of the National People's Congress.
My duties will be to give several lectures each year to the CAS faculty and graduate students and to supervise PhD dissertations (I have my first graduate student already--a wonderful person named LI hong, who is writing about venture capital and innovation. And I will teach a 4 week course this summer exploring ways to use recent advances in non-equilibrium thermodynamics in economics and finance.
The best part of the day was my visit with Cheng Siwei after the ceremony. More on that later.
JR
Posted by John Rutledge at 8:06 PM | Comments (8) | TrackBack
China News Stories to Track
Journalists invited to cover upcoming NPC, CPPCC sessions. The Chinese government has invited both Chinese and foreign journalists (including journalists from Taiwan) to cover the sessions of both the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC) to be held in early March. This is a big deal--especially the CPPCC meetings--in China's steps to bring more sunlight into the political process. Great move.
Chinese may OK property rights law. In chairman Mao's days, all property was owned by the government. In 2004, the Constitution was amended to include the protection of private property, although enforcement of the right has remained ambiguous. This has led to many disputes between Chinese and foreign companies and local political authorities, who sometimes abused the system for their own profits. And it led to situations where local officials forcibly appropriated land from farmers with little or no compensation, worsening the growing tensions between rural and urban China.
Under the Constitution, state-owned property is seen as both sacred and inviolable, but the protection of private property is limited to that deemed "legal." The new law will provide that legal framework. Private property will have the same legal status as that held by the state or the public, and the law will require that authorities provide appropriate, i.e., market-priced, compensation to people whose land has been seized.
This law will reduce the risk of investing in China for foreign investors, attract more capital into China. This is great for China.
But America take note. The capital that will come into China must come out of some other place. Capital is the source of jobs, productivity, and paychecks. We need government policies that will keep the capital within our borders.
Charities left high and dry. My friend Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress, has been making waves last week. His comments about the over-heated Chinese stock market had a huge impact on the markets. He also talked about widespread corporate irresponsibility, including both direct malfeasance, such as ignoring health and safety standards in coal mines, and failing to engage in charitable social activities, as you will read in this article in Hong Kong's The Standard.
I will write more about Cheng Siwei later. I met with him 2 weeks ago in the Chinese White House to receive my formal appointment as Honorary Professor at the Schinese Academy of Sciences (CAS), where Cheng Siwei is the Dean of the CAS Graduate University's School of Management. After the ceremony, we had the most extraordinary conversation about economics, finance, physics and chemistry. More on the remarkable man leter today.
JR
Posted by John Rutledge at 6:44 PM | Comments (2)
CEO, Gold Miner, and Quarterback Compensation
I got some great comments from readers about the CEO compensation piece I wrote on Friday, including one challenging my claim that public boards aren't worth a damn, one comparing CEO's and other star players in sprts and Hollywood, one asking how to keep the good CEO's if you take away the stock option free-ride, and one from a wonderful young man who just got his first Wall Street job. You can read them by clicking on the comments button under the Forbes on Fox story.
Which brings me to coal miners.
OK, I'll admit it--I read a lot of weird stuff. I have a fire-hose of journal abstracts, dissertation topics, and newspapers from all over the world landing in my inbox every day so I can see what other people are working on. Imagine how exciting it was this morning when volume 22 of, Research in Law and Economics showed up on my desktop.
I know what you are thinking. "JR, you are so lucky! please tell me how I can get in on this fascinating subject. Please answer soon because I can hardly wait for my first issue."
All you have to do is sign up as a Guest user at ScienceDirect. It's free. Once you have signed up you can graze through a list of at least a gazillion professional research journal titles (Actually, only 2692) and check off the ones you want to track. ScienceDirect will then send you an email evey time htey release a new issue with a table of contents and abstracts for all the articles. If you want to buy an article they will sell them to you ala carte, but you can graze the abstracts for free. It's like eating at a dim sum restaurant of nerdly ideas.
Back to the coal miners. This issue contains an interesting article called Lays vs. Wages: Contracting in the Klondike Gold Rush. Mine owners during the gold rush had two different types of compensation arrangements with the miners they hired to work their claims, ordinary wage contracts and lay contracts which gave the miners a share of the takings. The author analyzes the conditions--the risk of working in extreme weather conditions--that typically led to lay contracts.
That concept--pay for work but upside interest for taking risk and bulding the vallue of a business--makes sense for executive compensation discussions today. If someone wants a piece of the upside they need to have some skin in the game. I think that's why leveraged buyoouts--where the managers frequently pony up their life savings to invest in the company--have a better track record than public company stock options.
But why stop there? I have always thought that franchise players--the Magic Johnson's and Michael Jordan's--that can impact a sports team's value should structure contracts where equity is a big piece of the package. Same for TV, movies, music, and ordinary businesses.
Let me know what you think.
JR
Posted by John Rutledge at 5:50 PM | Comments (5)
February 2, 2007
Forbes on Fox Saturday Morning
I invite you to tune in to Forbes on Fox tomorrow morning on the Fox News channel. The show airs at 11AM in New York and 8AM in Los Angeles as part of Neil Cavuto's Cost of Freedom Saturday morning block of shows. Tomorrow we discuss CEO pay, an issue that Neil Cavuto discussed with President Bush during his interview earlier this week.
Congress is flirting with the idea of passing legislation to regulate the pay of senior executives, a numb-nuts idea that harkens back to the days of wage and price controls. In particular, they don't like big bonuses.
President Bush told Neil that pay should be tied to performance, period. Our topic was whether paying CEO's on performance only was a good idea.
Everyone agreed the government should stay out of it, setting compensation is the job of the board of directors. Legislating compensation is a terrible idea. you might as well try to legislate the price of fish. You hire CEO's by negotiating with them in a market where everybody else is trying to hire the good ones too. If you don't pay the market price of fish, you don't get the fish. At least not the good fish.
From my experience, that works fine for private companies, where the shareholder is sitting at the board table. But boards of public companies aren't usually worth a damn. They are probably the CEO's buddies. They don't have any skin in the game. And in today's Sarbanes-Oxley world the odds are very high that they are also idiots; no sane person would serve on a public board today.
Over the years, as head of a private equity firm and board member of a lot of companies, I have hired, fired, and negotiated compensation packages for more CEO's, COO's, and CFO's that I would have liked. (True confession: I hate doing all of the above.)
When setting a comp package, I want the CEO to be rooting for the shareholders all the time, so compensation must be based on performance. But I do not want him watching a ticker tape all day, or checking his net worth on his BlackBerry as the stock price goes up and down. I want him to be out there building the business. So I don't like to tie compensation to the stock price.
Structuring pay based on stock market performance is crazy. CEO's like it because they get a free ride--the stock market goes up 10% every year even if the CEO stays in bed until noon. You have to account for this opportunity cost of using the shareholders' capital when you establish the compensation scheme. The same goes for bonus calculations, by the way.
Instead of stock market performance, structure the CEO's equity interest as payment for building the company's Intrinsic Value over a period long enough to execute the company's business plan, say, 5-7 years.
Intrinsic Value is the amount the company would fetch in a fair market, as determined by the company's board, usually a multiple of the company's cash flow less debt. You can negotiate the process for doing this as part of the comp package. The exception is when a company is being sold, when it makes sense to tie comp to the realized value.
This also solves the whole options-dating issue because the question doesn't even come up.
And never, never, allow the CEO to also be Chairman of the board. Not because the CEO is a bad person, because they have different jobs to do. The CEO's job is to root out every opportunity to invest the shareholders' capital where it will earn high enough returns to increase value. The Chairman's job is to be the capital cop, making sure the returns are actually there. It is the creative tension between the two that builds the value of a company.
What about back-dating options? To my knowledge, it is not illegal for a board to issue stock options with a strike price below current market value--or, indeed, to issue any claim on the company. But it is certainly stupid, since the difference in value must be reported as taxable income to the employee. And it must be documented and disclosed to the shareholders, the tax authorities, and the auditors. (When in doubt, disclose your brains out.) I have never seen it done on a board.
If the managers back-date the options without the board's knowledge it is theft, tax-fraud, or both.
So what's a shareholder to do? Demand performance by the board and raise holy hell when they don't do their jobs. Or start your own business, the only really effective way to get good governance.
JR
Posted by John Rutledge at 7:56 PM | Comments (4)