The Curious Case of the Deviant Dividends

Sunday, April 22nd, 2012

Pull up any ETF ticker on your favorite finance page and a wealth of information awaits you. Ever wonder about how accurate all of it is? If the answer is No, then today’s column is for you.

Most of the information is beyond dispute. The price is the price. But some values such as price-to-earnings and especially dividend yields really need to be scrutinized to avoid nasty surprises.

The other day on Bloomberg (the paid version), I came across several ETFs with incredibly rich dividends, with one – Guggenheim’s Solar ETF (TAN/NYSE) – outshining the others.

TAN holds about 30 solar energy companies. Its dividend yield is 9.2% according to Bloomberg and others. Indeed, its dividend of $2.11 (adjusted for a 1:10 reverse split) divided by its price of $23.02 works out to 9.2%. But is that likely for what should be a high growth sector?

In fact, looking deeper, only seven of the companies in the ETF, representing about 28% of the total allocation, have ever paid a dividend. Of those, two have postponed dividends for 2012 and another has cut its dividend by more than half. The weighted average yield on the seven is under 1%.

Since holdings can change every quarter I also checked holdings as of February 2011. The picture was the same: seven dividend-payers with an average yield of below 1%.

Where then did most of TAN’s dividend come from? The answer, according to the fund’s prospectus, is securities lending. Nearly 90% of TAN’s investment income for the 12 months ending last August came from lending about half its shares to short sellers.

You may recall that short sellers, expecting a stock to fall, sell shares that they have borrowed from other investors who are “long” (ie. They are invested in the shares). If the share price falls, short sellers buy it back at the lower price, return it to the lender and pocket a profit.

TAN, being an index ETF, is always long its shares. By lending, it earns interest from the short sellers and protects itself by demanding collateral, usually worth more than the value of shares loaned.

Generally, the ETFs with higher levels of lending income tend to be sector specific or they hold securities that are thinly traded or harder to borrow for other reasons.

Now you may say, a dollar is a dollar. However, a dollar from securities lending is not nearly as safe as a dollar from dividends. Few ETFs can earn so much from securities lending. It helps that TAN targets a very specific sector of the market. That likely means its holdings are harder and more expensive to borrow.

It could also be that the manager is lending to less credit-worthy short sellers or that the manager is accepting lower quality collateral. Either way, it does open the fund up to more risk than if it prohibited or restricted securities lending to a minimal amount. If a short seller is not able to return the borrowed stock, the fund manager will have only the collateral. In the normal course, that’s OK. But in a crisis, especially if the manager is holding poorer quality assets, the fund will suffer.

The other concern, especially for those seeking a steady stream of income, is that the income from lending will be much more volatile. TAN has fallen by 70% over the last two years and valuations on its holdings are beginning to look really cheap. At some point, that should see short sellers close their positions. Without that lending income, TAN’s yield will likely be closer to 1% than to 9.2%.

One last thought: There is no argument that securities lending is a completely legitimate activity within modern capital markets. But consider the optics: a fund manager enabling short sellers to pummel the very stocks held in the fund. For investors, the extra lending income helps fill the belly but taste like cardboard.

Besides dividends, there are other factors – price-to-earnings, use of derivatives and integrity to mandate being three – that must be examined carefully when selecting an ETF. It takes time and effort but as the example of dividends shows, this added scrutiny is a must for the serious investor.

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Tags: Bloomberg, Curious Case, Dividend Payers, Dividend Yield, Dividend Yields, Earnings, ETFs, Growth Sector, Guggenheim, Investment Income, Investors, Nasty Surprises, Nyse, Prospectus, Reverse Split, Rich Dividends, Share Price, Short Sellers, Solar Energy Companies
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Goldman Now Aggressively Selling Apple To Clients, Hikes Price Target To $600

Wednesday, January 25th, 2012

In case one was wondering how the Goldman trading team was axed in Apple, we now know that they are pushing their inventory of stock in the name out of the door and to clients harder than ever, having just released a forecast with a $600 price target. However, with nearly 200 hedge fund holders in the name, and pregnant to the teeth in the stock, we fail to find who the incremental buyer of GS’ AAPL stock will be.

From the report:

We are raising our estimates after this quarter’s upside results. For FY2012, we forecast revenues of $148.26 billion and EPS of $40.36, up from $138.34 billion and $35.13. Our forecast now calls for revenues and EPS of $166.09 billion and $44.55 in FY2013 and $186.24 billion and $49.10 in FY2014, up from $160.55 billion and $40.03, and $180.83 billion and $43.50, respectively. Even after this quarter’s upside, we believe the year is chock full of catalysts to drive further share price momentum. We continue to expect a late March quarter iPad refresh and a lower price point for the iPad 2, as well as a mid-year iPhone refresh. We believe the MacBook Air will continue to gain share in the PC sector, and we believe Apple will finally launch an iOS-based television in late 2012 or early 2013. Finally, our expectation for a dividend announcement this year could represent a critical catalyst that brings a new class of investors into the stock.

Yes: dividend investors. And also a catalyst for the outflow of growth investors.

Full report:

Tags: Aapl Stock, Apple, Catalysts, Critical Catalyst, Dividend Announcement, Eps, Estimates, Expectation, Goldman, Growth Investors, Hedge Fund, Ipad, Iphone, Launch, Outflow, Pregnant, Price Momentum, Price Target, Share Price, Teeth
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“It’s 11:01?” (Saut)

Tuesday, September 27th, 2011

“It’s 11:01?”

by Jeffrey Saut, Chief Investment Strategist, Raymond James

September 26, 2011

“It’s 11:01 p.m., do you know where your children are?” … is a phrase that haunted me during my teen years as every night our local news anchor would begin his broadcast with that exact question, reminding my parents that I was out past my curfew. Similarly, investors asked themselves last week, “It’s 1101, do you know where your stocks are?” as on Wednesday the Doleful Dow dove through last Monday’s intraday low of 1188.36 and headed for the Netherlands. In this case, the Netherlands would be the region below the August 9th intraday “selling climax” low of 1101.54. For seven weeks I have discussed the importance of holding above the 1100 level, or only marginally violating it, if our analogue to the October 1978 and October 1979 bottoming sequence is going to continue to play. So far, the correlation (R²) between then and now is remarkable. How much longer that R² extends is unclear, but as long as the 1100 holds we are sticking with this analogue that has served us so well.

Of course, given that strategy has surfaced questions about how much cash we would raise if 1100 is broken. My response has been, “We recommended raising roughly 30% cash back in the March-April timeframe. Another 5% was raised when the S&P 500 (SPX/1136.43) violated the 1320 level and 5% more was harvested when the SPX traveled below its July reaction low of 1295.92.” While it is true we recommended putting some of that capital back to work seven weeks ago near the selling-climax lows, using a dividend-paying stock whose share price had collapsed to what our fundamental analysts thought were “absolute lows,” we have still been pretty circumspect in recommitting capital to the broad stock market until it is apparent THE bottom has been recorded.

Last week’s Dow Dump of 6.4% was the worst Weekly Wilt since October 2008, which if you will recall was when the “bottoming process” began as on 10/10/08 ninety-three percent of the stocks traded on the NYSE made New Annual Lows and we were bullish. Like in October of 2008 the news backdrop surrounding last week’s “wilt” was grim. Worries centered on the Greek Gotcha’, slowing economies, credit spreads, commodity crashes, ineffective governments, a fickle Fed, Brazilian import tariffs, class warfare, etc., leaving participants’ frustration levels elevated. That frustration is being increasingly reflected in my emails, aka “hate mail,” because I have tried to stay constructive on stocks after their generational oversold reading of August 8-9. Such a swelling of “hate mail” has historically had bullish implications for stocks. For example, early last week some of our financial advisors objected to my reference to “class warfare” in regards to President Obama’s proposed new tax regime. I would remind those folks that, “According to the Tax Foundation, after the 1929 crash, Congress proceeded to raise the top marginal tax rate from 25% to 63% by the end of Hoover’s term. As you may recall, hiking those rates may have made folks feel that rates were more equitable but it sure didn’t help the economy.” Another email referenced last Monday’s letter where I quoted the sagacious GaveKal organization and its potential solution to the Greek dilemma. This emailer’s verbiage read:

“Really? I mean really?! How stupid do you think I am? Who believes that to apply a ‘global tax cut in Europe’ would have ‘little direct impact on the German tax payer’?! This assumes that the German government has a way to replace all those tax credits that they gave to the banks with Greek bonds losses. Why? Because tax credits are not something the banks are going to repay to the German government.”

It is really too bad that emailer missed the entire point of the GaveKal quote since it was intended to show that there are many “out of the box” solutions to Greece’s woes whether GaveKal’s idea is implementable or not. Then I have received numerous “pings” about my inability to turn bearish; and, to all of those folks I have this to say. To my knowledge Raymond James was the only investment bank to write about the Dow Theory “sell signal” of September 1999 and tell investors not to let anything go more than 15% – 20% against them. I also wrote about the Dow Theory “buy signal” of June 2003, as well as the “sell signal” of November 2007. Most recently, I wrote about the “sell signal” that occurred on August 4, 2011 and opined I hoped it would prove false like the “flash crash” sell-signal of May 6, 2010 … QED!

The reason I revisit my “hate mail” thesis this morning is because it speaks to the frustration level investors are currently feeling. Participants that didn’t raise some cash in March and April are frustrated because they have seen the value of their portfolios decline. Participants who did raise cash are frustrated because they didn’t raise enough cash. Participants that panicked, and sold everything seven weeks ago, are frustrated as they have watched stocks like EV Energy Partners (EVEP/$70.50/Strong Buy) rally from its August 8th intraday low of $53.10 into last Tuesday’s intraday high of $77.77. Indeed, just about everybody is frustrated, making my best observation – it is difficult to find any optimists around. The situation currently at the focal point of the world’s problems appears to be Greece, as comparisons abound about how a Greek default would push the planet into the sort of financial fiasco that followed the Lehman paroxysm. And with that analogue I take exception.

The 2008 Armageddon occurred because Lehman’s bankruptcy fractured the financial system in unanticipated ways. The current crisis, however, was avoidable and has been hoisted on the country by the cowardice and incompetence of elected leaders on all sides of the political aisle. Unless there are significant policy shifts, and the U.S. starts to act like a real country instead of a failed state run by a bunch of fanatical factions, our government runs the risk of spiraling out of control with attendant economic and financial damage. That said, there are indeed some good things happening. As pointed out in an excellent article by Reuters’ Alan Wheatley titled “Beyond the gloom, reforms bode well for growth” (as paraphrased by me):

“Largely unnoticed by markets riveted by the drama of the day, more and more countries are successfully implementing complex, politically treacherous reforms needed to raise their long-term economic growth rates. … There’s more appetite for reform today than there was 10 years ago; that’s for sure. … We continue to believe that at some stage the markets will begin to acknowledge these reforms. This, in turn, should lead to a permanent reduction of the fiscal risk premium from very high levels currently.”

Meanwhile, the SPX’s 10.8% mauling from its July 21st intraday high into the August 9th intraday “climax low” has left ~52% of the S&P 500 stocks yielding more than the 10-year Treasury Bond and ~53% sporting P/E ratios of under 12x earnings. Moreover, consensus earnings estimates have not really come down all that much with this year’s estimate pretty sticky at $98 and next year’s hovering around $111. While I think those estimates are too high, even using my lower estimates produces a P/E ratio for the SPX of 11.8x in 2011 and 10.7x in 2012. If correct, such estimates render an earnings yield of ~9.3% for the SPX with an equity risk premium of ~7.5%. To be clear, my estimates assume no recession for the U.S. economy, a stance not shared by most. However, if we are entering a recession I have to ask why are Baltic freight rates rising, why are railroad shipments and intermodal loadings increasing, why is L.A. port traffic perky, why are RevPar (revenue per available room) numbers tacking at double digits, etc.? Additionally, why have tax collections in the 46 states that have reported them risen 11.4% (year-over-year) in 2Q11, the sixth consecutive quarter in which revenues were up. Tax revenues had declined significantly the five previous quarters. It has been the strongest showing since 2Q05. All states reported growth in personal income taxes. Both personal income and corporate tax revenues increased 16.5%; and, sales tax revenues rose 5.9% according to the Rockefeller Institute. Nope, I am still in the no recession camp because our economy has not built up any new excesses that need to be washed through the system.

The call for this week: Last week the Dow Jones Industrial Average (INDU/10771.48) broke below its intraday August 9th low of 10604.07, but the SPX did not violate its respective selling-climax low of 1101.54. Neither did a number of other much-watched indices. To me that sets-up the potential for a downside non-confirmation. This week should resolve the suspense. A decisive break below 1100 (5 – 10 points) would target 1020 -1030 according to our work. Whatever the resolution, we have done a fairly decent job of “calling” the stock market this year despite our terrible “call” that 2011 might just be the year of the banks. Fortunately, we avoided the marquee banks in favor of names like IBERIABANK Corp. (IBKC/$43.83/Strong Buy). But even though such names have held up better than their large cap brethren, we have still lost money and have moved on (read: sold our mistakes quickly). From here, my best idea for investing in banks is to use FBR Small Cap Financial Fund (FBRSX/$14.78). I have followed the fund’s portfolio manager, David Ellison, since the 1980s when he was managing bank mutual funds at Fidelity. Interestingly, David went to 60% cash before 2008’s Financial Fiasco, a feat that speaks to his risk-adjusted management style. Also consistent with our “cautious and conservative strategy until ‘things’ are resolved,” is the Goldman Sachs Dynamic Allocation Fund (GDAFX/$10.19), which has about one-third of the stock market’s downside but captures ~80% of the upside. As for fixed income allocations, I am still using Putnam Diversified Income Trust (PDINX/$7.39), the MainStay Floating Rate Fund (MXFAX/$9.11), and the Pioneer Floating Rate Fund (FLARX/$6.65).

Tags: Amp, Analogue, Chief Investment Strategist, Climax, Correlation, Curfew, Dividend Paying Stock, Dow, Exact Question, Fundamental Analysts, jeffrey saut, Last Monday, Lows, News Anchor, Raymond James, Seven Weeks, Share Price, Spx, Stock Market, Stocks, Teen Years
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Corrective Phase of U.S. Equities Not Over, According to Technical Indicators

Friday, May 27th, 2011

“A number of technical indicators have been very helpful in timing the end of prior corrective phases when cyclical equity conditions were still generally constructive, i.e. a sustainable, low inflation global economic expansion and the absence of significantly overvalued conditions,” BCA Research said yesterday. “Currently, these indicators suggest that the corrective action in the broad U.S. equity averages has further to go.

The research note mentions the following indicators.

• The momentum is still falling from an overbought zone, and the 26-week rate of change of S&P 500 has still not retreated to zero or below zero which typically signals a complete unwinding of overbought conditions.

• Our Equity Investor Sentiment Composite has not yet fallen to the levels that imply a sufficient easing in overly optimistic expectations.

• Moreover, new highs on the NYSE minus new lows have stayed elevated, providing another indication that money flows have not abated to a level that suggests that a new wall of worry has been erected.

• Insiders remain aggressive sellers and an easing in the sell/buy ratio to a more neutral zone would provide comfort that executives had a higher conviction that their current share price valuation was not running ahead of their expectations for business performance, as is currently the case.

• Both our Intermediate Equity Indicator (IEI) and BCA Equity Capitulation Index (ECI) are still elevated.

The report concludes that while the cyclical backdrop remains constructive for equities, it is too soon to declare that the corrective process has run its course.

Source: BCA Research, May 26, 2011.

Tags: Backdrop, Business Performance, Capitulation, Corrective Action, Corrective Phase, Course Source, Eci, Economic Expansion, Equity Investor, Insiders, Investor Sentiment, Lows, Money Flows, Neutral Zone, New Highs, Nyse, Optimistic Expectations, Report Concludes That, Share Price, Technical Indicators
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European Engines of Growth

Wednesday, April 27th, 2011

Emerging countries in Europe are expected to outpace their developed counterparts over the next two years, with Latvia, Poland, Romania and Slovakia leading 2012 GDP growth, according to The World Bank.

In its “EU10 Regular Economic Report,” the organization expects Romania to lead the way with 2012 GDP growth of 4.4 percent followed by Slovakia’s projected growth of 4.3 percent. Poland’s GDP is anticipated to grow by 4 percent this year and 4.2 percent next year. As domestic demand recovers, Latvia is set to produce a GDP of 4 percent by 2012.

Based on “low pre-crisis imbalances, deep integration into European production networks, European Union funds, and, in the case of Poland, solid consumption,” these countries should show solid growth, according to The World Bank.

The projections come with a hedge: the countries will have to tackle stagnant job growth, particularly among the young and unskilled, and make sure the financial sector remains stable.

To obtain the growth, The World Bank took into consideration monetary and fiscal policies. The organization expects monetary policy to remain accommodative, with a few central banks in the EU10 region already beginning the “tightening cycle of policy rates in response to increases in headline inflation and accelerating economic growth.” As for fiscal policy, EU10 governments have “embraced fiscal consolidation” and have already reduced deficits by lowering public wages and capital investments and raising taxes.

Monitoring these policies is an essential part of our investment process. For the Eastern European Fund (EUROX), we’ll continue to watch the actions of these promising countries to determine potential opportunities over the next two years.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries.  The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

The EU10 countries include Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.

Tags: Capital Investments, Central Banks, Counterparts, Countries In Europe, Currency Fluctuation, Economic Report, Emerging Market, Financial Sector, Fiscal Consolidation, Fiscal Policies, Fiscal Policy, GDP, GDP Growth, Headline Inflation, Monetary Policy, Political Risk, Production Networks, Public Disclosure, Regional Fund, Share Price
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What To Do About Japan? Part II

Friday, March 18th, 2011

What to do About Japan? Part II

Posted on March 17, 2011

By Tom Bradley

While it’s still premature to evaluate the impact that the tragedy in Japan will have on businesses and the economy, Edinburgh Partners (the manager of our Global Equity Fund) has conducted a preliminary assessment.

Before addressing specifics, EPL notes that the comparisons some commentators are making with the stock market’s reaction after the 1995 Kobe earthquake are not appropriate. In 1995, the stock market was expensive, trading at a cyclically-adjusted price-earnings multiple (P/E) of over 35x. Currently, the P/E is less than half that level and earnings growth remains strong (although it will be hampered in the near-term by the residual effects of the earthquake and tsunami).

In evaluating the potential impact on corporate earnings over their 5-year forecast horizon, the key question EPL is addressing is the extent to which production facilities have been affected. For many companies, where the plant remains intact, they’re expecting only short-term supply chain disruptions. In the case of construction and power companies, they are looking at comparatively larger and more sustained impacts.

EPL’s analysts expect that for the majority of companies in the Global Equity Fund, long-term earnings forecasts will not vary by more than 10%. In general, they feel the share price declines for these companies have been excessive and expect to see sustained appreciation when the nuclear threat abates and general sentiment improves. Once they’re able to confirm their initial findings, they’ll look to increase holdings where appropriate.

For certain construction-related companies, EPL anticipates a potential positive change of more than 10% in long-term earnings forecasts, as these companies are likely to benefit from a significant increase in public works spending. Kajima is an example of a portfolio holding that falls into this category.

The manager believes that the two principal caveats to a recovery in stock prices relate to nuclear risk and bond market risk (i.e. reconstruction financing needs will place excessive pressure on government finances). The first risk remains unclear. The current expert appraisals suggest minor contamination at a local level but until definitive statements are made by the authorities, concerns will remain.

While the second risk is also real, EPL feels that a different scenario will emerge whereby the magnitude of the disaster will stimulate national unity in the political process and we’ll see a co-ordinated reaction from the Treasury and the Bank of Japan. Early signs of this are encouraging.

At the risk of sounding pat, we encourage investors to stick to their long-term plan and avoid any knee-jerk investment decisions based on the news coming out of Japan. Our manager is on top of the situation and is making the hard decisions on your behalf.

Tags: Commentators, Construction Related Companies, Corporate Earnings, Disruptions, Earnings Forecasts, Earnings Growth, Epl, Forecast Horizon, Global Equity Fund, Initial Findings, Kajima, Kobe Earthquake, Nuclear Threat, Price Declines, Price Earnings, Residual Effects, Share Price, Stock Market, Term Earnings, Tom Bradley
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Whoosh!

Monday, November 8th, 2010

Whoosh!

by David Andrews, Director of Research, Richardson GMP Ltd.

That is the sound of North American equity markets moving higher on the release of Ben Bernanke’s sequel, Quantitative Easing Part 2. Key benchmarks in Toronto and New York rushed higher, trading at levels not seen since Lehman Brothers filed for bankruptcy in September 2008. Oh yeah, there was also the U.S. mid-term elections this week but all investors could seem to do was yawn as all eyes were squarely on the Fed. For the record, quite a few Democrats were ‘whooshed’ out of office as the Republicans stormed back to take the House of Representatives. The outcome is a clear signal that Americans are angry about how the current administration is handling the economy.

The Fed basically met ambitious expectations with details of their new large scale asset purchase program. They plan to buy $600 billion of assets over the next 8 months – $75 billion per month – and left the door open for more should they need to add further stimulus. We think the announcement helps stocks in two important ways. Firstly, it immediately sinks the value of the U.S. dollar which should be supportive of earnings going forward, especially for export oriented U.S. companies. Secondly, QE2 should help stocks through multiple expansions. The Fed has basically ensured lower interest rates for an extended period of time. The stock market uses interest rates to discount future earnings, hence the share price lift we witnessed in stock values this past week. Whoosh indeed!

In other news this past week, Investment Canada flushed the idea of a BHP Billiton’s takeover of Saskatchewan’s crown jewel: Potash Corp. Citing no ‘net benefit’ to Canada, the federal government protected its federal electoral votes in Saskatchewan by siding with the provincial government and effectively nixing the deal. That ‘whooshing’ sound may also be the career aspirations of Billiton’s CEO Marius Kloppers who now has three M&A strikeouts on his resume. Canadian corporate earnings have been strong with Suncor reporting a $1billion profit and Manulife Financial getting out from under a $1 billion loss one year ago. The king result this week belongs to Magna which blew past expectations, hiked its dividend and announced a stock split as the company continues to reap the benefit of the recovery in the automotive sector.

Commodities on a Roll

Commodity markets have exploded to the upside, boosted again this week by the Fed’s QE announcement. Investors have lost faith in the ability of governments to resist debasing their paper currencies. The Fed is banking that higher stock market wealth will spark consumer spending. The CRB Index is up 13.8% in September and October.

Tags: American Equity, Asset Purchase, Ben Bernanke, Bhp Billiton, Canadian Market, Career Aspirations, Clear Signal, Commodities, Crown Jewel, Current Administration, Director Of Research, Electoral Votes, Expansions, Gmp, Investment Canada, Lehman Brothers, Marius Kloppers, Potash Corp, Provincial Government, Share Price, Stock Values, Whoosh Whoosh
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Knowing Your Shareholder’s Rights (Mark Mobius)

Saturday, April 10th, 2010

This article is a guest contribution from Mark Mobius, Vice-Chairman, Franklin Templeton Investments.

This week, I talk about an issue that I think is important for investors, especially for long-term investors. It is not enough just to identify the next “big opportunity”, but, having identified it and invested in it, you need persistence and determination to ensure that your investment stays on the right track.

In my view, shareholder activism is not a privilege – it is a right and a responsibility. When we invest in a company, we own part of that company and we are partly responsible for how that company progresses. If we believe there is something going wrong with the company, then we, as shareholders, must become active and vocal.

However, most minority shareholders tend not to be very active. One of the biggest reasons for their reluctance is that it can take a lot of time and effort, and sometimes money too, to persuade management to change. To become a strong activist, one may need to hire lawyers, which could become quite expensive. Shareholders often find that it is much easier to simply sell their position in a company that they feel is going in the wrong direction. If enough shareholders sell out, and the share price drops, the company’s management may realize that their actions are not welcomed by the market, and they may retrace these actions. However, even if a share sell-off engenders change (which itself is unlikely), the change usually comes too late for those shareholders that have already sold out. In the long term, trading in and out of a company’s shares could present a costlier and more time-consuming strategy than simply exercising your rights as a shareholder.

We pursue shareholder activism in varying degrees of intensity. Our initial step is usually to communicate with the company’s management and directors to express our concerns and begin a dialogue. Often, that is enough. If that does not work, then more aggressive action, such as voting out the directors, may be needed. However, the latter requires many investors to get together and express the same concerns. Deciding when and if we might consider taking a shareholder activist position must be carefully weighed against how much we have invested in the company and whether we think taking aggressive action has a good chance of success to warrant the necessary time and money involved.

A historical example of an occasion when our strategy of shareholder activism proved successful happened in May 2006 with a large [international] manufacturing company. The company had historically been paying a nominal fixed royalty fee to the founding family, for the use of their name. Then, in the first quarter of 2006, the company’s board decided to change this royalty from a fixed sum to a percentage of net sales, which involved raising the payment quite substantially. When this change was disclosed in the first-quarter earnings report, we immediately sent a letter to the company on May 5, 2006, expressing our strong disagreement and detailing why we thought the decision was an abuse of minority shareholders’ rights.

Next, we led a large group of minority shareholders in complaining to various entities – the company, the individual board members’ offices and the local regulator. Finally, we made the case public through the media. We normally do not favor public announcements on such matters, and our decision to go public was made when we felt that we had exhausted all other options available to us at the time with little success. We also felt it was necessary to communicate our concern and the concern of other shareholders as quickly as possible on such a material change involving a public company.

On May 8, 2006, our combined efforts bore fruit: the company revoked the decision to pay royalties to the founding family. As a further positive development, the company announced that ownership of the brand would be transferred to the company at no charge, ensuring that no royalties would be paid at all, in the future as well. Sure enough, after the company’s share price had fallen more than 8% in the preceding three days, it recovered by more than 2% on the day after the announcement.

The fact that the founding family, the company’s management and its directors finally revoked their decision should reflect positively on all of them. In their response, they showed that they were sensitive to the concerns of minority shareholders, which we view as an important indication of good corporate governance. Their actions reaffirmed our faith in the company as well as our positive outlook for its future growth.

I hope this example sparks in you the interest and desire to become a more active participant in the companies where you are a shareholder. I would strongly encourage you to speak up and take action, to the extent that your time and capabilities allow, if you disagree with the direction that a company’s management is following. We may be minority shareholders, but by speaking out for what we think is right, we may be able to bring about change for the greater good of a company and all its shareholders.

Source: Knowing Your Shareholder Rights, Mark Mobius, April 2, 2010

Tags: Active One, Activist, Dialogue, Franklin Templeton Investments, Initial Step, Intensity, Investment, Lawyers, Mark Mobius, Minority Shareholders, Persistence, Privilege, Reluctance, Share Price, Shareholder Activism, Shareholder Rights, Shares, Term Investors, Vice Chairman, Wrong Direction
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Hendry: Not Yet Time to Invest in Inflationary Assets

Tuesday, March 17th, 2009

Hugh Hendry, CIO, Eclectica Asset Management, appeared on CNBC, Wednesday, March 11, 2009 and shared his contrarian views on investing in inflationary assets, asserting that it is not yet time to do so. To appreciate Hendry, you must see him in action.

Geoff Cutmore: Hugh has been a huge proponent of Potash Corporation, that was some months ago. Does he still have a view that the business will continue to do relatively well even as the share price falls. There does seem to have been faint signs of life in commodities. Do you still have a trading position in Potash. What is your take on these shares and the macro view for fertilizers and the agricultural space?

Hugh Hendry: A good question. I have in part of my business, we have an agricultural equity franchise (fund), clearly Potash is one of the very best agricultural businesses in the world, but we’re talking about a business, lets not forget, which has now fallen from $260 to, like, $60. The notion that I would have had ownership from that level all the way down is preposterous, and in our trading accounts at the present time, clearly I can’t own that. But what you do hear is that George Soros is the biggest shareholder now of Potash, and if you look at the performance of agricultural equities, they’re performing almost in line with gold shares, i.e. they’re outperforming at the present time.

But I have to throw some water on that, on those flames. I still believe this is still a profoundly deflationary environment, and therefore this whole notion of investing at this present moment in inflation or inflationary assets is ill-conceived and poorly timed, and so I think what we’ve seen is this waterfall decline, then we’ve seen an explosive rally, and I think it then comes down again. I think there’s still a lot of hope, and a lot of recognition how strong these businesses are, but further price swings, I think.

In this next must see segment, Hugh Hendry and Liam Halligan of Prosperity Capital Management, locked horns over how quantitative easing (QE) will affect the economy. Halligan and Hendry get into a heated argument over QE. Halligan claims to be in a minority of one that it will be inflationary, while Hendry tells Halligan that he is, in fact, consensual, and that his view is held by many. Finally, Hendry points out that they, in fact, both agree that quantitative easing is doomed but that Halligan’s claim that it is inflationary is what’s out in left field, that QE is a profoundly deflationary policy for the time being, hence, Hendry’s assertion that it is not the right time to invest in inflationary assets,… yet.

In this third segment, Hendry and Halligan discuss the effects of falling Sterling and QE. Hendry fires back initially by saying Halligan “has a very loud voice, and he’s kind of a scary guy.” Its is hilarious to hear Hendry take a bite out of Halligan in his usual way. Halligan’s response is that Hendry is insulting and that its demeaning to him. To Hendry, guys like Halligan should not be allowed to come on TV and spout. Hendry tells Halligan, “You’re not a rational person…”

The debate between Halligan and Hendry over QE is revealing and serves as an excellent source of enlightenment on the contentious issue of central banks printing money to get around the credit-burdened economic curve, especially if you’re wondering what to do next and when to do it.

Here is some additional quoted material from CNBC:

The stock market is still an unsafe place for investors as quantitative easing, by which central banks boost the supply of money attempting to kick-start economies, is unlikely to work, Hugh Hendry, Chief Investment Officer at Eclectica, told CNBC.

Hendry also disagreed with Warren Buffett’s view, recently expressed to CNBC, that inflation is likely to be as bad if not worse than in the 1970s.

“I’ve honestly never known a time of near-universal conviction that we have to worry about inflation today,” Hendry told “Squawk Box Europe.”

“For quantitative easing there’s no successful precedent. It has never, ever succeeded,” he added.

He is buying government bonds, shorting stocks and “can’t buy enough dollars.” Taking the contrarian view to the majority of speculators creates opportunities, Hendry added. “Gold, silver, I’m shorting them right now.”

Inflation will become a reason to worry for authorities again at some point, but they should think about combating deflation right now, Hendry said.

“It is coming back in the future. All I’m saying it is just an unprofitable proposition at the time,” he said. Betting on inflation is as if “we got a new book and we’ve read the last page. But if you read the entire novel, it’s a different journey.”

Despite Tuesday’s strong rally in the stock markets, shares are not a good investment, said Hendry, who continues to bet on government bonds.

“I dare you to touch an equity today. Tell me you’re making money on equities,” he said.

The unravelling of the crisis is likely to continue as world economies re-adjust after the cheap credit bubble has burst.

“We were deluded by easy finance and as that easy finance is being removed, we’re shocked,” Hendry, who said his investment fund made a 32 percent return last year and is up 10 percent this year, said.

The market has grown for about 30 years and for a long period, it will be “going nowhere,” Hendry said, likening this period with the one after the crash of 1929 and with the crisis in Japan at the beginning of the 1990s, despite claims that this time it is different because the world has evolved.

“I am saying that we are no different. Here we are, surrounded by technology and computers, and we are no different.”

Tags: Agricultural Businesses, Capital Management, Cnbc, Contrarian Views, Eclectica Asset Management, Explosive Rally, Fertilizers, Franchise Fund, George Soros, Gold Shares, Good Question, Halligan, Hugh Hendry, Potash Corporation, Present Moment, Present Time, Price Swings, Proponent, Qe, Share Price, Signs Of Life, Trading Accounts
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Rio Tinto/BHP Billiton at parity

Friday, December 19th, 2008

Yep, the share prices of the two mining giants have crossed. After suffering another sickening fall on Thursday, Rio shares (down 10 per cent) are now trading at £10.40, about 4p lower than BHP’s.

This is seriously embarrassing for Rio. After all, BHP’s abandoned bid was pitched at a ratio of 3.4:1.

Of course, the reason Rio is being dragged lower is debt. And Rio has a lot of it – $40bn to be precise, against a market value of $27bn.

The company says it will be able to meet its debt repayments ($8.9bn is due next September) and does not need a rights issue.

But the market doesn’t believe Rio, and the result is a sinking share price.

Since BHP walked away last week, Rio shares have fallen 58 per cent.

Related links:
No respite for Rio - FT Alphaville

Source

Tags: Alphaville, Bhp Billiton, Bid, Debt Repayments, Ft Alphaville, Gbp, Giants, Lot, Parity, pence, Reason, Respite, Rio 10, Rio Tinto, Share Price, Share Prices, Shares, usd
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