Vedran here again, filling in for David Galland. With the presidential debate this last Wednesday, it would be impossible to ignore the elephant in the room and write this issue without mentioning it. However, I don't want to start another debate on what a Romney administration or another Obama administration might resemble. Such conversations involve much speculation and often get us nowhere. Obama's second term could be far different from his first in terms of government expansion and regulation. And Romney… well, does anyone really know what he stands for? And even if you think you know, what his presidency would really be like is another question altogether.
What I'd rather discuss is the problems that aren't going to disappear regardless of the winner. If you believe that four more years of Obama or Romney are going to solve all of the world's problems, you're just kidding yourself. Unfortunately, the world's problems are bigger than ever. Believe it or not, the US presidential election is not the most important event on the planet right now. Let's get started with a list of issues which aren't going away.
In the past few decades, the US has been the center of the world. However, with the emergence of China and other markets and the organization of the European Union, other political decisions are often just as important as our own. Does this mean that we're completely helpless to international winds of fortune? Of course not; in this recession, some countries are clearly doing better than others. We could implement better policies, which would alleviate much of the suffering. Nonetheless, even the countries with lower unemployment rates and better growth are still sluggish. While things might be better elsewhere, they certainly aren't great either.
With this election season, we need to be realistic. Regardless of what happens with our candidates, there are still plenty of troubles worldwide to worry about. And those problems are big enough to drag us down with them. Even if my favorite candidate – Ron Paul – were somehow miraculously elected by write-ins, he wouldn't be able to solve all the world's problems. Unfortunately, the dangers in the economy extend far beyond our shores.
By Vedran Vuk
The press despises CEOs getting raises on top of bonuses on top of stock options, while the rest of us are barely keeping up with inflation. However, there's a special level of anger reserved for those CEOs whose bonuses go up when their profits and stock prices go down. We should be angry, right? Aren't losses matched with bonuses a clear sign of poor corporate governance? Actually, this isn't always the case.
Certainly, if the CEO has performed poorly, he doesn't deserve a bonus. However, how does one define performance? Despite what most people think, profits and the stock price aren't always the best metrics. No, I haven't gone crazy. Think about this from a non-corporate perspective.
When a crew member on a sinking ship saves the lives of dozens, there's only one word to describe him or her – hero. All sorts of adoration and sometimes even awards are bestowed on such individuals. However, what if we treated this hero like the media treats a CEO facing losses? "Hey, this crew member might have been responsible for sinking the ship. Perhaps he's no hero at all. Forget about the lives he saved; he and rest of the crew are responsible for the sinking."
Before throwing the CEO or your poorly performing stock overboard, there's a few questions to ask yourself about management with the ship example in mind. First and foremost, did the CEO sink the ship? It's one thing if the CEO was navigating through a hurricane and he hit the shore. It's a whole different matter if he sank the ship thanks to his bad decisions.
Second, once the ship started sinking, how did he react? Did he save almost everyone onboard, or were his evacuation plans even worse than his navigation? If he sank the ship but saved the crew, it's a gray area. You probably still want to throw him overboard. However, if the ship ran into a major hurricane and the CEO's decisions saved the whole crew, then he might be rightfully a hero.
The same goes with managing a company. If the company lost $500 million, we might immediately consider the CEO to be a failure. But what if the CEO's decisions saved the company from losses of $750 million? Without his decision-making, things would have been worse. Now, I'm saying this from a personal perspective, but if someone saved me $250 million, I wouldn't feel so bad for giving him a $5 million bonus for a job well done.
Whether a CEO deserves his bonus or not isn't always black and white – or should I say "in the black or in the red?" Sometimes one can give an excellent performance in bad times.
There's also a flip side to this issue. There are times when companies are making record profits, and the CEO doesn't deserve his bonus. This is particularly important in commodity-driven industries, such as mining and the oil industry. If the price of gold or oil shoots through the roof, the profits of most mining and oil companies are going to go up as well. In turn, the CEOs may get special rewards for meeting certain levels of profitability or share price, or they get a huge payoff from their options finally being in the money.
However, they didn't do jack to earn those profits. They just happened to be the lucky schmuck sitting in the CEO chair when the gold price jumped 30%. In some cases, higher gold prices might actually be hiding incompetence. While total revenue is up, production might be down, but the CEO gets rewarded anyway. While the money is good, lots of people will shrug off otherwise poor performance. But consider that someone who is underperforming in good times is probably going to be a disaster in bad times.
Firms with a proprietary trading division – mostly banks as well as companies with commodity derivatives trading departments – often face the same situation. The trading group will make a huge profit, and as a result of the success, the CEO will get a bonus as well for a good year. However, we can't attribute the success of the traders to the CEO. If the CEO had the idea to expand a new division into Asia and the division did very well, then he deserves a reward. But in the case of the trades, it's hard to argue that the CEO's plans contributed to their success. If you tell your shareholders and analysts that part of your plan is the traders getting lucky next quarter, things will not go over well.
When you're looking at the management of a company, it's not simply about being in the plus or the minus. Instead, it's about having a CEO whose decisions are cutting losses in the bad times and whose decisions are outperforming the competition in good times. That might be hard for the media to sort out, but as an investor, you can get ahead by putting aside that bias and judging performance objectively.
By Vedran Vuk
Last week, I was hanging out with a friend of mine who had just emigrated from Serbia in the last year. He was contemplating opening a restaurant which serves ćevapi, a Bosnian specialty. For the uninitiated, here's a picture below:
Basically, if you like hamburgers, you'd like ćevapi. Rather than being a patty on a bun, the ćevapi is meat spears between bread with a few extra flavors in there. The name sounds much more exotic than the meal itself. There's just one problem with my friend's idea: he had never worked in a restaurant back in Balkans. If he started one here, it probably wouldn't be the best ćevapi in the world.
But then I realized something peculiar – the one Balkan restaurant in Houston that serves ćevapi is a bit mediocre too. If it were in the Balkans, it wouldn't last long. Have you ever noticed how practically all food in the US is pretty mediocre compared to its origins? Whether it's Italian dried meats, European bakeries, or German sausages, we just never seem to get it quite right in the States. Doesn't that seem a bit strange? After all, we've received so many immigrants over the years, yet the flavors from the home countries have never transferred completely.
Here's my theory. The problem is that most people who came over to the States back in the day were like my friend. They had a good idea to start a restaurant and were hard-working, but knew how to pull off the recipes only halfway. We never got the most skilled from other countries. Why is that? Well, think about it. Why would the best ćevapi maker in Sarajevo move to the US? He's probably doing just fine for himself over there. In fact, his opportunities in Bosnia are actually a lot better than in the US – same with any other place. I'm sure that the best sushi chef in the world is still in Japan making a fortune.
When tough economic times arrive, it's never the best who must turn their lives upside down by relocating to other continents. It's the rest of us. With that in mind, your career is ultimately your best recession protection. In the worst economic climates, you can always insulate yourself by being the best in your field, or even better, working on a skill to make yourself indispensable. When economic turmoil is pushing others into difficult decisions, you get to stand firm.
Making career changes or training for a new one isn't easy, but sometimes it's necessary. And often the allure of current big paychecks can fool us into not training for the future. The best example of this is the auto industry. It's stupid to not work on new skills when you're in an industry where your coworkers are getting axed year after year for decades. If you're in such a field, making a transfer to another sector or at least training for it is probably going to be a better payoff than any gold stock our publications can recommend.
If you have to choose between being the best or having an in-demand skill, I'd go for the in-demand skill. If you're the best philosophy student at your college, it doesn't really mean too much for your job prospects… it's better than being an average philosophy student, but you're still up a creek without a paddle.
In my own field, I know a lot of fellow graduates in business and finance who are very talented but not doing so well. But here in the Houston area, I've been hanging out with a lot of engineers and medical professionals lately. From the viewpoint of their careers, there almost isn't a recession.
As I said, it's not something one can change immediately, but it's certainly something to think about or at least to talk about with your kids who may be choosing their careers now. Holding gold and a few other investments can help bring us through these tough times, but it's hard to make money on your investments when you're liquidating your positions to supplement a missing paycheck. Ultimately, your number-one protection in a recession will always be your skill set. Make sure it's a good one.
OK, you guys know that I dislike both candidates equally, but this was just a too funny and cute combination of Romney's mention in the debate of cutting PBS funding and his 47% comments. I had to share it. However, on a deeper level, it just might be right. That Muppet that lives in the trash certainly isn't paying his taxes, and that addict Cookie Monster is certainly suspect as well…..
If Internet Explorer were like real life:
Never thought of this sign that way, but the added caption is totally right.
Ouch, a scathing quip on the upcoming Columbus Day:
The title of this YouTube video is spot on: Worst Movie Death Scene Ever.
And that's it for this issue of Casey Daily Dispatch. As always, thank you for being a subscriber.
Casey Senior Analyst