joi, 11 noiembrie 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

G-20 Agrees to Postpone Agreement

Posted: 11 Nov 2010 09:13 PM PST

Anyone with an ounce of common sense knew the G-20 conference would be a failure. The only question was what form the failure would take. In the typical conference of this nature there is some early fireworks and then a coming together in a "Kumbayah" agreeing to agree moment.

This year, differences are so huge, the G-20 could not even agree to agree. Instead they agreed to postpone agreement.

Don't let the following headline fool you, look beneath the surface: G20 leaders near agreement, if not progress
The G20 will agree to setting vague "indicative guidelines" for measuring global imbalances and hammer out the details next year, G20 sources said on Friday, effectively calling a timeout to let tempers cool after heated debate over currencies.

"It was very hard work," said one G20 source after a negotiating session that ended around 3 a.m.

Leaders are expected to call on the International Monetary Fund to develop a range of indicators to identify when imbalances pose a threat to economic stability. G20 finance ministers will consider the findings at a meeting in early 2011, according to a draft statement obtained by Reuters.

An earlier version of the document showed negotiators debating over whether those indicators ought to be "measurable" or "quantitative and qualitative." In the end, neither phrase was included, suggesting the G20 failed to agree on the wording.
Grinding Towards Accord?

Please consider the following fluff statements in the Bloomberg article G-20 Grinds Towards Currency, Trade Accord After Talks
South African Finance Minister Pravin Gordhan said leaders and their aides had made progress in coming to agreement on how to address global imbalances.

Australian Prime Minister Julia Gillard said "some work" still needed to be done on bridging divides over currency valuations.
Some work needs to be done? Really? That's like planning a trip to Mars, drawing a picture of a rocket ship with a crayon and proudly announcing "some work needs to be done".

Moreover, Gillard's statement looks nonsensical in light of positions taken by China, Brazil, and Germany.
"Don't make other people take the medicine for your disease," Yu Jianhua, a director general at China's Ministry of Commerce, told reporters in Seoul late yesterday. "Quantitative easing will have a very big impact on developing countries including China."

The G-20 meeting of finance ministers and central bankers last month agreed to move toward "more market-determined exchange rate systems" and make efforts on "reducing excessive imbalances." The U.S. Federal Reserve a week later said it would pump $600 billion into the economy to spur growth. Brazil, Germany and China said the move would drive down the dollar and fuel speculative capital flows that risk asset bubbles.

China is seeking to modify the language on trade imbalances in the summit communique, said a German official taking part in the talks who requested anonymity because he isn't authorized to speak publicly for the government.
Trade War Looms

Yahoo!Finance has a much more believable headline. Please consider Specter of trade war looms as G-20 nations gather
Leaders of major economies faced the urgent task at their summit Friday of resolving currency disputes that have raised fears of a global trade war.

A dispute over whether China and the United States are manipulating their currencies is threatening to resurrect protectionist policies like those blamed for worsening the Great Depression. The biggest fear is that trade barriers will send the global economy back into recession.

Hopes had been high that the Group of 20, which includes wealthy nations like Germany and the U.S. and rising giants like China, could be a forum to forge a lasting global economic recovery. Yet so far, G-20 countries haven't agreed on an agenda, let alone solutions to the problems that divide them.

The delegates have clashed in particular over the value of their currencies. Some countries, like the United States, want China to let the value of its currency, the yuan, rise. That would make Chinese exports costlier abroad and make U.S. imports cheaper for the Chinese to buy. It would shrink the United States' trade deficit with China, which is on track this year to match its 2008 record of $268 billion.

But other countries are irate over the Federal Reserve's plans to pump $600 billion into the sluggish American economy. They see that move as a reckless and selfish scheme to flood markets with dollars, driving down the value of the U.S. currency and giving American exporters an advantage.

Richard Portes, president of the Center for Economic Policy Research in London, said the dim prospect for a substantive agreement "is very dangerous for the world economy."

Portes said he fears "the possibility that currency wars and global imbalances might lead to severe trade protectionism over the next year or so."

For now, the G-20 countries are expected to agree on noncontroversial issues, like an anti-corruption initiative and the need for oversight by the International Monetary Fund.

But they're finding no common ground on the most vexing problem: how to address a global economy that's long been nourished by huge U.S. trade deficits with China, Germany and Japan.
G-20 Countries Can't Even Agree on the Agenda

In case you missed it, here is the key sentence from the above article: "So far, G-20 countries haven't agreed on an agenda, let alone solutions to the problems that divide them."

Not only is there "some work" to be done as Australian Prime Minister Julia Gillard gingerly puts it, the G-20 committee cannot even agree to an agenda!

Hells bells, they cannot even agree on whether or not the results should be "measurable" or "quantitative and qualitative."

I believe that proves my allegation that Geithner's Four-Point Plan for the G-20 is Nothing but a Wish-List

Thus, unless things change rapidly in the next few hours, the only recognizable achievement of from the G-20 summit, will be an agreement to postpone the agreement.

How comforting.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Measuring the Success of Bernanke's QE II "Virtuous Circle"

Posted: 11 Nov 2010 05:15 PM PST

One easy way to measure success is against stated goals. With that in mind, let's take another quick look Bernanke's op-ed piece in the Washington Post describing the need for, and the benefits of another round of Quantitative Easing.

Please consider What the Fed did and why: supporting the recovery and sustaining price stability by Ben Bernanke, October 15, 2010.
The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
"Virtuous Circle" Examined

Certainly Cisco's warning yesterday does nothing to support the contention that lower corporate bond rates will spur investment. Please see Congratulations to Cisco Insiders for Dumping 6,620,750 Shares, 60% of Holdings in 6 Month; Cisco CEO Whines about Taxes; Is Chambers Worth a Dime?)

However, lower corporate rates have created a bubble in junk bonds, hardly a measure of success.

Bernanke wants to drive the long-end of the yield curve lower. This is something we can easily measure since his announcement.

Yield Curve September-November 2010



The above chart hardly represents a stunning measure of success vs. the stated goals.

However, if one wants to measure failure by the number of complaints from our trading partners then QEII was a resounding failure.

The list of complaints about QEII is long and growing: South Korea, Hong Kong, Brazil, China, Volcker Complain about Bernanke's QE Policy.

To top it off the German Finance minister went so far as to call "clueless". There is some dispute as to the exact translation of the German quote, but none of the translations are very polite.

The stock market, gold, silver, and commodities have certainly been on a tear, but the bottom line is that gold is reacting to the liquidity, but the consequences to the real economy are negative.

Small Businesses Hurt by QE II

Inquiring minds are digging into the November NFIB Small Business Trends Report for clues about the health of the economy and the plight of small businesses.

Once again the number one problem facing small business owners is lack of sales. The second biggest concern is taxes. In spite of a huge surge in commodity prices, inflation barely registered as a concern.

From the NFIB Report ...
OPTIMISM INDEX
Optimism rose again in October to 91.7, but remains stuck in the recession zone established over the past two years, not a good reading even with a 2.7 point improvement over September. This is still a recession level reading based on Index values since 1973. However, job creation plans did turn positive and job reductions ceased. The mood for inventory investment weakened a bit even though views of inventory adequacy improved, and an improvement in sales trends produced a marked improvement in profit trends, still ugly, but less so by a significant amount.

LABOR MARKETS
Average employment growth per firm was 0 in October, one of the best performances in years. Reaching the "0" change level raises the odds that Main Street may contribute to private sector job growth for the first time in over a year.

CAPITAL SPENDING
The frequency of reported capital outlays over the past six months rose two points to 47 percent of all firms, three points above the 35 year record low. The percent of owners planning capital outlays in the future fell one point to 18 percent because the environment for capital spending is not good.

INFLATION
The downward pressure on prices appears to be easing as more firms are raising prices and fewer are cutting them. Seasonally adjusted, the net percent of owners raising prices was a net negative five percent, a six point increase from September. Plans to raise prices rose five points to a net seasonally adjusted 12 percent of owners. However, most plans to raise prices have been frustrated by the recession and weak sales during the past few years. On the cost side, four percent of owners cited inflation as their number one problem and only three percent cited the cost of labor, so neither labor costs or materials costs are pressuring owners to raise prices.
If "pricing power" in making a comeback, owners will begin to see a reversal of rather adverse profit trends.

PROFITS AND WAGES
Reports of positive earnings trends posted a seven point improvement in October, registering a net negative 26 percent. Still, far more owners report that earnings are deteriorating quarter on quarter than rising.

CREDIT MARKETS
Overall, 91 percent reported that all their credit needs were met or that they were not interested in borrowing. Nine percent reported credit needs not satisfied, and a record 52 percent said they did not want a loan (13 percent did not answer the question and might be presumed to be uninterested in borrowing as well). Only three percent reported financing as their number one business problem. However, 30 percent of the owners reported weak sales as their top business problem, a major cause of the lack of credit demand observed in financial markets. A near record low 31 percent of all owners reported borrowing on a regular basis. Reported and planned capital spending are at 35 year record low levels, so fewer loans are
needed.
Virtually none of that is supportive of the claim QE II was going to prove an economic benefit.

Most Important Problem

Please compare inflation to sales, taxes, competition from big business, and taxes. Inflation barely registers.



Sales and Taxes are Two Biggest Problems


Inflation Is A Non-Issue


Historically inflation measured as a big concern in the mid-to-late 1970's. Inflation concerns spiked again in the summer of 2008 along with gas prices. In spite of a huge recent rally in commodities there is no fear of inflation now.

From the report "Seasonally adjusted, the net percent of owners raising prices was a net negative five percent, a six point increase from September. Plans to raise prices rose five points to a net seasonally adjusted 12 percent of owners. However, most plans to raise prices have been frustrated by the recession and weak sales during the past few years."

The number of business owners raising prices is a net negative 5%. The profit squeeze continues as small businesses are not able to pass along rising input prices. The result is easy to spot: " far more owners report that earnings are deteriorating quarter on quarter than rising."

Measures of Success

If success is measured by increased speculation in commodities, junk bonds, and the herding of investors into gold and silver, then the Fed's policies this year have been a resounding success. Otherwise the Fed's policies, including QE II have been an abject failure.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Irish, Portuguese, Spanish Bond Whacked; France Joins Germany in Proposals to Make Bondholders Share the Pain; Trichet Supports "Extend and Pretend"

Posted: 11 Nov 2010 11:39 AM PST

A pair of articles on Bloomberg highlight the ongoing mess in Europe. Please consider Irish Debt Falls for 13th Day on Default Concern; Bunds Climb
Irish government bonds tumbled for a 13th day on mounting concern that the nation will be forced to restructure its finances.

Spanish bonds also headed for a 13th day of declines as data showed the nation's economic growth stalled. French Finance Minister Christine Lagarde said yesterday that investors must share in the cost of safeguarding sovereign debt. German bunds advanced on demand for the safest assets, while Portuguese debt recovered from earlier losses. Italian bonds fell.

"Lagarde's comments mentioned restructuring, and that's another nail in the coffin" for so-called peripheral nations' debt, said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. "There's still a big constituency of investors and traders who have not recognized until now that restructuring could happen."

The best bid for Irish 10-year bonds was 9.07 percent, or a price of 74.09, while the nearest offer was at 8.61 percent, or a price of 76.55, Bloomberg data show.

"The wide bid-offer spread indicates how thin trading has become, and reflects a lack of two-way market activity," said Peter Chatwell, an interest-rate strategist at Credit Agricole Corporate & Investment Bank in London.

For 10-year bunds, the difference between the bid and the offer was less than one basis point, the Bloomberg data show.

The Spanish-German 10-year yield spread widened to 215 basis points today from 206 yesterday. That's still below an intraday euro-era high of 232 basis points reached on June 17.

The Italian 10-year bond fell for a sixth straight day, its longest run of declines since June, before the nation sells as much as 8.25 billion euros of 2015, 2026 and 2034 debt tomorrow.

The spread against bunds was at 176 basis points, up from 166 basis points yesterday. That compares with a peak of 185.5 basis points reached on June 8.

"Italian paper has been under pressure recently on a combination of periphery woes and political uncertainty," Chiara Cremonesi, a fixed-income strategist at UniCredit SpA in London, wrote in an e-mailed report today. "We expect demand at tomorrow's auction to be good," with "support from the current level of spread," she said.
Ganging Up on Bondholders

Bloomberg reports France Joins Germany Ganging Up on Bondholders
French Finance Minister Christine Lagarde said investors must share the cost of sovereign debt restructurings, backing a German call that helped send yields on Irish and Portuguese bonds to record highs.

"All stakeholders must participate in the gains and losses of any particular situation," Lagarde said during an interview yesterday in Paris for Bloomberg Television's "On the Move" with Francine Lacqua. "There are many, many ways to address this point of principle."

"Lagarde's comments mentioned restructuring, and that's another nail in the coffin" for peripheral debt, said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. "There's still a big constituency of investors and traders who have not recognized until now that restructuring could happen."

"We do also need creditors to be involved in the costs of restructuring," Merkel said today in Seoul, where she's attending a summit of the Group of 20 leaders. "There may be a conflict here between the interests of the financial world and the interests of politicians. We can't constantly explain to our voters that taxpayers have to be on the hook for certain risks, rather than those who make a lot of money taking those risks. I ask the markets sometimes to bear politicians in mind, too."

Trichet's Stance

Trichet says such talk risks exacerbating the situation for indebted nations as they struggle to cut their budget deficits.

"The more you talk about restructuring debt, the harder it is to obtain debt," Irish Finance Minister Brian Lenihan said Nov. 2. "That is the reality."
Nonsense from Trichet

Trichet's idea of a solution is "don't talk about it and the problem will go away". Well it won't. Nor will "extend and pretend".

The US made a serious mistake in not making bondholders share the pain in US bank bailouts. As a result, US banks are still undercapitalized, crippled, and unwilling to lend. The reality is there is no painless solution no matter what Trichet, any central bankers, or any politicians think.

A further reality is that Ireland made a huge mistake in agreeing to horrendous austerity measures instead of just plain defaulting. That would have forced the restructuring issue to the forefront, long ago.

And as long as we are talking about realities, here is an obvious one that Trichet does not seem to understand: What can't be paid back, won't.

By the way, these renewed concerns about Europe are on balance, US dollar supportive.

Those Who Take Risks Should Pay For Them

Three cheers to Merkel for stating this reality "We can't constantly explain to our voters that taxpayers have to be on the hook for certain risks, rather than those who make a lot of money taking those risks."

Here's one more reality for the road: Those who take the risks should pay for them. It's the only thing that makes any sense.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Congratulations to Cisco Insiders for Dumping 6,620,750 Shares, 60% of Holdings in 6 Month; Cisco CEO Whines about Taxes; Is Chambers Worth a Dime?

Posted: 11 Nov 2010 01:52 AM PST

Cisco was hit in afterhours trading on Wednesday following a rare revenue warning. Futures are down but dip-buying strength has been so insane lately that one must wonder if there will be any follow through.

Regardless of what the stock does, the huge warning may portend the end of the ramp in capital spending on technology by corporations. If so, what's left of the recovery (if anything) is all on the backs of consumers.

While pondering that grim setup, please consider Cisco Forecasts Fall Short of Estimates; Shares Slide
Cisco Systems Inc., the largest maker of computer networking equipment, forecast sales and profit for this quarter that fell short of analysts' estimates, sending the shares down as much as 15 percent in late trading.

"There's no reason to think that that's going to reverse quickly," said the San Francisco-based analyst, who still advises buying the stock. "This is kind of a deteriorating situation."

The company is seeking other ways to reward investors. Cisco said in September it will initiate its first dividend, starting in the fiscal year that began last month. The size and timing of the payout will depend on tax laws and repatriation policy, because much of Cisco's cash is abroad.

Tax Laws

Chambers, 61, has said that he wants to bring at least $30 billion in cash back to the U.S. and that tax laws make it too expensive to do so. He's called for a tax repatriation break, saying Cisco will increase its U.S. headcount by 10 percent if a favorable law is passed.
Spare Me The Whine

I am not a fan of corporate taxes. However, I am less of a fan of allowing giant corporations send jobs and cash overseas, then beg for a repatriating holiday, lather-rinse-and-repeat.

I talked about this exact setup on November 1, in Tax Avoidance by Google and Apple, Corporate Cash, Job Creation During Schumpeterian Depressions.

Google pays a tax rate of 2.4% thanks to tax laws. That happens via strategies known to lawyers as the "Double Irish" and the "Dutch Sandwich". Meanwhile, small businesses in the US get hit with 35% corporate tax rates, and may pay high state tax rates on top of that.

The equitable thing to do is treat small businesses and giant corporations alike. If anything, and to help bring jobs and cash back to the US, taxes on profits held in the US ought to be lower than profits held overseas. That would have Cisco moving that cash back to the US in a hurry, and not to the disadvantage of small businesses either.

Whatever the tax rates is, it ought to be fair and equitable. On this score, granting special breaks to companies holding cash overseas just increases the likelihood that future cash and hiring will be overseas, regardless of what nonsense Chambers spews about increasing headcount here.

Flashback 10/30/07: Cisco to triple headcount in India to 10K by 2010
John Chambers said Monday that Cisco plans to scale-up its headcount in India to 10,000 by 2010, reports the Rediff news. Cisco currently employs about 3,000 there. In December, the company selected India as the site for its Cisco Globalization Center East. The campus in Bangalore, which will house the 3,000 employees, will be inaugurated today. In addition to increasing headcount, Chambers said that Cisco will shift 20 percent of its upper management staff, across all functions, to India. It will pour $1.1 billion into the area, too. The investment is slated to include $750 million on research and development, $150 million on Cisco capital, $100 million on venture capital, $100 million on expanding customer support and $50 million on campus in Bangalore.
Now Cisco want to bring $30 billion back to the US, saving the company as much as $10.5 billion in taxes, while it will increase its US workforce (type and quality of employees is unspecified) by a few thousand workers IF a "favorable law is passed".

Two years from now, rest assured those hires (if any) will be laid off in some corporate restructuring plan.

Cash Cow - Who has the Cash?

In case you are wondering where the cash is, company by company, please consider Cash Cow: Who has the Cash, Who has the Debt, by Sector and Company

With that out of the way let's return to the main theme.

Cisco Order Slippage

The Wall Street Journal reports Cisco Stock Falls as CEO Cites Order Slippage
Cisco Systems Inc. reported solid quarterly results but then disappointed investors with a bearish forecast that called into question the strength of technology spending, citing weakening orders from U.S. cable-TV operators and government agencies.

The news sent shares of the Internet-equipment giant tumbling almost 14% in after-hours trading on the Nasdaq Stock Market. Cisco said it expects revenue to rise only 3% to 5% in the current quarter and 9% to 12% in the current fiscal year—below the 12% to 17% annual revenue growth the company has said is its longer-term aim.

John Chambers, Cisco's chief executive officer, said orders from cable operators were off 35% in the quarter from a year ago. He added that orders from state governments in the U.S. fell 25% from a year earlier and 48% from the prior quarter.

"We are obviously not projecting growth as fast as we would like over the next several quarters," said Mr. Chambers, whose quarterly remarks are closely watched as a barometer of corporate tech spending. The "air pockets" Cisco hit "surprised us, quite candidly," he said.
The Cable Surprise

In a twist of unpublished fate, on Wednesday morning I received an Email from "Cable Guy" who wrote ...
Hello Mish

My cable customers are dropping services left and right. The only way we can get them to take multiple services is by discounting the **** out of them. And my company has not shown a profit in the last 3 quarters.

Customers are dropping or cutting back cable services because they cannot afford them anymore.

I hope you can point out how deflation is occurring in spite of the printing of money and how it is affecting consumer behavior to make this a long ride down.

Thanks
Cable Guy
Over 500,000 People Quit Cable Last Quarter

Please consider Over 500,000 People Quit Cable Last Quarter
Ryan Lawler at GigaOm added up the numbers and reports over 500,000 subscribers canceled cable in the last quarter. He looked at the subscription numbers reported from four of the five largest cable companies.

While it's bleak for cable companies, it doesn't necessarily mean people are giving up on pay TV.

Verizon, DirecTV, and AT&T combined added 820,000 new subscribers in the last quarter.
I got that link from "Cable Guy" and I asked him about the expansion at Verizon, DirecTV, and AT&T.

He responded "Dish and Direct are just undercutting (intro offers) to pull TV viewers. However, they will lose customers as soon as the intro is out and they raise prices. Verizon and AT&T's increased share is for internet. "

"Cable Guy" also has a pizza delivery business and sells pizzas at night, attempting to make ends meet. He notes "I have not raised prices for 4 years! I can't. But my costs of doing business has gone up by 30%."

NFIB Report Shows Lack of Sales Still #1 Problem of Small Businesses

Cable Guy's (Pizza Guy's) experiences are exactly what the NFIB reports on small businesses for months on end.

I talked about that in NFIB Report Shows Lack of Sales Still #1 Problem of Small Businesses, Inflation Barely Registers
INFLATION
Seasonally adjusted, the net percent of owners raising prices was a net negative five percent, a six point increase from September. Plans to raise prices rose five points to a net seasonally adjusted 12 percent of owners. However, most plans to raise prices have been frustrated by the recession and weak sales during the past few years.

PROFITS AND WAGES
Reports of positive earnings trends posted a seven point improvement in October, registering a net negative 26 percent. Still, far more owners report that earnings are deteriorating quarter on quarter than rising.
Surprise, Surprise, Surprise



I graciously send a tip of the hat to Gomer Pyle.

Nonetheless, I feel obliged to point out that if anyone was surprised by the Cisco announcement it certainly was not Cisco insiders.

Cisco Insiders Sell 6,620,750 Buy 0 Shares in Last Six Months

Inquiring minds are taking a peak at Cisco Systems, Inc. Insider Transactions



Insiders bailed hand over fist. In fact, they sold 60% of their holdings!

But hey who could possibly have known? Then again, it appears with Cisco, it's always a good time to sell.

CEO Chambers' Transactions

  • Sep 16, 2010 CHAMBERS JOHN T Officer 285,000 Direct Acquisition (Non Open Market) at $0 per share.
  • Aug 18, 2010 CHAMBERS JOHN T Officer 243,178 Direct Automatic Sale at $22.50 per share. $5,471,505
  • May 18, 2010 CHAMBERS JOHN T Officer 22,273 Direct Option Exercise at $20.53 per share. $457,264
  • May 18, 2010 CHAMBERS JOHN T Officer 22,273 Direct Automatic Sale at $25 per share. $556,825
  • May 17, 2010 CHAMBERS JOHN T Officer 1,000,000 Direct Option Exercise at $16.01 per share. $16,010,000
  • May 17, 2010 CHAMBERS JOHN T Officer 1,250,000 Direct Automatic Sale at $24.61 per share. $30,762,500
  • Mar 5, 2010 CHAMBERS JOHN T Officer 1,800,000 Direct Option Exercise at $16.01 - $20.53 per share. N/A
  • Mar 5, 2010 CHAMBERS JOHN T Officer 1,800,000 Direct Automatic Sale at $25 per share. $45,000,000

I went through all recent insider transactions and stripped out those of CEO John Chambers. To highlight one example, on May 17, Chambers exercised a right to buy and immediately sold (and then some), 1 million shares netting a mere $14,752,500.

Bear in mind, that is a single transaction.

To show just how deserving Chambers is, please consider the following chart.

Cisco Monthly Chart



click on chart for sharper image

Chambers became CEO of Cisco in January 1995. If you bought and held then, congratulations you were a winner for 3+ years or so. Then for the next 11 years you watched Chambers makes hundreds of millions cashing out options while you made nothing.

Share Buybacks Masked Dilution

Please consider Share Repurchases + Hoarding Cash = Stock Price Underperformance by Joseph Levy on Seeking Alpha.
Cisco Systems, Inc. (CSCO) - The company has not paid any cash dividends to shareholders and currently has no plans to do so in the future. [Mish Note: Cisco has announced unspecified dividend plans as mentioned above] In the five fiscal years ending July 2010 they repurchased 1.631 billion of its shares paying out $37.931 billion, or an average price of $23.26.

Had CSCO repurchased just enough shares to cover all new stock issues (for acquisitions, employee purchases, exercise of stock options, etc) during the five fiscal years ending July 2010, they could have used the remaining stock repurchases funds ($13.6 billion) to pay cash dividends to shareholders. Additionally there was a cash buildup of $23.8 billion from the end of July 2005 ($16.055 billion) to the end of July 2010 ($39.861 billion). Thus, shareholders could have been paid cash dividends totaling approximately $37.4 billion or just under $6.00 per share (average annual dividend rate of approximately $1.20) over the five year period ending July 2010.

Does John Chambers and the Cisco Board believe the current stock price would be $6.00 lower today had this shareholder friendly program (paying cash dividends) been implemented instead of the actual stock repurchases made in conjunction with a cash hoarding policy? A 5% annual cash dividend yield over the last five fiscal years surely would have resulted in Cisco's shares trading higher than its current stock price. Additionally, long term investors would have been rewarded with an additional $6.00 per share in cash dividends. While most eminent CEO's and Boards of Directors give lip service to the mantra "enhancing shareholder value" I don't believe Cisco has accomplished this by repurchasing their shares, hoarding their cash and electing not to pay cash dividends to shareholders.
What's the Point?

In a February 2009 post, Brad Reese on NetworkWorld provides additional figures dating back to 2002 and asks Cisco stock repurchases ... what's the point?



Shareholder Rape

What's the point? It should be obvious. Cisco gets to pretend it is increasing shareholder value while corporate insiders get to dump massive numbers of shares over the years.

It's as if the company exists for the primary reason of granting insiders options to sell shares which the company "graciously" repurchases while waving a flag of "increasing shareholder value".

This is nothing more than shareholder rape.

Chambers Not Worth a Dime

Public companies are owned by shareholders. Officers control day-to-day operations but the goal of the corporation (and therefore the goal of the CEO), is to increase shareholder value.

By that measure (increasing shareholder value), Chambers has been worthless for over 10 years. However, the fact that he has taken out 10's of millions of dollars in stock options proves he is a magician.

Magicians are obviously worth every penny, because no one seems to care.

Former Countrywide CEO Angelo Mozilo, was a tremendous magician, perhaps one of the best ever. Mozilo cashed out over $1 billion worth of stock options and shares while running Countrywide to virtual bankruptcy.

In the wake of the collapse, Mozilo was accused of fraud. In a travesty of justice Countrywide CEO Mozilo settles with SEC for $67.5M
Countrywide CEO Angelo Mozilo has agreed to a $67.5 million settlement to avoid trial on fraud and insider trading charges that alleged he profited from risky mortgages he signed off on before the collapse of the housing market.
After taking out $1 billion, a mere $67.5 million fine was quite the Houdini escape act in and of itself.

The kicker is "$25 million of Mozilo's restitution will come from an escrow fund the company set up to cover shareholder litigation and Mozilo has no obligation to pay the remaining amount, according to the settlement agreement."

Excuse me for asking the obvious, but what the hell is the point of fining someone $42.5 million if the settlement requires no obligation to pay?

Is this a great country (for corporate insiders) or what?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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