Trends I'm Watching

Five lousy CEOs who get fabulous pay

Trend: Investors lose when executives receive rich pay packages for poor performance.

Michael Brush at MSN Money describes five examples of exorbitant executive pay for poor performance.

Link: MSN Money - 5 lousy CEOs who get fabulous pay.

The problem of executive pay has gotten so bad that pay experts quip that "pay for performance" has turned into "pay for pulse."

CEOs get rich pay packages just for staying alive and showing up -- regardless of how well their companies do. And many CEOs at the top of the pay pyramid do a pitiful job for shareholders.

[Here's] ... five of the worst offenders, taken from a recent study called "Pay for Failure." The study was created by Paul Hodgson of The Corporate Library, an independent research firm that helps investors assess risk in corporate governance practices.

...Pfizer shareholders can only wish that the company's stock price had done as well as Pfizer's CEO over the past five years. During this time, shareholders lost 35% as the stock fell to $24.60 from $38.20. Yet Pfizer chairman and chief executive Henry McKinnell made more than $15.5 million a year, on average, for a total of $78 million. He also has a pension package worth $83 million.

...pharmaceutical company Merck (MRK, news, msgs) says it structures pay to align the interests of execs with those of shareholders. It hasn’t worked out that way. Shareholders have lost 41% in the past five years as the stock slipped to $33 near the end of last year from $56 at the start of 2001.

During the same time period, former chief executive Raymond Gilmartin made about $54 million, or around $10.8 million a year. That includes $37.8 million in profits from cashing out options over the past two years.

As chairman and chief executive of AT&T (T, news, msgs) and of SBC Communications before it merged with AT&T, Edward Whitacre earned $85 million during the past five years, or about $17 million a year on average. Upon retirement he will continue as a consultant for three years at more than $1 million a year, and get lifetime access to the corporate jet, a car, an office and support staff. And he's in line for an annual pension of $5.3 million.

Shareholders have a five-year loss of 40% to show for Whitacre's efforts, as the stock has fallen to $23.50 from $39.30.

Rich pay packages for poor performance seem common in the telecom sector. BellSouth (BLS, news, msgs) chairman and chief executive F. Duane Ackerman, for example, made about $46 million in the past five years. That works out to over $9 million a year. But shareholders lost 23% as stock fell to $27.40 from $35.60.

Safeway (SWY, news, msgs) chairman and chief executive Steven Burd earned $52 million, or $10.4 million a year, on average, over the past five years. During that time, shareholders lost 54% as the stock fell to $23.70 from $52.

Why do so many CEOs get so much for so little? The basic problem is that many boards are too close to managers, even though they are supposed to look out for shareholders.

How China is winning the oil race

Trend: The US cannot compete with China for foreign sources of oil, so technology breakthroughs providing alternative energy sources and energy conservation grow in importance.

Jon Markman at MSN Investing describes why the US cannot compete with China for oil and other commodities, especially when dealing with rogue states and using weapons for leverage.

Source: MSN Money - How China is winning the oil race

As Americans pay more for gas, China gobbles up deals for new supplies of oil and other critical resources -- often from rogue regimes in Africa, South America and the Middle East.

The United States is the world's greatest consumer of energy at present, but China is the world's fastest-growing consumer. That puts us in direct competition for any new sources of crude oil, natural gas, coal and uranium....

Energy acquisition is a zero-sum game in which there are winners and losers. Any new energy that China obtains for its fast-growing economy is unavailable to us forever. So you just have to wonder whether the United States' antipathy for dealing with the worst of the world's rogue states has led inexorably to $4-a-gallon gasoline this spring.

Dan Zhou, chief analyst at CEB Monitor Group in Beijing, points out that China has emerged as an attractive partner in Africa and Central Asia in four ways:

• Its intensifying demand drives up prices for their products, which are largely raw materials such as oil, zinc and copper.
• It sets virtually no standards for political transparency or economic reform to get deals done.
• It ignores internal human-rights abuses as an impediment to deal-making.
• And it is a one-stop shop, offering not just investment, trade, skilled workers and military weapons, but also diplomatic protection in the form of its United Nations Security Council veto.

China's hunt for oil in Africa has made it essentially the new colonial superpower in the region....

In Latin America, the story is much the same: China is increasingly becoming the partner of choice for repressive, paranoid or regionally ambitious regimes that want to buy guns and tanks with their oil and ore revenues.

Meanwhile, in the Middle East, Hu has found in Saudi Arabia another repressive regime that wishes to ease away from a highly dependent relationship with the United States.

Iran is China's fastest rising partner in the region. It probably won't be long before Iran becomes China's largest source of imported oil, which will put their economic and political interests directly opposed to U.S. politicians and consumers.

And finally we get to Central Asia republics, which formerly belonged to the Soviet Union, all nestled up against China's back door.

Of course, the Chinese have not left democratic countries' resources off its shopping list.

...our politicians are unlikely yet to ease up on rules preventing U.S. companies from participating in the sort of bribery and weapons brokerage that has become de riguer for doing business in the equatorial zone where most new energy sources are being discovered.

Five Economic Indicators To Watch

Trends: At this point (April 24, 2006), these indicators suggest the US economy is slowing slightly.

Barry Ritholtz summarizes a Wall Street Journal article: Five Indicators Give Early Clues To the Direction of the Economy.

Link: The Big Picture: 5 Telling Economic Indicators.

1) Orders for capital goods

Look to orders for nondefense capital goods excluding aircraft, or "core capital goods," to gauge how much equipment companies will buy in the near future. (Note: Watch for distortions to the headline number  by the volatile aircraft sector).

2) Initial jobless claims

Each week, the Labor Department counts the number of people filing new claims for unemployment benefits. Falling claims are an early indicator of a surge in hiring, which in turn means more people with paychecks to spend. Because it is impossible to spot a trend in one week, economists track the "four-week moving average" of claims.

The moving average fell below 300,000 earlier this year, a threshold that indicates the economy may be running above the point where wages should rise as companies have to compete for qualified workers. If claims moves higher, it is a sign that growth may slow. If it goes even lower, watch for inflation -- and more Fed interest-rate increases.

3) Home-builder sentiment

NAHB readings above 50 mean the outlook is positive, and below 50 suggest times are tough. The index topped at 72 in June 2005, accurately predicting the peak in new-home sales the following month, and has declined steadily to 50. That is the lowest level in a decade, except for a brief period after the 9/11 attacks.

Housing construction now appears to be following the downward arc of declining sales. Along with rising oil prices and interest rates, a severe housing slowdown remains one of the major risks to U.S. economic growth this year.

4) Retail sales

The Commerce Department's monthly retail-sales report is an important signpost of consumer spending, which accounts for the biggest chunk of spending in the economy. Car sales are volatile, so economists look at a measure excluding them to gauge underlying trends.

If consumers keep getting squeezed by rising gas prices, weakness in retail sales and consumer spending on other things could follow.

5) The bond market

The bond market has pushed the yield on the benchmark 10-year Treasury note above 5%, the highest in nearly four years, raising borrowing costs for businesses and pushes up mortgage rates. That, in turn, could damp growth prospects. There is risk the 10-year's yield could go even higher.

The Shanghai Cooperation Organization (SCO) adds Mongolia, Iran, India and Pakistan

Trend: Iran's ties with China, Russia, and India are growing stronger, which may affect both the price of oil and international support for their nuclear program.

Asia Times Online describes the significance of Iran joining the SCO. This provides some insight into how Iran is perceived in Asia.

Link: Asia Times Online :: China News, China Business News, Taiwan and Hong Kong News and Business.

The Shanghai Cooperation Organization (SCO), which maintained it had no plans for expansion, is now changing course. Mongolia, Iran, India and Pakistan, which previously had observer status, will become full members. SCO's decision to welcome Iran into its fold constitutes a political statement. Conceivably, SCO would now proceed to adopt a common position on the Iran nuclear issue at its summit meeting June 15.

The SCO, an Intergovernmental organization whose working languages are Chinese and Russian, was founded in Shanghai on June 15, 2001 by China, Russia, Kazakhstan, Kyrgystan, Tajikistan and Uzbekistan. The SCO's change of heart appears set to involve the organization in Iran's nuclear battle and other ongoing regional issues with the United States.

The timing of the SCO decision appears to be significant. By the end of April the director general of the International Atomic Energy Agency is expected to report to the United Nations Security Council in New York regarding Iran's compliance with the IAEA resolutions and the Security Council's presidential statement, which stresses the importance of Iran "reestablishing full, sustained suspension of uranium-enrichment activities".

The SCO membership is therefore a lifeline for Iran in political and economic terms. The SCO is not a military bloc but is nonetheless a security organization committed to countering terrorism, religious extremism and separatism. SCO membership would debunk the US propaganda about Iran being part of an "axis of evil".

The SCO secretary general's statement on expansion coincided with several Chinese and Russian commentaries last week voicing disquiet about the US attempts to impose UN sanctions against Iran. Comparison has been drawn with the Iraq War when the US seized on sanctions as a pretext for invading Iraq.

iShare ETFs to reduce fees

Trend: Some EFTs are reducing fees while the popularity of ETFs as an investment vehicle increases, which should further increase demand.

Tom Lydon at ETF Trends reports that some iShare ETFs will be reducing fees soon.

Link: ETF Trends: Reduced Fees on iShare ETFs

Barclay's plans to reduce the fee on sector ETFs even more.  The reduction in fees will be effective May 1st. 

• The iShare ETFs linked to some of the S&P index sector, such as iShares S&P Global Energy (IXC), will be reduced from 0.65% to 0.48%. 
• Fees on Dow Jones related ETFs, including iShares Dow Jones U.S. Utilities (IDU), will go from 0.6% to 0.48%. 
• ...those ETFs linked to Goldman Sachs Indexes, one being iShares Goldman Sachs Technology (IGM), are moving to 0.48% from 0.5%.

Product Stewardship

Trend: Companies that design products to minimize waste and environmental damage may have a competitive advantage, both in economics and visibility.

BusinessWeek magazine describes the movement to design complex products with the disposal in mind.

Source: HP Wants Your Old PCs Back

Proponents argue that a company's responsibility for what it sells should include collection and disassembly at the end of the product's life cycle. As a slogan, product stewardship has been around since the Earth Days of the 1970s, but it is now a serious force in the auto and electronics sectors of Japan and Europe. The movement is likely to broaden in the U.S. as well. Several states are strong-arming auto makers into using less toxic parts, persuading thermostat manufacturers to fund bounties for the return of old mercury-laden devices, and pushing pharmaceutical giants to redesign packaging to reduce waste and accept unused medications for disposal.

A few years ago, when environmentalists in Washington State began agitating to rid local dumps of toxic old computers and televisions, they found an unexpected ally: Hewlett-Packard Co. Teaming up with greens and retailers, HP took on IBM, Apple Computer, and several major TV manufacturers, which were resisting recycling programs because of the costs.

Aided by HP's energetic lobbying, the greens persuaded state lawmakers to adopt a landmark program that forces electronics companies to foot the bill for recycling their old equipment. "This bill puts our market-based economy to work for the environment," said Washington Governor Christine O. Gregoire as she signed the plan into law on Mar. 24.

The movement to recycle electronic refuse, or "e-waste," is spreading across the nation, and so is HP's clout. The company helped the greens win a big battle in Maine in 2004 when the state passed the nation's first e-waste "take-back" law. Washington followed suit. Now, Minnesota and New Jersey are preparing to act, and 19 other states are weighing legislation. Activists hope to banish high-tech junk from landfills and scrub the nation's air and water of lead, chromium, mercury, and other toxins prevalent in digital debris.

HP's efforts have made it the darling of environmentalists. They say take-back laws are more effective at getting digital junk recycled than point-of-sale fees, which tax consumer electronics products to fund state-run recycling programs. They're also pleased because effective programs in the U.S. reduce the likelihood that the products will be shipped to less developed countries and disassembled under unsafe conditions.

But HP's agenda isn't entirely altruistic. Take-back laws play to the company's strategic strengths. For decades the computer maker has invested in recycling infrastructure, a move that has lowered its production costs, given it a leg up in the secondary market for equipment, and allowed it to build a customer service out of "asset management," which includes protection of data that might remain on discarded gear.

In 2005, HP recycled more than 70,000 tons of product, the equivalent of about 10% of company sales and a 15% increase from the year before. And it collected more than 2.5 million units (in excess of 25,000 tons) of hardware to be refurbished for resale or donation.

No other electronics maker has a resale business on this scale. But the others may soon wish to emulate HP.

For television makers, on the other hand, take-back laws are terrifying. Following the lead of PC makers, they're pushing consumers to replace their bulky television sets with flat-screen models, many of them primed for high- definition viewing. As a result, in the next three years, Americans are expected to throw out more than 550 million analog TV sets and computer monitors that contain thousands of tons of lead. The last thing these companies want are coast-to-coast take-back laws.

More than a dozen consumer electronics companies, including Panasonic, Sony, and Philips, have formed a group called the Manufacturers Coalition for Responsible Recycling. Backed by IBM, Canon and Apple, they have dispatched lobbyists to statehouses across the nation, pushing bills that mirror California's somewhat weak recycling program. Instead of forcing manufacturers to take back waste, they would impose a levy of up to $10 on sales of products to help states cover recycling costs without burdening equipment makers.

Environmentalists' biggest disappointment has been Apple Computer Inc. The company's progressive image, loyal customers, and retail network make it a natural for a take-back program. Yet Apple has fought such programs, and it lags behind HP and Dell Inc. in voluntary recycling.

Investing in Tomorrow's Liquid Gold: Water

Trend: The amount of water for personal consumption is small and declining while the world's population continues to expand.

Daniel Pink at the The Trend Desk on Yahoo! Finance describes the long-term view of investing in water.

Link: Investing in Tomorrow's Liquid Gold: The Trend Desk - Yahoo! Finance

Oil dominates the world economy. But get ready. There's a new liquid in town -- one that could prove to be an equally potent source of both geopolitical conflict and entrepreneurial activity.

By 2025, water will become the most serious resource problem in the world economy, according to the Center for Strategic and International Studies, a Washington think tank. The problems are twofold, researchers say.

First, the supply of water and the demand for it are rarely in the same place. For example, China has about 21 percent of the world's population but only 7 percent of its water.

Second, an astonishingly small amount of the world's water is actually usable. Water pollution is already the single largest cause of sickness and death worldwide. Indeed, CSIS's Global Strategy Institute says if all the water on Earth were compressed to a single gallon, only four ounces would be fresh water. Of that four ounces, only two drops would be readily accessible.

Human beings already use one of those drops. But about 92 percent of that single drop goes to agriculture and industry; just 8 percent goes to cities, towns, and municipalities. Think about that: For every gallon of water on the planet, only 8 percent of one drop is available for drinking, bathing, and other personal consumption.

As the world population rises -- particularly in China, South Asia, and parts of Africa -- the potential for calamity and conflict soars. But where danger exists, so does opportunity.

Water may be one of the richest investment opportunities of the next few decades. Any company that can improve desalinization techniques, find methods to transport water from where it's located to where it's needed, or figure out other ways to expand the useable water supply from less than a drop to, say, three or four drops might become the Shell or BP of H20.

In an excellent research report last month, UBS Investment Bank spells out the perils and promise of this emerging opportunity. The report notes the considerable uncertainty surrounding water investment but recommends four equipment and services stocks that are providing the "picks and shovels" in the pursuit of the new liquid gold. They are: Air Products and Chemicals, which does water treatment; Nitto Denko, a producer of separation membranes for refining and condensing water; Guangdong Investment Limited, a water utility; Pall Corp., which designs and manufactures filtration products.

Liquid Profits Flowing From Water-Based ETF (PHO)

Trend: China and India face water problems, which should benefit companies that provide pertinent products and services.

Investor's Business Daily provides some insight into water ETF (PHO).

Link: Investor's Business Daily: Liquid Profits Flowing From Water-Based ETF

Emerging markets aren't just clamoring for raw materials. They also need more water. And in the U.S., pipelines are aging and treatment facilities need repair.

"As supply lines become more strained, utilities around the world are going to be forced to raise rates and buy more equipment," said Jack Payne, chief investment officer at Michael Joyce & Associates.

Recently, his Richmond, Va., company started moving clients into PowerShares Water Resources. (PHO) "It's the only real way to get direct exposure to companies benefiting from supplying and producing fresh water around the world," said Payne. "It's an active, long-term bet on a sector that's just starting to become more in focus with investment managers."

Outperforms S&P 500

The ETF opened in December. It's up 19.5% vs. the S&P 500's 4.8% this year, through Tuesday.

"The early returns are nice, but there are some compelling fundamental reasons to be in this fund now," said Anthony Welch, a money manager at Sarasota Capital Management.

Parts of China and India face huge delivery and supply problems, he says. "Only 11% of India's households have access to piped water," said Welch. "By 2025, that number will more than quadruple."

As a result, India's water use should more than double. "Even in the U.S., which has nearly 100% access to clean water, a lot of the pipes in use are over 100 years old," said Welch, whose firm also invests in the ETF. "That's not too surprising considering this country is over 200 years old and about 700,000 water pipes run throughout the U.S. A lot of those are going to need replacing in coming years."

Based On Index

The fund is based on the 37-stock Palisades Water Index. Sectors are weighted according to long-term industry fundamentals by analysts at Dallas-based Water Tech Capital, the index's creator.

As of April 1, sector weightings were: utilities, 26.5%; treatment, 23%; infrastructure, 16.5%; analytical, 6%; resource management, 17%; and conglomerates, 11%.

Disclosure: I own shares of PHO.

Nanotech ETF – PXN

Trend: PXN is a new narrow sector ETF that allows investors to invest in a basket of companies focused on nanotechnology.

Business Week Europe on Yahoo! Finance describes an ETF that invests in nanotechnology.

Link: How to Invest in Nanotech

Nanotechnology, which involves the development, manufacture, and application of products at the molecular level, should have a profound impact on virtually every business if implemented successfully.

Late last year, Lux Research, in tandem with PowerShares Capital Management, launched an exchange-traded fund, the PowerShares Lux Nanotech Portfolio (PXN), for investors seeking to invest in nanotechnology. The tiny $89-million fund invests in 26 stocks in the Lux Nanotech index. Year to date through Mar. 28, the ETF gained 11.8%, vs. 3.9% for the S&P 500-stock index. [The portfolio is too new to be ranked by Standard & Poor's.]

The Lux index consists of companies that make tools used to develop nanotechnology, and well-established firms integrating nanotechnology into their existing products. Components are broken down into two basic types of stocks: "nanotech specialists" and "end-use incumbents." The specialists, including FEI Co. (FEIC) and Flamel Technologies (NASDAQ: FLML - news) (FLML), are small- and mid-size companies that focus specifically on developing or funding nanotechnology applications. The end-use incumbents are large-cap companies applying nanotech to existing product lines. The two groups are then equally weighted with 75% applied to the nanotech specialist components and 25% for the end-use incumbents.

PROMISING TRIO

While some see the ETF as a good vehicle for those who want to invest in nanotechnology, others point to its drawbacks, such as holdings that are not yet profitable and the extreme volatility associated with industry-specific funds that seem gimmicky.

Srikant Dash, index strategist at Standard & Poor's, notes that narrow sector ETFs have two legitimate uses. "First, money managers who have a view on a narrow industry, but do not have a view on individual stocks within that narrow sector, can use these ETFs to implement their views," he says. "The second user group consists of trading desks and active traders who trade frequently on news about a narrow industry, or want to manage their risk exposure to it."

Another way investors can play nanotech initially is by investing in large-cap companies applying the technology to their existing product lines, thereby avoiding unstable and unprofitable startups. Nanotech is expected to have a powerful impact on three major industries initially: semiconductors, life sciences, and energy.

FACTS VS. FAD

Many well-known firms are already integrating nanotech, says Peter Hebert, chief executive officer of Lux Research. "For example, 3M Co. (MMM) stated it has $800 million worth of nano-enabled products it is selling right now," he says. "American Pharmaceutical Partners (APPX) has a new cancer drug, Abraxane, that is enabled by nanotech. It is on the marketplace as we speak."

Big pharma companies are using new nano-particles to reformulate existing drugs to make them more effective and potent, and therefore extend the patent and lead to bigger revenues, experts say.

via Tom Lydon at ETF Trends

Why Are Healthy Companies Freezing Pension Plans?

Trend: Individuals must assume more responsibility for retirement savings as corporations reduce benefit expenses.

Kim Snider summarizes the new brief by the Center for Retirement Research focusing on healthy companies freezing pension plans.

Link: Kimmunications: Why Are Helathy Companies Freezing Pension Plans?

Healthy companies with well funded pension plans are freezing those plans and replacing them with defined contribution plans.

Already in 2006, Coca-Cola, Nissan, IBM and Alcoa have frozen their plans. In 2005, Verizon, Sprint, Lockheed Martin, and Hewlett Packard, among others, did the same. A new brief by the Center for Retirement Research looks at why these healthy employers are freezing their pension plans and the impact on American Workers.

The brief offers four possible explanations:

The first is that some U.S. companies are cutting pensions to reduce workers’ total compensation in the face of intense global competition.

The second explanation is that employers have been forced to cut back on pensions in the face of growing health benefits to maintain existing compensation levels.

The third explanation, by contrast, points to the finances of the plans themselves — specifically, their market risk, longevity risk, and regulatory risk that make defined benefit pensions unattractive to employers.

The final explanation is that with the enormous growth in CEO compensation, traditional qualified pensions have become irrelevant to upper management who now receive virtually all their retirement benefits through non-qualified plans.

Each of these explanations contains a kernel of truth, and they all help explain the current trend.

The report concludes:

This change has an immediate adverse effect on mid-career workers, and, even though younger workers do not recognize it, the shift will probably mean that many young workers will end up with an inadequate retirement income. For, while 401(k) plans are fine in theory and could even be superior for the mobile employee, they transfer too much of the responsibility to the individuals and individuals make mistakes at every step along the way. Median 401(k)/IRA balances in 2004 were only $35,000 in 2004 according the Federal Reserve Board’s most recent Survey of Consumer Finances.

There are more than enough explanations for the new trend. A desire to control compensation costs, the pressures of rising health care outlays, the confluence of economic, demographic, and regulatory risks, and the emergence of a two-tier pension system all make the sponsorship of defined benefit pension plans relatively unattractive. Moreover, the genie is out of the bottle. Given that the employer-sponsored pension system is a voluntary arrangement, nothing is likely to stop other healthy companies from following suit and closing down their defined benefit plans.