Feb 22, 2019

Axios Markets

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Situational awareness:

  • Kraft Heinz's stock plunged more than 20% after the company reported a slew of bad news — including a $15 billion writedown of its best-known brands, a fourth quarter loss of $14 billion, and an SEC investigation into its procurement practices. (Axios)
  • Pinterest filed confidentially for an IPO that's expected to value the company at $12 billion or more. (WSJ)
  • 7 Federal Reserve officials will be speaking today. Order of appearance: Atlanta Fed's Bostic, N.Y. Fed's Williams and S.F. Fed's Daly, Vice Chair Clarida, N.Y. Fed VP Potter, Vice Chair for Supervision Quarles, St. Louis' Bullard, Philly Fed's Harker and N.Y. Fed's Williams again.
1 big thing: The most overpaid CEOs

Illustration: Aïda Amer/Axios

Who is the most overpaid CEO? It's Ronald Clarke of Fleetcor Technologies, or so says a new study that analyzes performance and pay.

  • Clarke is not overpaid because he makes more than $52 million a year. It's because he earns 1,517 times the average salary of a Fleetcor employee, has delivered unimpressive results for Fleetcor's stock holders and just 14% of shareholders voted to approve his pay.

What's happening: The main culprits spotlighted by As You Sow, a non-profit dedicated to shareholder advocacy, are CEOs who take home massive paychecks but whose companies come up short on total shareholder return (a metric that tracks a company's stock, including reinvestment, annualized for 5 years).

The group identified 100 such CEOs, a number of whom take home more than 1,000 times what the median employee at their firm does and have their pay packages challenged by investors.

  • "Overpaid CEOs underperform financially," Paul Herman, CEO of HIP Investors, who helped craft the list of worst CEOs, tells Axios.
  • In fact, he says, the average "overpaid" CEO makes $11 million to $53 million more than the average CEO at an S&P 500 company.

Why it matters: CEO's growing demand for richer salaries are often leading them to value short-term gains over long-term results, prioritizing stock buybacks that temporarily pump up a company's stock price over long-term investments in employees and growth.

That's bad for the individual companies and for the country, advocates say.

"The crisis we're in today of inequality has a lot to do with what has been happening in executive suites."
— Former U.S. Labor Secretary Robert Reich, during As You Sow's call with reporters on Thursday

The organization says large U.S.-based asset managers like BlackRock, Vanguard and StateStreet continually rubber stamp exorbitant executive pay packages opposed by individual investors, pension funds and more discerning European asset managers.

Northern Trust, which manages $1.1 trillion in assets, did not vote against any pay deals.

The numbers that matter: This has continued despite poor returns for investors, says Rosanna Landis-Weaver, As You Sow's program manager.

  • "We found that the 10 companies we identified as having the most overpaid CEOs, in aggregate, underperformed the S&P 500 index by an incredible 10.5 percentage points and actually destroyed shareholder value, with a negative 5.7% financial return."
  • "In analyzing almost 4 years of returns for these 10 companies we find that they lag the S&P 500 by 14.3 percentage points, posting an overall loss in value of over 11%."

Rounding out the top 10 companies with the most overpaid CEOs:

2. Oracle (which topped the list last year)

3. Broadcom

4. Mondelez International

5. Wynn Resorts

6. Walt Disney

7. TransDigm

8. AIG

9. Mattel

10. CSX

See the full list of 100 most overpaid CEOs.

Go deeper: Corporate CEOs took home more than you think

Bonus chart: Today's CEO pay
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Data: As You Sow; Chart: Naema Ahmed/Axios

Thanks to the 2010 Dodd-Frank financial reform bill, shareholders gained access to new information this year.

  • Companies must now disclose the ratio of pay between the CEO and the company’s median employee. Not surprisingly, five of the top 10 worst CEOs overall are present in the list's top 10 companies with the highest ratio of CEO to median employee pay.

"If you look at the pay of top CEOs relative to workers, that ratio in the 1950s was 20 to 1, was about 30 to 1 by the late '70s, and by the mid-1990s it was 120 to 1," Robert Reich, who served as Labor Secretary for President Bill Clinton, said during Thursday's call with reporters. "When I was working in the White House that was a cause of real concern. That ratio seemed appalling to most people. Now it’s 300 to 1."

2. Happy workers = alpha

Finding employees who actually like their job through Glassdoor, where workers rate their employer, can add up to 5 percentage points of alpha per year, according to analysts at Bank of America Merrill Lynch.

What's happening: While the site has been inundated with 5-star reviews that look more like "corporate gaming" than honest assessments these days, BAML's global research team says screening for longer reviews and using text-based deep learning algorithms has proven the website still useful for investors.

  • "Employee ratings can lead to better risk-adjusted returns."
  • "Stocks with high ratings would have outperformed those with low ratings by almost 5 percentage points per year from 2013 to 2018, and would have offered a Sharpe Ratio of 1.18 vs. 0.53."

Analysts said they screened for longer than average (30 words) reviews and text sentiment factors to cut through the noise of Glassdoor's now obviously compromised star reviews.

"Text sentiment was important, in that we found inconsistencies within reviews for example, a reviewer might assign a positive rating to a company that was at odds with a strongly negative written response in the pros and cons section."
3. Americans are loading up on U.S. debt
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Reproduced from Deutsche Bank, using Federal Reserve data; Chart: Axios Visuals

Foreigners sold $77.35 billion in U.S. Treasury debt in December, the most recent month for which data is available.

That's the largest outflow since the U.S. government started recording Treasury debt transactions in January 1978, data shows.

  • Since 2000, foreign buyers had been the main growing source of Treasury sales. That trend has reversed and American buyers, including banks, pension funds and households, have more than picked up the slack.

Why it matters: U.S. demand for Treasuries has remained incredibly strong since late last year and in fact has increased as yields have fallen, meaning investors are being paid less to hold the debt.

  • That's unusual and the fact that yields remain near these particularly low levels (2.69% on the 10-year at press time) likely suggests investors are continuing to position for a downturn, despite the stock market's reversal.

Deutsche Bank Chief International Economist Torsten Slok notes that foreigners sold a total of $91 billion of U.S. stocks and bonds in December, with around 85% of that being U.S. government debt.

Despite this significant upward pressure on Treasury yields during the stock market rout (because selling leads to lower prices, meaning yields should rise), benchmark 10-year yields fell from 3.20% in November to 2.60% in December.

  • "This reveals how strong the domestic bid is from pension funds and banks for U.S. Treasuries at the moment," Slok said.
4. S&P sales and profit moving in the wrong direction
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Adapted from The Earnings Scout Report; Note: Only 419 companies have reported in Q4 2018; Chart: Andrew Witherspoon/Axios

With more than 80% of S&P 500 companies now having reported fourth quarter results, it's becoming clear that sales growth is slowing but profit growth has plunged, Axios' Courtenay Brown writes.

Why it matters: Profit margins are the tightest since 2017. Companies are blaming rising labor and material costs.

  • According to FactSet, the S&P's collective after-tax profit margins have dropped to 10.7% from 11.3%.

Bonus stat: The percentage of S&P companies beating profit expectations trails the 5-year average. The number of companies that have topped sales estimates are above the 5-year average so far.

5. Meet the world's 55 minotaurs
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Data: PitchBook; Chart: Chris Canipe/Axios. Tap on the graphic to get the names of the companies and how much they've raised.

Being a unicorn — a private company worth a billion dollars — isn't cool. You know what's cool? Raising a billion dollars, Axios' Felix Salmon writes.

Just yesterday, food delivery company DoorDash announced $400 million in new venture capital funding, bringing its total funding to $1.37 billion.

The big picture: Meet the minotaurs — our term for the companies that would be worth more than $1 billion even if the only thing they did was to take the cash that they have raised and put it in a checking account.

  • Axios has found 55 minotaurs as of early 2019. That's more than the 39 unicorns found by venture capitalist Aileen Lee when she invented the concept just over 5 years ago. (There are well over 300 unicorns today.)
  • The first minotaur was Alibaba, in 2005. The first American Minotaur was Facebook, in 2011, followed within a month by Groupon and Zynga.
  • 24 new minotaurs were created in 2018, a huge jump from 14 in 2017 and just 9 in 2016.

The rise of the minotaur reflects a new form of investing, epitomized by Japan's SoftBank, and a new form of company-building, dubbed "blitzscaling" by entrepreneurs Reid Hoffman and Chris Yeh.

The big idea: If you have enough money, your investments can become self-fulfilling prophecies. The trick is to find a really big market with winner-takes-all economics. Then, spend an unholy amount of money on growing as fast as you can, and no one else will be able to touch you.

  • If you're a startup taking a meeting with SoftBank CEO Masayoshi Son, you know that he comes bearing both a carrot and a stick.
  • The carrot is that he can invest hundreds of millions of dollars in your company, or even billions of dollars, to turbocharge your growth and help you crush your competition. The stick is that if he doesn't, that money will go to your competitor, and you will be the company getting crushed.

Blitzscaling isn't designed to be healthy for the economy. It's a deliberate attempt to build a monopoly that can't be competed against unless you have pockets that are billions of dollars deep.

  • It's the promise of monopoly rents in the future that makes billion-dollar investments attractive in the present.
  • The other side: You don't need to raise billions of dollars in order to scale into a monopoly. As Tim O'Reilly points out in a recent critique of blitzscaling, Google raised only $36 million before its IPO. Even Amazon raised only $108 million in venture capital before it went public.

History: Kwame Nkrumah was the first president of Ghana. A politician, pan-Africanist and revolutionary, he led the country to independence from the U.K. in 1957, and was a founding member of the Organization of African Unity, the first-ever union of African countries and a forerunner of today's African Union.

Under Nkrumah, forestry, fishing and cattle-breeding expanded, and production of cocoa — Ghana's No.1 export — doubled.

Nkrumah initiated the Ghana Nuclear Reactor Project, created the Ghana Atomic Energy Commission and introduced a 7-year plan in 1964 focused on further industrialization, emphasizing domestic substitutes for common imports, modernizing the building materials industry, machine making and electronics.

He began the construction of a hydroelectric power plant, the Akosombo Dam, on the country's Volta River that he projected would provide "the quickest and most certain method of leading [Ghana] towards economic independence."

He was voted African Man of the Millennium by listeners of the BBC, which described Nkrumah as a "Hero of Independence" and "international symbol of freedom as the leader of the first black African country to shake off the chains of colonial rule."