GalaTime

• A VC: Bonuses

I prefer bonuses that are based on ebitda. My thinking is that value creation in companies comes from earnings growth. The more ebitda you have, and the faster it is growing, the more value you are creating for stockholders. But I don’t like the idea that management is incented to maximize ebitda in the short run to create bigger bonuses for themselves while starving the business of needed investment.

So I’ve become fond of an approach where the company pays management bonuses on “incremental year ove year ebitda.” The way this works is you pick a base year and for the next year you pay management a bonus of x% of the incremental ebitda they generate. The best way to do this is a five year plan with a goal of obtaining a significant increase in ebitda so management has time to make the investments needed to get there.

• CrossingWallStreet: Why Do People Make Market Forecasts?

The dirty secret is that stock market forecasts are fun.

It’s odd that people ignore this basic insight. Markets are a lot of fun. Sure, every serious person is seriously concerned over market forecasts because they’re not serious. Still, people do it anyway. Why? It’s damn fun.

The worst moment of Stewart V Cramer was Stewart saying that finance isn’t a “game.” Oh please! Cramer may deliver his advice in a clownish way, but the advice is serious (in his mind). The thing I hate about Jon Stewart is that he combines too much self-righteousness while being too little informed. The two reinforce each other. Stewartism is really an invitation to ignorance. As long as you have that smug, knowing attitude, who needs to actually understand the issues?

• FT: Hedge funds seek redemption with pay-outs

Hedge funds that locked up clients’ money last year have started paying out cash earlier than many had planned, in a move that could free tens of billions of dollars – and threatens another wave of hedge fund share and bond sales.

The repayments follow anger from many investors at the decision of hundreds, perhaps thousands, of hedge funds to suspend withdrawals, impose “gates” limiting withdrawals or create “side pockets”, which pay out only when assets can be sold.

• Business Insider: Eastern Europe About To Go Bust, Taking Western Europe With It

Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region’s GDP. Good luck. The credit window has slammed shut.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country — facing a 12% contraction in GDP after the collapse of steel prices — is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia’s central bank governor has declared his economy “clinically dead” after it shrank 10.5% in the fourth quarter.

• Big Picture: Bear Market Comparisons, 1929-2009

• Economic Times: Wealth managers devise new strategies to woo investors

Leading the race, the newly launched SMC Wealth Management Services is promoting their portfolio management scheme - the arbitrage scheme, perhaps first of its kind in the wealth management space. Under this scheme, ‘basket trading’ is one of the main strategies used to generate reasonable returns.

Basket trading is a single order to buy or sell a set of 15 or more securities taking advantage of the difference between the sum total of weightages of those stocks and the index level under which stocks are enlisted.

Yay, now you can pay 15 times the brokerage!

Economic Times: Wealth managers go head hunting in times of pink slips

In times of rising lay offs across industries, wealth managers are going head hunting for new talent as they see huge opportunity in the wealth management domain.

Axis Bank, SMC Global, Reliance Money, Birla Sun Life, ASK Investment Managers are looking at recruitments in sales/wealth advisory verticals.

Launched in July, the wealth management division of Reliance Money has set a target of 1,00,000 clients by the end of current fiscal. “We are adding to the central wealth management team in Mumbai, besides other cities. With economic development of the country, the need for wealth management services will grow exponentially. Within a period of next 5 years, the market should see 10-fold growth,” said Sudip Bandyopadhyay, director and CEO, Reliance Money.

Let’s hope they offer compensation models that align with their clients’ interests. Unlike mutual funds. Or PMS. Or ULIPs.

• Mint: Banks woo wealthy customers with PE, gold fund offerings

ICICI Bank is one of many Indian banks devising alternative investment options such as private equity (PE), structured products with a capital guarantee, and gold for high networth individuals (HNIs) at a time when returns from investments in equities and real estate have turned volatile.

Also read: India to become trillion-dollar wealth management mkt by 2012

“The bullish sentiments on the real estate market have died down. Gold is coming up as a good investment option. We are seeing growing interest from individuals to invest in 1kg gold biscuits. Traditionally, gold has always given a return in excess of 8% annually,”

Hmm. Do review the structured products in detail, before committing funds.

• Business Standard: Hedging: 120 firms caught napping

Data culled from the unaudited first quarter results reveal that these 120 companies set aside Rs 8,900 crore for currency fluctuations, exotic derivative products and mark-to-market (MTM) losses to hedge their exports.

The companies took foreign currency loans through external commercial borrowing (ECBs). This increased the cost of funds as the new accounting norms forced borrowers to make provisions for MTM losses following the rupee depreciation. Besides, the meltdown in the global equity markets hurt FCCBs issuers the most. The investors have postponed their conversion plans as shares of most high premium FCCBs are trading at a huge discount.

The MTM losses of the 120 companies show that realised losses on account of derivative products and revenue hedging are modest at Rs 1,700 crore, while the unrealised or MTM losses due to currency fluctuations are higher at Rs 7,200 crore.

Damned if you hedge, damned if you don’t.

• CXO Advisory: Combining Momentum and Roll Return Signals for Commodity Futures

They test combinations that iteratively buy backwardated (positive roll return) winners and short contangoed (negative roll return) losers.

Trend following rules with formation periods of one, three and 12 months and a holding period of one month (Mom1-1, Mom3-1 and Mom12-1) are the best momentum strategies.

The best roll return strategy (TS1) buys the 20% of commodities with the most positive roll returns and shorts the 20% with the most negative roll returns each month.

Time to test this on Indian commodity markets.

• NY Times: Booming China Suddenly Worries That a Slowdown Is Taking Hold

• Economic Times: Now, broking cos will run PMS for free

In a last ditch attempt to retain money in structured portfolio schemes, brokerages have begun to float portfolio schemes that entail no asset management charges.

“Investors were not keen on sharing profits when the market was soaring; profit sharing then created a negative impression in the minds of investors. But with the market now on a downtrend, investors are coming into terms with the new fee concept,”

About time!

• Business Standard: Cement industry sees prolonged pain ahead

The Rs 85,000 crore domestic cement industry is fast realising the painful situation it is getting into, as the GDP growth rate is on a slippery path and over 70 million tonnes of fresh capacities are in the pipeline in the next two years.

The capacity utilisation is expected to come down by as much as 85 per cent in the current financial year from 95 per cent in the previous financial year due to capacity addition and expected slowdown in the construction and housing sectors.

The 203.51 million tonne industry is expected to add 45 million tonnes in FY09 . . . dispatches in 2007-08 were 167.67 million tonnes.

As expected, see earlier post: Cement production, consumption & price trends

• Hindu Business Line: Mall development slows in second quarter

The second quarter saw new mall supply of about two million sq ft, less than the anticipated six million sq ft. The shortfall was mainly due to delays in completion of interior finishing and fit-outs, and the ongoing liquidity squeeze.

“Despite lack of quality space in the market, the top eight cities in India are currently witnessing around 18 per cent vacancy across the 40 million sq ft of operational malls. This can be attributed to the fact that most of the supply has come within the same micro-markets targeting the same catchments, thereby creating an oversupply within respective neighbourhoods,”

• DNA: PMS investors are in for a rude shock

. . . every time a PMS fund manager buys or sells the shares, there is an incidence of capital gains tax on the investor, irrespective of whether the investor chooses to redeem his investment with the PMS or not.

PMS is a pass-through where the ultimate tax incidence is upon the investor. This is because, unlike a mutual fund, which has a separate identity conferred by the IT Act (Sec. 10 (23)(D), a PMS is just a service provided by the fund manager who acts like the agent of the customer or investor and for which he is paid a fee.

Since early January, the stock markets have fallen. Hence investors who had invested in PMS and have stayed invested without booking capital losses, have seen the value of their portfolios fall by around 30%.” In a double whammy of sorts, they also need to pay short-term capital gains tax.

• Business Standard: Credit card dues surge 87 per cent

. . . credit card outstanding rose 87 per cent to Rs 26,596 crore, with Rs 12,375 crore added between May 25, 2007 and May 23 this year. The rise was 45 per cent till May 2007. Banks are already complaining of rising defaults on unsecured advances such as credit cards and personal loans.

The flow of housing loans too has slowed down to 13.8 per cent till May-end this year, compared to 21.6 per cent last year. As of May 23, 2008, total outstanding home loans were estimated at Rs 2,62,486 crore, Rs 31,70 crore higher than the level at the end of May last year.

I imagine this will get worse in the near future.

• BCA Research: Natural Gas: Stay Bullish

• DNA: Sebi slaps curbs on PMS practitioners

Sebi asked PMS houses not to pool assets of investors the way mutual funds do and also increased the minimum networth requirement for floating a PMS house.

The networth required to float a PMS scheme has been increased to Rs 2 crore from Rs 50 lakh earlier, purportedly to weed out the smaller players.

The number of PMS players has shot up to 205 as on March 31, 2008, from just 18 in 1999. These include several small and mid-size brokerage firms. This is unlike in the markets abroad, where PMS is run primarily by asset management companies.

• Bloomberg: Libor Set for Overhaul as Credibility Is Doubted

The benchmark interest rate for at least $347 trillion of derivatives and 6 million U.S. mortgages is set for its biggest shakeup in a decade on concern that banks misquoted their true borrowing costs.

. . . complaints by investors that financial institutions weren’t telling the truth about their funding costs after rising mortgage defaults contaminated credit markets and drove up borrowing costs.

Libor rates jumped after the association said April 16 that any member banks found to be misquoting rates will be banned.

. . . some lenders were manipulating the rates to prevent their borrowing costs from escalating.

Oops!