As I began to work on the Value Creation series, I thought that it should begin with an iconic person who epitomized the very spirit of proposition. So, I decided that an excellent place to start the series was with the entrepreneur Carlos Slim Helu' known by most simply as Carlos Slim.
The prolific growth and subsequent value creation of the companies launched Carlos Slim catapulted him to being named the world's richest man (surpassing Bill Gates) by Forbes (#1) in 2010, 2011, 2012 and 2013. This is an incredible feat as most people had believed surpassing Bill Gates in net worth to be a fantasy, it is all the more notable because Slim is from an developing country, Mexico. Slim although starting from very humble beginnings, began his investing career at the very early age of twelve. He initially made his first fortune in real estate, becoming a millionaire in his early 20's and has since created a net worth of over $73 billion dollars through his companies. Mr. Slim's holdings are diverse and encompass many facets of the economy ranging from securities, banking, insurance and real estate. However, he is the most dynamic in the telecommunications industry and his core holding is his telecom firm, America Movil SAB (AMXL) which operates in 18 countries, takes in revenues of over $59 billion and has over 150,000 employees.
The recent upswing in the telecommunications industry make it an excellent place to outline value creation as it has been a dominant generator of wealth and jobs.The telecom sector is on an all time high so an exploration of his philosophies are ideal. As a point of reference, the telecom sector was up last year over 21% and has a total market capitalization of over $93 billion. This week the FCC started an auction for the H Block spectrum which operates in the mobile broadband space. The capital markets believe the sector has tremendous upside as we saw the largest bond transaction in history completed as Verizon launched and closed a $50 billion bond deal last year. Slim sees more potential opportunities in telecom and for American Movil, he says it will invest over $9 billion over the next 4 years, citing greater speed and services for small business as the particular growth engines.
As a point of note, Dennis O'Brien, a fellow Forbes list (#233) billionaire and the wealthiest man in Ireland obviously sees the same opportunities. He recently decided to increase his telecommunications holdings in what he called a "massive" telecoms push. Mr. O'Brien owns Digicel, a Caribbean and Central American telecom group. Mr. O'Brien sees international markets and products as incredibly valuable due to "world order changing". Clearly, the telecommunications industry is where many are creating value and wealth, potential investors should take note and follow the trend.
When I initially I met with Carlos Slim, he was declared the richest person in the world with over $80B (that has since went down to only $73B), despite his immense wealth, the first most notable thing about the man was his extreme humility. Despite being a multi billionaire, Carlos resides in a relatively modest six-bedroom house, that is less than mile away from his office. He personally doesn't ascribe to the concept of conspicuous consumption and doesn't have a super yacht or multiple mansions around the world. He doesn't have a fleet of high performance, exotic cars and still prefers to actually drive by himself.
As I spoke with him he spoke in a gentle, patrician voice often pausing to allow me time to interject or ask questions. As we talked, it was apparent to me that this very proud Mexican man from a family of (6) six children, whose roots hailed from Lebanon epitomized the American dream of re-invention and value creation. So, I pressed him for what he thought contributed the most to his success and for a formula and set of rules that he lived by. The first thing he noted was that human capital was the best investment and that you should strive to educate and enlighten everyone around you. The following are Carlos Slim's 10 key tenets for success in business:
1. Have a simple organizational structure
2. Maintain austerity
3. Focus on Growth
4. Minimize non-productive things
5. Work together
6. Re-invest profits
7. Be charitable
8. Keep Optimistic
9. Work hard
10. Create wealth
An additional key factor that Carlos Slim defined as critical to success was the control of negative thoughts. He outlined 1) being positive, 2) being present, 3) being contrarian and 4) fast action as key components of success. Please find (4) four of Carlos Slim's operating principles for success in his own words:
1. “Do not allow negative feelings and emotions to control your mind. Emotional harm does not come from others; it is conceived and developed within ourselves.”
2. “Live the present intensely and fully, do not let the past be a burden, and let the future be an incentive. Each person forges his or her own destiny.”
3. “When there is a crisis, that’s when some are interested in getting out and that’s when we are interested in getting in.
4. “When we decide to do something, we do it quickly.”
As a testament to his philosophies it was recently announced that the billionaire was poised to double a $250 million investment from a lending agreement he made with the New York Times in 2009 during the height of the financial crisis--a time when most were frightened to invest and even more wouldn't have invested in old media. Carlos Slim's take on the investment? "Courage taught me no matter how bad a crisis gets… any sound investment will eventually pay off. In business, you invest when things are not in good shape. When you invest at these times, you take a better position than your competitors. When there is a recession and your competition does not invest, they are giving you the advantage."
Each person forges his or her own destiny. For all prospective entrepreneurs take these tenets and Believe in yourself.
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As of late, it seems that finance has been under attack and demonized by various sources from the government to the media. As a finance person I might be admittedly biased in terms of the derision, but as a practical person I understand the need for modern finance and trading to make all components of the society work.
If people thoroughly don't believe this: eschew bank and credit cards and resort to paying cash for any and all of your transactions from your home, to your car and education--most people aren't in a position to do this, so we are enabled with additional mobility by modern finance.
Proselytizing aside, I see these grumblings as a form of protest because of the underlying issue: most people don't see how they can benefit in the broader economy outside of finance. I constantly receive a number of messages asking for ideas that don't require extensive knowledge of trading and capital markets because they don't see how they can participate in it. That is a false perception because the markets actually are a meritocracy and will lift those who are willing to take the risk.
With that being said, I wholly agree that the broader society needs to see upward mobility. Subsequently, I believe that there needs to be a focus on value creation along with the consequential creation of jobs, in which everyone can participate. I have been bombarded with questions on how can people outside of the confines of finance participate in the upswing in the markets. Most all of the questions start with, "I only have.."as they believe that since they do not have millions or tens of millions that they can't participate in what I outline. That isn't particularly true, but it is evidence of the need to define the methods of successful people in arenas other than finance.
To that extent, I decided to move beyond the study of numbers, prices and balance sheets to the thesis, plans and actions of a number of my clients along with the businesses that I follow. The Value Creation series will serve to interpolate how they extrapolate value in the broader economy from their companies. I have spent the greater part of my adult life in financial transactions, economic prognostication and securities analysis--so I will always be a trader in my heart-- but after a long career, however, I believe that now is the time to explore value creation beyond the numbers in a intrinsic and involved fashion.The purpose will be as my business role model, Reginald F. Lewis stated "..to get behind the numbers.." and determine what moves and drives value.
In this critical period after the financial crisis, America is in grave need of new creators of value that will assist in generating new jobs.The greatest evidence of job creation through value creation is in the technology industry and can be seen in the wealth and jobs that are created on the west coast. We are constantly seeing examples of young undaunted college kids who create billions in value, by dint of will and effort and as a result build monolithic companies in relatively short periods.
This is the spirit that built America and it needs to be spread abroad.
In homage to that spirit, I will present the stories and methods of people such as Carlos Slim, Patrick Soon Shiong, T.Boone Pickens and others who have conspicuously and inconspicuously created billions of value in companies in sundry areas not directly tied to finance. It is my hope that these articles will inspire others, serve to ignite their passion, give them direction and help to motivate and move them to action.
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Today the Japanese Yen dropped against all major currencies after a short lived rally for the past 3 days, it was weakened by the latest record current account deficit. The yen has weakened significantly due to the Abe administration's resolve and commitment to fight the deflation that has plagued the country over the last thirty years. These initiatives have been dubbed the "Third Arrow" of the "Abenomics" monetary policy.
The 592.8 billion yen shortfall was far larger than the median analyst forecast estimates of 368.9 billion yen of 24 economists by Bloomberg, the previous deficit account was 127.9 billion yen in comparison. This deficit is the largest in nearly 30 years, expect it to assist in keeping the currency weak. Japan is an export driven economy and the weakness in the yen, when coupled with the increased demand on energy that was substituted due to the shutdown of the nation's nuclear plants--has effectively driven up the import costs for the country. Japan is sensitive to oil prices since it is devoid of natural resources and it will be sensitive to energy price volatility in the future. These challenges will be accompanied by a new sales tax in April and the combination of these factors could cause complications in the economic plan.
If confidence begins to wane--it could drive the yen even lower. This phenomenon could cause the country to eventually become a deficit nation that uses funding from foreigners versus the current situation of Japanese investors holding 95% of their country's investments. The latest economic data clearly outlines this and Cabinet Minister Akiri Akmari, stated this tenet after the economic meeting. This is key because he is responsible for economic revitalization. Particular risks to note are deficit dependency which could create a need for servicing of the enormous debt by the international investing community.
This isn't the first time we have heard these concerns voiced, after the release of the Bank of Japan's October minutes, members stated that potential risks to the economy loomed and voiced caution outlining their concerns over future growth. Bank of Japan (BOJ) board member Sayuri Shirai stated that" attention should be paid to the downside risks" along with outlining uncertainty in overseas economies. Despite Haruhiko Kuroda's attestations to sustain stimulus aggressively.The focus of the central bank was 2% inflation in (2) two years. Due to these policies the yen decreased 13 percent last year alone.
The current account deficit could significantly undermine investor confidence in Japanese Government Bonds (JGB's). Key measures to observe for Abenomics are real wage increases and export volumes. Most expect that exports will increase mainly due to economic recovery and an increase consumption in the United States. However, Japanese companies must begin to increase wages and prices, this is something that they have shown reticence to do.
Currently, international capital flows of approximately $125 billion in overseas money is invested in Japan, as I stated in the RISE OF THE JAPANESE STOCK MARKET don't expect the debtor status change overnight or to occur in the immediate future-- but it should be on the radar if these trends continue. I participated in a conference in Tokyo and one of the participants of my panel was Jesper Koll, the Managing Director and Head of Japanese Equity Research for JP Morgan. Jesper has been in Japan for over (3) three decades and is an incredibly bright fellow--he hinted at this during our conversation and enlightened me along with the group on this trend. Please see the link to the G1 Global Conference on Monetary Policy of Abenomics
I believe that these events may signal a new range of 100-105. The dollar yen is one of the most widely traded currency pairs in the world and information released by the CFTC shows that short positions have increased by $2.1 billion to over $14.4 billion in last December alone, creating the largest net short position since before the financial crisis.
Concurrently, the Bank of Japan is seriously considering a two hour extension of the functional operating hours settlement system, this will most likely occur in the beginning of 2016 when the bank revamps it's settlement system. This will initially affect the commercial banks using the system for interbank transfers--and Japanese firms engaging in business globally. The extension would make the cut off period 9pm Tokyo time making same day settlement possible throughout Asian countries. Another beneficial point of this change is an extension into the London market hours, this will ostensibly create an environment in which Japanese companies and investors can purchase foreign funds using JGB's as collateral--a market dynamic created by Abenomics that shouldn't be over looked and will be a key driver.The nation's economy bought 1.48 trillion yen of dollar bonds while investors in Asia increased holdings of dollar bonds for the fifth consecutive month. Most believe that the BOJ will increase purchases this year. I expect that the BOJ most likely will attempt to push the currency lower in 2014.
From a traders perspective it will pay to be medium term bearish JPY, an additional reason to short the yen are Abe's comments to China over airspace, these factors will reduce the currency being viewed as a safe haven.
In terms of international investing, Abenomics will have additional benefits as evidenced by the purchase of Jim Beam by Suntory for $16 billion USD including debt. This was was driven by the underlying economics of a weaker currency, as it gives Japanese companies economic incentives to gather higher returns, that then translate to greater profits and currency arbitrage opportunities. Expect to see Japanese focused funds do incredibly well along with exposure to them be highly sought after by institutional investors and super high net worth individuals alike. Get on the train now, it has already left the station and will pick up speed.
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The Bank of England (BOE) held their interest rates steady at their record low 0.5%--as expected, marking the 58 consecutive month of continuing the rate. Policymakers also decided to maintain the 375 billion sterling quantitative easing measures however no accompanying statement was released.
Market participants are expecting the newly minted Central Bank Governor Mark Carney to change the forward guidance policy as conditions improve. An interest rate change would be used to accelerate the economy by improving the credit conditions in the country. This seems likely as consumer prices rose at the lowest levels in 48 months in the country, this is evidence of positive growth measures in Great Britain's economy and serve as a testament that it is on the upswing.
Governor Carney previously stated in August of 2013, that the Bank of England would reassess it's current policy when the unemployment rate reached 7% anticipating that it wouldn't be reached until 2016--however the rate has unexpectedly dropped off far sooner that the expected, making some economists speculate that a tightening policy might be implemented much sooner than was originally planned. Some market participants say don't expect a rate increase before the middle of 2015.
I believe that the likelihood of the BOE maintaining low rates throughout 2014 is very low given the falling unemployment rate. Bear in mind that the growth rate in 2013 was very close to 2%, If this trend continues, expect Governor Carney to raise interest rates sometime in 2014. Look for some indication of guidance next month when the Bank of England's quarterly inflation report is released.
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The Japanese stock market continued to surge giving the Nikkei 225 index a gain of 56.7% for the year--outpacing all other major markets including the Dow Jones and the FTSE 100. The Nikkei's 2013 performance was its best year since 1972, in that year the market increased an incredible 92%.
The additional 0.7% gain on the last trading day made it the index's highest level in the last (6) six years, signaling a massive reversal of Japan Inc.'s fortunes. Prime Minister Shinzo Abe commented on the benchmark, leaving his vacation to ring the closing bell at the Tokyo Stock Exchange. Mr. Abe cited the historic highs as positive results from his administration's monetary policies dubbed "Abenomics"--the focus of these policies has been to create liquidity from loose monetary policy that will serve to power inflation in the real economy. Japan has had a 20 year period of stagnant growth and deflation. In his comments at the closing ceremony, Mr. Abe urged his countrymen to use the hundreds of thousands in bonuses provided by the performance to " keep it moving.."
Apparently foreign investors are encouraged by the policies, as approximately over $125 billion of overseas money was invested in Japan, the highest amount since 2005. This is what caused Nikkei 225 index to rise to 16,291.31 and outpace the Topix on the final trading day of the year. The much broader Topix closed up 0.95% up to 1,302.29 with an impressive 52% gain for the year. When the Nikkei gains faster than the Topix it is a sign that overseas investors are buying equities thematically as a bet that there will be a weakening currency and stronger stock market. This is called short yen/long stocks by traders, due to the smaller composition of stocks in the Nikkei (225 companies) foreign investors find it much easier to research and invest in the Nikkei Index. In contrast, the Topix which is composed of 1755 companies, is much more complex and creates a need for a deeper understanding of the country and companies.
Prime Minister Abe and his administration have sought to end a condition that the Japanese call "Cho Endaka"--which means ultra high yen. In one year, the Japanese currency has dropped approximately one fifth against the US dollar, this has created a tremendous boost for the export driven Japanese economy and is the result of cheap yen and rising stock prices. The close of the session saw dollar buying 105.35 yen, a dramatic increase from the 87 yen level at the end of 2012. Look for the Nikkei to be a source of volatility and a major focal point of the trading and investing community, as trading experts have called for a range of 18,000 to 20,000 in the Nikkei for 2014.
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The passage of the Volcker Rule will probably be one of the most important determinants of financial firms performance in the upcoming year, mainly due to the combination of the pervasiveness and ambiguity of the almost 900 page document.
I have had several discussions with CFTC Commissioner Bart Chilton who--despite the seemingly sanguine look on my face--I have the utmost respect for. I consider the Commissioner to be a diligent, intelligent regulator with only the best of intentions and a true understanding of the markets along with the realistic capabilities and the limits of financial firms. The Commissioner was a key person at the CFTC in regards to the completion of the Volcker rules, he struck a great balance between pragmatism and doing the utmost to protect investors. Bart has worked tirelessly and the financial community will miss his presence and intellect when President Obama replaces him next year.I hope that the next appointee will be as involved and as open as Commissioner Chilton has been.
After 3 years of development, the passage of the rules by the regulatory quintuplet of the Federal Reserve Board, Federal Deposit Corporation (FDIC), Securities Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) was finally unveiled along with key tenets of the proposed reform law passed by Congress in response to the financial crisis. Ironically, although proprietary trading wasn't the reason for the financial crisis, it was a particular focus of prohibited banks activities. Along those lines neither hedge funds or private equity firms caused any of the financial malaise but both were also excluded from bank participation by Congress. Look for the latter two sectors to perform incredibly well in 2014 as the banks are sidelined from participation and the rules are not applied to either respective industry.
The rules do however affect any financial concern with federally insured deposits, this now includes the investment banks as they were forced to become BHC's (Bank Holding Corporations) by the Federal Reserve Bank during the financial crisis--whether they wanted to or not--and forced to take capital. Financial experts and academics agree that while reform advocates praised the initiative, it is effectively fixing something that wasn't broken and it doesn't address the roots of the financial crisis.
I initially discussed the timing additional year delay to July 2015 along with the coordination issues and implications of the proposed rules in Volcker Rules! Most notably, the former Federal Reserve Bank Chairman made it a point to distance himself from the final product that bears his name and similarly outlined some of the points that I voiced in this commentary when I met with him at the International Monetary Fund meetings in Washington, D.C.
A particularly gray area for regulators and lawmakers alike was the concept of hedging. When it comes to liquidity providing and the eventuality of making profits due to the risk taking there isn't a clear demarcation between client activities and trading profits or losses. After over almost 20 years of capital markets participation as a trader, investment banker and asset manager--I can't clearly discern the difference and I have not met any professional trader who can. It initially would seem that the litmus test is whether the firm made a profit. The comparisons of market-making and permissible hedging in juxtaposition to proprietary trading—is incredibly hard to distinguish between on an institutional trading desks. Banks will still be allowed to participate in the proprietary trading of US government, state and municipal bonds along with other US government backed financing firms such as Fannie Mae and Freddie Mac--entities which, strangely enough were in the center of the last crisis. The Volcker rules will also allow the banks to invest in foreign bonds.
The financial community applauded that market making activities were left intact, this is incredibly important to financial firms because the total annual revenue of these practices exceeds over $40 billion USD—that translates into $10B a year in pre tax profits according to Standard and Poor’s. A number of top firms like Goldman Sachs, JP Morgan Citibank and Bank of America previously generated significant portions of their revenue from trading. Those activities and revenues will have to be generated elsewhere if they are to remain competitive. The general trading environment has dropped 30% since 2007 and those that are left have seen a corresponding 35% reduction in pay, we can expect that trend to continue and far less capacity in the financial industry in the future taking away from GDP.
With over 892 pages, who are the other groups applauding the rules? Lawyers, Lobbyists and Consultants! The ensuing confusion should create lots of billable hours as the documents are the perfect trifecta of vague, voluminous and ambiguous. The extensive interpretations should add to the economy's GDP as the lawyers look for loopholes, consultants advise both sides and lobbyists push for legal change of the existing rules.
A key point in the rules is that CEO's will have to attest to compliance programs making them fully accountable as the CEO assures responsibility. The banks are required to create and monitor compliance programs that the CEO now has to certify. This means that they can be prosecuted for malfeasance as the CEO is ultimately responsible and subject to litigation.This tenet was seen as a key victory by finance critics.
Ultimately these measures will raise costs for US banks causing them to be less competitive than foreign banks while reducing their profitability. Expect foreign banks and the unregulated "shadow banking" sector to capitalize on their conspicuous absence.