Wednesday Night #1665 with George Kesteven

Prelude:
The latest news of Justin Bieber – a 19-year old tragedy. has prompted an on-line petition to the White House to deport him from the U.S. which has so far garnered 100,000 signatures.[Update: With more than 234,000 signatures and counting, the deportation request is well over the 100,000 names a petition on the White House website needs before the Obama administration is required to respond to it.] How effective are on-line signatures? Do they have credibility and do they change positions or policies? While many appear frivolous, the large organizations such as Avaaz (founded by a Canadian) do appear to have brought about change, if only by raising awareness around the world. The Guardian article Inside Avaaz – can online activism really change the world? gives an interesting appraisal of the organization and the impact of its internet-based activism.
Gerald reminds us that over 100,000 people died in 1665 of The Great Plague

Introducing  her former CAIF colleague and good friend, George Kesteven, Margaret Lefebvre recalled the difficult times that the income trusts lived through, commenting that it was very difficult to arouse sympathy for something that people did not understand.
However, as the income trusts are now a thing of the past, Wednesday Night was particularly interested in learning from George about the work of investor relations officers (IROs)  and the Canadian Investor Relations Institute that he chairs. He pointed out that while investor relations officers interface with all of the stakeholders, they also must combine this function with that of compliance officers to ensure that all communications/disclosures meet the regulatory requirements. The challenge today is how to use social media. While in the U.S. companies are now using Twitter links to websites to disclose financials, in Canada there is a requirement that companies must use a wire service before publishing news on social media.
IROs also face challenges in tailoring their communications according to whether the company’s base is principally institutional or retail – each having its own objectives (growth versus income) not to mention understanding of the company’s business.
The IRO does not develop strategy, but must be aware of it and be able to communicate it to the investor; however, what is now happening more often is that the shareholder who does not agree with the strategy, will discuss its concerns directly with the board, and eventually, may decide to put up a new slate. Another issue of increased level of shareholder activity is related to executive compensation (special reference Jamie Dimon Gets $9.5 Million Raise After JPMorgan Chase Hit With $20 Billion Fines). To fend off criticism from shareholders, companies generally publish comparisons with compensation at equivalent companies and the IRO is expected to flag that information.

A recent story about the Harvard Endowment investment in Transylvanian timber [Harvard Overpaid for Timber as Romanian Agent Held for Bribery] raises the question of how sophisticated some institutional investors are. The more important issue is the portfolio profile of such entities; how much risk have they stated that they will bear? Also, as all portfolios are measured against something – generally an Index – some portfolio managers will take additional risks to ‘beat the index’. This, however, is contrary to the declared objectives of the portfolio and more important, it is not in the interest of the investor, e.g. if the Index is down 30% and the portfolio down only 28%. As Tony Deutsch points out, it used to be that portfolio managers were listed by the rate of return they produced.However, trustees who naturally wanted to see their managers in the top quartile, fired those who didn’t achieve the desired results and hired a new one. To put an end to this, the investment managers came up with the measurement against the index – a system which became ‘a tenure program for investment managers’. People have now moved into private equity and … that’s how we get Transylvanian timber purchases.
The three key evaluation considerations: solid management; solid asset base; ability to control costs.

Actuarial costs for pension funds management are rising exponentially, especially in the case of funds for a cadre of retired persons.
The managers of defined contributions plans are obliged by law to prove that they have ensured that the beneficiaries are suitably educated, given the tools they require to make reasoned and informed decisions, and should also be able to point those beneficiaries to a default fund that will meet their needs.But with all the education that the institution offers, can we reasonably expect everyone (the professor of Chinese calligraphy or the gardener – to have the ability to make the necessary portfolio decisions? The answer is no. The best solution is that you have a portfolio run professionally to which the beneficiaries of the pension plan have access, and then you hope for the best.
A possible solution to the defined benefit dilemma is to share the risk for the top 15% of the fund (e.g. base it on the market’s performance); this would not have worked in 2008, but it is to be hoped that year was an aberration. Would it not be preferable for many to be able to ‘repatriate’ their money to the pension fund? There are some professional associations that offer a sort-of mutual fund to their members with very low fees. Institutions could follow this model. There are of course restrictions on institutional portfolios (% that must be held in bonds) and these need to be adjusted according to circumstances, but the problem is not insurmountable.

Changing topics, Diana read a message from John Buchanan, currently in London, where he is selling his house. He cited a number of costs that are far lower than in Montreal including:
$18 a month for virtually unlimited cellphone,
$900 a year for my home insurance (on a house worth many millions),
get cheese that has taste for less money than a Canadian spongy 500 grams,
pay $6 a month for unlimited internet from Sky,
buy a good New Zealand Sauvignon Blanc for about 10 bucks, pay 1% interest on my mortgage and yes, it does rain a lot!
This provoked a lively discussion including references to the provincial taxes levied on alcohol, with special mention of Alberta’s low costs, and the effect of supply management on the cost of cheese, as well as questions about other living costs not covered, and the comment “If everything is so good there, why are we living here?”

The market
Although it appeared in early December that the market was heading for a correction, portfolio managers didn’t want to sell anything because they were sitting on such good profits. It wasn’t until the second week of January that the expected dip began to happen; this is part of a correction given that since last summer the market has been up some 20%. The correction is expected to be approximately 5% – not a bear market. In fact, it is expected that the bull market will continue for quite a while. thanks partly to the Fed monies that go into the QE and eventually find their way to the market. What will happen with Janet Yellen‘s arrival. The outlook is good for 2014, though not as good as in 2013 and those who have stocks that have done well in the first and third legs should bear in mind that usually they will not do so well in the fifth.

The State of the Union (SOTU) (see U.S. Government & governance 2013-2014)
Is Obama an idealist or a politician? Opinion is divided as it seems clear that he is working hard to create a favourable climate for Senate elections in 2016. On the other hand, he did mention gun control in the SOTU, despite predictions that he would not in order to avoid annoying voters in key election states.
To one observer, it is surprising that the U.S. is still battling over social issues such as inequality and minimum wage that most other developed countries have faced some time ago. However, congressional opposition to virtually anything that the president proposes has led to his statement that he will now proceed by executive order where and as he can. One issue that puzzles Canadians who travel frequently to the States is the adamant opposition to the idea of socialized universal health care, despite numerous examples of western democracies where it has existed for years.
Perhaps had Obamacare been promoted as an extension of the very successful Medicaid, and had the public been prepared from the outset for problems with the roll-out …?
On the other hand, Canadians should remember that the arguments over Medicare were equally virulent and in fact, many specialists left the country as soon as it was introduced and the exodus continues because of the incomes they can generate in the U.S.

Canada
Why does the Harper government appear to be instituting more and more policies that alienate certain bases, the most immediate example being the shutting down of services to the veterans? Leaving aside the appalling incident at the meeting with Minister Fantino, it is a uselessly heartless cost-saving measure. And there is no senior member of the government with a military background to take up the cause – just as there are no scientists. The most rational explanation is that all departments must cut costs in order to meet Mr. Flaherty’s target of a balanced budget by the end of 2014. The instructions are essentially, we don’t care how you do it, just do it. NO exceptions. It is expected that  legislation to require “balanced budgets during normal economic times, and concrete time lines for return to balance in the event of an economic crisis” will be introduced in the forthcoming budget (even though a number of economists have argued against it). What remains a mystery is why it is so important to have a balanced budget at this moment – and why is there so little discussion or push-back at the political level?
Arguments need to be couched in terms of “the cost of the balanced budget is too great for [insert cause/interest group] followed by the illustration. So far no-one is doing this.
Quebec, meanwhile, continues to make noises about a balanced budget, although admitting the inconvenient truth of a projected $2.5 billion deficit. Despite the army of condo-building cranes in Montreal, economic activity is negligible and . Are foreign investors staying away in droves thanks to the PQ policies?

P R O L O G U E

With great pleasure, we will welcome Margaret Lefebvre’s former CAIF colleague and good friend, George Kesteven for a long overdue return visit – he was last with us in February 2008. George is currently Manager, Corporate and Investor Relations at Sterling Resources Ltd and serves as Chair of the Canadian Investor Relations Institute Board of Directors.
Given George’s background and expertise, oil & gas, energy policy, pipelines and related matters will certainly be at the top of the agenda.

Madelaine Drohan: Where Canada Gets Energy Wrong
Canada’s environmental performance is harming its image as an energy superpower
(OpenCanada.org) It’s that time of year when the world’s business and political elite flock to Davos, Switzerland for the annual meeting of the World Economic Forum.
This year, they will be shown the forum’s latest report on which countries do the best job of providing an affordable, sustainable, and secure energy supply. It’s no surprise that Norway is in the top spot. Of the 124 countries assessed, they have done the best job of managing the trade-offs necessary to ensure that energy contributes to a country’s economic, social, and environmental well-being. But it is somewhat of a shock to find Canada down in 14th place, below countries such as Colombia, Costa Rica, Romania, and Latvia. Yes, we’ve been lapped by Latvia.
This isn’t a great result for a country that Prime Minister Stephen Harper once boasted was an emerging energy superpower and whose government has poured time and resources into trying to achieve that status. And it cannot be dismissed as an assessment put together by the “environmental and other radical groups” that have been the bane of Natural Resource Minister Joe Oliver’s existence. The report is the result of a three-year research project by the World Economic Forum and Accenture, a global accounting firm. Only the most bull-headed of governments could ignore the message that Canada trails a wide range of countries in managing energy for the greater good.
The Global Energy Architecture Performance Index Report 2014
Effectively balancing the demands of providing an affordable, sustainable and secure energy supply continues to play a key role in the development of countries. Driven by the boundary constraints of economic development, geography and prosperity, countries are striving to find new and innovative ways to meet the demands of their energy system.
The interview with Brian Ferguson, CEO of Cenovus  offers a more positive look at the tar sands and the industry in general, while U.S. refineries are rejoicing over the opening last Wednesday of the Keystone Pipeline south leg.
Mario Iacobacci recommends Amec’s Samir Brikho: A man of boundless energy – and opinions, with the comment that it “Provides a view of Canada’s energy industry that is probably representative of what the business community thinks.” It is a refreshingly outspoken interview.
Jeff Rubin adds another perspective “Big Oil is discovering that blindly chasing production growth through developing ever more costly reserves isn’t contributing to the bottom line. Maybe that’s a message Canada’s oil sands producers need to be listening to as well.” (Why turning a buck isn’t easy anymore for oil’s biggest players)
All of the above leads us to remind you that the McGill Institute for the Study of Canada is holding its annual conference,   Petrocultures 2014: Oil, Energy, and Canada’s Future on February 6-7, 2014, at the McGill Faculty Club. More information  and to register. Désirée McGraw is co-chairing the conference with Annette Hester, senior associate with the William E. Simon Chair in Political Economy at CSIS and an economist, writer, and independent scholar; participants include past and present  Wednesday Nighters Brett House, Jonathan Sas and Chris Ragan.

There has been much, much more from Davos, especially related to comparisons with  the 100^th anniversary of the outbreak of WWI, the ever gloomy Nouriel Roubini citing “Echoes of 1914: backlash against globalization, gilded age of inequality, rising geopolitical tensions, ignoring tail risks” . For more gloom and doom, see Davos diary: A new sense of dread is settling over the world’s elites – the dread stemming from the inexorable march of technology towards the elimination of jobs.   (Do see entertaining comments from Tony Deutsch and Guy Stanley on World Economy 2014)

Feeding our on-going fascination with Bitcoins, Brett House offered this (rather large)  morsel  from Marc Andreessen whose venture capital firm, Andreessen Horowitz, has invested just under $50 million in Bitcoin-related start-ups.:  Why Bitcoin Matters Far from a mere libertarian fairy tale or a simple Silicon Valley exercise in hype, Bitcoin offers a sweeping vista of opportunity to reimagine how the financial system can and should work in the Internet era, and a catalyst to reshape that system in ways that are more powerful for individuals and businesses alike.

A propos the Bitcoin story and the numerous public policy issues raised every day, we recommend Why Your Company Needs A Cynic The modern definition of cynicism doesn’t have positive connotations, but the original meaning of the word — a cynic as a contrarian is something every company could use. We would substitute ‘organization’ for ‘company’ and are happy that Wednesday Night boasts a number of resident cynics.

The House of Commons resumes sitting Monday. Following his triumphant trip to Israel, Stephen Harper will no doubt be more uncompromising than ever, so no doubt the session will be turbulent.  It  is  expected to focus on the federal budget, an important government decision on the Northern Gateway oilsands pipeline, more tough-on-crime legislation, a series of challenges facing the Canadian military, and the ongoing Senate expenses scandal, among other issues. Postmedia reminds us that Finance Minister Jim Flaherty has already said he’ll reject any big-spending proposals and instead try to squeeze economic growth out of low-cost measures … [and]  if the Harper government tables it in mid-February as expected the fiscal blueprint will land during the period when public attention is focused on the Winter Olympics in Sochi, Russia. Such clever timing!
Mr. Harper has announced that there will be an emergency debate on the situation in Ukraine – other than a rather blatant shout-out to Ukrainian Canadian voters, we cannot see what useful purpose this will serve. And can someone explain, please, why Andrew Bennett, Canada’s Ambassador for Religious Freedom, is holding a media teleconference from Kyiv on Monday (or any other day of the week?)
Presumably there are not sufficiently large – or concentrated – blocs of Syrian-Canadians, or Egyptian-Canadians, for any such gesture towards the crises in either country. Canada is not at the table for the Syrian talks  and Stephen Harper has made his views very clear In Tel Aviv, Harper offers gloomy view of Syria’s war and Egypt’s democracy Prime Minister Stephen Harper is painting a dark picture of the Middle East, saying Canada doesn’t want either side to win a Syrian civil war fuelled by sectarian forces from across the region – and that its most populous country, Egypt, is not ready for democracy.
Has anyone seen the latest iteration of the PM’s page on the government website, 24/seven? Presumably this is the work of  new PR advisors. Not too sure why it was necessary, nor why Pet adoption (which we fully endorse) is considered the only appropriate cause for him to support – oh, wait, lots of voters own pets.

While George Will suggests that Cancelling the State of the Union Address would be a good way to cut costs, we can be assured that on Tuesday night, President Obama will deliver the annual message. Most commentators believe that the president will focus on immigration, along with jobs and the economy.  According to The Hill, Retaining the Senate counts as Obama’s top political goal for the year, and much of his address will be given with that in mind. Thus it is unlikely that gun control will be on the agenda as  It’s not an issue that would help Democratic Senate candidates or incumbents running in Alaska, Arkansas, South Dakota, West Virginia or Montana. Sunday’s talk shows were naturally dominated by the topic as administration officials used them to signal a backup strategy of executive action (Obama’s Plan to Use Executive Action Triggers Criticism)
Also of concern was the threat  looming over at the Sochi Olympics (Putin’s Games).  Each day, as February 7 approaches,  there is new, unnerving news about corruption, human rights violations and terrorism; The talk shows managed, however,  to avoid  the latest  Cri du Coeur, which  comes from the fashion critics – and just about everyone else who believes that Olympic athletes should be attractively/fashionably  clothed in something that celebrates their nationality and prowess, along with the abilities of a respected designer. Alas, Ralph Lauren has had a serious relapse. “We have outfits made in America … by your well-meaning but hopeless great-aunt” , says the New Yorker.  We imagine that the athletes are really grateful they have been told not to wear their Olympic uniforms outside of the events. Interestingly, diligently as we have searched, we are unable to find a complete album of the teams’  get-ups. It seems that everyone was riveted by the “Christmas sweaters”.

On a lighter note:

For all of you telephone conference time travellers:
What if the annoyances of conference calls happened in real-life meetings. Painfully accurate…and hilarious

Blades of fun, a history of skates
Amazingly, the earliest ice skates were found at the bottom of a Swiss lake and were calculated to be from 3,000 BC. Scientists deduced it was the population in southern Finland who created the first skates out of animal bones. And as the area was populated with many small lakes, this was a convenient way to get around. … The Dutch took advantage of their inventions in 1572 during the Battle of IJsselmeer in Amsterdam where they surprised the more powerful Spaniards by taking the combat to the ice of the frozen canals.In the 17th century — after James II was temporarily exiled to the Netherlands — he returned to England and shared this new sporting activity with the British aristocracy. It soon spread to all classes as a great way to enjoy winter days on frozen ice. And in the 1740s the first organized skating club was created in Scotland, the Edinburgh Skating Club.

So, don your Olympic Christmas sweaters and skate over to Wednesday Night for what should be a highly informative evening.