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By any measure, executive pay has reached absurd levels. Until corporate boards put shareholder interstes above crony capitalism, investors will suffer. The Securities and Exchange Commission has proposed greater disclosure on compensation. That’s helpful. Better still would be to give shareholders greater power to choose directors who represent their interests, and to oust those who do not.
USA Today, April 19, 2006


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CEOs Cash In, But How Many Are Worth $100 Million?
By: Pete Kendall, April 19, 2006
"A minute ago, everyone wanted to be a millionaire. In another, everyone will want to beat one. Say hello to the sadistic side of social mood."
The Elliott Wave Financial Forecast, March 2002

The seeds of renewed rebellion against CEOs, who by climbing to the top of the corporate ladder aligned themselves perfectly with a long rise in social mood, are starting to sprout. In addition to this editorial from today's issue of USA Today, the nation's largest daily newspaper, a chorus of anti-CEO sentiment is starting to pour down high and low stations alike. Here's one of several recent examples:

Senator Rips Ex-Exxon CEO's Retirement Package
Amid record oil prices and soaring gasoline costs, Exxon Mobil's $400 million retirement package to its former CEO is a "shameful display of greed" that should be reviewed by Congress and investigated by federal regulators, Democratic Sen. Byron Dorgan said on Tuesday.
 
Dorgan said he wants Exxon Mobil officials to appear at a Senate Commerce Committee hearing to explain how the corporation "justifies" giving its former boss, Lee Raymond, such a huge retirement package.
Reuters, April 18, 2006

These are the same storm clouds that we talked about last March (see Additional References below). For a better glimpse of the storm itself, we have to dig a little deeper. EWFF entries from 2002 (also in Additional References) offer a good description of the what shold happen when the next phase of the bear market picks up where the first phase left off. That's when board rooms were really being scorched by a social mood decline that was in its third successive year of falling stock prices. People forget now, but, at the time, CEOs faced an unprecedented wave of negative attacks. In fact, it was so relentless that USA Today ran a major feature in May 2002 exclaiming about how investors were being bombarded "nearly every day" by "corporate misdeeds." The paper even asked us to comment on the dynamic, which we were more than happy to do (see the May 2002 entry which referenced USA Today's article).

Notice the comment about Jim Cramer, CNBC's Mad Money host. Back then he was being vilified after riding high through the tail end of the bull market. These days, he's hotter than ever. "Mr. Cramer is re-energizing the financial world," says the March 13 issue of Investment News. "Red-faced and balding, he paces back and forth like a mountain man, throwing chairs and begin the heads off plastic toy bulls. Such theatrics are wining Mr. Cramer a loyal audience and turning the former hedge fund manager into a pop culture icon." Socionomically speaking it can only mean one thing: stocks are much closer to a top than a big bottom.

Additional References

March 2005, EWFF
More Storm Clouds Over the Corner Office
As the rally from March 2003 peters out, one key indication that the developing decline is a continuation of the post-mania slide to much lower levels is that the backlash against many of the stars of the old bull market is reappearing. In August, EWFF identified the outline of a new wave of attacks, and it is now visible across the breadth of corporate America. From Fannie Mae, where federal regulators have uncovered still more accounting irregularities, to new revelations about conflicts of interest in the investment banking industry, the scandal mills are heating up. After several investments banks settled suits, Reuters reported that derivatives litigation is "Set to Explode." In December, when The New York Times insinuated that New York State attorney general Eliot Spitzer was about to relinquish his offensive against various financial giants, Spitzer quickly disavowed the notion. Since then, he has opened up a new line of attack against insurance giant AIG and issued subpoenas to major record labels and investment consulting firms. At the same time, post-peak revelations are spilling forth in the trials of former mania-era heroes at WorldCom, Healthsouth and Tyco. Still to come: the New York Stock Exchange's case against its former president, Dick Grasso, and the criminal trial of Enron's former principles. Krispy Kreme, Bally Total Fitness and OfficeMax are also in the seminal stages of accounting inquiries. Investigations of the accounting, insurance and medical device industries are also underway by the Justice Department, IRS, SEC and various state agencies.

Don't be fooled by reports of besieged corporate leaders; it is only a preview of coming attractions. The latest executive compensation surveys reveal that, by at least one key measure, the infatuation with corporate leadership reached record levels in 2004. According to Mercer Human Resource Consulting, the average ceo bonus rose to a new high of $1.14 million. The bonuses represent a 46% increase from 2003. Based on ceo compensation, the bear market has yet to begin. Some formerly beleaguered leaders, like Martha Stewart, are also back on the high ground of 1999. Even though she's been in jail, Stewart's star is soaring, with the landing of roles in two TV shows and a company stock that has soared back to heavenly heights. After collapsing to about $5 near the lows of October 2002, Martha Stewart Living Omnimedia shares rose to $37, right where they were one day after MSO came to market in October 1999. MSO's price/earnings ratio cannot be calculated because the firm lost $7.5 million in the fourth quarter of 2004. It expects to lose more than twice that amount in the first quarter of 2005. "Jail can give beaten ceos and burned-out celebrities the martyr's halo," explains Thursday's Washington Post. As long as the trend is rising, MSO can bask in its optimistic potential of the future.

October 2002, EWFF
The bear market has guided Stewart's image with the same precision as the bull. In September, the now "tarnished queen of perfection" beat the NASDAQ to a new low when she refused to testify before Congress about insider trading charges and had her case forwarded to the Justice Department. "Everything negative that could happen has happened," said the author of a Stewart biography. "A curtain has been drawn back in a way that is causing her excruciating and irreparable damage."

But the curtain to "everything negative" has nothing to do with Martha Stewart. This is clear from the alleged offense, which would not even have been prosecuted in the bull market, and the fact that corporate executives everywhere face similar attacks. The more fully that they leveraged the benevolent effects of a rising social mood, the more likely it is that they now face the slings and arrows of angry shareholders, politicians and community activists. At the top of the ever-lengthening list of fat cat targets is Dennis Kozlowski, Tyco's former chief executive officer. Three months ago, virtually no one had ever even heard of him. Now he is so notorious and such a threat to society that his bail was set at $100 million. The charges against him range from his forgiveness of $50 million in loans to himself and other Tyco executives and the purchase of items like a $15,000 dog umbrella stand. EWFF anticipated these strikes against the excesses of the old bull market at the start of the bear market. The backlash is precisely why we said GE's former chairman Jack Welch would regret his decision to ignore GE's mandatory retirement age and stay on after 2000 (see July 2001 issue). According to Newsweek, "Welch is no doubt wishing he could rethink this whole episode." When his wife's divorce filing revealed a "lavish lifestyle, Welch became the latest ceo in the cross hairs." By staying in the spotlight long after the bull market, Welch opened his image as "America's most revered ceo" up to the current series of unfortunate events.

May 2002, EWFF
Another bear market trend that is getting hard to keep up with is the unraveling of bull market icons discussed last month. Stories about former paragons of the rising trend being laid low flood in. Two days ago it was former world beater Bernie Ebbers getting the boot from Worldcom. Yesterday it was Hershey's Foods' CEO, who has become a "bitter issue" in a candy strike that is the first acrimony between union and management in 22 years, or near the end of the last bear market. Today, the cracking of bull market pedestals is so loud that the backlash itself made the front page of USA Today. The article is actually about the fact that "examples of corporate misdeeds bombard investors nearly every day." It notes, for instance, that Congress will be "flaying oil executives on charges of keeping gasoline prices artificially high by manipulating supply." With the help of one of your editors, the story [excerpted below] even identifies some of the causative principles behind the flaying:

Scandals Shred Investors' Faith
By John Waggoner and Thomas A. Fogarty, USA TODAY

A drumbeat of corporate misdeeds has helped crush stock prices and eviscerate pension plans. But the biggest victim may be trust — investors' trust in financial advisers, stock analysts and Corporate America.

During the bull market, corporations and those who ran them seemingly could do no wrong. Now they're feeling the backlash, in the form of congressional hearings, bankruptcy trials and investor outrage.

Examples of corporate misdeeds bombard investors nearly every day.

The lessons Enron and Andersen have left for business students have yet to sort themselves out, says finance professor Keith Brown at the University of Texas. But if problems fester to the point that the average little guy starts to believe that stock investing is a sucker's game, he says, "We'll have a serious problem."

Peter Kendall, co-editor of newsletter The Elliott Wave Financial Forecast, says a bear market often reveals the worst excesses of a bull market. "Everything that was revered on the upside is a target in a bear market." Those excesses have to be corrected before the public regains its confidence.

Typical features of the so-called recrimination phase:

Reviled CEOs. "Those who had Teflon in the bull market have Velcro in the bear market," Kendall says. In 1929, the chief target was Richard Whitney, president of the New York Stock Exchange. Kenneth Lay, former CEO of Enron, may be the current target.

Tarnished icons. You don't have to be a CEO to incur a sudden loss of status in a bear market. James Cramer, co-founder of TheStreet.com, became famous enough to be part of ad campaigns for Rockport shoes. Now he's the subject of an unflattering book by a former associate.

Increased interest in regulation. The Securities Act of 1934, the groundwork for most of today's securities law, was a result of abuses during the roaring '20s — as was the Investment Company Act of 1940, the foundation of mutual fund regulation.

The Securities and Exchange Commission is considering rules for corporate disclosure. The National Association of Securities Dealers (NASD) has proposed rules to limit conflicts of interest with stock analysts. Several pension reform bills are in front of Congress, which is holding hearings nearly every day on business abuses. This week was the oil industry's turn in the hot seat.

"Gasoline companies have not been forthcoming as government has sought to understand how competitive the industry truly is," said Sen. Joseph Lieberman, D-Conn., at a hearing Tuesday on gas pricing. "That further erodes the confidence of the American people — who have a right, through their government, to ensure that companies are behaving fairly."

Reform and regulation are one step to regaining the public's confidence. But that often happens well after much of the damage is done to investors' trust.

"The government takes steps after the horses have left the barn," Kendall says.

The SEC took wide-ranging steps to reform the financial system after the bear market of 1973-74. But investors continued to yank money from mutual funds for nearly a decade. It took a generation to get over the excesses of the 1920s, despite the government's overhaul of the financial system.
USA Today, May 2, 2002

The anger is so intense that major articles have appeared in recent weeks exploring mass public attacks on accountants, doctors, priests and, most importantly of all, chief executive officers. This week's Business Week cover story says, "The Crisis in Corporate Governance." "Evidence is mounting that the golden age of CEOs is over," says another USA Today piece. George W. Bush, the nation's top chief executive, is the primary target of Stupid White Men, a new book by anti-free market activist Michael Moore. In recent weeks, the book, which publishers refused to print during the rally last November, hit the top of the New York Times bestseller's list. It signals the start of a swoon that should make the earlier George Bush's 1991-1992 fall from power look like a picnic.

April 2002, EWFF
For Bull Market Types: A Vicious Cycle
The reigning monarch of the dip-buying crowd is the Saudi Prince that EWFF profiled back in May 2000. On April 6, 2000, when the bear market in the S&P was less than a month old, the "nephew of King Fahd" jumped in with a highly publicized purchase of stocks valued at $1 billion. A month later, right before another short-term peak, the prince took another $1 billion swing at catching the lows. According to press reports, the prince continued buying right through the highs of September 2000 when the market turned down decisively. On March 11, 2002, the billionaire prince completed the acquisition of another billion in stock that has the potential to be as ill timed as his first billion. The role of bullish pride over reason in these buying campaigns is evident from media accounts like this recent Wall Street Journal item about the prince's infatuation with Priceline.com: "Two years ago, the prince invested $50 million in Priceline.com, when the shares were trading in the $40 to $50 range. Now, the company's shares are at about $5. The prince also said in the interview that he had not gone forward with a complex plan to purchase $50 million in Priceline shares at $25 a share. Announced in the fall of 2000, it would have required the prince to take possession of the Priceline shares by Sept. 8, 2002." The prince's latest purchases included another $100 million in Priceline.com shares. Somebody needs to slip the prince a subscription to EWFF. It probably won't keep him from buying, but maybe it will give an understanding of the manner in which a declining mood trashes the reputations of bull market luminaries.

The prince's backfiring effort to publicize his stock- picking prowess and the Wall Street Journal's coverage of his Priceline debacle shows how the expectations that lift bulls to prominence in a bull market become ammunition for their destruction in a bear market. This is a big part of the process we were referring to last month when we talked about the rising backlash against bull market icons, "The next, more personal phase of this process will focus on individuals that benefited the most from the rising mood." Another taste of this bear market force was evident in Louis Rukeyser's tumble from his perch as the host of Wall Street Week. Rukeyser was fired after he refused to accept a devaluation to the level of a senior correspondent. One way or another, bear markets mess the hair of "venerable bulls," not to mention lighten their wallets. Just ask another part-time bull market TV commentator, Jack Welch. The former chairman of General Electric, who signed recently to serve as an occasional guest host on CNBC, is being sued for divorce and half his $1 billion fortune after a fling with the editor of the Harvard Business Review.

The bear market's encroachment on bull market terrain also includes a number of new books and memoirs that deliver "dazzling body blows" to once-revered icons. Dot.con, a scathing history of the Internet bubble, accords "lots of real estate to the biggest boosters of the bubble stocks, the ever-perky faces of CNBC. " Another coming tell-all will sully the names of some of its top talents. "Legendary hedge fund operator and CNBC commentator" Jim Cramer is the target of a scathing, behind-the-scenes expose. "Jim would do the opposite of what he was saying on television," says the author, a former employee of Cramer's hedge fund company. Trading With the Enemy also takes swipes at anchor Maria Bartiromo and analyst David Faber, contending that Cramer used them to talk up stocks that the hedge fund had purchased. "No sooner would Maria be thanking us for the help than we'd be getting a payback a quick hit thanks to our friends at CNBC." CNBC defended its team with this comment: "Any insinuations [that] our reporters' journalistic practices have been anything less than completely ethical are outrageous." The tone of the response, along with Rukeyser's outburst at his former employer in his last Wall Street Week appearance, are clear signs that a bear market is very much in force. It makes perfect sense that, at the end of the transition from a virtuous bull to a vicious bear, fits of indignation are a common stopping point.

March 2002, EWFF
In December 1999, protestors rattled the World Trade Organization by staging a series of raucous demonstrations on the streets of Seattle. At the latest World Economic Forum in New York, people voiced the same "chaotic multitude of complaints." But the streets were quiet by comparison because the "dissent against corporate America has moved indoors." The "undercurrent of resentment to the U.S. corporate establishment" is so entrenched that The Wall Street Journal now places it within an "aura of social change." This is the backlash against business institutions and icons that The Elliott Wave Theorist anticipated in 1998. Over the course of the topping process, EWT and EWFF have chronicled its tightening grip. The next, more-personal phase of this process will focus on the individuals that benefited the most from the rising mood. The transition is foreshadowed by the plummeting popularity of Who Wants to Be a Millionaire. The TV game show that dominated prime time at the highs is down to its last weekly slot. The New York Times notes that interest in the attainment of instantaneous wealth has been replaced by a "Nervous Hunger for Torture Shows and Gross Out Stunts." A minute ago, everyone wanted to be a millionaire. In another, everyone will want to beat one. As shown by this note from Investment News, a weekly newspaper for financial advisors, the injuries will be even worse than the insults: with $3 trillion in losses from June 2000 through June 2001, wealthy investors are absorbing the bulk of the damage from falling stock prices. Say hello to the sadistic side of social mood.

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