Barron's : A Different Dimension

A Different Dimension

Dimensional Fund Advisors eschews stock-picking completely, and yet manages to beat the market consistently.

It was 7:30 on a sunny October morning in Austin, Texas, and class was about to start. Most students were finishing their coffee and chatting about how they were looking forward to hearing professor Eugene Fama, the University of Chicago economist who a week earlier had won the Nobel Prize. The program, however, wasn't your typical grad-school seminar. It was orchestrated by Dimensional Fund Advisors, the $332 billion mutual-fund firm whose investment strategy is based on Fama's early and ongoing research; and the students were the financial advisors who sell its funds.

This was no boondoggle business trip. The College, as it's known, is a two-day, biannual event that draws more than 100 advisors from all over the nation for some very academic presentations, held in a lecture hall the firm built just for this purpose. The advisors are already sold on the veracity of the efficient-market hypothesis pioneered by Fama in 1965 -- they have to be in order to sell Dimensional's funds -- but they come to hear about new research, and new products and strategies, and for the chance to hear the gospel from the prophet himself.

Dimensional Fund Advisors is unusual. Its fans are true believers, bordering on evangelical, yet it is hardly a household name like other fund firms of its size. (About 85% of DFA's assets are in mutual funds, making it the eighth-largest fund family, sandwiched between JPMorgan and Oppenheimer Funds.) That relative anonymity is by design: The firm doesn't advertise; it sells its funds only through advisors who have undergone a rigorous screening; it doesn't sell its funds on most brokerage platforms; and it's privately held. Because its funds are essentially quantitative -- driven by computer models, rather than by individual security selection -- there are no star managers. Though it doesn't eschew the press, it's careful to work only with reporters who "get" what it does; this was the first time a reporter had been invited to the College.

And yet its overall performance is headline-worthy. More than 75% of its funds have beaten their category benchmarks over the past 15 years, and 80% over five years, according to Morningstar -- remarkable for what some investors wrongly dismiss as index investing. Its process is simple and repeatable -- and yet no other firm has tried emulating it. When asked why, co-founder, chairman, and co-CEO David Booth, 67, draws a surprising analogy to Star Wars, and Luke Skywalker's inability to harness the power of the Force until his devotion was deep and unwavering. "We are believers down to our toes," Booth says.

The force, in this case, is the theory of efficient markets, first put forth by Fama in 1965. Dimensional's funds all operate on the same principles -- that it's hard to beat the market, and impossible to do it consistently, by stock-picking. There are, however, various factors that can be exploited to provide market-beating returns. That, along with sophisticated trading strategies, a keen eye toward tax-efficiency, and low expenses (the average DFA fund charges just 0.39%) has led to Dimensional's success.

But don't liken what DFA does to indexing, and definitely don't call it passive: "I recoil when people think that what we do is being passive, because it has nothing to do with being passive," Booth says. "We are trying to beat the market without forecasting in the usual sense."

DAVID BOOTH met Fama while a Ph.D. student at the University of Chicago in the fall of 1969. (His alma mater is now known as the Booth School of Business, thanks to a $300 million donation he made in November 2008.) Booth took Fama's class "the very first quarter" and, in his second year, worked for him. "We've been associates for 44 years," Booth says.

Booth graduated in 1971, and 10 years later, along with Rex Sinquefield, another student of Fama's, launched Dimensional Fund Advisors from his apartment in Brooklyn, N.Y. Sinquefield served as chief investment officer until 2005, when he left to devote more time to his political causes. He served on the Dimensional board until last summer, when he retired completely from DFA.

From the beginning, Booth wanted to put Fama's findings into practice. "Gene describes himself as taking an idea and beating it to death," Booth says with a laugh. "That's not me. I want to apply the idea."

Dimensional's director of investment strategy is Kenneth French, an economist and professor at Dartmouth College, and a collaborator with Fama for nearly 30 years. The Fama-French "three-factor" model is the root of Dimensional's strategy, and their ongoing work has informed the development of new strategies and products for decades. "They expect Ken and I to say exactly what we think about things, and we do," Fama says. "Other firms use our work; they just do it without our input. Dimensional is the only business that will tolerate me."

Fama and French are not the only academics on Dimensional's board, and Fama isn't even the only Nobel Prize winner. Myron Scholes of Stanford University, who won in 1997 for the Black-Scholes method for valuing derivatives, lends his expertise to the funds' board. Also on the board are Roger Ibbotson, the founder of research firm Ibbotson Associates, a current hedge- fund manager, and Yale professor, and four other academics, from Chicago and Stanford. "That lineup is unbelievable," says co-CEO Eduardo Repetto. "When you talk to the board about investments, you're not talking to marketing people. You're talking to the people who wrote the book on investing." Repetto is no slouch in the academics department himself -- in fact, he's a rocket scientist. He joined Dimensional almost 14 years ago, shortly after completing his Ph.D. in aeronautics at the California Institute of Technology and, like Booth, deciding that a career in academia was not for him.

THE FIRM TAKES its academic bent seriously. DFA began where Fama's research began -- on the assumption that stock-picking is too inconsistent and unpredictable to be a reasonable method of beating the market. Sure, every year, some active managers will outperform; some will even outperform several years in a row. But that doesn't indicate skill, Fama says. "With 3,000-plus active managers, some are going to look good -- but that's what you'd expect as a matter of chance," he says. "It's very difficult to tell luck from skill." Even to the extent that skill is involved, stock-picking is not a repeatable process with the consistency and persistence of returns that would enable investors to anticipate which managers are likely to outperform -- especially given the cost of making those bets. "Active management is a zero-sum game, and that's before costs," Fama says. "That's not opinion. That's math."

The firm began with a focus on small and micro-cap stocks, a specialty that it's still best known for. Small stocks underperformed for the first nine years of its existence, yet DFA grew to a $4 billion firm by 1990.

In 1992, Fama and French published their three-factor model, which incorporated and expanded on the established capital asset-pricing model, demonstrating that low-priced (value) stocks and small-company stocks have higher average returns. Dimensional incorporated the three-factor model into its funds right away.

Dimensional is overwhelmingly equity-driven, with 78% of its assets in stocks. Though most of Fama and French's work has been in equities, their method can be applied to fixed income -- bonds have two factors, maturity and credit quality -- and Dimensional offers 20 bond funds. But many advisors use other firms for their fixed-income allocation.

DIMENSIONAL'S FUNDS aim to capture the returns of an asset class -- be it small or large companies, developed or emerging markets -- without slavishly adhering to an index. And they do. For example, take the Vanguard Small Cap Value index fund (VISVX), which is based on the S&P 600 Small Cap Value index and is the counterpart to Dimensional's DFA US Small Cap Value (DFSVX). The DFA fund has a much smaller tilt -- its average market value is $1.1 billion, versus Vanguard's $2.7 billion -- and on all measures is much more value-oriented. So the Dimensional fund better captures the market-beating advantage of small and value stocks. In fact, a lot better: The DFA fund returned 42% in 2013, beating 88% of its peers in Morningstar's small-cap value category, versus the Vanguard fund's 36% return, which beat just 53%. Over 15 years, which includes periods that were less favorable to small and/or value stocks, DFA's fund returned an average of 12% a year, beating 80% of peers. The Vanguard fund returned 10% on average, beating just 37% of peers.

The Dimensional fund costs twice as much as Vanguard's -- 0.52% versus 0.24% -- but the significant outperformance more than makes up for that difference.

TRADING IS ALSO a crucial factor in DFA's outperformance. Index funds trade in baskets -- whenever a stock is added or dropped from the index, it's bought or sold almost immediately, which can drive the price up or down. Similarly, active managers often want to get into or out of a stock quickly. DFA, however, takes a more methodical, opportunistic approach to trading. There's never pressure to buy or sell a fund within a certain time frame. Instead, it serves as a market-maker for the 14,000 stocks it owns, offering to sell when frenzied buying has sent the bid higher, and taking a stock off another trader's hands when the shares can be acquired cheaply. Every morning, traders get a list of stocks the firm wants to buy or sell, but instead of mandated trading orders, the trading desk determines if conditions are good for each transaction. "We go into the market and see where the most anxiety is and where we can trade at favorable prices," says Booth. "We provide liquidity."

Trade execution is critical to another factor that Fama and French added to their model more recently: Stocks that are falling tend to continue to fall, and those that are rising tend to continue to rise. "So you want to trade slowly," Booth says. "We are slow to trade most of the new names that have recently fallen into the value category, because they are negative-momentum stocks. We're also slow to sell positive-momentum stocks. We'll hold on for years."

Trading costs have also influenced portfolio construction, as have the sharp advisors that work with the firm. Dimensional's 5,000-stock international core funds, for instance, were created at the behest of the firm's largest client, $22 billion Buckingham Asset Management. The international core fund combines developed and emerging markets, minimizing the trading costs that would occur, say, when a country like Israel or South Korea "graduates" from the emerging to the developed category. Rather than one fund selling and another buying, advisors who want exposure to both asset classes can get it in one fund. "That eliminates risk and costs, and we don't have to rebalance," says Larry Swedroe, a principal at Buckingham. "That's a huge advantage, and a big innovation." Dimensional also has a 3,000-stock U.S. core fund.

Dimensional has 76 funds, many of which overlap because of its willingness to work with advisors to meet their needs. "We have several versions of our core portfolios to accommodate advisors who want more or less of a small or value tilt," Repetto says.

The latest factor, profitability, has been steadily implemented since being introduced in four funds a year ago; it will be a factor in all DFA funds by early this year. The profitability factor incorporates firms with higher profitability relative to price, cash flow, or other metrics. That's essentially the secret behind Warren Buffett's success. Investors tend to pay too much for -- or, in other words, not apply enough of a risk discount to -- "lottery" stocks. Think of a bell curve of stock returns: You'll see far more returns to the left of the mean, and a few outsize winners on the right. That market's willingness to pay for the small chance of outsize gains means that other profitable firms, relatively speaking, have lower prices.

DIMENSIONAL'S FRATERNITY of 1,900 advisors manages 60% of its assets. Though advisor-sold, all its funds are no-load, and Dimensional doesn't have any revenue-sharing agreements. But advisors can't simply decide to start working with DFA; they first must overcome several hurdles.

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"We have a lengthy front-end process," says Dave Butler, who oversees DFA's advisor network. "Our goal is to be a consultant to the advisors." First, they attend a small conference that explains the research that the firm is based on, and how Dimensional operates. After that, a DFA regional directors makes an office visit to discuss the advisor's investment philosophy, the plan for DFA funds, and how the transition will be communicated to clients.

It took Bud Kahn, a Pittsburgh advisor managing $150 million, nearly six months to be "permitted" to sell DFA funds. That was seven years ago. Now 90% of his firm's assets are in DFA funds. "DFA adds value to my practice," he says. "They serve as a board of directors. They help evaluate my models, help me plan the future of my business; they even helped with a new Website."

Advisors aren't required to sell only Dimensional funds, but they are expected to generally run their business in accordance with the broad philosophy of market efficiency, a long-term view, and an emphasis on low-cost products. That's good for the investor, and also good for Dimensional. "Advisors who have gone through our process, who have the right language, and approach the market the way we do, have a much better ability to keep client assets deployed in the market," Butler says. "Look at 2008 and 2009 -- we had positive cash flows in both years. I don't think there's any other money manager that can say that. I credit the advisors; they kept their clients on track."

Advisors selling DFA funds have monthly or quarterly meetings with one another, facilitated by a DFA manager, to discuss portfolio and practice management. And there's the College, held every two years. This year, as usual, Fama and French spoke, with Fama presenting 18 pages of data arranged neatly in columns (later referring to it as "pretty low-level stuff"), and French explaining it all. Behavioral-finance expert Brad Barber also spoke, as did an array of Dimensional execs to tie it all into the business. "DFA has far and away the best educational conferences," says Rick Ferri, who manages $1.3 billion, $100 million of which is with DFA. "They put Ph.D.s in front of you. Everyone else gives you marketing people."

More than 100 advisors came to Dimensional's Austin, Texas, headquarters for two days of seminars.
THE CHIEF CRITICISM -- and it's a fair one -- is that the very nature of the way Dimensional operates can keep their funds out of reach for investors with assets too low to pique the interest of most advisors. Booth acknowledges the problem, saying that eventually advisors will have Web-based services that allow them to take on smaller clients. "We're working with advisors to address that market," he says. "I won't hold my breath, but I think there's hope."

Even for investors who work with advisors, it's not easy to get into a Dimensional fund. There's no shortcut to the advisor-approval process, and DFA doesn't work with any full-service brokerages, though it does work with certain advisors at independent broker-dealers, such as LPL Financial and Raymond James. For many, investing with Dimensional requires hiring a new advisor.

The firm is expanding its reach, however, hoping for a larger piece of the $18 trillion 401(k) market, of which it has just $25 billion. Its 2010 purchase of SmartNest, a software platform developed by MIT economist and Nobel laureate Robert Merton and Boston University professor Zvi Bodie, serves as the engine for Dimensional's "managed DC" product.

Managed DC is a simple Web interface that takes the focus off accumulation and asset allocation and instead puts it on the likelihood that an individual's plan will generate the income he or she will need in retirement. Instead of choosing funds and making asset-allocation decisions, investors input their contribution amounts and expected income needs. Dimensional adjusts each individual's portfolio mix -- made up of one global stock fund and two inflation-protected bond funds of different durations.

NO MATTER how investors access their funds, Booth says, Dimensional's strategy requires staying the course. "Where people get killed is getting in and out of investments," Booth says. "They get halfway into something, lose confidence, and then try something else. It's important to have a philosophy."

WSJ : Andreessen: Bubble Believers 'Don't Know What They're Talking About'

VEry Interesting interview, different point of view from people from the market...talking of $100b valuation for Snapchat...



Andreessen: Bubble Believers 'Don't Know What They're Talking About'

Venture Capitalist Discusses the Current State of Tech Investing

In a 2011 essay in The Wall Street Journal, venture capitalist and Internet pioneer Marc Andreessen predicted that software companies are "eating the world" by replacing old industries with new services that are smarter, faster and cheaper.

If anything, Andreessen's prophecy is unfolding ahead of schedule. The smartphone is now a portal into a taxi ride, a doctor's appointment or a date.

Startups like Airbnb Inc., TaskRabbit Inc. and RelayRides Inc. have used software apps to pioneer a new economy where consumers share their materials and services. Google Inc., GOOG -0.73% the 12th most-valuable company by market capitalization when Mr. Andreessen's essay was published, is now third on that list.

In an interview with The Wall Street Journal, Mr. Andreessen looked back on his predictions and made some new ones for the year ahead. He stands by his assertion that the rise of valuable new software companies is a fundamental economic shift—rather than a bubble—and explains the multibillion-dollar valuations of Pinterest Inc., a startup his venture-capital firm Andreessen Horowitz invested in, and Snapchat, one his firm didn't.

Edited excerpts:

WSJ: What's driving the current speed of technological progress?

Mr. Andreessen: It's only really in the last two years that the smartphone has now become a mass-market phenomenon. Heading into 2014, I think the number is like 2 billion smartphones in the world, and that number is growing really fast. Within three years, I don't think it's going to be possible to buy a phone that's not a smartphone. The vendors are literally going to stop making these low end feature phones, they're just going to make smartphones instead. That's what takes us to 5 billion.

We're just now starting to live in the world where everybody has a supercomputer in their pocket and everybody's connected. And so we're just starting to see the implications of that.

WSJ: Does that further the power of those who control the platforms— Apple Inc. AAPL -2.20% and Google Inc.?

Mr. Andreessen: On current trends, yes. Apple and Google are both in extraordinarily powerful positions because they are the two dominant platforms owners in this new world. And there's no question they are both gaining strength right now. The big question for Apple is: Can they hold market share in the high end of the market? And the question for Google is: Can they keep Android together, or does Android fragment, especially overseas?

WSJ: There's a flood of capital going into a range of software companies. Is this sustainable?

Mr. Andreessen: In my opinion, there's nothing broad-based that's happening. There's no bubble, per se. Bubbles are a very specific phenomenon where you've got mass psychology and you've got every mom and pop investor and every cabdriver and every shoe-shine boy buying stock in whatever it is—going all the way back to the South Sea Bubble all the way through to the dot-com bubble.

There's nothing like that. We're talking about a fairly small number of companies. And then, we're talking almost entirely on the private side. It hasn't really affected the public market that much.

Andreessen's Portfolio
Winners

Nicira—Cloud networking startup sold to VMWare for about $1.26 billion in 2012
Skype—Microsoft's purchase of the voice-over-Internet provider netted Andreessen $153 million less than two years after their investment
Zulily—Shares of the online retailer jumped 71% in their November debut
Losers

Fab—The e-commerce site has laid off staff and fallen short of its revenue targets after expanding overseas too quickly
Kno—Education software maker sold to Intel this year for a fraction of what venture capitalists put in
Zynga—Shares of the game maker still sag more than 60% below their IPO price of $10 in November 2011

WSJ: How is this different than the dot-com bubble?

Mr. Andreessen: The costs of building an Internet company today are far lower than they were in the late '90s. In the '90s if you wanted to build an Internet company, you needed to buy Sun servers, Cisco CSCO -0.09% networking gear, Oracle ORCL -0.27% databases, and EMC EMC 0.00% storage systems. And those companies would charge you a ton of money even just to get up and running. The new startups today, they don't buy any of that stuff. They don't buy literally anything from any of those companies. Instead, they go on Amazon Web Services and they pay by the drink and they're paying somewhere between 100x and 1000x cheaper per unit—per unit of compute, per unit of storage, per unit of networking, per unit of software.

In retrospect, it's a miracle that anything worked in the late '90s given how limited the market was and given how expensive it was. It's a miracle that eBay EBAY -1.26% worked, it's a miracle that Amazon worked.

The devil's in the details. It's really up to each company to demonstrate that it's going to be a franchise company and demonstrate over time that it can monetize appropriately. The ones that make it work are going to be enormously valuable. This is a time of very big franchise creation. The people who say it's all like the '90s and it's all going to come crashing down just don't know what they're talking about.

WSJ: But is there enough demand out there for two or three or more players in these categories that are getting a lot of venture money?

Mr. Andreessen: Generally in tech, the markets are winner take all. Google still competes with people in search and so forth, but over time, Google is gaining share against Microsoft MSFT -0.67% and against Yahoo. YHOO +1.34%

I think it's a question of: What are the categories versus industries? Are Dropbox and Box the same thing or are they different things? One way of looking at it is it's the same thing. Another way of looking at it—which is what we believe—is they are very different. Because one is consumer focused, the other is enterprise focused.

Another example is: Should all the sharing-economy companies just be one company? We think the answer is no. We think there is a big winner per vertical.

WSJ: With a lot of companies getting funding across the board, inevitably, many will fail. Is failure a good thing or a bad thing in Silicon Valley?

Mr. Andreessen: I'm really schizophrenic on this. I can argue both sides of it. The Midwestern Protestant in me is very strongly on the side of failure is terrible and horrible and awful and the goal of every entrepreneur should be to not fail. This whole thing where failure is somehow good in Silicon Valley, or failure is OK, or failure is wonderful, or failure is part of the process, is just a bunch of nonsense, and is actually a destructive sort of meme because it gives people an easy excuse to give up. If you look at a lot of the great successes in corporate history and in technology, they required real determination and real staying power.

The other side of it that I can argue equally enthusiastically, is that an enormous cultural positive for the Valley and more broadly the U.S. is that failure does not end your career. Failure is not a mark of shame that means you are done in your field—which is true in a lot of the rest of the world. In the Valley, it means you have valuable experience. One of the things I always tell our entrepreneurs is, don't just hire people out of successful companies, because the people out of successful companies didn't learn anything. Maybe they were just along for the ride. Whereas, the people who have been through tough times tend to be much more resilient and they tend to be much more determined and they're not daunted by things being hard.

The way I try to resolve it is, I think there's a grain of truth on both sides. I think both are kind of true and then it's just a question of nuance and judgment. You really can't just give up the minute things get hard. But at the same time, not everything works. And when something doesn't work, it shouldn't end your career, it should just inform the next thing you do. And that's kind of how the Valley works.

WSJ: How do you get behind startups with no business model? With Pinterest, how do you get from zero revenue to a $3.8 billion valuation?

Mr. Andreessen: There are two categories of companies like this. You can guess which one I think Pinterest is in.

There are the ones where everybody thinks they don't know how they're going to make money but they actually know. There's this kind of Kabuki dance that sometimes these companies put on where we're just a bunch of kids and we're just farting around and I don't know how we're going to make money. It's an act. They do it because they can. They don't let anyone else realize they have it figured out because that would just draw more competition. Facebook FB -0.28% always knew, LinkedIn always knew, and Twitter TWTR +2.22% always knew.

They knew the nature of the valuable product they were going to be able to offer and they knew people were going to pay for it. They hadn't defined it down to the degree of being ready to ship it, or they didn't have a sales force yet, so there were things that they hadn't yet done. But they knew. They had a high level of confidence and over the passage of time we discovered they were correct.

Now, there are other companies that honestly have no idea. Like, they really honestly have no idea. You need to be very cautious on these things because one of the companies that had no idea how it was going to make money when it first started was Google.

WSJ: Which type is Snapchat?

Mr. Andreessen: The bull case on Snapchat is that there's a company in China called Tencent that's worth $100 billion. And Tencent is worth $100 billion because it takes its messaging services on a smartphone and then wraps them in a wide range of services—things like gaming and social networking and emojis, and video chat—and then charges for all these add-on services. And it has been one of the most successful technology companies of all time and is worth literally $100 billion on the Hong Kong Stock Exchange. Maybe that's [CEO Evan Spiegel's] plan. Maybe Evan's plan is to transplant the Tencent business model into the U.S., which nobody has actually been able to do yet.

WSJ: As software eats the world, what happens to the older, incumbent businesses being attacked by newer startups? Will they simply decay and die and go away, or will they adapt?

Mr. Andreessen: If somebody wants to go into a full defensive crouch, some people do choose to do that. But I think more and more big companies are thinking OK, there are big opportunities here, there are new ways to reach out to customers, to ensure our customers are happy.

>>> US Treasury Sec Lew to tell European counterparts to work on boosting growth

US Treasury Sec Lew to tell European counterparts to work on boosting growth and avoiding deflation - financial press
- Lew to urge France to support economic growth, and Germany to increase domestic demand, and push leaders to make more progress on European banking union. Lew will also remark on Portugal's good progress in working through its bailout plan. 
- Cites comments from an aide to Secretary Lew ahead of his trip to France, Germany and Portugal next week.

>>> T-Mobile US Issues statement on AT&T offer to woo T-Mobile customers, calls

T-Mobile US Issues statement on AT&T offer to woo T-Mobile customers, calls it a "desperate move by AT&T"
- CEO: "This is a desperate move by AT&T on the heels of what must have been a terrible Q4 and holiday for them. I'm flattered that we have made them so uncomfortable! We used AT&T's cash to build a far superior network and added Un-carrier moves to take tons of their customers - and now they want to bribe them back! Consumers won't be fooled...nothing has changed; customers will still feel the same old pain that AT&T is famous for. Just wait until CES to hear what pain points we are eliminating next. The competition is going to be toast!" 

>>> Sirius XM Inc Confirms receipt of all stock takeover offer from Liberty Medi

Sirius XM Inc Confirms receipt of all stock takeover offer from Liberty Media; special committee to review the offer
- SiriusXM's Board of Directors received a non-binding letter from Liberty Media Corporation proposing a transaction pursuant to which all outstanding shares of common stock of the Company not owned by Liberty would be converted into the right to receive 0.0760 of a new share of Liberty Series C common stock. Liberty has indicated that immediately prior to such conversion, Liberty intends to distribute, on a 2:1 basis, shares of Liberty's Series C common stock to all holders of record of Liberty's Series A and B common stock. Upon the completion of the proposed transaction, Liberty indicated that it expects that SiriusXM's public stockholders would own approximately 39% of Liberty's then-outstanding common stock. 
- SiriusXM's Board of Directors intends to form a Special Committee of independent directors to consider Liberty's proposal. Liberty's proposal noted that the transaction will be conditioned on the approval of both a Special Committee and a majority of the public stockholders of SiriusXM, other than Liberty. Liberty also noted that the approval by the Liberty shareholders of the issuance of the Series C common shares in the proposed transaction would also be required under applicable Nasdaq Stock Market requirements.

FT : Growth slows for big US carmakers

Growth slows for big US carmakers

Car sales in the US for all three of the market’s biggest carmakers fell short of expectations in December, underlining how the breakneck pace of the market’s recovery slowed during 2013. US sales for General Motors, the market leader by sales, were 6 per cent down on December 2012, while Ford’s sales were up only 2 per cent and Toyota’s decreased 1.7 per cent. The figures damped sales figures for the whole year, which looked set to be about 8 per cent àbove the figure for 2012, at a seasonally adjusted annual rate of sales (Saar) of about 15.6m. The figure is markedly weaker than the 13 per cent growth that the industry recorded for 2012 over 2011. However, Chrysler, the fourth-biggest carmaker by sales, enjoyed the latest of a series of strong sales results, reporting an increase of 6 per cent on December 2012 and full-year sales 9 per cent ahead of 2012. Michelle Krebs, an analyst at car information site Edmunds.com, said reports suggested the disappointing December sales reflected the bad weather across much of the US around Christmas. "That may cause year-end sales to be lower than expected, but shoppers may close on their intended purchases in January instead," Ms Krebs said. Chrysler’s relative success reflected the continued strong demand for both pick-up trucks and sports utility vehicles. December US sales for the company’s Jeep brand were 34 per cent up on December 2012, largely because its new Cherokee sport utility vehicle, which was delayed by manufacturing problems, sold strongly. Sales of Chrysler’s Ram pick-up trucks, which were 11 per cent up on December 2012, were also strong. Some other pickups – including GM’s GMC Acadia, which was 53 per cent up on December 2012, and Ford’s F-series, which was up 8.4 per cent – also bucked the generally gloomy trend. Ms Krebs said Chrysler had been lucky to have a number of "hot" products in its line-up to meet consumers’ demand for tough cars for winter. "The new Cherokee, a vehicle with more macho than other SUVs in its segment, proved to be a big winner among shoppers," she said. "The Ram continued to be a popular selection for truck buyers." For Ford, which had been expected to post year-on-year sales gains of about 6 per cent, some of the sharpest sales falls were in its smaller passenger cars. Sales of the Focus compact car were 31 per cent down on December 2012. Nevertheless, John Felice, Ford’s vice-president for US sales, insisted that the company’s 10.8 per cent sales gain for the full year showed the company had enjoyed a successful year. "We saw strong growth across the entire Ford line-up and made significant gains in the import-dominated coastal markets," he said. General Motors also suffered declines in its small passenger cars, as well as a 16 per cent fall in sales of its Chevrolet Silverado pick-up truck, one of its biggest sellers. Nevertheless, Kurt McNeil, vice-president US sales operations, pointed to the 7 per cent growth in sales for 2013 over 2012 as evidence that GM and the wider US auto industry had "put the last traces of the recession in the rear-view mirror". GM’s shares fell 3.28 per cent to $39.60, while Ford’s rose 0.58 per cent to $15.53.

FT : Liberty plans move for whole of Sirius XM

Liberty plans move for whole of Sirius XM

John Malone’s Liberty Media, which has been strengthening its hold over Sirius XM since the depths of the financial crisis, on Friday proposed to make the satellite radio broadcaster a wholly owned subsidiary, in a deal that could give it more firepower in its push to consolidate the US cable industry. Liberty Media owns about 53 per cent of Sirius as part of its portfolio of media, communications and entertainment businesses. It is pitching the transaction to Sirius shareholders as a way to convert a non-controlling stake in a subsidiary into an equity position in a more liquid parent company. The tax-free transaction values Sirius at about $3.68 per share, or a 3.1 per cent premium on the $3.57 closing share price on Friday. Sirius had an equity value of about $21.5bn on Friday. If approved, the deal would convert each share of Sirius common stock into 0.0760 of a new share of Liberty’s Series C common stock. Liberty said Sirius public shareholders would ultimately own about 39 per cent of Liberty’s outstanding common stock. Greg Maffei, Liberty’s chief executive, told a conference call on Friday that the proposal was intended to simplify the two companies’ capital structures and eliminate the ambiguity of their long-term relationship. It would enhance Liberty’s access to capital "to support the pursuit of other potential attractive investment opportunities", he added. "All it does is move the Sirius XM shareholders in the position of a non-controlling economic stake at the sub level to a similar non-controlling economic position in new Liberty at the parent," he said. For the first nine months of 2013, Sirius reported that free cash flow increased 42 per cent to $624m from the same period in the previous year. The move comes after Liberty spun off its Starz entertainment company and continues to push for consolidation of the fragmented US cable business. In May, Liberty paid $4.6bn for 27 per cent of Charter Communications. Since then, Liberty and Charter have circled rival cable operator Time Warner Cable. However, Mr Maffei dodged questions on whether the new source of cash would be used to pursue Liberty’s ambitions to consolidate the cable market. Charter, which has an enterprise value of about $28bn, would require substantial funding to snap up the larger Time Warner Cable, which has an enterprise value of about $61bn. In 2009, Sirius accepted a $530m rescue package from Liberty, saving the company from a bankruptcy filing or a forced deal with Charlie Ergen, chief executive of Dish, the US satellite broadcaster. In exchange, Liberty acquired preferred shares in Sirius along with seats on its board. As Sirius’s business rebounded, Liberty increased its stake and petitioned US regulators until it acquired a controlling stake in January 2013. The following month, Mel Karmazin left his post as chief executive of Sirius, after signalling his reluctance to work for a controlling shareholder. Sirius said on Friday that a special committee of independent directors would consider the proposal. Mr Maffei said Liberty saw no significant regulatory hurdles given that it already had a controlling stake.

FT : Pressure to end digital ‘tax bonanza’

Pressure to end digital ‘tax bonanza’

Seven US technology giants, including Apple and eBay, paid just £54m in UK corporate tax in 2012, the Financial Times has discovered, highlighting the challenge for governments seeking higher tax revenues from multinationals. The amount, which is relatively modest given the scale of their combined sales at $15bn, will add urgency to a planned rethink of global tax rules. A review was launched by world leaders last summer amid mounting frustration over the difficulty of capturing revenue from the internet sector. This prompted both Italy and France to propose new digital taxes last week. The UK tax paid on profits made by Microsoft, eBay, Yahoo, Facebook and Apple fell in 2012, the last year for which figures are available, while those of Amazon and Google rose. The net effect was that their combined tax bill on current-year profits fell from £45m to £37m. However, after adjustments and provisions, including £24m set aside by Google, the total UK corporation tax charge rose to £54m. The new figures will concern David Cameron, prime minister, who promised a year ago to make "damn sure" that foreign companies paid higher taxes in the UK. Margaret Hodge, chair of the parliamentary public affairs select committee, described the figures as depressing. She accused the government of presiding over a "tax bonanza" for global internet companies. The companies did not comment on the FT’s findings but they have repeatedly said they comply with all tax laws. The relatively low tax payments by the technology companies reflect their ability to concentrate overseas economic activity in low tax countries such as Ireland, Switzerland and Luxembourg, leaving a minor role for operations in countries such as the UK. The global tax rates that Apple, Google, Microsoft and eBay paid in 2012 are significantly lower than five years ago at 25 per cent, 19 per cent, 24 per cent and 15 per cent respectively. The tax rates of their foreign operations ranged from just below 10 per cent for Microsoft to 5 per cent or less for the other three. The prevalence of very low tax rates in the high-tech sector has fuelled criticism of the companies but in 2012 the global tax rate was 33 per cent for Yahoo, 89 per cent for Facebook and even higher for Amazon which reported a post-tax loss. The tax rates of Amazon and Facebook were pushed up last year by foreign losses which could not be offset against other profits. International proposals on how to tax the digital economy are due to be published in September but it is proving one of the most difficult issues in a global project to rethink rules launched last summer by the G20. Italy confirmed plans last week to introduce a new tax in July on online advertising, although the measure is widely thought to flout the rules of the EU single market. France has also moved to extend its tax powers over internet groups, with a proposal to extend its cultural support tax to include online companies that produce original content in French.

>>> Weekly Market Update: Welcome to 2014

Weekly Market Update: Welcome to 2014

- The year 2014 began halfway through the week, closing out a year during which by most measures, economic recovery established itself throughout the global economy. US, European and Japanese equity markets closed on Tuesday at or not far from their highs of the year, while the performance of other Asian equity markets was less impressive. On Thursday, European and US indices stumbled lower. US equities saw their first down day for the opening trading session of the year since 2008. Fixed income investors saw yields move higher, with the yield on the 10-year UST topping out on Thursday around 3.04%, its highest level since 2011. Bund and gilt futures started the year with sharp losses of their own, as investors bet on more European stabilization in 2014. For the week, the DJIA less than 0.1%, the S&P500 lost 0.5% and the Nasdaq fell 0.6%.

- By many measures, 2013 was a banner year. Equities closed out the year with outsized gains: the S&P 500 rallied 30%, its best year since 1995, to close at an all-time high of 1,848 on Dec. 31st, while the Nikkei 225 gained 57%, its best year since 1972. Natural gas finally moved out of the doldrums, gaining 26% in 2013, its best gain since 2005. Renaissance Capital reported that the US IPO market was busier than in any year since 2000, with 222 companies raising a total of $55B. Deal volume in the US was up 11% y/y to around $1 trillion, while global deal volume remained more or less flat. Meanwhile after 13 positive years, the US fixed income market had its worst year since 1994, with the Barclays US aggregate bond index declining 1.9% y/y. Gold was the other notable looser, with the yellow metal loosing 28% in 2013, ending its 12-year bull run. EUR/USD and USD/JPY closed out 2013 just off one-year highs (at 1.38 and 105, respectively). USD/CNY ended 2013 at 6.0539, up 2.9% y/y compared to the 1.2% rise seen in 2012 and the 4.7% rise in 2011.

- December manufacturing PMI data from around the globe have been under the microscope this week. The official China data came in at 51.0, barely above contraction and at a four-month low. In Europe, Germany and Italy saw readings that indicated a solid level of expansion, with both sustaining six months of growth, while France's manufacturing PMI fell to a seven-month low, with sharp declines in both output and new orders. The US Markit PMI reading hit its highest level in a year, with the output index at its best level in nearly two years.

- The October S&P/Case-Shiller Index indicated home prices continued robust gains through the fall, with the y/y gain at 13.6%, the strongest showing since February 2006. Analysts highlighted that Q3 data from CoreLogic data showed 4.1 million homeowners have escaped negative equity in 2013, helping to significantly improve household balance sheets and confidence (6.4 million remain in negative equity). The December consumer confidence survey certainly reinforced this point, with the index rising to 78.1 from 72 in November. The Conference Board said that sentiment was close to a 5-year high, with consumers attributing the improvement to more favorable economic and labor market conditions.

- Detroit's Big Three turned in their best showing since 2007, reporting 2013 industry sales up 7.6% y/y, at 15.6M units. December sales results, however, fell short of consensus expectations. Ford's US sales grew 1.7% in the month, while the company's 2013 US sales increased 10.8%. Chrysler December sales grew 6% y/y, with 9% growth in 2013 sales, its biggest improvement in six years. General Motors saw its sales during the last month of the year slipping 6.3%, saying bad weather cut into December sales, and discounts in late November pulled sales ahead from December.

- Activist investor Carl Icahn has identified a new target for his loving attention: Hertz. On Monday, the company disclosed that it had adopted a one-year shareholder rights plan after having "dialogue" with a number of shareholders. Early reports said that Corvex and Third Point were building stakes and may have talked with management. Then on Friday, CNBC reported that Icahn had accumulated 30-40 million common shares, to the surprise of nobody. Share of Hertz are up more than 12% on the week.

- Cooper Tire's $2.2 billion merger deal with India's Apollo Tyre has now officially gone flat, after months of suits and counter suits between the firms. Cooper said financing is no longer available and continues to claim, as it has for months, that Apollo breached the terms of the agreement. Fiat reached a $3.65 billion deal with the UAW that will allow it to acquire the remaining outstanding 41.5% stake in Chrysler. Network security firm FireEye has a $1.05B stock-and-cash deal in hand to acquire Mandiant, which has become known for its forensic investigations of IT security breaches. Mandiant is best known for publishing a detailed report in early 2013 about a Chinese military hacking group in Shanghai responsible for hacking hundreds of companies and organizations in the US.

- Netflix said it was testing new price plans for streaming video as it tries to lure more viewers. Among the plans being tested are a $6.99/month plan that allows only one video stream to be watched and a $9.99/month plan that allows three streams at one time. This compares to the company's standard $7.99/month offering for video on up to 2 screens at once and an $11.99/month family plan for streaming up to four shows at once.

- FX markets were roiled by low-volume trading in the year-end holiday period. EUR/USD backed off two-year highs just below 1.3900 seen last Friday. Skeleton crews manning trading desks did not react to weekend comments from ECB's Draghi that there was no urgent need for ECB action amid encouraging signs that the euro zone crisis has subsided. Dealers were watching rates in the first days of the New Year for signs the liquidity squeeze that supported the euro in mid-December was continuing to fade. During the week, ECB excess liquidity rose to around €275B (the highest level since July), compared to around €200B on Dec 27th. USD/JPY maintained the strength seen in the last days of December through the first few weeks of January, around five-year lows. Japanese markets reopen on Monday after being closed most of the week surrounding the New Year's holiday.