Tension pierces corporate veil at CME
CURIOUS INVESTOR DAVID ROEDER email@example.com April 27, 2012 7:28PM
CME Group CEO Craig Donohue. Sun-Times file photo
David Roeder reports on real estate at 6:22 PM. Every Thursday on News- radio 780 and 105.9 FM WBBM. The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday
Updated: April 29, 2012 2:31AM
It’s calm on the outside, turmoil on the inside at the company that owns the Chicago futures markets, CME Group (CME).
CME’s chief executive, Craig Donohue, said last week he’s departing in about a month, well ahead of schedule. Donohue, 50, had earlier said he would “retire” by year’s end, setting off speculation that he was being forced out.
The owner of the Chicago Mercantile Exchange and the Chicago Board of Trade has perfected the public company art of projecting competence and confidence in open forums, although I sometimes prefer the old days when these exchanges were member-owned. The culture was emotional, the complexions ruddy, and finding someone with a gripe was as easy as grabbing the first available trader with a member’s badge in the pits.
CME has long since gone corporate and it has felt the down side of the transition. Disputes have been hushed, although traders still criticized it for its response to the MF Global collapse. CME seemed more concerned with limiting corporate liability than dealing with a breach of trust in its markets.
There’s also the company’s declining stock price, falling revenue because trading volumes are off, and criticism that it hasn’t paid attention to expenses. Donohue got paid $6 million last year mostly from bonuses and stock grants even as the share price tumbled 25 percent.
Sources insist Donohue was not forced out. I’ll buy it. But I also know CME is using his departure to mend fences. It is displaying a new cost-cutting zeal, even laying off 35 people last quarter, and setting out new principles for CEO pay that should limit windfalls when the stock doesn’t perform.
It’s also working to reduce its 32-member board. I’m told there’s plenty of maneuvering over that, with the old Merc and Board of Trade contingents battling against outside directors who have become more assertive.
Donohue was a steady, rational force while the exchange was completing huge steps such as the Board of Trade-Merc merger in 2007 and the shift to electronic trading. But he is a lawyer and too lawyerly when CME needs to reconnect to traders and shareholders.
His successor, Phupinder Gill, ran the old Merc’s back-office “clearing” operation, knows the technology and trading mentality completely, and has the trust of all factions.
With all that said, is CME is a good stock to buy? At $268.38, it’s lost half its value in four years. But it remains a money machine, with a dividend yield of 3.3 percent, a price-earnings ratio less than 10, and a profit margin that ranks near the top of the Standard & Poor’s 500 entries.
This stock will revive when trading does. It’s the closest thing to a certainty in the financial markets.
SCHOOL FOR SCANDAL: Just a couple of weeks ago in this space I highlighted William Blair & Co.’s favorable review of the Mexican offshoot of Wal-Mart, Wal-Mart de Mexico (WMMVY). Then, wouldn’t you know, the New York Times reports evidence that the company, part of Wal-Mart Stores (WMT), had been bribing Mexican officials until 2005, and both stocks tumble.
The Blair retail team cut its rating on WMMVY to a neutral “market perform” and pointed out that the company’s store-building picked up in Mexico after 2005. So if bribes were a problem earlier, were there more pressures in later years to meet higher expansion goals?
HAPPY TRAILS: I couldn’t let this column pass without mentioning the retirement of Paul Kasriel as Northern Trust’s chief economist. Kasriel, 65, has been with Northern for more than 25 years. He starts the next chapter Tuesday, which I gather will involve mostly enjoying life and nature around his home on the Lake Michigan side of Door County.
“My big challenge is to learn to play the bass guitar,” said Kasriel. “If you play the bass guitar well, people know it. If you don’t, they don’t realize it.”
Kasriel always has delivered astute observations about the economy, particularly about the role of the Federal Reserve and the impact of bank credit, or lack thereof. He correctly foretold the depth of the recession because he understood its origin, a bubble of bad debt. Accordingly, he gets the last word.
CLOSING QUOTE: “When you have an asset bubble burst, it does great damage to the financial system. You get weak recoveries and you’re not likely to get self-sustaining growth until the system is fully functioning. I’m pretty confident the economy will accelerate in the second half of the year. We are now seeing banking systems create credit again.” — Paul Kasriel, retiring chief economist, Northern Trust