5 To 1 Says They're Overpaid (Part I)

Swiss Army Brand Turnaround Benefitted Both Employees and Shareholders, Not Top Management

Swiss Army knives are a pretty good product and you may have noticed the brand has shown up on some other nice things in recent years. Swiss Army brand watches, luggage and fragrances are on the market now too and keeping to the quality, value and style of the knives they have done well.

The parent company, Victorinox, is headquartered in Switzerland, one of the more expensive places in the world in which to do business. In this age of outsourcing and the pressure to lower costs, expensive Switzerland’s economy is still doing very well. Unemployment is only 3.65% and the currency is stronger than either the US dollar or the Euro.

The Financial Times wrote last week that after 911, Victorinox faced a 30% drop in sales of its’ Swiss Army knives due to new strict airport security measures.  Since airport security was going to remain strict, the company decided that this was probably a permanent loss of sales and scaled back its' operations and began to develop and invest in new products.

Victorinox has a commitment to its' workforce as well as its' stockholders. During the adjustment period, the company went to great pains to protect the whole workforce and didn't, like many American companies, reward management for firing workers and outsourcing. Cutting costs like extras across the firm and lending unneeded people out to other firms temporarily minimized the job cuts. The payroll policy also came into play. The company has a rule of limiting its' top paid employees to a ratio of 5 to 1 to the wages of the lowest paid employees, a policy that helped control payroll costs at the time.

The expansion into watches, luggage and fragrances was a success and the new products now make up 60% of sales, a track record which makes Victorinox’s turnaround notable. Despite scoring a small triumph, the company’s management team hasn’t been given bonuses worthy of a czar and instead can enjoy a rate of pay five times that of the bottom of the company’s pay scale as well as the job security, esteem and respect such good work merits. Victorinox’s shareholders and employees have also been rewarded and the company’s future seems to have been only enhanced as the quality and value and reach of the Swiss Army image has only benefitted.

By the way, Swiss Army knives are not made in China. They are still made in Switzerland.

Investment Conclusion: Question management teams whose strategy to add value is to outsource jobs without a realistic strategic plan that will make the company succeed in the long run and are paid huge salaries and bonus packages to do so. Hint: There are lots of them out there right now.

Tax Bill Finally Passed

Now We Can Make Tax Related Investment Decisions

After weeks of wrangling and a long year of uncertainty, at least we know now what tax rates are going to be over the next two years. The bill extended the tax regime we have been in for a number of years but added an estate tax on estates over $5 million.

There was no estate tax this year so when Yankees owner George Steinbrenner died last summer, it seemed his his heirs were lucky and their Dad's $1.5 billion estate would pass tax free. This bill addressed that loophole, however. His heirs now have a choice whether to pay 35% now or keep the much lower cost basis on the estate and pay capital gains taxes on it sometime in the future. I imagine the Steinbrenners will keep the Yankees for now and pay taxes on it some other day.

Fidelity Investments did a nice summary on the new law's tax rates and investment ramifications. If tax policies are important to you, I recommend giving it a close read.

Fidelity's Take on the Tax Bill

Investment Implication:

This tax law is stock market friendly because it will reduce uncertainty and isn’t going to trigger new year end selling as it taxes long term capital gains and dividend paying investments at the same rates as today.

The big questions about this law in a year or so will be did the low tax rates stimulate the economy and was the benefit enough to increase tax revenues down the road enough to reduce the budget deficit?

First observation this afternoon: Bond yields fell very sharply today which seems to indicate the market felt the tax bill will stimulate the economy substantially to help balance the government’s budget without creating an inflation problem.

China's Stolen Software a Trojan Horse

China's growth in manufacturing is in large part due to the theft of technology and licenses. As a result of stolen software installed on the majority of China's computers, it is particularly easy for hackers to get into them....

One persistent problem is that much of the pre-installed software still consists of pirated copies. While China has released statistics showing that the use of legitimate software in China has increased dramatically, the Business Software Alliance, an international software industry group, estimates that 79 percent of the software sold in China in 2009 was illegally copied, creating a loss to the industry of $7.6 billion in revenue. Even more important to Beijing, these statistics mean the vast majority of Chinese computer systems — government and private alike — remain vulnerable to malware.

China and its Double-edged Cyber-sword | STRATFOR December 2010

-Investment Conclusion? Some day just maybe, software companies like Oracle and Microsoft will increase their revenues in China. In the meantime, it is the same thing as before. The Chinese are stealing western technology and neither business or government care to do much about it.