Following the surprise announcements by Hank Poulsen to Congress in late September/beginning of October of 2008, that if the $700 billion TARP bill is not passed the U.S. would enter something worse than the Great Depression and that "marshall law" would have to be used, as one who follows policy developments, economic activity and the markets intimately, I knew that at that moment the market had not adequately priced in the gravity of the situation, and that stocks would fall much further. [So much for efficient market hypothesis.] I immediately called close family and friends and advised them to sell their losing investments to recognize the benefit for tax purposes. As expected, the DOW rapidly priced in the new info and fell from 11000 to 8000 in short order.
As the DOW neared 7000 in February 2009, some commentators saw an opportunity for a significant bear market buying opportunity. I agreed with that sentiment and went through the tedious process of dwindling down a list of about 50 stocks down to one -- Altria (MO). [I always keep a continually updated list of prospective investment opportunities.] There were many other high growth stocks that I had on that list, and even a couple of beaten up banks (no, not C or BAC), that had I bought in place of MO, I would have gained far more in 2009. Baidu.com (BIDU) was on that list; so was Fifth Third (FITB). Wow! I lost out on some huge gains by not buying these two. But given the severity of the situation, the prudent decision was to invest in safety: to me MO is about as safe as it gets -- people buy cigarettes even in the worst of times, and with its growing international presence, as well as the company's very robust dividend policy and share buyback program, it was the surest thing I could find. [Also note, I only invest in a select few companies at a time -- I do not believe diversification fits my investment goals and investment sentiment].
Those calling for a bear market rally nailed it. From March 2009 through the remainder of the year, the markets ripped off huge gains for investors. As the end of 2009 neared, I waited until I would be counted for the company's last dividend for the year, and then sold MO with a nice gain for the year. [The investments I manage are largely in tax beneficial ROTH IRAs]. My plan at that point was to remain in cash, and wait for a significant pullback in the market before buying again. But in early January, significant chatter picked up on a small company that I had been tracking. A major buying opportunity presented itself, and I made the decision to shift my portfolio into the company. As a result of that decision, my portfolio gained 120% in a matter of a couple weeks putting me well on track to have my best year as an investor; I have been investing since 2001. Because of the risks involved with the company, I am not disclosing the name of the company. I will however, disclose my number two play for the year that I would have put my money into had I not invested in this much smaller enterprise -- Domino's Pizza (DPZ), which is up almost 50% on the year. If the market can remain semi-stable over the next few quarters, I think DPZ can still bring healthy returns to investors even at these levels.
Over the last few years, my investment strategy has necessarily turned short-term in nature as the global markets have convulsed violently, both positively and negatively. I do not see these wild swings ending any time soon. What I do see over the next few years is substantial declines in the markets. In this environment, my investment strategy over the next year is to continue monitoring one small company in particular, as well as a handful of other small companies, and DPZ. I will buy heavily in any one of these companies if I see a significant short-term opportunity. Right now I am in 100% cash.
I monitor market data like a hawk. I have enough info now to conclude that the risks in the market are as severe as ever. I share the opinion of many bearish writers at the Financial Times, the Economist, and the Wall Street Journal -- BIG BIG trouble is ahead. In my opinion, DOW could see 4000 or even lower over the next few years; SP500 may see 400 or lower. If we can avoid total collapse, these levels will present once in a lifetime buying opportunities. Accordingly, I plan to invest heavily in biotechs and nanotechs after each severe decline.
To understand the severity of the situation, we have to understand how we arrived to the point we are at. Some writers go back decades, but I am comfortable going back as far as the Nasdaq bubble that popped earlier this decade. When tech stocks crashed, the U.S. economy soon entered a recession. Rather than allowing the economy to deal with slower growth naturally, the Bush Administration made the decision to artificially create growth through stimulation. Under Bush, taxes were cut and interest rates dropped to record lows; the U.S. was running real negative interest rates from 2002-2005. Loose monetary policies coupled with bad homeownership mortgage policy, created a second bubble in the real estate market.
Making matters far worse, tied to real estate assets were new securitized instruments that enabled banking institutions through their in-house casino-like hedge funds to make enormous bets utilizing obscene levels of debt. At the height of the crisis in 2008, large banks on average were overleveraged at a ratio of 37 to 1, according to a new report. When the bubble popped on the real estate market, a bubble many, many times greater also popped in the asset-backed securities market.
To address the two latest bubbles, another bubble of even greater scale emerged -- U.S. public debt to cover the losses from the private sector.
All economic-market bubbles come to a violent, tragic end. This one will be no different.
Peace
Jeremy
Saturday, February 27, 2010
Thursday, February 25, 2010
MUST READ -- CHARLIE MUNGER'S MASTERPIECE "BASICALLY, IT'S OVER"
After completing yesterday's blog regarding the necessity for the Volcker Rule to address the problems on Wall Street, I came across a masterful article that lays out what may happen should we fail to pass the provision. The piece is written by billionaire businessman, investor, vice chairman to Berkshire Hathaway, and Warren Buffett's most trusted confidant over the past 50 years -- Charlie Munger. Charlie Munger's article, which was published in Slate a few days ago, I argue, may be the most important piece written in decades on the state of America's economic affairs. I have copied and pasted the article below. Notes: as Munger is telling a parable through metaphors, it is helpful to note that the "Good Father" represents the former heads of Treasury, particularly Paul Volcker, who are currently advising President Obama to pass the Volcker Rule; also note that the casinos represent the hedge funds that are held inside Wall Street banking institutions. Here is Charlie Munger's masterpiece...
Title: "BASICALLY, IT'S OVER" -- A Parable About How One Nation Came to Financial Ruin
In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."
The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.
Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland's security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than "plain vanilla" commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage.
In its first 150 years, the government of Basicland spent no more than 7 percent of its gross domestic product in providing its citizens with essential services such as fire protection, water, sewage and garbage removal, some education, defense forces, courts, and immigration control. A strong family-oriented culture emphasizing duty to relatives, plus considerable private charity, provided the only social safety net.
The tax system was also simple. In the early years, governmental revenues came almost entirely from import duties, and taxes received matched government expenditures. There was never much debt outstanding in the form of government bonds.
As Adam Smith would have expected, GDP per person grew steadily. Indeed, in the modern area it grew in real terms at 3 percent per year, decade after decade, until Basicland led the world in GDP per person. As this happened, taxes on sales, income, property, and payrolls were introduced. Eventually total taxes, matched by total government expenditures, amounted to 35 percent of GDP. The revenue from increased taxes was spent on more government-run education and a substantial government-run social safety net, including medical care and pensions.
A regular increase in such tax-financed government spending, under systems hard to "game" by the unworthy, was considered a moral imperative—a sort of egality-promoting national dividend—so long as growth of such spending was kept well below the growth rate of the country's GDP per person.
Basicland also sought to avoid trouble through a policy that kept imports and exports in near balance, with each amounting to about 25 percent of GDP. Some citizens were initially nervous because 60 percent of imports consisted of absolutely essential coal and oil. But, as the years rolled by with no terrible consequences from this dependency, such worry melted away.
Basicland was exceptionally creditworthy, with no significant deficit ever allowed. And the present value of large "off-book" promises to provide future medical care and pensions appeared unlikely to cause problems, given Basicland's steady 3 percent growth in GDP per person and restraint in making unfunded promises. Basicland seemed to have a system that would long assure its felicity and long induce other nations to follow its example—thus improving the welfare of all humanity.
But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."
The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called "financial derivatives."
Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland's currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.
And then came the twin shocks. Hydrocarbon prices rose to new highs. And in Basicland's export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland's GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors.
How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland's politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the "Good Father." Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions.
Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy. Second, as this change was sure to be painful, he suggested that Basicland's citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life.
The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.
The strong faith of these Basicland economists in the beneficence of hypergambling in both securities and financial derivatives stemmed from their utter rejection of the ideas of the great and long-dead economist who had known the most about hyperspeculation, John Maynard Keynes. Keynes had famously said, "When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." It was easy for these economists to dismiss such a sentence because securities had been so long associated with respectable wealth, and financial derivatives seemed so similar to securities.
Basicland's investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father. Such bankers provided constructive services to Basicland. But they had only moderate earnings, which they deeply resented because Basicland's casinos—which provided no such constructive services—reported immoderate earnings from their bucket-shop systems. Moreover, foreign investment bankers had also reported immoderate earnings after building their own bucket-shop systems—and carefully obscuring this fact with ingenious twaddle, including claims that rational risk-management systems were in place, supervised by perfect regulators. Naturally, the ambitious Basicland bankers desired to prosper like the foreign bankers. And so they came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve by creating more bucket shops in Basicland.
Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district. The casinos resented being compared with cancer when they saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers.
As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.
Peace
Jeremy
Title: "BASICALLY, IT'S OVER" -- A Parable About How One Nation Came to Financial Ruin
In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."
The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.
Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland's security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than "plain vanilla" commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage.
In its first 150 years, the government of Basicland spent no more than 7 percent of its gross domestic product in providing its citizens with essential services such as fire protection, water, sewage and garbage removal, some education, defense forces, courts, and immigration control. A strong family-oriented culture emphasizing duty to relatives, plus considerable private charity, provided the only social safety net.
The tax system was also simple. In the early years, governmental revenues came almost entirely from import duties, and taxes received matched government expenditures. There was never much debt outstanding in the form of government bonds.
As Adam Smith would have expected, GDP per person grew steadily. Indeed, in the modern area it grew in real terms at 3 percent per year, decade after decade, until Basicland led the world in GDP per person. As this happened, taxes on sales, income, property, and payrolls were introduced. Eventually total taxes, matched by total government expenditures, amounted to 35 percent of GDP. The revenue from increased taxes was spent on more government-run education and a substantial government-run social safety net, including medical care and pensions.
A regular increase in such tax-financed government spending, under systems hard to "game" by the unworthy, was considered a moral imperative—a sort of egality-promoting national dividend—so long as growth of such spending was kept well below the growth rate of the country's GDP per person.
Basicland also sought to avoid trouble through a policy that kept imports and exports in near balance, with each amounting to about 25 percent of GDP. Some citizens were initially nervous because 60 percent of imports consisted of absolutely essential coal and oil. But, as the years rolled by with no terrible consequences from this dependency, such worry melted away.
Basicland was exceptionally creditworthy, with no significant deficit ever allowed. And the present value of large "off-book" promises to provide future medical care and pensions appeared unlikely to cause problems, given Basicland's steady 3 percent growth in GDP per person and restraint in making unfunded promises. Basicland seemed to have a system that would long assure its felicity and long induce other nations to follow its example—thus improving the welfare of all humanity.
But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."
The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called "financial derivatives."
Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland's currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.
And then came the twin shocks. Hydrocarbon prices rose to new highs. And in Basicland's export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland's GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors.
How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland's politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the "Good Father." Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions.
Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy. Second, as this change was sure to be painful, he suggested that Basicland's citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life.
The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.
The strong faith of these Basicland economists in the beneficence of hypergambling in both securities and financial derivatives stemmed from their utter rejection of the ideas of the great and long-dead economist who had known the most about hyperspeculation, John Maynard Keynes. Keynes had famously said, "When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." It was easy for these economists to dismiss such a sentence because securities had been so long associated with respectable wealth, and financial derivatives seemed so similar to securities.
Basicland's investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father. Such bankers provided constructive services to Basicland. But they had only moderate earnings, which they deeply resented because Basicland's casinos—which provided no such constructive services—reported immoderate earnings from their bucket-shop systems. Moreover, foreign investment bankers had also reported immoderate earnings after building their own bucket-shop systems—and carefully obscuring this fact with ingenious twaddle, including claims that rational risk-management systems were in place, supervised by perfect regulators. Naturally, the ambitious Basicland bankers desired to prosper like the foreign bankers. And so they came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve by creating more bucket shops in Basicland.
Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district. The casinos resented being compared with cancer when they saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers.
As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.
Peace
Jeremy
Wednesday, February 24, 2010
Why the Volcker Rule is the Single Most Important Financial Reform
Ignorance with power is about as dangerous as it gets. Enter thoughtless puppets attached to strings of powers...
"I care not what puppet is placed on the throne of England to rule the Empire, ... The man that controls Britain's money supply controls the British Empire. And I control the money supply."
These words were uttered in early 1800s London by then the most powerful banking financier in the world -- Baron Nathan Mayer Rothschild.
When we ignore history, we only set the stage for repeating it. From multiple sources, I am reading this morning that the Obama Administration continues to be engaged in a major fight with the Senate to enact the "Volcker Rule." Wall Street lobbyists have come out guns-a-blazing to shoot down the proposal. Republican Senator Bob Corker, one of the Senators who opposes the rule says that the rule was merely introduced by the White House to "satisfy populist anger against Wall Street and not because the White House thought it was good policy." Sorry, Bob, but five former secretaries of the U.S. Treasury support the Volcker Rule. Read history, dummy.
The Volcker Rule is THE key component of any significant financial reform of Wall Street. Failure to pass the Volcker Rule would be a tragic failure of leadership to respond to the financial crisis. To understand the importance of the Volcker Rule, we have to have a historical context and how proprietary investment trading emerged in commercial banks.
One of the causes of the Great Depression was commercial banks engaging in risky investment activity. This is problematic because risky investment activity typically entails a certain amount of leverage (debt) that is used to "juice" gains. Juicing gains is great when investments work out. But when investments turn the other direction, an investor (in this case, commercial banks holding deposits of businesses and individuals) that is over-leveraged will find itself in a world of hurt. When a commercial banking investor finds itself in a world of hurt, the deposits of other businesses and individuals are put at enormous risk of being wiped out entirely. This is what happened during the Great Depression. Following the collapse of the stock market, legislators responded by passing the Banking Act of 1933 (also known as the Glass-Steagall Act). Among other things, what the Act did was make it unlawful for commercial banking and investment banking activities to be done under the same financial house. This law remained in effect until 1999 when Republicans led the charge to repeal the Glass-Steagall Act. President Bill Clinton signed the repeal into law in November 1999.
Rewind one year from 1999 -- in 1998 the global stock markets witnessed one of the scariest events to hit it in more than a decade. What happened? Ever hear of the hedge fund Long Term Capital Management? No worries, few have. A great book tells the story of LTCM far better than I am able too -- "Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It" written by Nicholas Dunbar. In a nutshell, LTCM was a hedge fund engaged in proprietary trading activity. Using computers and mathematical models and huge amounts of leverage (it was using a debt to equity ratio of 25-to-1... equivalent to what banks were using in 2007), LTCM was taking the investment world by storm by returning 40% per year through a four-year stretch in the 90s. Then came 1998, and a Russian bond crisis. When the bond market tanked, LTCM lost about 90% of its value in FOUR MONTHS!! Warren Buffett stepped in and organized a bailout effort of LTCM (read about the Panic of 1907 and you will find eery comparisons to J.P. Morgan bailing out Wall Street) so that LTCM's collapse would not lead to a trickle collapse of other Wall Street institutions.
Fast forward to 2007, and we find a Wall Street not too dissimilar from what we saw just prior to the Great Depression. Here, Wall Street banking institutions, empowered by the Glass-Steagall repeal, had formed hedge fund operations within each banking house. Basically, each major Wall Street bank now had their own LTCM. Basically, it was one GINORMOUS ticking time bomb.
With Wall Street banks over-leveraged at a ratio of 25-to-1, following the collapse of the real estate market and the derivative securities that accompanied them, banks had no way to pay off the enormous debt. Enter the federal government and the largest financial bailout in history -- the U.S. Government had to print off over $1 trillion in new debt to pay off the debts created by hedge funds of Wall Street banks... debt that you and I and every other taxpayer will be paying off for many, many years to come -- all because of GREED on Wall Street.
The Volcker Rule would put an end to this. The Volcker Rule would make it unlawful for banking institutions to operate in-house hedge funds.
This is THE ONLY financial reform that truly matters. Wall Street knows that and is fighting it like crazed dogs -- a sure sign there is real meat to the rule. The rule would mean no more proprietary trading in banking institutions, which would mean that banking institutions would not earn the kind of profits it has earned since the repeal of Glass-Steagall in 1999 -- it would also mean that the American taxpayer would no longer be required to bailout banks for failed trading activities.
Pass the damn rule, fools!
Peace
Jeremy
"I care not what puppet is placed on the throne of England to rule the Empire, ... The man that controls Britain's money supply controls the British Empire. And I control the money supply."
These words were uttered in early 1800s London by then the most powerful banking financier in the world -- Baron Nathan Mayer Rothschild.
When we ignore history, we only set the stage for repeating it. From multiple sources, I am reading this morning that the Obama Administration continues to be engaged in a major fight with the Senate to enact the "Volcker Rule." Wall Street lobbyists have come out guns-a-blazing to shoot down the proposal. Republican Senator Bob Corker, one of the Senators who opposes the rule says that the rule was merely introduced by the White House to "satisfy populist anger against Wall Street and not because the White House thought it was good policy." Sorry, Bob, but five former secretaries of the U.S. Treasury support the Volcker Rule. Read history, dummy.
The Volcker Rule is THE key component of any significant financial reform of Wall Street. Failure to pass the Volcker Rule would be a tragic failure of leadership to respond to the financial crisis. To understand the importance of the Volcker Rule, we have to have a historical context and how proprietary investment trading emerged in commercial banks.
One of the causes of the Great Depression was commercial banks engaging in risky investment activity. This is problematic because risky investment activity typically entails a certain amount of leverage (debt) that is used to "juice" gains. Juicing gains is great when investments work out. But when investments turn the other direction, an investor (in this case, commercial banks holding deposits of businesses and individuals) that is over-leveraged will find itself in a world of hurt. When a commercial banking investor finds itself in a world of hurt, the deposits of other businesses and individuals are put at enormous risk of being wiped out entirely. This is what happened during the Great Depression. Following the collapse of the stock market, legislators responded by passing the Banking Act of 1933 (also known as the Glass-Steagall Act). Among other things, what the Act did was make it unlawful for commercial banking and investment banking activities to be done under the same financial house. This law remained in effect until 1999 when Republicans led the charge to repeal the Glass-Steagall Act. President Bill Clinton signed the repeal into law in November 1999.
Rewind one year from 1999 -- in 1998 the global stock markets witnessed one of the scariest events to hit it in more than a decade. What happened? Ever hear of the hedge fund Long Term Capital Management? No worries, few have. A great book tells the story of LTCM far better than I am able too -- "Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It" written by Nicholas Dunbar. In a nutshell, LTCM was a hedge fund engaged in proprietary trading activity. Using computers and mathematical models and huge amounts of leverage (it was using a debt to equity ratio of 25-to-1... equivalent to what banks were using in 2007), LTCM was taking the investment world by storm by returning 40% per year through a four-year stretch in the 90s. Then came 1998, and a Russian bond crisis. When the bond market tanked, LTCM lost about 90% of its value in FOUR MONTHS!! Warren Buffett stepped in and organized a bailout effort of LTCM (read about the Panic of 1907 and you will find eery comparisons to J.P. Morgan bailing out Wall Street) so that LTCM's collapse would not lead to a trickle collapse of other Wall Street institutions.
Fast forward to 2007, and we find a Wall Street not too dissimilar from what we saw just prior to the Great Depression. Here, Wall Street banking institutions, empowered by the Glass-Steagall repeal, had formed hedge fund operations within each banking house. Basically, each major Wall Street bank now had their own LTCM. Basically, it was one GINORMOUS ticking time bomb.
With Wall Street banks over-leveraged at a ratio of 25-to-1, following the collapse of the real estate market and the derivative securities that accompanied them, banks had no way to pay off the enormous debt. Enter the federal government and the largest financial bailout in history -- the U.S. Government had to print off over $1 trillion in new debt to pay off the debts created by hedge funds of Wall Street banks... debt that you and I and every other taxpayer will be paying off for many, many years to come -- all because of GREED on Wall Street.
The Volcker Rule would put an end to this. The Volcker Rule would make it unlawful for banking institutions to operate in-house hedge funds.
This is THE ONLY financial reform that truly matters. Wall Street knows that and is fighting it like crazed dogs -- a sure sign there is real meat to the rule. The rule would mean no more proprietary trading in banking institutions, which would mean that banking institutions would not earn the kind of profits it has earned since the repeal of Glass-Steagall in 1999 -- it would also mean that the American taxpayer would no longer be required to bailout banks for failed trading activities.
Pass the damn rule, fools!
Peace
Jeremy
Tuesday, February 23, 2010
Hope on the Hill?
Yesterday, a newly released poll shows 86% of Americans now believe our political system is broken -- the highest percentage ever. On the same day, a handful of Republican Senators broke from party ranks and gave their support for a $15 billion jobs bill. Among those who gave their support were moderate, New England Republicans Olympia Snowe and newcomer Scott Brown. It is not yet known whether the New England Republicans will be the bridge for further legislative action in the gridlocked Senate, nonetheless, some see the passage of the jobs bill as a sign of hope.
Before getting too excited, first consider that the $15 billion jobs bill is literally a water drop in the waterfall-sized spending by Washington to save Wall Street, and it comes nowhere close to addressing the serious unemployment problem on Main Street. Recall, between TARP and other federal bailout measures, the U.S. Government spent well over $1 trillion to prop up Goldman Sachs, Citigroup, Bank of America, among other financial institutions. Also note, that real unemployment in America currently sits at around 17% -- meanwhile, bonuses on Wall Street were up 17% to over $20 billion in 2009. Further, roughly 2.7 million will lose unemployment benefits in April; over 6 million Americans have been unemployed for over 6 months -- four times as high as the average over the last 50 years and the highest level since the Great Depression. In this context, the $15 billion jobs bill is a complete joke.
We will know soon enough whether this New England Republican coalition has any substance, when the healthcare debate seriously ramps up to another level in the days ahead. One way that Main Street can be helped is passing a comprehensive healthcare reform. Talk to any federal bankruptcy judge and they will tell you that one of the primary burdens on American families filing for bankruptcy today are medical expenses; latest studies show that over 60% of Chapter 13 filings is linked to medical expenses -- those with healthcare insurance report medical expenses in excess of $18,000, and those without insurance report medical expenses over $27,000. So the key word here is "comprehensive." Unfortunately, what has been proposed so far by the House and Senate, and now the White House, only goes to a part of the problem. Unless Democrats will accept Republican proposals for tort reform, and unless other needed measures are adopted like medical and legal education reform as well as a public option for high-risk insureds, I don't see the cost of healthcare for American families coming down a meaningful level.
Meanwhile, what does the $15 billion jobs bill actually do? It provides payroll tax benefits for employers at a time when the government is running severe deficits from tax revenue shortfalls and overspending. (In a previous blog, you will find that under the right circumstances, I do favor eliminating corporate earnings taxes altogether and increasing marginal rates of individual taxpayers.) We are in a mess of historic proportions with no easy solutions. But some see the bi-partisan support for the $15 billion jobs bill as a step in the right direction and a sign of hope on the Hill. We shall see.
Peace
Jeremy
Before getting too excited, first consider that the $15 billion jobs bill is literally a water drop in the waterfall-sized spending by Washington to save Wall Street, and it comes nowhere close to addressing the serious unemployment problem on Main Street. Recall, between TARP and other federal bailout measures, the U.S. Government spent well over $1 trillion to prop up Goldman Sachs, Citigroup, Bank of America, among other financial institutions. Also note, that real unemployment in America currently sits at around 17% -- meanwhile, bonuses on Wall Street were up 17% to over $20 billion in 2009. Further, roughly 2.7 million will lose unemployment benefits in April; over 6 million Americans have been unemployed for over 6 months -- four times as high as the average over the last 50 years and the highest level since the Great Depression. In this context, the $15 billion jobs bill is a complete joke.
We will know soon enough whether this New England Republican coalition has any substance, when the healthcare debate seriously ramps up to another level in the days ahead. One way that Main Street can be helped is passing a comprehensive healthcare reform. Talk to any federal bankruptcy judge and they will tell you that one of the primary burdens on American families filing for bankruptcy today are medical expenses; latest studies show that over 60% of Chapter 13 filings is linked to medical expenses -- those with healthcare insurance report medical expenses in excess of $18,000, and those without insurance report medical expenses over $27,000. So the key word here is "comprehensive." Unfortunately, what has been proposed so far by the House and Senate, and now the White House, only goes to a part of the problem. Unless Democrats will accept Republican proposals for tort reform, and unless other needed measures are adopted like medical and legal education reform as well as a public option for high-risk insureds, I don't see the cost of healthcare for American families coming down a meaningful level.
Meanwhile, what does the $15 billion jobs bill actually do? It provides payroll tax benefits for employers at a time when the government is running severe deficits from tax revenue shortfalls and overspending. (In a previous blog, you will find that under the right circumstances, I do favor eliminating corporate earnings taxes altogether and increasing marginal rates of individual taxpayers.) We are in a mess of historic proportions with no easy solutions. But some see the bi-partisan support for the $15 billion jobs bill as a step in the right direction and a sign of hope on the Hill. We shall see.
Peace
Jeremy
Sunday, February 21, 2010
Red, White, and Doom?
"I‘ve seen democracies fail around the world. They don‘t all succeed. And some of them have a pretty good run and then fail. At some point, the system just fails. Nothing gets done. We‘ve had democracy in Greece fail and the colonels take over. I don‘t want to get extreme about this, but at some point, Americans are going to get really tired of a Congress and government that doesn‘t operate effectively and respond." - Liberal Democrat Chris Matthews this past week on Hardball.
"Parties and Partisanship are destroying this democracy." Conservative Republican Joe Scarborough this past week on Morning Joe.
"According to Paul Krugman, the winner of a Nobel prize for economics and a columnist for the New York Times, modern America is much like 18th-century Poland. On his telling, Poland was rendered largely ungovernable by the parliament’s requirement for unanimity, and disappeared as a country for more than a century. James Fallows, after several years in China as a writer for the Atlantic Monthly, wrote on his return that he found in America a vital and self-renewing culture that attracts the world’s talent and “a governing system that increasingly looks like a joke”. Tom Friedman, another columnist for the New York Times, reported from the annual World Economic Forum in Davos last month that he had never before heard people abroad talking about “political instability” in America. But these days he did." - The Economist, an article this past week
"This, argue the critics, is what happens when a mere 41 senators (in a 100-strong chamber) can filibuster a bill to death; when states like Wyoming (population: 500,000) have the same clout in the Senate as California (37m), so that senators representing less than 11% of the population can block bills; when, thanks to gerrymandering, many congressional seats are immune from competitive elections; when hateful bloggers and talk-radio hosts shoot down any hint of compromise; when a tide of lobbying cash corrupts everything. And this dysfunctionality matters far beyond America’s shores. A few years ago only Chinese bureaucrats dared suggest that Beijing’s autocratic system of government was superior. Nowadays there is no shortage of leaders from emerging countries, or even prominent American businesspeople, who privately sing the praises of a system that can make decisions swiftly." - The Economist, a different article that ran this past week
"Remember, democracy never lasts long. It soon wastes, exhausts and murders itself. There never was a democracy yet that did not commit suicide." John Adams, about 200 years ago (being quoted by economists in the past several weeks)
"The average lifespan of the world's greatest civilizations has been 200 years... Then once a society becomes successful, it becomes arrogant, righteous, overconfident, corrupt and decadent . . . overspends . . . engages in costly wars . . . wealth inequity and social tensions increase and it enters a secular decline." Scottish Historian Alexander Tytler, about 200 years ago (being quoted by economists in the past several weeks)
It is wise to view doomsday mentalities with a healthy dose of skepticism. The majority of the time, these contribute little to a constructive discourse, and even less to constructive action. That said, it is also wise to listen in on what the contrarians are saying in times of comfort and complacency. As an investor, for example, it is prudent to listen to what the bears have to say in periods of market bullishness; those who ignore these voices do so at their own investing peril. Failure to do so, I would argue, is simply a failure to do your due diligence. Since the summer of 2001 when I started investing, I made it a point to read both bullish and bearing writers. Over that period, I have found the bearish argument to be much more compelling. Years ago, there were investment writers and economists who predicted a sharp decline in the real estate market and in the stock market, and a severe recession, while the herd of bulls were calling for Dow at 18,000. The bears were right. Similarly, when level-headed political types who have devoted their careers constructively to the public debate -- when they caution about the pending collapse of our democracy should the politicians in Washington maintain its destructive course, it is foolish to ignore these sentiments entirely. In the years I have been reading the Wall Street Journal, the New York Times, the Financial Times, the Economist, Politico, and other news sources -- I have never seen so many vocalize their concerns about the potential for a complete collapse of the U.S. Government than I am reading at this moment.
On Morning Joe last week, Joe Scarborough went on to blast both parties for being "idiots of history." He adds, "It's a food fight with children on both sides. Where have all the grown ups gone? You HAVE to TALK to the other side. Grow UP!" It is no wonder that 64% of the American public now favors having third party candidates in political races. Politicians are not elected to serve a party or the powers that preside over the purse -- they were elected to serve the people. To serve the people, politicians must legislate in a bi-partisan fashion. We must start working together before we really screw things up.
"Nothing can be more absurd than the practice that prevails in our country of men and women not following the same pursuits with all their strengths and with one mind, for thus, the state instead of being whole is reduced to half." - Plato, about 2400 years ago
Peace
Jeremy
"Parties and Partisanship are destroying this democracy." Conservative Republican Joe Scarborough this past week on Morning Joe.
"According to Paul Krugman, the winner of a Nobel prize for economics and a columnist for the New York Times, modern America is much like 18th-century Poland. On his telling, Poland was rendered largely ungovernable by the parliament’s requirement for unanimity, and disappeared as a country for more than a century. James Fallows, after several years in China as a writer for the Atlantic Monthly, wrote on his return that he found in America a vital and self-renewing culture that attracts the world’s talent and “a governing system that increasingly looks like a joke”. Tom Friedman, another columnist for the New York Times, reported from the annual World Economic Forum in Davos last month that he had never before heard people abroad talking about “political instability” in America. But these days he did." - The Economist, an article this past week
"This, argue the critics, is what happens when a mere 41 senators (in a 100-strong chamber) can filibuster a bill to death; when states like Wyoming (population: 500,000) have the same clout in the Senate as California (37m), so that senators representing less than 11% of the population can block bills; when, thanks to gerrymandering, many congressional seats are immune from competitive elections; when hateful bloggers and talk-radio hosts shoot down any hint of compromise; when a tide of lobbying cash corrupts everything. And this dysfunctionality matters far beyond America’s shores. A few years ago only Chinese bureaucrats dared suggest that Beijing’s autocratic system of government was superior. Nowadays there is no shortage of leaders from emerging countries, or even prominent American businesspeople, who privately sing the praises of a system that can make decisions swiftly." - The Economist, a different article that ran this past week
"Remember, democracy never lasts long. It soon wastes, exhausts and murders itself. There never was a democracy yet that did not commit suicide." John Adams, about 200 years ago (being quoted by economists in the past several weeks)
"The average lifespan of the world's greatest civilizations has been 200 years... Then once a society becomes successful, it becomes arrogant, righteous, overconfident, corrupt and decadent . . . overspends . . . engages in costly wars . . . wealth inequity and social tensions increase and it enters a secular decline." Scottish Historian Alexander Tytler, about 200 years ago (being quoted by economists in the past several weeks)
It is wise to view doomsday mentalities with a healthy dose of skepticism. The majority of the time, these contribute little to a constructive discourse, and even less to constructive action. That said, it is also wise to listen in on what the contrarians are saying in times of comfort and complacency. As an investor, for example, it is prudent to listen to what the bears have to say in periods of market bullishness; those who ignore these voices do so at their own investing peril. Failure to do so, I would argue, is simply a failure to do your due diligence. Since the summer of 2001 when I started investing, I made it a point to read both bullish and bearing writers. Over that period, I have found the bearish argument to be much more compelling. Years ago, there were investment writers and economists who predicted a sharp decline in the real estate market and in the stock market, and a severe recession, while the herd of bulls were calling for Dow at 18,000. The bears were right. Similarly, when level-headed political types who have devoted their careers constructively to the public debate -- when they caution about the pending collapse of our democracy should the politicians in Washington maintain its destructive course, it is foolish to ignore these sentiments entirely. In the years I have been reading the Wall Street Journal, the New York Times, the Financial Times, the Economist, Politico, and other news sources -- I have never seen so many vocalize their concerns about the potential for a complete collapse of the U.S. Government than I am reading at this moment.
On Morning Joe last week, Joe Scarborough went on to blast both parties for being "idiots of history." He adds, "It's a food fight with children on both sides. Where have all the grown ups gone? You HAVE to TALK to the other side. Grow UP!" It is no wonder that 64% of the American public now favors having third party candidates in political races. Politicians are not elected to serve a party or the powers that preside over the purse -- they were elected to serve the people. To serve the people, politicians must legislate in a bi-partisan fashion. We must start working together before we really screw things up.
"Nothing can be more absurd than the practice that prevails in our country of men and women not following the same pursuits with all their strengths and with one mind, for thus, the state instead of being whole is reduced to half." - Plato, about 2400 years ago
Peace
Jeremy
Wednesday, February 17, 2010
No to "Pay As You Go"?; Deficit Spending; Time for an Integrated Tax System?
Yesterday, Kansas City Fed Chief Thomas Hoenig stated the obvious: "The U.S. government must make adjustments in its spending and tax programs."... "It is that simple. If pre-emptive corrective action is not taken regarding the fiscal outlook, then the United States risks precipitating its own next crisis." You don't have to be an economist to know that if spending is not paid for today, it is paid for at a greater price tomorrow.
I've shared the figures in a prior blog: in 1980, gross national debt was less than a $1 trillion; now we are nearing $14 trillion with projections for it to balloon to $18-$20 trillion over the next decade. During that stretch, the federal government ran deficits each year except for a short window during the Clinton Administration. In the 1990s, the Clinton Administration and a Republican Congress utilized a "Pay As You Go" rule which led to a rare budget surplus. In the summer of 2009, the House passed a similar "Pay As You Go" bill; last month, the Senate barely passed the bill by a count of 60-40 -- every Republican voted against the measure. The Republican opposition vote is seen by political pundits as political expediency. Disgraceful. I wonder if Republicans will vote against President Obama's call to invest in nuclear power facilities and off-shore oil drilling -- two policies traditionally favored by Republicans? Environmentalists are slamming the Obama Administration on this one -- a sign again that Obama is a pragmatist by nature.
One of the great challenges we will face over the next several years is how to (1) put the U.S. economy on a sustainable growth path, while at the same time (2) increase tax revenues and (3) reduce federal spending. In the wake of the 2008 financial crisis, economists almost universally agree that federal spending (inspired by Keynesian economics) was the only thing that kept the economy from slipping into a depression because consumers were no longer spending, banks were no longer lending, and corporations were no longer investing. While there may be a time and a place for Keynesian economics, the same economists will tell you that it it too is unsustainable over the long term. As federal stimulus measures are phased out in the coming quarters, consumer spending must ramp up, banks must start lending, corporations must start investing -- AND, tax revenues must increase while federal spending must be cut to a level to create multiple periods of budget surpluses. This is an extremely difficult challenge to pull off. Is it an impossible one? It is impossible for us to solve this problem if we do not adopt a crisis mentality now, and start making some very difficult choices.
How do we put the economy on a sustainable growth path, while at the same time increase tax revenues and reduce federal spending? The answers will require hard choices -- some of which the Left will dislike, some of which the Right will dislike. On taxes, for example, here is my position:
Under current federal tax policy, corporate earnings are taxed at the front end on business income, and then are taxed again on the back end through stock sales (stock prices reflect a valuation of post-tax retained earnings) and through dividend distributions to shareholders. It is traditionally argued that this “classical” form of double-taxation distorts at least three financial and economic decisions: “(1) whether to invest in noncorporate rather than corporate form, (2) whether to finance investments with debt rather than equity, and (3) whether to retain rather than distribute earnings.” In a nutshell, this classical tax structure creates inefficiencies in the procurement and use of capital. These inefficiencies are problematic because economic activity and growth are negatively impacted.
Some propose a tax "integration" model so that corporate income is taxed only one time. Tax integrationists generally fall into two camps: (1) those who propose taxing corporate income at the corporate level, and (2) those who propose taxing corporate income only one time at the shareholder level. Under either approach, two significant challenges are raised: (1) “what should be the extent of U.S. taxation of U.S. corporate income paid to foreign investors and parent companies?”; and (2) “how should foreign taxes paid by U.S. companies on foreign income affect the U.S. taxation of U.S. shareholders on distribution of those earnings?” Tax integrationists do not agree on how to address these two problems. Some favor a series of new international treaties so that foreign investors are able to participate in the benefits of a U.S. integrated tax system; others argue for not extending the benefits of the integrated tax system to foreign investors. Further, some favor a pass-through of foreign tax credits for foreign taxes paid at the corporate level so that it is not double-taxed at the shareholder level; others oppose this approach because of the loss of tax revenue arising from foreign pass-through tax credits.
There are at least two other major issues that arise by only taxing corporate one time. First, everyone agrees that tax revenues will decline, and will have to be recouped through other means. Second, many argue that corporations have major benefits in society and that corporations should be required to pay more to compensate for those benefits. Both of these issues, as well as the two previously mentioned issues, must be addressed if a corporate tax integration model is ever going to pass the House and Senate and receive bi-partisan support.
History is always helpful for a context. From 1861 to 1873, no double taxation existed; corporate income was taxed one time at the shareholder level. Double-taxation through the taxing of dividends did not begin until the passage of the Revenue Act of 1936. But because of low tax rates on corporate income and high rates on major individual earners, the effects of double taxation did not become substantive until 1986. Following the Tax Reform Act of 1986 where maximum individual marginal rates dropped to historical lows, the relative tax burden on corporate-derived income increased substantially. [A historical perspective on individual marginal rates is also helpful: over the past 100 years, we have traditionally used a progressive marginal rate model where lowest income families were taxed at less than 5% on average and highest income families were taxed at more than 70% on average -- in between the these two levels, incomes were taxed on a progressive scale; this traditional scale dramatically changed in 1987 when top marginal rates dropped to 38.5% and lowest marginal rates increased to 11%.]
If there is going to be a serious discussion about implementing an integrated corporate tax system, then there must also be a reasonable response to the question of how the resulting tax revenue shortfall will be addressed. Everyone agrees that double-taxing corporate income creates a certain amount of capital inefficiencies, but the question is whether as a matter of public policy these inefficiencies are favorable to bearing inefficiencies elsewhere. Specifically, as the double-taxation model is phased out, taxes must be ramped up in other areas to make up the difference for the loss.
Taking account and consideration of all of these issues, I favor the mid-1800s model of taxing corporate-derived income only one time, at the marginal rate of the individual shareholder. In accord with this view, income from stock sales and dividend distributions would be taxed at the marginal rate of the individual shareholder. [As for capital outflows to foreign investors, I do not favor permitting foreign investors to take advantage of such a "one tax" system.]
Taxing corporate income only one time at the shareholder level will maximize capital efficiency and business growth. Increased economic activity will have positive derivative effects of a larger labor workforce by which additional tax revenue can be obtained. To better capture tax revenue at the individual level, marginal rates at the individual level should be changed on all levels to reflect levels that have worked historically. The arbitrary marginal rates currently in use should be phased out, and replaced with a continuum progressive rate system whereby a mathematical algorithm is used to tax income. Individual income taxation should start at the $5000 annual income level and at a rate of 1%, and for each additional dollar of income, the continuum progressive rate increases accordingly until it is maxed out at the upper end at a rate of 70% for annual income of $25+ million. Dividends and stock sales would similarly be taxed at the continuum progressive rate of the respective individual taxpayer. This model will make up for any tax revenue shortfalls of the integrated system. Moreover, this model will not negatively impact consumer spending across the the various income levels. [Studies show that income over $1 million does not contribute to consumer spending.]
BUT, I can only support such an integrated single tax system that is designed for maximum economic growth, ONLY WHEN three important conditions are met. First, by act of Congress through the construction of a new federal-based general incorporation statute (to supercede Delaware corporate law), the corporation must be stripped of its “artificial individual” status. The corporation should no longer be afforded certain Constitutional rights intended only for real, human individuals. Through this action, corporations would no longer be able to use shareholder capital to buy a political voice in Washington, for example, in the name of exercising First Amendment rights. Only the voice of the individual taxpayer should be heard in Washington. With an integrated tax system where corporate income is taxed only one time by the shareholder, the power of corporations in Washington would only increase. Measures will be needed to correct the negative repercussions of such a tax model. By act of Congress to supercede state incorporation statutes, specifically Delaware corporate law, the “artificial individual” framework can be overridden so that corporations may no longer contribute to political advertisements, political campaigns, and other lobbying and political activities. Henceforth, such activity may only be accomplished at the individual/shareholder level. As corporate power would increase through an integration tax system, this act of Congress is necessary to curb corporate influence in Washington. [Most corporate law and securities law experts will tell you that for years we have been moving progressively toward a federal-based corporate law structure to patch up problems created by Delaware law.]
Second, by act of Congress, shareholders, particularly minority-holding shareholders, must be given increased binding voting rights to have a legitimate say on a range of corporate issues such as executive compensation, board appointees, outsourcing and off-shoring operational activities, and mergers and acquisitions. Again, because corporate power will increase through an integrated tax system, corporate behavior must be curbed through a federal-based corporate law (exemplified in the previous paragraph), that, among other things, improves corporate governance and strengthens the role of the shareholder. A more democratic corporate governance structure where shareholders have increased voting rights will have significant positive effects on corporate behavior and help harness the anticipated increased business growth in a more constructive manner.
Third, and finally, by act of Congress and enforced through the Securities & Exchange Commission, all publicly-traded corporations must disclose social impact and environmental footprint data as a subsection of mandatory financial annual 10-K and quarterly 10-Q filings [as a footnote, I will tell you that I do not currently favor mandatory reporting of this data because it is cost prohibitive to many corporations; but, I do favor it if an integrated tax system is implemented]. With the benefits of an integrated tax system, specifically, accelerated economic activity, corporations must pay back to the public by partnering in the public effort to assist at-risk communities and to address critical environmental and resource consumption issues. The goal is to achieve a sustainable business and economic model; corporations must do more to help out with severe issues that call sustainability into question. Requiring mandatory “social” and “environmental” data reporting will help shareholders monitor corporate behavior toward these ends; wage rates for outsourced labor, water consumption, energy consumption, resource usage, are among the quantifiable data that would be required. Armed with these disclosures, through shareholder activism (afforded through increased shareholder voting rights), consumer activism (boycotts), and litigation via the SEC, corporate behavior can be altered so that it plays a more constructive role in helping governments and non-profits address critical social and environmental issues impacting our world.
The corporation has arguably emerged as the most powerful entity in the global public square. An integrated tax system will only strengthen its position in the world. The aforementioned congressional actions serves as compensation to society for the added benefit the corporate entity will receive as a result of maximized capital efficiencies and business growth. At the heart of this discussion is what social role ought the corporation play in the public square. The integrated tax system I propose, which will greatly improve capital efficiencies, will enable the corporation to pursue a new era of economic growth. Coupling the integrated tax system with the three congressional actions listed above, will help shape corporate behavior in a more constructive manner so that the corporation and global business activity is harnessed to serve the greater ends of the global community.
Peace
Jeremy
I've shared the figures in a prior blog: in 1980, gross national debt was less than a $1 trillion; now we are nearing $14 trillion with projections for it to balloon to $18-$20 trillion over the next decade. During that stretch, the federal government ran deficits each year except for a short window during the Clinton Administration. In the 1990s, the Clinton Administration and a Republican Congress utilized a "Pay As You Go" rule which led to a rare budget surplus. In the summer of 2009, the House passed a similar "Pay As You Go" bill; last month, the Senate barely passed the bill by a count of 60-40 -- every Republican voted against the measure. The Republican opposition vote is seen by political pundits as political expediency. Disgraceful. I wonder if Republicans will vote against President Obama's call to invest in nuclear power facilities and off-shore oil drilling -- two policies traditionally favored by Republicans? Environmentalists are slamming the Obama Administration on this one -- a sign again that Obama is a pragmatist by nature.
One of the great challenges we will face over the next several years is how to (1) put the U.S. economy on a sustainable growth path, while at the same time (2) increase tax revenues and (3) reduce federal spending. In the wake of the 2008 financial crisis, economists almost universally agree that federal spending (inspired by Keynesian economics) was the only thing that kept the economy from slipping into a depression because consumers were no longer spending, banks were no longer lending, and corporations were no longer investing. While there may be a time and a place for Keynesian economics, the same economists will tell you that it it too is unsustainable over the long term. As federal stimulus measures are phased out in the coming quarters, consumer spending must ramp up, banks must start lending, corporations must start investing -- AND, tax revenues must increase while federal spending must be cut to a level to create multiple periods of budget surpluses. This is an extremely difficult challenge to pull off. Is it an impossible one? It is impossible for us to solve this problem if we do not adopt a crisis mentality now, and start making some very difficult choices.
How do we put the economy on a sustainable growth path, while at the same time increase tax revenues and reduce federal spending? The answers will require hard choices -- some of which the Left will dislike, some of which the Right will dislike. On taxes, for example, here is my position:
Under current federal tax policy, corporate earnings are taxed at the front end on business income, and then are taxed again on the back end through stock sales (stock prices reflect a valuation of post-tax retained earnings) and through dividend distributions to shareholders. It is traditionally argued that this “classical” form of double-taxation distorts at least three financial and economic decisions: “(1) whether to invest in noncorporate rather than corporate form, (2) whether to finance investments with debt rather than equity, and (3) whether to retain rather than distribute earnings.” In a nutshell, this classical tax structure creates inefficiencies in the procurement and use of capital. These inefficiencies are problematic because economic activity and growth are negatively impacted.
Some propose a tax "integration" model so that corporate income is taxed only one time. Tax integrationists generally fall into two camps: (1) those who propose taxing corporate income at the corporate level, and (2) those who propose taxing corporate income only one time at the shareholder level. Under either approach, two significant challenges are raised: (1) “what should be the extent of U.S. taxation of U.S. corporate income paid to foreign investors and parent companies?”; and (2) “how should foreign taxes paid by U.S. companies on foreign income affect the U.S. taxation of U.S. shareholders on distribution of those earnings?” Tax integrationists do not agree on how to address these two problems. Some favor a series of new international treaties so that foreign investors are able to participate in the benefits of a U.S. integrated tax system; others argue for not extending the benefits of the integrated tax system to foreign investors. Further, some favor a pass-through of foreign tax credits for foreign taxes paid at the corporate level so that it is not double-taxed at the shareholder level; others oppose this approach because of the loss of tax revenue arising from foreign pass-through tax credits.
There are at least two other major issues that arise by only taxing corporate one time. First, everyone agrees that tax revenues will decline, and will have to be recouped through other means. Second, many argue that corporations have major benefits in society and that corporations should be required to pay more to compensate for those benefits. Both of these issues, as well as the two previously mentioned issues, must be addressed if a corporate tax integration model is ever going to pass the House and Senate and receive bi-partisan support.
History is always helpful for a context. From 1861 to 1873, no double taxation existed; corporate income was taxed one time at the shareholder level. Double-taxation through the taxing of dividends did not begin until the passage of the Revenue Act of 1936. But because of low tax rates on corporate income and high rates on major individual earners, the effects of double taxation did not become substantive until 1986. Following the Tax Reform Act of 1986 where maximum individual marginal rates dropped to historical lows, the relative tax burden on corporate-derived income increased substantially. [A historical perspective on individual marginal rates is also helpful: over the past 100 years, we have traditionally used a progressive marginal rate model where lowest income families were taxed at less than 5% on average and highest income families were taxed at more than 70% on average -- in between the these two levels, incomes were taxed on a progressive scale; this traditional scale dramatically changed in 1987 when top marginal rates dropped to 38.5% and lowest marginal rates increased to 11%.]
If there is going to be a serious discussion about implementing an integrated corporate tax system, then there must also be a reasonable response to the question of how the resulting tax revenue shortfall will be addressed. Everyone agrees that double-taxing corporate income creates a certain amount of capital inefficiencies, but the question is whether as a matter of public policy these inefficiencies are favorable to bearing inefficiencies elsewhere. Specifically, as the double-taxation model is phased out, taxes must be ramped up in other areas to make up the difference for the loss.
Taking account and consideration of all of these issues, I favor the mid-1800s model of taxing corporate-derived income only one time, at the marginal rate of the individual shareholder. In accord with this view, income from stock sales and dividend distributions would be taxed at the marginal rate of the individual shareholder. [As for capital outflows to foreign investors, I do not favor permitting foreign investors to take advantage of such a "one tax" system.]
Taxing corporate income only one time at the shareholder level will maximize capital efficiency and business growth. Increased economic activity will have positive derivative effects of a larger labor workforce by which additional tax revenue can be obtained. To better capture tax revenue at the individual level, marginal rates at the individual level should be changed on all levels to reflect levels that have worked historically. The arbitrary marginal rates currently in use should be phased out, and replaced with a continuum progressive rate system whereby a mathematical algorithm is used to tax income. Individual income taxation should start at the $5000 annual income level and at a rate of 1%, and for each additional dollar of income, the continuum progressive rate increases accordingly until it is maxed out at the upper end at a rate of 70% for annual income of $25+ million. Dividends and stock sales would similarly be taxed at the continuum progressive rate of the respective individual taxpayer. This model will make up for any tax revenue shortfalls of the integrated system. Moreover, this model will not negatively impact consumer spending across the the various income levels. [Studies show that income over $1 million does not contribute to consumer spending.]
BUT, I can only support such an integrated single tax system that is designed for maximum economic growth, ONLY WHEN three important conditions are met. First, by act of Congress through the construction of a new federal-based general incorporation statute (to supercede Delaware corporate law), the corporation must be stripped of its “artificial individual” status. The corporation should no longer be afforded certain Constitutional rights intended only for real, human individuals. Through this action, corporations would no longer be able to use shareholder capital to buy a political voice in Washington, for example, in the name of exercising First Amendment rights. Only the voice of the individual taxpayer should be heard in Washington. With an integrated tax system where corporate income is taxed only one time by the shareholder, the power of corporations in Washington would only increase. Measures will be needed to correct the negative repercussions of such a tax model. By act of Congress to supercede state incorporation statutes, specifically Delaware corporate law, the “artificial individual” framework can be overridden so that corporations may no longer contribute to political advertisements, political campaigns, and other lobbying and political activities. Henceforth, such activity may only be accomplished at the individual/shareholder level. As corporate power would increase through an integration tax system, this act of Congress is necessary to curb corporate influence in Washington. [Most corporate law and securities law experts will tell you that for years we have been moving progressively toward a federal-based corporate law structure to patch up problems created by Delaware law.]
Second, by act of Congress, shareholders, particularly minority-holding shareholders, must be given increased binding voting rights to have a legitimate say on a range of corporate issues such as executive compensation, board appointees, outsourcing and off-shoring operational activities, and mergers and acquisitions. Again, because corporate power will increase through an integrated tax system, corporate behavior must be curbed through a federal-based corporate law (exemplified in the previous paragraph), that, among other things, improves corporate governance and strengthens the role of the shareholder. A more democratic corporate governance structure where shareholders have increased voting rights will have significant positive effects on corporate behavior and help harness the anticipated increased business growth in a more constructive manner.
Third, and finally, by act of Congress and enforced through the Securities & Exchange Commission, all publicly-traded corporations must disclose social impact and environmental footprint data as a subsection of mandatory financial annual 10-K and quarterly 10-Q filings [as a footnote, I will tell you that I do not currently favor mandatory reporting of this data because it is cost prohibitive to many corporations; but, I do favor it if an integrated tax system is implemented]. With the benefits of an integrated tax system, specifically, accelerated economic activity, corporations must pay back to the public by partnering in the public effort to assist at-risk communities and to address critical environmental and resource consumption issues. The goal is to achieve a sustainable business and economic model; corporations must do more to help out with severe issues that call sustainability into question. Requiring mandatory “social” and “environmental” data reporting will help shareholders monitor corporate behavior toward these ends; wage rates for outsourced labor, water consumption, energy consumption, resource usage, are among the quantifiable data that would be required. Armed with these disclosures, through shareholder activism (afforded through increased shareholder voting rights), consumer activism (boycotts), and litigation via the SEC, corporate behavior can be altered so that it plays a more constructive role in helping governments and non-profits address critical social and environmental issues impacting our world.
The corporation has arguably emerged as the most powerful entity in the global public square. An integrated tax system will only strengthen its position in the world. The aforementioned congressional actions serves as compensation to society for the added benefit the corporate entity will receive as a result of maximized capital efficiencies and business growth. At the heart of this discussion is what social role ought the corporation play in the public square. The integrated tax system I propose, which will greatly improve capital efficiencies, will enable the corporation to pursue a new era of economic growth. Coupling the integrated tax system with the three congressional actions listed above, will help shape corporate behavior in a more constructive manner so that the corporation and global business activity is harnessed to serve the greater ends of the global community.
Peace
Jeremy
Monday, February 15, 2010
Winds of Political Change Sweep Through Indiana; Iran Will Be Armed With Nukes
Indiana residents took it on the chin today when Senator Evan Bayh made the surprise announcement that he will not seek a third term. Given that Bayh is one of the very few voices of moderation and compromise, in this era of heavily divisive partisan politics, Bayh's decision is a blow to the American political landscape in general. Again, it highlights how difficult it is in the current environment for incumbents to hold their seats.
Since the mid-1990s the winds of political change have been sweeping through our country, as Independent voters swelled to a current majority. Independent voters like myself are fed up with big dollar interest groups running Washington. And we are tired of politicians bitching at each other on the TV screen instead of working together to construct sound legislation and public policies that are capable to sustain the American dream for generations to come. When the "leadership" cannot reason and act outside of the powers over the purse or beyond the party line, they are no longer leaders -- they are puppets. Washington is one big puppet show.
Because of structural impediments, it is very difficult for a third party to have a substantial place in Washington. But if there is a time when a third party is possible, it is now. That many people are sick of the puppet parties.
What is baffling to me, is that the Republican Party and Democratic Party are on the brink of blasting their cozy duopoly into the history books. How smart is that? Not very. All these two knucklehead parties had to do is get along (even a little bit), write some good legislation together, and don't bow to the party line or to the powerful dollar nearly as often, and in so doing Independents would have remained a distant minority. I can only liken their simple-mindedness to two powerful companies that previously agreed to work together to dominate a market with a duopoly, and then totally ruining it with tit-for-tat litigation (AMD-Intel with chips come immediately to mind; HP and Canon with inkjet cartridges also comes to mind).
Boneheads.
Speaking of boneheads, Iranian leader Mahmoud Ahmadinejad is about to put his cozy little seat in jeopardy. Young Iranians have taken to the streets in recent months with hopes to bring positive change to their country. Ahmadinejad and the Revolutionary Guard are responding with a iron fist. Hopefully, the will of the people will prevail.
It is uncertain what the state of Iran will look like years from now. My hope is that those who have longed for a real democracy will one day have it. What is for certain, whether it is a democratic Iran or dictatorship Iran, it will be an Iran armed with nukes. The world is incapable of stopping it just as it was not possible to stop China, India, Pakistan, and North Korea from obtaining them.
American leadership has over the past many years voiced opposition to Iranian nukes; this was hot air and Iranian leaders knew that. The only real course of action that the U.S. can take is set up anti-missile defense systems in various locations in the Middle East and in eastern Europe as it is in the process of doing (the U.S. is currently in talks with Bulgaria to set up a shield there; the U.S. is also deploying a missile shield to Qatar, United Arab Emirates, Bahrain and Kuwait).
Remember the day when there were no nukes? Neither do I.
*sigh*
I heard the bells on Christmas day
Their old familiar carols play
And mild and sweet the words repeat,
Of peace on earth, good will to men.
I thought how as the day had come,
The belfries of all Christendom
Had roll'd along th' unbroken song
Of peace on earth, good will to men.
And in despair I bow'd my head:
"There is no peace on earth," I said,
"For hate is strong, and mocks the song
Of peace on earth, good will to men."
Then pealed the bells more loud and deep:
"God is not dead, nor doth He sleep;
The wrong shall fail, the right prevail,
With peace on earth, good will to men."
'Til ringing, singing on its way,
The world revolved from night to day,
A voice, a chime, a chant sublime,
Of peace on earth, good will to men!
By Henry Wadsworth Longfellow -- published in December 1864 in the midst of the American Civil War.
Peace
Jeremy
Since the mid-1990s the winds of political change have been sweeping through our country, as Independent voters swelled to a current majority. Independent voters like myself are fed up with big dollar interest groups running Washington. And we are tired of politicians bitching at each other on the TV screen instead of working together to construct sound legislation and public policies that are capable to sustain the American dream for generations to come. When the "leadership" cannot reason and act outside of the powers over the purse or beyond the party line, they are no longer leaders -- they are puppets. Washington is one big puppet show.
Because of structural impediments, it is very difficult for a third party to have a substantial place in Washington. But if there is a time when a third party is possible, it is now. That many people are sick of the puppet parties.
What is baffling to me, is that the Republican Party and Democratic Party are on the brink of blasting their cozy duopoly into the history books. How smart is that? Not very. All these two knucklehead parties had to do is get along (even a little bit), write some good legislation together, and don't bow to the party line or to the powerful dollar nearly as often, and in so doing Independents would have remained a distant minority. I can only liken their simple-mindedness to two powerful companies that previously agreed to work together to dominate a market with a duopoly, and then totally ruining it with tit-for-tat litigation (AMD-Intel with chips come immediately to mind; HP and Canon with inkjet cartridges also comes to mind).
Boneheads.
Speaking of boneheads, Iranian leader Mahmoud Ahmadinejad is about to put his cozy little seat in jeopardy. Young Iranians have taken to the streets in recent months with hopes to bring positive change to their country. Ahmadinejad and the Revolutionary Guard are responding with a iron fist. Hopefully, the will of the people will prevail.
It is uncertain what the state of Iran will look like years from now. My hope is that those who have longed for a real democracy will one day have it. What is for certain, whether it is a democratic Iran or dictatorship Iran, it will be an Iran armed with nukes. The world is incapable of stopping it just as it was not possible to stop China, India, Pakistan, and North Korea from obtaining them.
American leadership has over the past many years voiced opposition to Iranian nukes; this was hot air and Iranian leaders knew that. The only real course of action that the U.S. can take is set up anti-missile defense systems in various locations in the Middle East and in eastern Europe as it is in the process of doing (the U.S. is currently in talks with Bulgaria to set up a shield there; the U.S. is also deploying a missile shield to Qatar, United Arab Emirates, Bahrain and Kuwait).
Remember the day when there were no nukes? Neither do I.
*sigh*
I heard the bells on Christmas day
Their old familiar carols play
And mild and sweet the words repeat,
Of peace on earth, good will to men.
I thought how as the day had come,
The belfries of all Christendom
Had roll'd along th' unbroken song
Of peace on earth, good will to men.
And in despair I bow'd my head:
"There is no peace on earth," I said,
"For hate is strong, and mocks the song
Of peace on earth, good will to men."
Then pealed the bells more loud and deep:
"God is not dead, nor doth He sleep;
The wrong shall fail, the right prevail,
With peace on earth, good will to men."
'Til ringing, singing on its way,
The world revolved from night to day,
A voice, a chime, a chant sublime,
Of peace on earth, good will to men!
By Henry Wadsworth Longfellow -- published in December 1864 in the midst of the American Civil War.
Peace
Jeremy
Wednesday, February 10, 2010
A Short Account of the History of the Corporation: PART 4 (The Rise of the American Business Corporation)
Previously, we saw how the many states shifted from the use of special charters to using general incorporation statutes. This was an important legal development making it much easier to bring businesses to life since it was no longer required that the business enterprise serve a public purpose.
Several other legal developments would revolutionize the American business corporation in the 19th century.
One catalyst was a landmark U.S. Supreme Court decision in 1819 that determined corporations have certain private rights that the state could not ignore. In Trustees of Dartmouth College v. Woodward, Chief Justice Marshall took a strong position in favor of private enterprise to be free of undue federal intrusion.
Speaking of the corporation’s characteristics of immortality and individuality, he writes:
"A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence… Among the most important are immortality, and… individuality; properties, by which a perpetual succession of many persons are considered as the same, and may act as a single individual."
As to what these characteristics confer upon a corporation, he adds:
"They enable a corporation to manage its own affairs, and to hold property… But this being does not share in the civil government of the country, unless that be the purpose for which it was created. Its immortality no more confers on it political power, or a political character, than immortality would confer such power or character on a natural person. It is no more a state instrument, than a natural person exercising the same powers would be."
This latter paragraph is interesting to me given what we have see between the corporation and the federal government in the bailouts stemming from the 2008 financial crisis, and from the recent U.S. Supreme Court decision that conferred upon the corporation the right to exercise political speech. If we read Marshall's opinion strictly, the federal government would be barred from taking over corporations and amend corporate charters to prevent corporate failures; further, corporations would be barred from exercising any form of political speech and political power. I make this point to highlight the fact that the corporation is constantly evolving, and since this is true, what is will not always be -- the public can continue to change the corporation so that it functions in a more sustainable manner.
Speaking precisely on the issue of whether state governments or the federal government have the power to alter the character of the corporation, is the central issue of Marshall's opinion. He writes:
"The benefit to the public is considered as an ample compensation for the faculty it confers, and the corporation is created. If the advantages to the public constitute a full compensation for the faculty it gives, there can be no reason for exacting a further compensation, by claiming a right to exercise over this artificial being, a power which changes its nature, and touches the fund, for the security and application of which it was created. There can be no reason for implying in a charter, given for a valuable consideration, a power which is not only not expressed, but is in direct contradiction to its express stipulations. From the fact, then, that a charter of incorporation has been granted, nothing can be inferred, which changes the character of the institution, or transfers to the government any new power over it."
What the Marshall Court essentially holds is that the charter granted by the state to a corporation “constitutes a contract” where the “consideration” (compensation) are the rights granted. And if there has been a consideration coupled with an acceptance amounting to a legally-protected contract, the contract cannot be amended by the government without the acquiescence of the corporation (unless it was chartered as a public enterprise). Thus, to be legitimate, the corporation need not offer an additional “consideration” such as to engage in public works, for example; the corporation was now free to operate toward its own ends.
Despite the Marshall Court’s reliance on contractual language in describing the state-to-corporation relationship, courts for the most part continued “moving away from enforcing corporate rights as if they were contractual.” This reflects the general sentiments of state legislatures, like Kentucky and New Hampshire for example, that argued states have the power to “alter, amend, or abrogate” granted charters to prevent corporate “fraud and abuses” in order to serve the public good. Nonetheless, the effect of the Marshall Court on the legacy of the corporate form in America cannot be overstated as it granted authority to the corporation the “power to govern” itself perpetually.
Another side-note that we will take up later: Though states continued to retain the power to alter charters as a means to regulate corporations, this proved an extremely fragmented and inadequate model for regulation. The eventual development of an external, federal-based regulatory framework proved necessary to monitor corporate behavior doing business across state lines and frequently across national borders.
Peace
Jeremy
Several other legal developments would revolutionize the American business corporation in the 19th century.
One catalyst was a landmark U.S. Supreme Court decision in 1819 that determined corporations have certain private rights that the state could not ignore. In Trustees of Dartmouth College v. Woodward, Chief Justice Marshall took a strong position in favor of private enterprise to be free of undue federal intrusion.
Speaking of the corporation’s characteristics of immortality and individuality, he writes:
"A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence… Among the most important are immortality, and… individuality; properties, by which a perpetual succession of many persons are considered as the same, and may act as a single individual."
As to what these characteristics confer upon a corporation, he adds:
"They enable a corporation to manage its own affairs, and to hold property… But this being does not share in the civil government of the country, unless that be the purpose for which it was created. Its immortality no more confers on it political power, or a political character, than immortality would confer such power or character on a natural person. It is no more a state instrument, than a natural person exercising the same powers would be."
This latter paragraph is interesting to me given what we have see between the corporation and the federal government in the bailouts stemming from the 2008 financial crisis, and from the recent U.S. Supreme Court decision that conferred upon the corporation the right to exercise political speech. If we read Marshall's opinion strictly, the federal government would be barred from taking over corporations and amend corporate charters to prevent corporate failures; further, corporations would be barred from exercising any form of political speech and political power. I make this point to highlight the fact that the corporation is constantly evolving, and since this is true, what is will not always be -- the public can continue to change the corporation so that it functions in a more sustainable manner.
Speaking precisely on the issue of whether state governments or the federal government have the power to alter the character of the corporation, is the central issue of Marshall's opinion. He writes:
"The benefit to the public is considered as an ample compensation for the faculty it confers, and the corporation is created. If the advantages to the public constitute a full compensation for the faculty it gives, there can be no reason for exacting a further compensation, by claiming a right to exercise over this artificial being, a power which changes its nature, and touches the fund, for the security and application of which it was created. There can be no reason for implying in a charter, given for a valuable consideration, a power which is not only not expressed, but is in direct contradiction to its express stipulations. From the fact, then, that a charter of incorporation has been granted, nothing can be inferred, which changes the character of the institution, or transfers to the government any new power over it."
What the Marshall Court essentially holds is that the charter granted by the state to a corporation “constitutes a contract” where the “consideration” (compensation) are the rights granted. And if there has been a consideration coupled with an acceptance amounting to a legally-protected contract, the contract cannot be amended by the government without the acquiescence of the corporation (unless it was chartered as a public enterprise). Thus, to be legitimate, the corporation need not offer an additional “consideration” such as to engage in public works, for example; the corporation was now free to operate toward its own ends.
Despite the Marshall Court’s reliance on contractual language in describing the state-to-corporation relationship, courts for the most part continued “moving away from enforcing corporate rights as if they were contractual.” This reflects the general sentiments of state legislatures, like Kentucky and New Hampshire for example, that argued states have the power to “alter, amend, or abrogate” granted charters to prevent corporate “fraud and abuses” in order to serve the public good. Nonetheless, the effect of the Marshall Court on the legacy of the corporate form in America cannot be overstated as it granted authority to the corporation the “power to govern” itself perpetually.
Another side-note that we will take up later: Though states continued to retain the power to alter charters as a means to regulate corporations, this proved an extremely fragmented and inadequate model for regulation. The eventual development of an external, federal-based regulatory framework proved necessary to monitor corporate behavior doing business across state lines and frequently across national borders.
Peace
Jeremy
Tuesday, February 9, 2010
Twinkies, Slurpees, Healthcare, and the Joy of Cooking
First Lady Michelle Obama is set to launch a campaign to fight childhood obesity. Recent figures state that roughly 1/3 of American children are obese. Between the lure of Playstation video games that draw children to the TV screen and away from outdoor activity, and the convenience and low cost of a McDonalds Dollar Menu, coupled with the fact that parents are busier than ever and are finding it difficult to cook healthy meals, it is not hard to see why there is a problem with childhood obesity. "TheRoot.com," a multimedia company offering African-American views, is running an article showing data that the epidemic is even more severe in the black community. With many urban public schools cutting back on sports programs due to cost cutting, and the fact that most urban communities are ill-suited to provide an accessible and affordable outlet for physical activity, there's no question that structural problems present significant challenges to the long-term health of urban youth.
In a previous blog entry, I discussed multiple facets that collectively make our healthcare system unaffordable to millions of Americans; remove anti-trust exemption, permit purchasing of plans across state lines, tort reform, a gov't subsidized high risk health insurance plan for those with added health risks (similar to gov't flood plain insurance), education reforms for legal and medical study costs, increase usage of generic brand medications -- all of these things can help reduce costs. We can add, decreasing the risks of obesity to that list. According to the latest numbers -- obesity is costing our healthcare system $147 billion a year. To create a sustainable healthcare model, one that is affordable for generations to come, every facet that is contributing to escalating costs must be addressed. It is perfect timing that Michelle Obama is about to launch this important initiative.
It is time to put down the twinkie and slurpee and pick up the joy of cooking.
You've heard me say before that a particularly God-given attribute that makes us so very human is the power to create. All around us, we see the results of this powerful gift. Cooking is another byproduct of our creative abilities. There is something fundamental and pure to me about starting with a pot: adding extra virgin olive oil along with a little more of my own olive oil mix that has been flavored over time with crushed red pepper flake, and add butter, chopped onion, chopped mushroom, and chopped garlic and simmer a few minutes... and then add balsamic vinegar and red wine and anchovy, and simmer a few more minutes, and then add tomato paste and chicken stock, and diced and crushed tomatoes, and add brown sugar and salt and pepper and red pepper flake and various italian seasonings, and allow to cook for at least a half an hour, and then add to the sauce the handcrafted meatballs created with care, and allow the flavors of the meatballs to meld with the tomato sauce for several more minutes... serve it up over pasta, with fresh made garlic bread, and a glass of red wine...
When enjoying a wonderfully tasty meal like this -- created by your own hands and for the pleasure of family and friends and for you -- you wonder why restaurants and fast food joints remain in business. We have the ability to create amazing dishes in our own home, and through cooking create an atmosphere of working together and dialogue. It is a wonderful gift, indeed.
The joy of cooking is one of my most favorite and simple pleasures in life that I look forward to every day.
"You can find your way across this country using burger joints the way a navigator uses stars." - Charles Kuralt
Peace
Jeremy
In a previous blog entry, I discussed multiple facets that collectively make our healthcare system unaffordable to millions of Americans; remove anti-trust exemption, permit purchasing of plans across state lines, tort reform, a gov't subsidized high risk health insurance plan for those with added health risks (similar to gov't flood plain insurance), education reforms for legal and medical study costs, increase usage of generic brand medications -- all of these things can help reduce costs. We can add, decreasing the risks of obesity to that list. According to the latest numbers -- obesity is costing our healthcare system $147 billion a year. To create a sustainable healthcare model, one that is affordable for generations to come, every facet that is contributing to escalating costs must be addressed. It is perfect timing that Michelle Obama is about to launch this important initiative.
It is time to put down the twinkie and slurpee and pick up the joy of cooking.
You've heard me say before that a particularly God-given attribute that makes us so very human is the power to create. All around us, we see the results of this powerful gift. Cooking is another byproduct of our creative abilities. There is something fundamental and pure to me about starting with a pot: adding extra virgin olive oil along with a little more of my own olive oil mix that has been flavored over time with crushed red pepper flake, and add butter, chopped onion, chopped mushroom, and chopped garlic and simmer a few minutes... and then add balsamic vinegar and red wine and anchovy, and simmer a few more minutes, and then add tomato paste and chicken stock, and diced and crushed tomatoes, and add brown sugar and salt and pepper and red pepper flake and various italian seasonings, and allow to cook for at least a half an hour, and then add to the sauce the handcrafted meatballs created with care, and allow the flavors of the meatballs to meld with the tomato sauce for several more minutes... serve it up over pasta, with fresh made garlic bread, and a glass of red wine...
When enjoying a wonderfully tasty meal like this -- created by your own hands and for the pleasure of family and friends and for you -- you wonder why restaurants and fast food joints remain in business. We have the ability to create amazing dishes in our own home, and through cooking create an atmosphere of working together and dialogue. It is a wonderful gift, indeed.
The joy of cooking is one of my most favorite and simple pleasures in life that I look forward to every day.
"You can find your way across this country using burger joints the way a navigator uses stars." - Charles Kuralt
Peace
Jeremy
Monday, February 8, 2010
Republicans Fight Banking Reform Designed to End "Too Big to Fail" Bailouts
When the House passed its version of banking reform in December 2009, no surprise Republicans down the line voted against the bill. We can take from their vote that Republicans are for Bush-TARP policies to use hundreds of billions of taxpayer dollars to bail out future big banking failures. Senate Republicans are also fighting the Senate version of financial reform. I've read through the major points of each bill (I doubt that many who oppose the bill have done the same), and here is essentially what they do:
(1) Wall Street firms and Larger Banking Institutions will have to increase capital requirements so that at all times they are adequately capitalized.
(2) Wall Street firms and Larger Banking Institutions will have to share in the cost of paying into an Emergency Fund totaling $150 billion that will be used to aid any one of them should they become financially troubled.
(3) Derivatives (mortgage backed securities, for example) and hedge funds will now be regulated just like any other stock, investment security, and investment house.
(4) The Federal Reserve will now face regularly scheduled audits designed to monitor its behavior.
(5) The Federal Reserve and other federal regulators will have increased powers to break up financial institutions that create a system risk.
(6) Shareholders of companies can now use their proxy voting powers on executive compensation packages; the vote, however, will be non-binding and board of directors will continue to have the power to pass compensation packages as they choose. (The provision is merely designed to make Board of Directors pay attention to the sentiment of their shareholders; if I had my way, I would make the shareholder vote binding.)
(7) The various financial regulatory bodies will now come under a single agency. (This proposal is designed to mimic what we saw with national security where the various law enforcement agencies were brought under a new "Homeland Security" agency.)
(8) Perhaps most important of all, if a Wall Street firm or large banking institution has taken on too much risk and begins to fail, it will either be bailed out by its competitors or it will simply fail -- it will now be unlawful to use public funds to bail them out.
(9) Consumers will see increased protections; namely, through the establishment of an independent consumer financial protection group, all of that fine-print legal language we see on credit card contracts and various other financial contracts, will now be required to be conveyed in a single one-page statement that summarizes the key points of each contract so that consumers know exactly what they are doing before signing.
In a nutshell, what these proposals do is end "too big to fail" bailout policy. Under these proposals, if a large banking institution fails -- then it will fail in an orderly fashion with the risk of that failure being shared by its competitors - not the taxpayer. Oddly, Republicans, who are touting "common-sense" conservatism (remember, it used to be "compassionate conservatism), are unwilling to pass the commonsense proposals listed above. On the wrong side of history, again.
My take on the proposals: I would prefer to see the consumer protection portions in a separate bill and not a part of the financial banking reforms. That said, if it came down to having both or nothing, then my vote would be for both. The banking proposals are critical to protect our national financial security. The one key proposal that you will find missing from these proposals is the new "Volcker Rule" that President Obama unveiled in January; recall, the "Volcker" Rule would now make it unlawful for commercial banking institutions (which now includes every bank -- there are no longer pure investment banks out there) to own and invest in hedge funds, and it limits the amount of leverage (debt) that can be used on derivatives and other proprietary trading practices. Wall Street is fighting the "Volcker Rule" like a mad dog -- a clear sign that this proposal has real meat to it. It will be interesting to see how House and Senate Dems attempt to incorporate the "Volcker Rule." The Volcker Rule is critical if we want to finally put an end to Wall Street firms making enormously risky bets that are impossible to pay off should they fail (again, some day I will write on the crisis stemming from the firm Long Term Capital Management in the late 1990s and the similarities to the investment risks taken just prior to the 2008-2009 financial crisis.)
Peace
Jeremy
(1) Wall Street firms and Larger Banking Institutions will have to increase capital requirements so that at all times they are adequately capitalized.
(2) Wall Street firms and Larger Banking Institutions will have to share in the cost of paying into an Emergency Fund totaling $150 billion that will be used to aid any one of them should they become financially troubled.
(3) Derivatives (mortgage backed securities, for example) and hedge funds will now be regulated just like any other stock, investment security, and investment house.
(4) The Federal Reserve will now face regularly scheduled audits designed to monitor its behavior.
(5) The Federal Reserve and other federal regulators will have increased powers to break up financial institutions that create a system risk.
(6) Shareholders of companies can now use their proxy voting powers on executive compensation packages; the vote, however, will be non-binding and board of directors will continue to have the power to pass compensation packages as they choose. (The provision is merely designed to make Board of Directors pay attention to the sentiment of their shareholders; if I had my way, I would make the shareholder vote binding.)
(7) The various financial regulatory bodies will now come under a single agency. (This proposal is designed to mimic what we saw with national security where the various law enforcement agencies were brought under a new "Homeland Security" agency.)
(8) Perhaps most important of all, if a Wall Street firm or large banking institution has taken on too much risk and begins to fail, it will either be bailed out by its competitors or it will simply fail -- it will now be unlawful to use public funds to bail them out.
(9) Consumers will see increased protections; namely, through the establishment of an independent consumer financial protection group, all of that fine-print legal language we see on credit card contracts and various other financial contracts, will now be required to be conveyed in a single one-page statement that summarizes the key points of each contract so that consumers know exactly what they are doing before signing.
In a nutshell, what these proposals do is end "too big to fail" bailout policy. Under these proposals, if a large banking institution fails -- then it will fail in an orderly fashion with the risk of that failure being shared by its competitors - not the taxpayer. Oddly, Republicans, who are touting "common-sense" conservatism (remember, it used to be "compassionate conservatism), are unwilling to pass the commonsense proposals listed above. On the wrong side of history, again.
My take on the proposals: I would prefer to see the consumer protection portions in a separate bill and not a part of the financial banking reforms. That said, if it came down to having both or nothing, then my vote would be for both. The banking proposals are critical to protect our national financial security. The one key proposal that you will find missing from these proposals is the new "Volcker Rule" that President Obama unveiled in January; recall, the "Volcker" Rule would now make it unlawful for commercial banking institutions (which now includes every bank -- there are no longer pure investment banks out there) to own and invest in hedge funds, and it limits the amount of leverage (debt) that can be used on derivatives and other proprietary trading practices. Wall Street is fighting the "Volcker Rule" like a mad dog -- a clear sign that this proposal has real meat to it. It will be interesting to see how House and Senate Dems attempt to incorporate the "Volcker Rule." The Volcker Rule is critical if we want to finally put an end to Wall Street firms making enormously risky bets that are impossible to pay off should they fail (again, some day I will write on the crisis stemming from the firm Long Term Capital Management in the late 1990s and the similarities to the investment risks taken just prior to the 2008-2009 financial crisis.)
Peace
Jeremy
Saturday, February 6, 2010
Sarah Palin for President? Tea Partiers = Crazies? And, North Korea Courting Capitalism?
Sarah Palin, please run for President in 2012... so President Obama wins by a landslide.
It is almost beyond belief to think that several million votes and a heartbeat was all that separated Palin from assuming the reigns as Commander-in-Chief of the U.S.
Scary.
The rhetoric fuming from Tea Partiers reminds me of another fringe group... Scientologists. Crazy, you say? Try this on for size...
A tea partier says to a reporter covering the National Tea Party Convention: "The mainstream media is the enemy." Scientologists have long declared journalists and the media as enemies. The latest evidence can be found on Google.com where a court injunction required Google to take down a website which was the leading global critic of Scientology practices. Where are we... China?
Tea Partiers are advocating for some form of purity test that political candidates must pass. Scientology can help with that: they have a seemingly endless list of purification programs and purification packages to choose from.
An overwhelming majority of tea partiers are opposed to openly gay men and women teaching in public schools. Scientology is about as anti-gay as they come.
Tea Party = Scientology? No.
Wacko = Wacko? Yes.
No need to waste any more thought on these jokers. On a more serious topic, I am reading that the poster child of all that is sane, North Korea's Kim Jong-il is courting international businesses to invest in its country so that it can become "mighty and prosperous by 2012." Orascom, an Eqyptian telecom company, who is partnered with American banking giant Morgan Stanley, is listening and is planning to invest in N. Korea's telecom infrastructure.
North Korea gaining the keys to a powerful capitalistic engine would be a tragedy. It must first be required to adopt democratic principles so that a representative system is in place to internally promote and protect human rights. It was wrong for an endless list of American businesses to invest in China over these many decades, without a mandate that the Chinese first adopt a democratic form of government. It was equally tragic when Intel and other western businesses began investing in Vietnam without a similar mandate that the Vietnamese adopt democracy.
History has proven that capitalism must be constantly checked by citizens otherwise the rights of people will be reduced to nothing more than an "expense" -- an externality -- that must give way to "efficiency" and "profitability."
Peace
Jeremy
It is almost beyond belief to think that several million votes and a heartbeat was all that separated Palin from assuming the reigns as Commander-in-Chief of the U.S.
Scary.
The rhetoric fuming from Tea Partiers reminds me of another fringe group... Scientologists. Crazy, you say? Try this on for size...
A tea partier says to a reporter covering the National Tea Party Convention: "The mainstream media is the enemy." Scientologists have long declared journalists and the media as enemies. The latest evidence can be found on Google.com where a court injunction required Google to take down a website which was the leading global critic of Scientology practices. Where are we... China?
Tea Partiers are advocating for some form of purity test that political candidates must pass. Scientology can help with that: they have a seemingly endless list of purification programs and purification packages to choose from.
An overwhelming majority of tea partiers are opposed to openly gay men and women teaching in public schools. Scientology is about as anti-gay as they come.
Tea Party = Scientology? No.
Wacko = Wacko? Yes.
No need to waste any more thought on these jokers. On a more serious topic, I am reading that the poster child of all that is sane, North Korea's Kim Jong-il is courting international businesses to invest in its country so that it can become "mighty and prosperous by 2012." Orascom, an Eqyptian telecom company, who is partnered with American banking giant Morgan Stanley, is listening and is planning to invest in N. Korea's telecom infrastructure.
North Korea gaining the keys to a powerful capitalistic engine would be a tragedy. It must first be required to adopt democratic principles so that a representative system is in place to internally promote and protect human rights. It was wrong for an endless list of American businesses to invest in China over these many decades, without a mandate that the Chinese first adopt a democratic form of government. It was equally tragic when Intel and other western businesses began investing in Vietnam without a similar mandate that the Vietnamese adopt democracy.
History has proven that capitalism must be constantly checked by citizens otherwise the rights of people will be reduced to nothing more than an "expense" -- an externality -- that must give way to "efficiency" and "profitability."
Peace
Jeremy
Friday, February 5, 2010
International Stem Cell Corporation (ISCO) - 2010 Conference Call: My Take on the Call
Today I listened in on International Stem Cell Corporation's (ISCO) annual conference call. Here's my take on company chairman Ken Aldrich's remarks in the call, the content of which he describes as a "roadmap" for what investors can expect in 2010:
First, Aldrich spent some time discussing why ISCO is not like other stem cell companies. One of the primary reasons that ISCO is different is that it has developed and patented the technology to create its own in-house universal stem cell bank; you will see in recent literature from ISCO that the name of this stem cell bank is called "UniStemCell." Whereas company's like Geron (GERN) have to forge licensing agreements to obtain stem cells, ISCO has its own stem cell bank to draw from. This asset allows ISCO to develop therapeutic applications in-house as well as license the use of its stem cell lines to other research companies. Aldrich did not use the term, but other literature I have found from ISCO describes this business model as an "Intel Inside" approach. By licensing its cell lines to other companies, ISCO intends to derive revenues both from the use of the cell lines as well as from any advancements that become viable products. Unlike other stem cell companies that are primarily focused on clinical trials to find specific cures, ISCO is primarily focused on distributing its cell lines to other companies.
Second, Aldrich points out that ISCO's proprietary stem cell technology (human parthogenic stem cell -- hpSC) also differentiates it from other stem cell companies. Whereas other stem cell companies face ethical problems by using fertilized eggs and human embryos, ISCO's technology uses non-fertilized eggs. From donated eggs, ISCO's hpSCs are pluripotent, meaning that the stem cells can become virtually any cell type of the human body; Aldrich describes an "unlimited" potential as to the range of degenerative diseases that may ultimately find cures because of this technology. ISCO's hpSCs also do not have the same negative effects of embryonic stem cells. Specifically, ISCO's stem cells don't have the problems of immune rejection as other stem cells do. ISCO has signed agreements with a couple invitro centers in California whereby carefully selected egg donors can donate their unfertilized eggs to ISCO. Through a process that takes roughly 9 months from receipt of the donor egg, ISCO can then create an "immortal" stem cell line that lasts forever. ISCO has estimated that roughly 50 to 100 carefully selected donors representing the various races and ethnicities can cover all of the distinctive genetic differences of the global population. In addition to its stem cell bank in California, ISCO is looking to partner with companies in other parts of the world whereby it can identify the right donors from different ethnic groups.
Third, ISCO is focusing some of its in-house research on treatments for the eye. Using its stem cell technology, ISCO has developed the first cornea ever created in a petri dish. ISCO plans on selling these corneas to pharmaceutical and research companies. This is another important ethical development from ISCO because traditionally, pharmaceutical companies use live rabbits to test toxicity on their eyes. ISCO's corneas may finally put an end to this horrible practice. ISCO expects to derive revenue from its cornea toxicity testing tools in the near future. Sticking with the eye, ISCO is also close to a "breakthrough" for a therapeutic application for the retina; no other details were provided.
Fourth, ISCO is focusing some of its in-house research on treatments for liver disease. Specifically, the company is focusing in on applications for acute liver failure. ISCO's liver cells created from its stem cells may be able to cause some level of "regeneration" of the liver. While Aldrich does not foresee whole livers being recreated, he does see the potential for some regenerative features. No timeline was provided as to when we might expect an announcement on its liver technology but Aldrich said that the company is getting "close."
Finally, and perhaps the most exciting news of all, is that ISCO currently has a skin cream application that is being tested and verified by independent third parties. He expects this process to take a month or two. Previously, ISCO announced the hiring of an experienced executive from the skin care industry who will be charged with developing a marketing and distribution plan for the skin care product. ISCO's skin cream has been tested in-house on facial wrinkles around the eyes and lips. Aldrich described the results from in-house testing of its skin cream as a "significant" difference, a "demonstrable" difference from other skin care products currently on the market. Aldrich sees this advanced skin cream, which was also created from its stem cell technology, as "distinctive" from anything else out there. Aldrich did not provide a timeline but I gather from his remarks that the company will start selling a skin care product some time this year. I've done some research on price points and distribution, and I think that ISCO can sell a vial of this cream for a minimum of $200 for each vial; I would like to see the price point closer to $300 to $400. Aldrich said that no decision has been made as to whether it will distribute the product through an established skin care company or whether it will distribute it alone. For long-term shareholders, it is best if ISCO sells the skin cream itself. While this approach will have significant upfront capital requirements (ISCO doesn't have much cash... which means ISCO would have to use some form of debt financing), over the long term the earnings and profit potential from producing the skin cream in-house will far outweigh the short-term costs. My guess is that we should know more in the next couple months about which way ISCO will go. I also think that ISCO should contact the folks at Oprah and see if they can get the product on her show.
In 2010, we can expect more key hirings and more patents to come down the pipeline. And for those concerned about its cash position, Aldrich did not seem too concerned. He says that the company is in a "strong" position in terms of its capital requirements. Aldrich also said that he doesn't want to see too much more dilution of its shares, so I am not sure where he is expecting to get the cash from... unless he expects to start generating significant revenue sooner rather than later. Stay tuned. And for a further boost of confidence, Aldrich says he is not at all concerned with competition in the field.
My take from the call is this: in 2010 we can expect ISCO to start seeing revenues from at least three streams - (1) cornea toxicity testers... probably within months, (2) stem cell lines... probably by the end of the year, and (3) an advanced skin cream... my guess is we will see the cream in the market by the fall and certainly before the holiday shopping season. My guess is that we also see ISCO's shares being traded on Nasdaq by the end of the year. I'm still not sure how the company plans to finance its operations in the near term. I know Aldrich is not at all concerned about this, but shareholders nevertheless should be because according to what I am reading from the company's most recent financial filings, ISCO has less than half million left in cash and it burns at least that much cash each month. We'll know soon enough how Aldrich plans to address this issue.
Disclosure: I do not currently own shares of ISCO... but I am a prospective investor.
Peace
Jeremy
First, Aldrich spent some time discussing why ISCO is not like other stem cell companies. One of the primary reasons that ISCO is different is that it has developed and patented the technology to create its own in-house universal stem cell bank; you will see in recent literature from ISCO that the name of this stem cell bank is called "UniStemCell." Whereas company's like Geron (GERN) have to forge licensing agreements to obtain stem cells, ISCO has its own stem cell bank to draw from. This asset allows ISCO to develop therapeutic applications in-house as well as license the use of its stem cell lines to other research companies. Aldrich did not use the term, but other literature I have found from ISCO describes this business model as an "Intel Inside" approach. By licensing its cell lines to other companies, ISCO intends to derive revenues both from the use of the cell lines as well as from any advancements that become viable products. Unlike other stem cell companies that are primarily focused on clinical trials to find specific cures, ISCO is primarily focused on distributing its cell lines to other companies.
Second, Aldrich points out that ISCO's proprietary stem cell technology (human parthogenic stem cell -- hpSC) also differentiates it from other stem cell companies. Whereas other stem cell companies face ethical problems by using fertilized eggs and human embryos, ISCO's technology uses non-fertilized eggs. From donated eggs, ISCO's hpSCs are pluripotent, meaning that the stem cells can become virtually any cell type of the human body; Aldrich describes an "unlimited" potential as to the range of degenerative diseases that may ultimately find cures because of this technology. ISCO's hpSCs also do not have the same negative effects of embryonic stem cells. Specifically, ISCO's stem cells don't have the problems of immune rejection as other stem cells do. ISCO has signed agreements with a couple invitro centers in California whereby carefully selected egg donors can donate their unfertilized eggs to ISCO. Through a process that takes roughly 9 months from receipt of the donor egg, ISCO can then create an "immortal" stem cell line that lasts forever. ISCO has estimated that roughly 50 to 100 carefully selected donors representing the various races and ethnicities can cover all of the distinctive genetic differences of the global population. In addition to its stem cell bank in California, ISCO is looking to partner with companies in other parts of the world whereby it can identify the right donors from different ethnic groups.
Third, ISCO is focusing some of its in-house research on treatments for the eye. Using its stem cell technology, ISCO has developed the first cornea ever created in a petri dish. ISCO plans on selling these corneas to pharmaceutical and research companies. This is another important ethical development from ISCO because traditionally, pharmaceutical companies use live rabbits to test toxicity on their eyes. ISCO's corneas may finally put an end to this horrible practice. ISCO expects to derive revenue from its cornea toxicity testing tools in the near future. Sticking with the eye, ISCO is also close to a "breakthrough" for a therapeutic application for the retina; no other details were provided.
Fourth, ISCO is focusing some of its in-house research on treatments for liver disease. Specifically, the company is focusing in on applications for acute liver failure. ISCO's liver cells created from its stem cells may be able to cause some level of "regeneration" of the liver. While Aldrich does not foresee whole livers being recreated, he does see the potential for some regenerative features. No timeline was provided as to when we might expect an announcement on its liver technology but Aldrich said that the company is getting "close."
Finally, and perhaps the most exciting news of all, is that ISCO currently has a skin cream application that is being tested and verified by independent third parties. He expects this process to take a month or two. Previously, ISCO announced the hiring of an experienced executive from the skin care industry who will be charged with developing a marketing and distribution plan for the skin care product. ISCO's skin cream has been tested in-house on facial wrinkles around the eyes and lips. Aldrich described the results from in-house testing of its skin cream as a "significant" difference, a "demonstrable" difference from other skin care products currently on the market. Aldrich sees this advanced skin cream, which was also created from its stem cell technology, as "distinctive" from anything else out there. Aldrich did not provide a timeline but I gather from his remarks that the company will start selling a skin care product some time this year. I've done some research on price points and distribution, and I think that ISCO can sell a vial of this cream for a minimum of $200 for each vial; I would like to see the price point closer to $300 to $400. Aldrich said that no decision has been made as to whether it will distribute the product through an established skin care company or whether it will distribute it alone. For long-term shareholders, it is best if ISCO sells the skin cream itself. While this approach will have significant upfront capital requirements (ISCO doesn't have much cash... which means ISCO would have to use some form of debt financing), over the long term the earnings and profit potential from producing the skin cream in-house will far outweigh the short-term costs. My guess is that we should know more in the next couple months about which way ISCO will go. I also think that ISCO should contact the folks at Oprah and see if they can get the product on her show.
In 2010, we can expect more key hirings and more patents to come down the pipeline. And for those concerned about its cash position, Aldrich did not seem too concerned. He says that the company is in a "strong" position in terms of its capital requirements. Aldrich also said that he doesn't want to see too much more dilution of its shares, so I am not sure where he is expecting to get the cash from... unless he expects to start generating significant revenue sooner rather than later. Stay tuned. And for a further boost of confidence, Aldrich says he is not at all concerned with competition in the field.
My take from the call is this: in 2010 we can expect ISCO to start seeing revenues from at least three streams - (1) cornea toxicity testers... probably within months, (2) stem cell lines... probably by the end of the year, and (3) an advanced skin cream... my guess is we will see the cream in the market by the fall and certainly before the holiday shopping season. My guess is that we also see ISCO's shares being traded on Nasdaq by the end of the year. I'm still not sure how the company plans to finance its operations in the near term. I know Aldrich is not at all concerned about this, but shareholders nevertheless should be because according to what I am reading from the company's most recent financial filings, ISCO has less than half million left in cash and it burns at least that much cash each month. We'll know soon enough how Aldrich plans to address this issue.
Disclosure: I do not currently own shares of ISCO... but I am a prospective investor.
Peace
Jeremy
Wednesday, February 3, 2010
Sign Petition for Constructive Political Dialogue at DemandQuestionTime.com
Copy and paste the following web link to your browser, and sign the petition that calls for more Q&A time between Democrats and Republicans...
http://demandquestiontime.com/
U.S. Senate Suffering From White Blight: Blacks, Latinos, and Native American Indians Are Woefully Under-Represented
I take pride in the fact that when we elected Barack Obama to be our President, it sent a message to the rest of the world that America is still a great nation -- made exceptional neither by the stock piles of our terrifying nukes nor by the trademarks of our vast corporations. Rather our strength comes from our impenetrable beliefs that the labels that once separated us -- slave and free, black and white, male and female -- are no more. That we have finally chosen a black man to be our leader is a remarkable testimony of how far we have come as a people.
But we have much more work to do.
We are a melting pot of tongues, tribes, and nations, yet, even today, many places of power remain woefully under-represented by Blacks, Latinos, and Native American Indians. From the corporate boardroom to the Pentagon to the Senate Floor, diversity remains much more of a feel-good rhetoric than it is good and real results. Currently, not a single Native American Indian is seated in the U.S. Senate; Native American Indians make up about 1.5% of the U.S. population. Latinos only have 3 seats in the U.S. Senate, despite making up roughly 14% of the U.S. population. And the worst statistic of all, there is only one black U.S. Senator currently seated. Women also remain under-represented in the U.S. Senate -- only 17 U.S. Senators are women.
The fact that even today, we are far more likely to see blacks and whites playing together on the gym floor or on the football field, or working together on the factory floor or on the battlefield, than on the Senate Floor, should draw our attention. The lack of diverse representation in this important place of power makes our politics weak and our policies weaker.
We have much more work to do.
Peace
Jeremy
But we have much more work to do.
We are a melting pot of tongues, tribes, and nations, yet, even today, many places of power remain woefully under-represented by Blacks, Latinos, and Native American Indians. From the corporate boardroom to the Pentagon to the Senate Floor, diversity remains much more of a feel-good rhetoric than it is good and real results. Currently, not a single Native American Indian is seated in the U.S. Senate; Native American Indians make up about 1.5% of the U.S. population. Latinos only have 3 seats in the U.S. Senate, despite making up roughly 14% of the U.S. population. And the worst statistic of all, there is only one black U.S. Senator currently seated. Women also remain under-represented in the U.S. Senate -- only 17 U.S. Senators are women.
The fact that even today, we are far more likely to see blacks and whites playing together on the gym floor or on the football field, or working together on the factory floor or on the battlefield, than on the Senate Floor, should draw our attention. The lack of diverse representation in this important place of power makes our politics weak and our policies weaker.
We have much more work to do.
Peace
Jeremy
Investing Intelligently: Part 5 (Examining a Company's Free Cash Flow)
Last time we identified a couple important things to look out for on the Balance Statement. It wasn't an all-inclusive list, but rather a quick way to identify important financial attributes of a prospective investment.
Sticking with this same approach, next we will take a look at the company's Cash Flow Statement to calculate an important metric frequently used by investors: Free Cash Flow (FCF). In simple terms, a company's FCF for the year or for a quarter, tells you how much cash the company has left in a period after it has accounted for all of its expenses that were required to pay for its ongoing operations and for growth. The calculation is a quick way to tell you about the company's financial health; cash is king in business. A company with a healthy amount of FCF can use its cash to pay out dividends or buy back stock or acquire another company or expand its operations. All of these things can reward you as a shareholder.
The basic calculation for FCF is simple. FCF = Cash Flow From Operations - Capital Expenditures. This calculation can be made more complex by factoring in other things, but if you use this simple formula, it will tell you basically what you want to know. So, if you pull up a company's Annual 10-K or Quarterly 10-Q on SEC.gov, in it you will find a Statement of Cash Flows. On the Statement of Cash Flows, you should find a line that reads something like this: "Net Cash From Operating Activities" or "Operating Cash" or "Cash From Operations" or something to that effect. Also on the Statement of Cash Flows, you should find a line that reads "Capital Expenditures" or "Additions to Property and Equipment" or something similar; capital expenditures are basically the costs for new buildings or manufacturing plants or equipment -- what the company purchases in order to expand its operations.
Like most financial data, in a vacuum the info is of little use. We want to put the company's FCF in context. So, for example, let's say we have calculated Company X's free cash flow for each of the last three to five years. This would give us an idea of how Company X's free cash flow is trending.
We can also take Company X's FCF for the past year (or trailing four quarters) and use it in another simple formula: Enterprise Value divided by FCF --> EV/FCF. Enterprise Value (EV) is a quick way of calculating what the company is currently being valued at on the stock market. A simple EV calculation is this: EV = Market Capitalization + Long-term Debt - Cash & Equivalents. We've gone over Long-Term Debt and Cash & Equivalents (Short-term or Marketable Securities). A company's market cap is easy to calculate: it is the current price of its stock multiplied by the total number of diluted shares outstanding. Instead of the Price to Earnings Ratio (PE), most investors find that the EV/FCF more accurately paints a picture of the company's current price on the market (its EV) in comparison to its free cash flow for the past 12 months.
With the EV/FCF ratio we can then look at how Company X is priced in comparison to the EV/FCF of its competitors. So, let's say Company X has an EV/FCF of 12, while Company Y's EV/FCF is 10. On the face of these figures, it would appear that Company Y is cheaper. But if Company X is growing faster than Company Y, then Company X is deserving of a higher multiple -- and it may be cheaper after all. Consequently, we want to know how Company X's EV/FCF measures up against its projected annual growth (G) rate over the next year or so; an easy ratio to use is EV/FCF/G. Once we have an idea of how Company X's EV/FCF compares to its projected growth rate, then we can use this info to compare it against its competitors. Going back to our example: let's say Company X's projected annual growth rate is 12% for the next few years, giving it an EV/FCF/G of 1; let's say Company Y's projected annual growth is only 5% over the next few years, giving it an EV/FCF/G of 2. Based on these calculations, Company X, with EV/FCF/G of 1 is a better value for investors.
Finally, Company X's current EV/FCF can be compared against its EV/FCF in previous years. This may tell you if the market is currently over-pricing or under-pricing Company X's stock in comparison to prior years.
Next, we will look at another ratio investors frequently use: Return on Invested Capital (ROIC).
Peace
Jeremy
Sticking with this same approach, next we will take a look at the company's Cash Flow Statement to calculate an important metric frequently used by investors: Free Cash Flow (FCF). In simple terms, a company's FCF for the year or for a quarter, tells you how much cash the company has left in a period after it has accounted for all of its expenses that were required to pay for its ongoing operations and for growth. The calculation is a quick way to tell you about the company's financial health; cash is king in business. A company with a healthy amount of FCF can use its cash to pay out dividends or buy back stock or acquire another company or expand its operations. All of these things can reward you as a shareholder.
The basic calculation for FCF is simple. FCF = Cash Flow From Operations - Capital Expenditures. This calculation can be made more complex by factoring in other things, but if you use this simple formula, it will tell you basically what you want to know. So, if you pull up a company's Annual 10-K or Quarterly 10-Q on SEC.gov, in it you will find a Statement of Cash Flows. On the Statement of Cash Flows, you should find a line that reads something like this: "Net Cash From Operating Activities" or "Operating Cash" or "Cash From Operations" or something to that effect. Also on the Statement of Cash Flows, you should find a line that reads "Capital Expenditures" or "Additions to Property and Equipment" or something similar; capital expenditures are basically the costs for new buildings or manufacturing plants or equipment -- what the company purchases in order to expand its operations.
Like most financial data, in a vacuum the info is of little use. We want to put the company's FCF in context. So, for example, let's say we have calculated Company X's free cash flow for each of the last three to five years. This would give us an idea of how Company X's free cash flow is trending.
We can also take Company X's FCF for the past year (or trailing four quarters) and use it in another simple formula: Enterprise Value divided by FCF --> EV/FCF. Enterprise Value (EV) is a quick way of calculating what the company is currently being valued at on the stock market. A simple EV calculation is this: EV = Market Capitalization + Long-term Debt - Cash & Equivalents. We've gone over Long-Term Debt and Cash & Equivalents (Short-term or Marketable Securities). A company's market cap is easy to calculate: it is the current price of its stock multiplied by the total number of diluted shares outstanding. Instead of the Price to Earnings Ratio (PE), most investors find that the EV/FCF more accurately paints a picture of the company's current price on the market (its EV) in comparison to its free cash flow for the past 12 months.
With the EV/FCF ratio we can then look at how Company X is priced in comparison to the EV/FCF of its competitors. So, let's say Company X has an EV/FCF of 12, while Company Y's EV/FCF is 10. On the face of these figures, it would appear that Company Y is cheaper. But if Company X is growing faster than Company Y, then Company X is deserving of a higher multiple -- and it may be cheaper after all. Consequently, we want to know how Company X's EV/FCF measures up against its projected annual growth (G) rate over the next year or so; an easy ratio to use is EV/FCF/G. Once we have an idea of how Company X's EV/FCF compares to its projected growth rate, then we can use this info to compare it against its competitors. Going back to our example: let's say Company X's projected annual growth rate is 12% for the next few years, giving it an EV/FCF/G of 1; let's say Company Y's projected annual growth is only 5% over the next few years, giving it an EV/FCF/G of 2. Based on these calculations, Company X, with EV/FCF/G of 1 is a better value for investors.
Finally, Company X's current EV/FCF can be compared against its EV/FCF in previous years. This may tell you if the market is currently over-pricing or under-pricing Company X's stock in comparison to prior years.
Next, we will look at another ratio investors frequently use: Return on Invested Capital (ROIC).
Peace
Jeremy
Tuesday, February 2, 2010
House Democrats Pass "Castle Nugent" Act
Last week, House Democrats passed a bill that turns "Castle Nugent Farms" in the U.S. Virgin Islands into a national historic site. The "Castle Nugent National Historic Site Act of 2010" was passed by a vote of 240 Yeas from Democrats (to their credit, 4 Dems did vote against the pork bill), and was opposed by 171 Republicans. The Act is projected to cost $26 million over the next five years to purchase about half of the privately owned land. Further, it is estimated that $1 million is needed to form a development plan with an additional $1 million in annual costs to manage the new area.
This Act wasn't reported on any major media outlets, and given its location, it wouldn't be. I found one article published down in the islands that reported on the bill -- it received roughly 600 views... that's it.
I am a strong advocate for protecting our precious national lands and landmarks, not only so future generations may enjoy them, but more importantly to me, so that we protect delicate ecosystems and the rich natural life these support. We have a moral obligation to preserve such areas, and create an environment that is sustainable.
But is the preservation of Castle Nugent necessary to meet that end? Hmmm. The Act sounds like wasted spending to me. Judge for yourself -- here's Castle Nugent's website...
http://www.caribbeanguesthouse.com/
Peace
Jeremy
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