Corporate Inversions – Do you think this is going to become an issue?

Corporate inversions are not a new issue, but it has had its run-ups over the years, as illustrated by Google’s Ngram Viewer:

What is a corporate inversion? From Investopedia, an inversion is simply,

Re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.

But based on the anecdotal evidence alone, this issue is going to heat up. The Wall Street Journal has hosted an excellent short take on how these inversion deals work:

Many observers intuitively consider this simply an unpatriotic exploitation of a broken tax code and one of its remarkable loopholes. One legal counsel’s comment pretty much says it all, “it’s just too good of an opportunity to waste.” Others consider the expatriation of tax revenue the result of disproportionate burden on businesses and corporations. Either way, there is a race to mergers as business leaders and legal strategists believe this run is coming to an end. The Wall Street Journal has recently published a flurry of articles and posts on this subject with one conspicuous standout, the pharmaceutical industry:

The race by companies to sidestep U.S. taxes reached a fever pitch as two drug firms unveiled foreign mergers that will help them slash their tax rates…[there is a]  growing craze for so-called inversions, in which a U.S. company buys a foreign target and adopts its lower tax rate or establishes a holding company in a country with a low tax rate.

The deals, mostly in the pharmaceutical industry but also cropping up in retail, consumer and manufacturing, have come fast and furious amid two trends: rebounding appetite for large, transformative mergers and acquisitions; and fear that the opportunity to use the cross-border tax strategy soon could disappear.

Pharmaceutical Industry Inversion (WSJ)

Regardless of the cause, the reality is that the U.S. government stands to lose significantly from this export of tax revenue. From an another WSJ article:

How much revenue does the U.S. Treasury stand to lose from corporate tax inversions? It is difficult to say precisely, but one estimate puts the figure at close to $20 billion.

A nonpartisan congressional research panel said the U.S. would receive an additional $19.46 billion over a decade if most new tax inversions were essentially halted with proposed changes to the tax code. The estimate, by researchers at the Joint Commission on Taxation, is based on estimates from previous inversions, in which U.S. companies make overseas acquisitions to gain tax advantages, and doesn’t take into account deals being made now…calculating how much the U.S. Treasury would lose is nearly impossible because of a dearth of reliable tax data from companies’ public filings and the variables in how companies can structure their businesses, tax experts say.

However this is resolved, I think we can all agree that when a corporate trend that generates the above results is being referred to as, “all the rage,” or, “too good an opportunity to waste,” one wonders how, as yet another Wall Street Journal article reports, Congress Is Split on Taxing of Corporate Inversions.

How Optimism Bias Changes Long-Term Projections

Weekend reading: IMF Working Paper, Growth: Now and Forever? by Giang Ho and Paolo Mauro. Those who do not follow the global market in general and the BRICs in particular (or other emerging economies), may not see a correlation to the U.S. market. In reviewing the paper, I would focus more on the psychological behavior of investors and the capital markets, rather than the particulars of emerging markets, their fundamentals, or the drivers in these markets, many of which are quite different from any of the G7. The premise is clearly stated in the abstract,

Forecasters often predict continued rapid economic growth into the medium and long term for countries that have recently experienced strong growth. Using long-term forecasts of economic growth from the IMF/World Bank staff Debt Sustainability Analyses for a panel of countries, we show that the baseline forecasts are more optimistic than warranted by past international growth experience. Further, by comparing the IMF’s World Economic Outlook forecasts with actual growth outcomes, we show that optimism bias is greater the longer the forecast horizon.

Just what do the authors mean by optimism bias? It’s frankly, little more than wish fulfillment. In the authors’ opinions, it is adding more weight to recent occurrences, then extrapolating those positive outcomes across the spectrum of events, where “forecasters often predict continued rapid economic growth into the medium and long term for countries that have recently experienced strong growth.” Again, this does not have a direct correlation to recent events in the U.S., as this economy has experienced forward yet modest growth in the last five years. But could this say anything about the continued expansion in the capital markets, which have little relation to economic events as they tend to affect the average person, employment and a service driven economy? In other words, although the markets seem to be pushing forward at dizzying heights, most would say there is nothing to indicate any kind of an eminent correction. Is the same bias at work in our capital markets? You decide. But the paper makes for an interesting case for why, in spite of argumentation for why global growth may in fact be slow in the coming years, forecasters continue to project strong growth, where predicting “economic growth into the medium term and beyond is notoriously difficult.” It would seem there are lessons to be learned here about bias from any perspective and how this bias has a tendency to affect the view of the future.

Ignorance is NOT Bliss

“The only real mistake is the one from which we learn nothing” – John Powell

Right now the overall job market is an undeniable difficulty for us as a country. Thinking about this reminds me of a few things from some years back. The above quote causes me to reflect on a few difficult times and painful past lessons – experiences which are now filtered with hindsight (and the advantage of 20/20 vision as it were). But I am thankful for the experience of many of these difficulties, though some have taken years to get to that point. After one painful business experience in particular, I was encouraged by a friend (at a different stage in life and much more experienced than I) to journal out what I had learned. I remember that at that time, I didn’t want to hear of it, and I certainly didn’t want to talk about it, even alone within the very safe pages of a journal. All I could think about was the frustration I was experiencing from my own decisions, some of them hasty. But learning is an ongoing, dynamic process.

Sometimes, I believe, we don’t feel quite ready to learn from what we are presently going through. Which is part of the reason I am determined to learn from decades past, because our current problems span way beyond few years of misguided choices. I am optimistic too, because I think for many, there is an honest inquiry into present difficulties, and why past approaches may no longer be relevant. Ultimately, I want to be a better learner, and a better practitioner of that knowledge and experience.

IBM’s Mysterious “Big Blue” Nickname

In honor of IBM’s conference call, I wanted to revisit the topic of the provenance of the nickname, Big Blue.

IBM's Mysterious Ubiquitous Name - Big Blue. Logo "bluing" courtesy http://howbehindwow.com/

IBM’s Mysterious Ubiquitous Name – Big Blue. Logo “bluing” courtesy http://howbehindwow.com/

I like urban legends not because they are believable, but because of what they say about human nature and sociology. Urban legends are also amusing not necessarily to believe, but they are fun to engage in (as if to believe) the idea of them being true, such as us humans ingesting eight spiders per year in our sleep.

A search for the provenance of the name Big Blue turns up very little historical documentation. Some say the term was first used in the early 1980′s, with the self-obviating point of the adjective big. But that doesn’t explain much. There are plenty of organizations with significant size, extent, influence, market share or intensity, and we don’t automatically add big to their description. The blue part seems to have no plausible theories at all. I have tried in vain to find the origins of this name, as I found myself instinctively using it years ago before ever realizing it was an ubiquitous nickname. I searched Google Books for the term and have been able to move the date back to 1975 with this mention. But the truth is, no one really knows the origin, including IBM:

How did IBM get its distinctive nickname, “Big Blue?” While the name came about organically, with no known single source, the first official reference in print to IBM as “Big Blue” was in BusinessWeek magazine:

“No company in the computer business inspires the loyalty that IBM does, and the company has accomplished this with its almost legendary customer service and support … As a result, it is not uncommon for customers to refuse to buy equipment not made by IBM, even though it is often cheaper. ‘I don’t want to be saying I should have stuck with the “Big Blue,”’ says one IBM loyalist. ‘The nickname comes from the pervasiveness of IBM’s blue computers’” (No. 1’s Awesome Strategy, BusinessWeek, June 8, 1981).

So there you have it. Isn’t that great, kind of mysterious and interesting? Or at least, it’s fun to engage in any of the possible explanations.

Center of the U.S. Population 1790-2010

The U.S. Census Bureau has some of the most interesting data visualizations, many of which help illustrate the magnitude of the data being presented. According to the Bureau, after each decennial census is tabulated, “the Census Bureau calculates the center of population. The National Mean Center of Population based on the 2010 Census is near Plato, Mo., an incorporated village in Texas County.” The mean center is fictitious of course, for the purpose of illustration as the Bureau goes on to explain, “the center is determined as the place where an imaginary, flat, weightless and rigid map of the United States would balance perfectly if all residents were of identical weight.” And the movement is in a southwesterly direction as the interactive map below illustrates: 

What is even more interesting are the suggestions for why the migration has moved in this direction. The Bureau states that the westerly direction has historically been the result of a “sweep [that] reflects the settling of the frontier, waves of immigration and the migration west and south.” But it is fair to say that although the imaginary mean center still resides in the South, a very large and disproportionate part of the population (as well as commerce) has settled in the West in general and California in particular. And there is a clear movement (though not a net loss) from California and the Southwest. The economic and sociological reasons for this would be very interesting to explore.

CYNK: The “NINJA Loan” of the Capital Market

Do we remember the NINJA loans? Or has it been too long – six or seven years? You know, loans made to folks with no income, job or assets for that matter. Does THAT sound familiar, and for that matter completely insane? Investopedia explains just why such loans are so risky,

While the specifics of any NINJA loan can change, most offer the lender a low initial rate, which is then increased after a few periods of payment. The borrower is hoping for the value of their property to appreciate significantly, allowing them to repay the loan with the newly found equity. However, when the property doesn’t appreciate, many borrowers cannot make the repayment.

This of course explains the full implications on the CDO market as outlined in an IMF paper which, oddly enough, seems less filtered by hindsight as it was written in 2008, so close to the mayhem and actually written in June of that year preceding the Lehman bankruptcy:

The damage was propagated at each stage of the complicated process in which a risky home loan was originated, then became an asset-backed security that then formed part of a collateralized debt obligation (CDO) that was rated and sold to investors.

The paper is worth a re-read as it underscores the fundamentals of the madness of the crowds, the reckless history of much lending activity (not the first time there has been a banking crash), followed by an absence of liquidity, panic, crash and finally, a backstopping by the government.

Of course the case of CYNK is quite different from the CDO market crisis mentioned above. But there are similarities of behavior, especially as they relate to knowingly engaging in fraudulent behavior, and the predictable irrationality of the crowd. And unfortunately, in the case of a pump and dump (or whatever this is), no backstopping is on the way.

Outside of those flipping round turns based on oscillators, algorithms and signals – the assumption is that this crowd knows what they’re doing – does anyone ostensibly investing in a security like this actually read, or even glance at the financial statements? And what about the qualitative data that should accompany the quarterly and annual reports, such as an absence of filing? No, unfortunately, all of the handwringing and analysis is pretty much foolishness. All you needed to know was the basic ‘NINJA’ equivalent found right there in the SEC filings:

No Income:

CYNK No Income

No Assets:

CYNK No Assets

No filing.

No dice.

And finally, this, the footnote on going concern (emphasis mine):

The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. These factors raise substantial doubt about its ability to continue as a going concern. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan to obtain such resources for the Company include: sales of equity instruments; traditional financing, such as loans; and obtaining capital from management and significant stockholders sufficient to meet its minimal operating expenses. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans.

Enough said. All the other anecdotes and, “meet the mysterious executives” behind the mythical unicorn, is just noise.

Population Shifts After Ten Years: 2002-2003 and 2012-2013

According to the U.S. Census, population shift has occurred for the following reasons:

Spurred in part by growth of the energy sector, some metropolitan and micropolitan statistical areas in North Dakota and west Texas are now experiencing rapid population gains, while growth has slowed or halted for some formerly fast-growing areas in the South and West.

What you immediately notice are the dark green shaded areas (representing 3+ percent growth), many of which that were, of course, where the height of the madness was occurring during the real estate boom. Some of these areas were the southwest states and especially California (generally anywhere east of the San Andreas Fault). As well as selected areas in southern states, and even a few high-growth inland areas that saw a tremendous ramp up during the early to mid-2000s such as Idaho.

The last ten seconds of the video shows a contra trend, practically wiping out growth area by area in the same manner that it appeared ten years prior. Corresponding to the quote above regarding the impetus for the current migration in recent years, you see 3+ percent growth in North Dakota as well as the current popularity of Texas. Another very interesting shift is from the north western, Reno area of Nevada to the north eastern area of the same state. What was driving that growth?

At the risk of sounding a bit like Pudd’nhead Wilson for pouring over such things, additional data sets and customizable maps for metropolitan and micropolitan statistical areas can be found here, the interactive map here.

The Myth and Romance of Los Angeles – Available at Last

What is ostensibly the best documentary on the City of Los Angeles (and a 95/90 Tomatometer) has at long last, been scheduled to be released on DVD. If you had not heard of the film, there is this, and little else according to IMDB,

In this documentary, Thom Andersen examines in detail the ways the city has been depicted, both when it is meant to be anonymous and when itself is the focus. Along the way, he illustrates his concerns of how the real city and its people are misrepresented and distorted through the prism of popular film culture. Furthermore, he also chronicles the real stories of the city’s modern history behind the notorious accounts of the great conspiracies that ravaged his city that reveal a more open and yet darker past than the casual viewer would suspect.

In addition to being an excellent descriptive paragraph, that’s the kind of stuff myth is made of.

But what is really driving the cult status is the film’s elusive nature as noted in a post today:

Los Angeles Plays Itself is a story of how L.A. has been portrayed on screen, its thesis unfolding through hundreds of iconic film clips. But the biggest reason that Thom Andersen’s legendary documentary has reached a near-cult status is that, due to copyright issues, the film has never been properly released in theaters or on DVD. Until now.

In a remarkable statement, the post goes on to punctuate just how interesting this film is, “it’s probably the most important media study ever conducted on the city—maybe any city!—and no one has been able to see it.” It’s remarkable that business and legal wranglings could eclipse something like this, for a decade.

 

The Sociology of Californians and Wealth Disparity

No matter what your background, leaning, or even possibly, previously held beliefs, there is no denying what many people sense anecdotally at a minimum, and now backed up by a growing body of data: income inequality is on people’s minds. Every economic forum I have attended in the last three years has made mention of this, whether the event was delivered by an economist, politician or business leader. The Field Research Corporation released a study with the following findings,

Majorities of Californians are dissatisfied with the way income and wealth in the state are distributed and believe the gap between the rich and the rest of the population is greater now than in the past. Yet, the public is divided about the extent to which government should try to reduce the wealth gap. In addition, Californians are evenly split when asked about raising the state minimum wage beyond its already scheduled increases.

Regarding the last section cited above, the results are exactly as expected when dealing with any public policy issue that involves the two major parties. Quite honestly, I think that is the part of the poll that most people are least interested in, due to the cynicism and general lack of civility in the discussion of public policy when either party stands to gain or lose as a result of an issue.

There is a very interesting note to this poll as it relates to U.S. born California residents versus foreign-born immigrants,

U.S.-born Californians are more likely to report dissatisfaction with the wealth gap and feel it is greater than in the past. However, they are less apt to feel that government should be doing a lot to try to reduce the gap, and a majority opposes increasing the state minimum wage beyond its already scheduled increases than the foreign-born public.

Foreign-born immigrants, on the other hand, are not nearly as dissatisfied with the way income is distributed in California and are less apt to feel it is greater now than in the past. Yet, a plurality supports government taking a more active role to reduce the wealth disparity, and a majority supports increasing the state minimum wage.

So there is an odd, inverse relationship of opinion among all respondents depending on where they were born and how they feel about the variance in income distribution. And that very same inverse relationship exists among the same respondents on the role of government in resolving this problem. In an interesting footnote to this discussion, the Field Poll found the same pattern to be true among the California Latino population, “majorities of California Latinos born in the U.S. say they are dissatisfied with the way income and wealth are distributed, while Latinos born outside the U.S. are more likely to be satisfied.”

The material point of the survey is the margin of majority who hold these views, cutting across a number of sociological backgrounds as shown in the table below:

Field Poll Income Inequality