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Tax Inversions-A Rant

A savvy businessman once told me “it’s important to know what problem you are trying to solve”.

Let’s ignore for the moment whether or not Treasury or the IRS had the power to change the rules on so-called tax inversions without Congressional action. (The power they said they didn’t have only a few months ago.)

Rather, let’s focus on what problem we are trying to solve. That is, why is the greatest country on earth chasing companies away? Shouldn’t the U.S. be the place that companies want to locate their headquarters?

Imagine this: the U.S. legal structure and tax regime was so attractive that Mercedes, Toyota, Astra Zeneca, Samsung, Total, Singapore Air, Banco Santander, Petrobras, Heineken, Fujitsu, Nokia, SAP, Audi, Tata Group, Lenovo, Pirelli, Deutsche Bank, Honda, LG, Hyundai, Roche, Credit Suisse, Four Seasons, Siemens, Phillips, Bridgestone, Anglo-America, DeBeers, Volkswagen, Canon,  L’Oréal, Swatch, Armani, LVMH, Toshiba, H&M, Mahindra, Aldi, Kubota, Onex, Ducati, ABB, Pemex, Saudi-Aramco, Hudson Bay, Panasonic, Nestle, Unilever, Tesco, Nissan, Royal Dutch Shell, Guinness, Michelin, Rolex, Sony, Axis Group, Swiss Re, Barclays, DBS, Ikea, Uniqlo, Ferrari, Maersk, Carrefour, British Tobacco,  Rio Tinto Zinc, Mittel, Reliance Group, HSBC, BP, BMW, Richemont, Zara, Canadian Pacific, ING, and Commerzbank all rushed to move their headquarters here. Wouldn’t that help income inequality?

 Wouldn’t that set off a wave of prosperity?

Wouldn’t it be a good thing?

What problem are we trying to solve?

You can buy my latest book: Survive and Prosper, Fifty Steps to Job and Career Security on Amazon Kindle. It’s a steal at $2.99.


Don’t Die of F****** Pneumonia

One of my cousins was recently admitted to the hospital with pneumonia, and went straight into the ICU. People tend to ignore pneumonia, or minimize its seriousness. You might have even heard people talking about “walking pneumonia”. That, in technical terms, is BS. Pneumonia is a badass illness.

According to Centers for Disease Control, 53,000 people died of pneumonia last year.
For those of us over 65, vaccinations are recommended, with the usual exceptions for certain conditions. And it is recommended for many under 65 with certain conditions. There are two different vaccines that cover different strains. You need both shots. Of course it isn’t foolproof. The vaccines aren’t 100% effective, and new strains emerge. Still, there is no reason to get seriously ill from a strain that a vax would have likely prevented.

If you are over 65 and haven’t had the shots, go see your doc. Don’t screw around. And if you are younger, check with your parents, other relatives and friends to make sure they’ve gotten the shots.

It’s likely that a lot of those 53,000 didn’t have to die.
Why Stock Buybacks Are Dumb

Stock buybacks are all the rage. There is even an investing newsletter called Total Yield that adds dividends and stock repurchases and uses that measure as a key criterion for investment decisions.

Despite its widespread popularity, I’m not crazy about stock buybacks. In fact, they are increasingly signs of dumb management. Here’s why:
  1. They are frequently used as a palliative to offset bad news.  About to issue an earnings release with a sales decline and a miss to analyst estimates? Throw in a stock buyback to see if it will relieve some investor pain, or even better, moderate a certain stock price decline.
  2. It doesn’t return money to shareholders; it gives money to people who no longer want to be shareholders. Real believers in a company’s story want to hold the stock. Who sells into a buyback? People who no longer believe.
  3. It raises questions about management motives. The proxy report, with all those new government-required compensation disclosures, is now as long as or longer than the financial statements. Is management somehow incented on earnings per share growth? Even if revenue doesn’t grow? Even if earnings don’t increase- just shares decrease? Easy to bury that in those endless proxy statements.
  4. Is that the best that management can do?  Aside from Apple and perhaps Microsoft, what company has more cash than it can readily deploy above its cost of capital? Now, I know that plenty of managers have wasted a lot of shareholders’ money on bad acquisitions (Time Warner/AOL), failed products (New Coke), and poorly executed international expansions (Target). If there is simply no place a company can find in its market space to put money to work with a reasonable expectation that it will return its cost of capital, then it is right to return it to shareholders. Otherwise, long-term holders want to see the money put to work.
  5. Aren’t special dividends better? OK, there may be some minor personal tax rate differences. But companies like The Buckle [BKE: NYSE] and RLI Corp [RLI: NYSE] have a history of issuing special dividends when management believes they’ve accumulated excess cash. Since that really is returning cash to shareholders, isn’t that better?
  6. It indicates a lack of confidence in the future. A company sitting on a pile of cash that spends it on a buyback rather than increasing its dividend is signaling a lack of confidence in its future. It’s simple: they are afraid that they’ll have to cut the dividend in the future. Cutting dividends is always seen as a bad sign. As a result, companies hold back on dividend increases even when projections indicate the dividend can be supported. Instead, they execute a stock repurchase.
  7. Companies are horrible market timers. There is a lot of stock repurchasing going on at market tops; not so much at market bottoms. If a Board is just totally committed to buying back shares, it would be wise to use some simple timing criteria. If a company’s average PE over the last ten years is fifteen, and it is currently trading at a twenty-five multiple, it probably isn’t a good time to repurchase. But if it is trading at a price-to-earnings ratio of ten, it might indeed be an excellent time.
  8. Companies repurchase stock while sitting on other obligations. I find this one particularly troublesome. Further, elected and regulatory officials are actively aiding and abetting this behavior.  Some background: The Financial Accounting Standards Board (FASB), The Securities and Exchange Commission (SEC), the American Institute of Certified Public Accountants (AICPA) and the Public Company Accounting Oversight Board (PCAOB) share ruling-making authority for accounting principles.  Full disclosure (confession?) I’m a member of the AICPA. Collectively, those bodies have made a complete mess of pension accounting and reporting. I will wager that ninety percent of sell-side analysts have little or no understanding of companies’ pension footnotes, or what pension liabilities really are. If, however, one parses through the recondite disclosures of a company’s pension assets and liabilities and concludes that the company is including a liability on its balance sheet, one may nevertheless find that company is repurchasing some of its outstanding stock. That is, rather than fully funding a liability that reduces the future value of the business and thereby increases shareholder wealth, it gives money to folks who no longer want to hold the stock. [An example: in the 2014 GE annual report, it states that “The GE Pension Plan was underfunded by $15.8 billion….at December 31, 2014”.  It also states: “We did not make contributions to the GE Pension Plan in 2014 and 2013. The ERISA minimum funding requirements do not require a contribution in 2015”. In the letter to shareholders, GE’s describes its plans to dispose of more of its financial services business. The proceeds of that disposition will be returned to shareholders in the form of stock repurchases. In other words, while sitting with a $15.8 billion problem, it is going to further reduce equity.] Now, why would I say that officials are actively abetting this activity? Because legislation allows companies to fund to a level found satisfactory under ERISA, even though actuaries find that amount insufficient. Skeptical of my point of view? Grab a few annual reports and spend some time actually trying to interpret the abstruse FASB/SEC mandated pension disclosures. Notice how optimistic some firms are about the long-term rate of return they expect on pension assets, even though interest rates on fixed income investments-a pension fund mainstay-bump along at record lows. Finally, the Federal Reserve, by manipulating interest rates rather than let markets determine rates, has become the enabler of the borrow-to-pay-dividends movement.
  9. Shareholders can borrow on their own.  Companies are now borrowing to pay dividends and buy back stock. If I want to pay myself a dividend, I can margin my shareholdings; I don’t need a company to do it. And I control the timing. And I can sell my stock in the market anytime I like. Saddling my equity position with future interest and principal obligations to fund a stock purchase doesn’t create any value.
  10. Reflect for a moment on why corporations exist. While they predate the mercantilist period, they began to be more widely used then, as a collection of individual investors could bear more risk than single investors. That is, corporations were formed to take risks. While one might not suspect that as consultants hustle “Enterprise Risk Mangement” programs, and companies hire more risk and compliance staff than sales and marketing folks, that nonetheless is their purpose. To take risks that individuals can’t afford.
Boards and CEOs, here’s what I believe is more appropriate.

Invest in the business. Search for growth opportunities. Look for productivity-enhancing investments. Energy reduction. Supply chain improvements. New product introduction.  

Cash burning a hole in your pocket? Lousy earnings release in your immediate future and you’d like to dilute its effect on your option value? Announce an increase in the dividend. Distribute a special dividend. But true up other obligations first. Clean up any old accounts payable. Fund your retirement liabilities like grown-ups. Settle outstanding litigation.  All those things will provide us owners with real value over the long term. 

Take some risks. Like these guys: Tesla. Google. Gilead. Chipotle. Whole Foods. Celgene. Continental Resources.  Give us more of that.







Harvard Business Review Article
The article I co-wrote with marketing maven Kim Whitler, recounting how we were able to work effectively together as CFO & CMO, has become one of the most reviewed at Harvard Business Review online. Check it out! 


The Sixty Most Interesting Over-Sixties

As happens this time of year, publishers list their most important/influential/etc. youngsters.  As an example, the May issue of Wired has “20 Unsung Geniuses”.  We think mature adults deserve recognition just as much as 20-something billionaires.  Here is our Sixty Over Sixty list of the most influential, annoying, important or folks we just find interesting.  Here then, sorted by age, is The Sixty Most Important Leaders Over Sixty.

Henry Kissinger.  Still the U.S. best thinker on foreign policy and diplomacy. His recently published book (at age 91) World Order is not only a best seller, it is extraordinary.
Jimmy Carter.  Better as an ex-President than President.  His work for Habitat for Humanity is a lesson for all of us.
T. Boone Pickens.  Oilman, energy expert.  Creator of The Pickens Plan for energy independence.
Frank Gehry.  Showing the world what new materials and CAD design can do to architecture.
Warren Bufett. Best investor in history.  Becoming one of the best philanthropists in history.
Alan Simpson.  Former Senator who, along with Bowles (below) is trying to get U.S. to fiscal sanity.
Diane Feinstein.  Influential Sr. Senator from CA.
Jack Welch. Executive, author, educator
Carl Icahn.  Activist investor.
Anthony Kennedy.  Supreme Court Justice
Jack Nicholson.  Actor
Freeman Morgan.  Actor.  “Through the Wormhole” commentator.
Yvon Chouinard. Founder of Patagonia, environmental activist and enemy of dams.
Ralph Lauren.  Fashion industry titan.
Harry Reid.  Senate Minority Leader.
Toby Cosgrove.  MD and President of The Cleveland Clinic.
Nancy Pelosi.  House Minority Leader.
William Koch.  Billionaire businessman and Libertarian.
Roger Ailes.  Founder of Fox News.
Don Imus. Radio personality, philanthropist, professional curmudgeon.
Martha Stewart.  Fashion arbiter, CEO of Martha Stewart Omnimedia.
Michael Bloomberg.  Former Mayor of NYC; eponymous founder of Bloomberg.
Mitch McConnell.  Senate Majority Leader.
Aretha Franklin.  Soul and R&B singer.
Joe Biden.  VP of the U.S.
Jerry Bruckheimer.  Co-creator of CSI, Cold Case, many others.
Joyce Meyer. Evangelist and author.
George Lucas. Motion picture producer and director; world builder.
Larry Ellison.  Founder of Oracle.
Lorne Michaels.  Founder of Saturday Night Live.
Erskine Bowles.  Co-leader of Simpson Bowles Committee. Prophet.
Harold Hamm.  Founder & CEO of Continental Resources, shale/fracking leader.
Dolly Parton.  Singer, songwriter, entrepreneur
Roger Altman. Founder-Evercore. Democratic kingmaker.
Cher Sarkisian.  Singer and entertainer.
Janet Yellen.  President-Federal Reserve Bank; arguably the world’s most powerful woman.
Bill Clinton.  Former President.  Co-founder of Clinton Global Initiative.
Stephen Spielberg.  Motion picture producer and director.
Dick Wolfe.  Co-creator of Law & Order franchise.
James Rothman.  Yale Professor of Biomedical Science; Nobel Prize Winner.
Mike Krzyzewski. Aruguably the finest men’s college basketball coach ever.
Hillary Clinton.  Former Senator, former Secretary of State, Presidential candidate.
Dick Parsons. Former CEO of Citibank, former CEO of Time-Warner, advisor to Providence Equity.
Randy Schekman. California University Cell Biologist; Nobel Prize Winner.
David Rubenstein.  CEO of private equity firm Carlyle.
Bruce Springsteen.  Singer and songwriter.
Timothy Dolan.  Cardinal of NY.
Francis Collins.  Director, National Institute of Health.
Chuck Schumer.  Sr. Senator from NY.
Rush Limbaugh. Talk show host; most influential conservative.
Bob Iger.  Chairman & CEO: Disney.
John Noseworthy.  CEO of The Mayo Clinic.
Danielle Steele.  Top ten best-selling author of all time.
Maureen Dowd.  Influential NY Times editorialist.
Martin Dempsey.  General-U.S. Army. Chairman, Joint Chiefs of Staff
Bill Belichick. New England Patriots head coach. Probably the best pro football coach ever.
Howard Schultz.  Founder and CEO of Starbucks
John Mackey. Co-founder and CEO of Whole Foods Market
Oprah Winfrey. Talk show host and most powerful woman in media
Carly Fiorina. Presidential Candidate

There were many other excellent choices, and my selection is largely arbitrary.  But I welcome your suggestions for additions (please don’t bother with deletions) and will consider them for my next update.  Post your comment here, or email gene@jobsoverfifty.
    Gene Morphis



Connecting Three Pieces of Data

  1.  Dr. Amy Reed, an anesthesiologist from Boston, has advanced cancer, possibly spread by a device called a morcellator.
  2. According to highly –esteemed analyst Stephanie Pomboy of Macro Mavens, as quoted in Barron’s July 12th 2014 edition, there are three million four hundred thousand (3,400,000) fewer fulltime workers now than before the Great Recession.
  3. The FDA is proposing regulation of cigar manufacturers and a stunning tax on cigars.
How are these three things connected?

Before we get into that, let us thank Dr. Amy Reed, who is battling Stage Four cancer, for raising the issue of the risks that may be associated with using the morbidly named “morcellator” in association with hysterectomies.  More on that here.  Dr. Reed is doing all women a big favor.  And thanks should also go to USA Today, and more particularly to America’s sole remaining conservative newspaper The Wall St. Journal for raising awareness sufficiently that the FDA had to look into it.  This is the basis of the connections, i.e., until the doctor and her husband, also a doctor, made a cause out of it the FDA wasn’t aware of it.

Now, why hasn’t the FDA looked into this before now?  Apparently because they have diverted their resources into issuing rules and regulations over the cigar industry.  Their proposed tax on cigars would likely wipe out most of the independent mom and pop cigar stores throughout the U.S.  Even though we know that cigar smokers rarely smoke with the frequency of cigarette smokers, generally don’t inhale and as a result are less likely to get cancer than cigarette smokers, the FDA is hell-bent to put the local cigar shops out of business.  I guess they haven’t noticed- or don’t care-that there are 3.4 million fewer fulltime workers than before the recession and closing mom and pop cigar stores will add to the number.

If you enjoy an occasional cigar, you might want to stock up now.
Say a prayer for Dr. Reed.


Marc Andreessen's Superpowers List


Saturday night I was enjoying my weekly ritual of pulling a cigar at random from a humidor and giving it a test.  This week was a Romeo and Julietta maduro Churchhill.  However, I glanced at Twitter and immediately became captivated as Marc Andreessen posted a thought provoking series of “superpowers” now available to almost anyone.

Mr. Andreessen is, of course, one of the co-founders of Netscape, a long-time venture capitalist, board member of several tech firms.  He also a co-founder of one of the hottest venture capital funds: Andreessen Horowitz.  I’ve noticed that he seems to find his muse on weekends and posts a series of thoughts. Those thoughts are always worth reading.

Saturday’s Twitter stream described a confluence of developments that he foresees coming together that will radically alter business, the economy and even individuals.  He calls them “superpowers”.   I’m recapping them in no particular order, and I’m sure I’m leaving some out. But the sum of his comments are worthy of review.

His list of superpowers includes online collaborative tools that lets groups from all over the world work together; crowdfunding that enables entrepreneurs to raise capital quickly and cost effectively;  software capabilities like Github that speed development; the “maker” movement with its 3-D printers; drones and robots changing the cost curves of delivery and freeing more people from drudgery. He also predicts revolutionary changes in health as smart devices keep track of our blood pressure, respiration and far more as well as other devices to help those with a disability function better.
We know from studies of “hype curves” and the experience curve that big new inventions and innovations take longer to make big impact than pundits predict, but then impact in different and bigger ways than projected.

I remember getting my first “car phone”.  It required installation of a box the size of a suitcase in the trunk of my car.  I could store ten numbers (!) (zero to ten obviously)  and the cost per minute of a call was imposing.  While there were all kinds of projections of the impact, I don’t remember anyone predicting that, 27 years later, we would walk around with a super-computer, video camera and world communication device in our pockets.

I don’t know where the confluence of Mr. Andreessen’s factors will lead – he doesn’t either and says so – but it is very likely to be far more pervasive than we can project and more profound.
If you use Twitter, you definitely should follow him. @pmarca.

And the Romeo and Julietta was delicious.

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Check out the article I co-wrote with marketing maven Kim Whitler, recounting how we were able to work effectively together as CFO & CMO.  Take a look here at Harvard Business Review online!

Here is a link to another article I helped Kim Whitler write for Forbes Online.



 

 

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