Diminished Return

Take a look…

Which stock would you think is the one that reported strong earnings and steady profit in the Fourth Quarter? Which is the one that still has their newest, most expensive product line basically grounded and out of service due to a serious component problem?

I’ve talked with friends over the past 24 hours about how Apple’s post earnings call collapse last night and today are not necessarily indicative of their performance, but rather the needs of shareholders.

I’m not an expert on things like this (not even a knowledgeable novice), but those who appear to agree, and provide the evidence (from Financial Post):

Apple is a great company making great products, and has an outstanding record of creating new markets. It enjoys margins closer to those of a software company than a consumer giant, has more than US$130-billion in cash and a historically unique franchise, one it has been able to expand time and again.

That’s a great company, but, word to investors, not one that can be counted on to grow and profit in the future at similar rates to the past.

Apple isn’t expensive on a price/earnings basis, it is phenomenal, and phenomena often don’t sustain themselves over time.

That’s clear from its gross margins, which fell to a still very high 38.6% compared to 44.7% in the year-ago quarter, and which are expected to range between 37.5 and 38.5% in Apple’s second quarter of fiscal 2013. Those are astounding numbers, but likely ones which, even in an innovative, well run and healthy business, will head downwards over time.

All businesses are not only subject to cycles, but eventual maximization of production possibilities and efficiency. This is not your Apple of the 1990’s, to be sure. They are going to remain a great company, and a reliable investment.

Unfortunately, I’m not convinced shareholders aren’t going to put pressure. Apple’s obscene out-performance of the market in general over the past several years puts funds and investors in a position of “demanding more” from the who delivers. Could there demands to draw down cash to bulk up dividends? Does the NASDAQ really want to go through this again?

It could be a great day for Conservatives in the House of Representatives if they take advantage of a golden opportunity right now!

Yes, the “fiscal cliff” deal was a “disaster.” Choosing to capitulate to the President and Senate’s demands for increases in top marginal tax rates, not to mention raising taxes of just about everyone by not extending the economic poison pill known as the 2% payroll tax holiday, certainly did not look good for the GOP and its leadership going into 2013.

They did know, of course, that the “debt ceiling” fight remained, as did the expiration of a continuing resolution for the FY 2013 Federal Budget. They chose to stick to their guns on not raising the debt limit until spending cuts were address. Unfortunately, even honest Conservatives don’t think this is such a great idea.

Now, Speaker Boehner, Majority Leader Cantor, et. al. presented a plan for a three-month extension to the debt limit. This will likely pass, the President will likely sign it, and the stage will be set for another fiscal “fight” to conclude with another deal, extension or continuation.

However, when you look at the numbers, you realize that not only is the House leadership’s latest strategy ineffective, it is also unnecessary.

I’m not a Federal budget expert. I am a local government budget professional, which means I spend my time balancing budgets to keep costs within current revenues (not discussing how much a deficit we should run with respect to entitlements and operations).

However, I know just enough to review the Congressional Budget Office’s baseline projections on the Federal deficit (last updated in August) and include the impact of the “Fiscal Cliff deal” on deficits CBO prepared following its passage earlier this month.

Now, as several Conservative columnists have indicated, the House finds itself in a difficult spot. Democrats control the Senate and the White House. As much as we would love to actually accomplish more direct budget reductions, the climate makes it pretty difficult to pass such legislation.

So, instead, why not take advantage of what we already have? Tying in reasonable GDP estimates for the remaining budget years of the Obama Administration, we see a positive pattern:

According to CBO, FY 2012 (ending 9/30/12) ended with a deficit of about 7% of GDP ($1.1 Trillion). Ten-figure budget deficits are not a good sign, and last year represented the fourth consecutive year of such fiscal mischief. However, if you look above, even with the increased deficits facilitated by the fiscal cliff deal, the total debt as a percentage of reasonable GDP (2.5% annual growth rate) continues to decline.

Historically, since we started the era of perpetual deficit spending five decades ago (with the short exception of the Clinton Administration/Republican Congress era), deficit spending has averaged about 2% to 3% of GDP. The “fiscal cliff” deal, as scored by CBO, accomplishes this.

Now, does it eliminate the deficit? Absolutely not! However, there is no way that is going to happen under the current administration.

What we really have here is an opportunity to accomplish the primary stated interests of the competing sides on this issue:

For the Conservative House, the primary stated goal is to reduce deficit spending.

For the President, the primary stated goal is to avoid continued debate over the debt ceiling.

So… let’s solve it right now!

Tuesday, the day after the President’s second inaugural, the House should propose a plan that provides a series of debt limit increases, equivalent to the debt-to-GDP ratios established following the fiscal cliff deal.

Give the President 6% for FY 2013 (you can even adjust the number retroactive to 12/31/12, when the primary Treasury limit was reached). Go ahead and INCLUDE the continuing resolution for FY 2013 now (bundle it). Then, give the President the subsequent debt authorities for the remaining fiscal years of his term of office (scheduled with the start of each fiscal year). They can even be updated to reflect changes in GDP, if you so choose (focus on the percentage, not the amount).

What does this really do?

First, it takes tax policy off the table. The Conservatives can now say that the deal reached on New Year’s Day is the primary tax policy for the remaining four years. They are not going to be able to make any changes until they regain power of at least the Senate, and more than likely also need the White House.

Second, it takes the debt issue off the table. The President didn’t want to have to worry about raising debt limits, and now he doesn’t have to. He gets automatic debt limit increases for the remainder of his term.

Finally, it focuses all budgetary debate on spending cuts. The House can now stand firm on taxes and debt. Those issues are off the table. We’re still going to need to cut spending to ” live within the means” of available revenue and new debt. The baseline still includes sequestration-level cuts, and the House should make it clear that their budget proposals to the President will come in at or below the available revenue and new debt.

Spending cuts are going to still be a challenge. The House leadership needs to prove they are actually committed to pulling the plug on discretionary programs, reigning in defense and implementing reductions to entitlements. The proposals are out there, but they have to be willing to take on the massive forces within and outside their ranks who will stop at nothing to keep the current state of federal plenty afloat.

General public opinion and partisan support for Conservatives in Congress is pretty low right now. Either they see them as an impediment, or failing to live up to expectations.

It’s time Boehner, Cantor, Ryan and their fellow members seize an opportunity. The “Fiscal Cliff” deal has a window of opportunity, quickly closing, they can use to step up their presence in leadership.

Local bank brands (what the FDIC calls “community banking”) are traditionally associated with small towns and rural parts of the country. For the most part, when you go to a major city, you normally only see major national bank brands with branches (at least with respect to handling traditional checking and mortgage customers).

The FDIC released a report today taking stock at trends in Community Banking over the past quarter-century. I specifically took interest in their commentary on bank geography, which upheld conventional wisdom.

As a result, the economic shift towards urban areas and away from rural areas, which significantly accelerated over the past decade, also appears to be having a negative impact on community banks and their available resources:

In 1987, the first year for which data are available at this level of detail, community banks operated 52 percent of U.S. banking offices and held 41 percent of industry deposits. By 2011, the community bank share of offices had declined by more than one-quarter, while their share of industry deposits had fallen by more than one-half. The decline was particularly evident in the metro counties, whereby 2011 community banks operated just 29 percent of banking offices and held 15 percent of deposits. In contrast, the community bank shares were more stable in micro and rural counties (Chart 3.2), where community banks still held a larger share of offices and deposits than noncommunity banks in 2011. The nation’s rural areas continue to be dominated by community banks, where community banks have more than 70 percent of both offices and deposits.

The spillover effect of this, to some extent, is the lack of available capital in those geographic parts of the country that need it to grow economic opportunities and encourage positive migration. Their dependence on community banks for that capital, and the lack of significant presence of noncommunity banks, creates a void that could facilitate an unending downward spiral.

So what does this really mean? The report concludes:

Growth and consolidation in these markets have also created opportunities for community banks, but to a lesser extent. In contrast, the nonmetro areas where community banks generally retain a larger market share have grown more slowly or even declined in population. While these economic and demographic challenges do not appear to be adversely affecting financial performance or leading to higher rates of consolidation among nonmetro community banks, they do appear to limit growth opportunities.

Qualcomm CEO Paul Jacobs’ keynote Monday at the 2013 Consumer Electronics Show (CES) in Las Vegas definitely reflected a changing of the guard in technology and its dominating sector.

Jacobs is only the third person to ever keynote the opening of CES, and Qualcomm is only the second company. Throughout its history, Microsoft has opened the annual technology extravaganza, featuring either founder Bill Gates or CEO Steve Ballmer.

Qualcomm is not exactly a household name for the general public, though it already has an influence in technology equivalent to that of Microsoft and Apple. In some ways, its presence is even more critical.

Qualcomm is primarily a chipmaker, holding half the global market for microprocessors used to power mobile devices like smartphones and tablets. More importantly, the almost completely own the market for chips used to power devices that use the LTE/4G band that is the highest mobile broadband speed available in consumer markets.

Jacobs’ presence reflects a sizable shift that has been noticed in technology for some time. While the tech industry will still need to create and innovate across the board, from computers to HDTV to processors, mobile products has taken the lead role in shaping the future when it comes to technology’s interface with society.

Consider some of the facts regarding the growing presence of mobile in our:

• 84% of people worldwide (where service is available) cannot go a single day without checking their mobile device
• 2/3 of those worldwide between 25 and 29 years of age check their mobile devices at least every half-hour
• In the US alone, the mobile “app” sector (develop and launch of software applications for mobile devices) has created approximately 477,000 jobs since 2007
• Most people look at their mobile devices about 150 times a day

As a business, Qualcomm isn’t doing too bad either. In the past five years, their stock price has increased 75%, while long standing technology stalwarts Intel and Microsoft have seen little to no growth. While they have not performed at the 450% pace of Apple since 2008, they currently have a slightly higher profit margin than Apple, and certainly better than Microsoft and Intel.

Jacobs pointed out in his CES speech, which was also used to announce the release of two new, higher-speed processors, how the rise of mobile as the primary means by which the public utilizes technology also reflects a significant shift between generations and demographics.

“Mobile is breaking down barriers and bridging the digital divide,” Jacobs said.

Throughout the presentation, Jacobs and a host of guests, including Big Bird, thriller director Guillermo del Toro, and rock band Maroon 5, reiterated the growing trend of today’s youth, reflected in Qualcomm’s new brand theme, “Born Mobile.”

To reemphasize the potential of mobile technology, Jacobs also announced Qualcomm’s sponsorship of the Tricorder X Prize, a $10 million creative contest to develop a mobile device that can monitor and diagnose health conditions. 

Announcements aside, the change at the podium signaled recognition of the shift already underway in technology around the world.

Our top stories today…

Duke’s Fuqua Profs Predict 2013

Marketing Prof Gavin Fitzsimmons offers a rather marketing-free observation:

“Marketers increasingly accept that much of consumers’ decision-making occurs outside their conscious awareness. In 2013, we have to push ourselves to adjust our marketing mix accordingly, as well as embrace new measures that help us better understand the psychology of the unconscious consumer.”

Debt Ceiling Deadline not an exact date

Bipartisan (Progressive) Policy Center places the clock stopping on life as we know it sometime between February 15th and March 1st. Counting from when Treasury officially hit the debt limit, this is only about 45 to 60 days, far less time than the government had during the last “debt ceiling” debate, when they (May 15th to August 2nd).

Once the ceiling is reached in its entirety, Treasury would have to prioritize expenditures to subsist on daily revenues received and cash on hand. The BPC analysis predicts the deficit margin of expenditures for February 15-March 15 would be around $176 billion, or 38% of total projected expenditures for the timeframe.

How will Regulation Affect Your Business This Year?

Now that the “fiscal cliff” deal has been worked out, it might be more than the 13 Paychex came up with. Still , probably a good idea to check them out.

Global Macro Monitor showcased a chart today showing that excess depository reserves (the money banks keep at the Fed above their required allotments) is starting to trend downward.

This is to be expected. While banks might be earning a some good interest from the Fed on money the Fed is injecting into the economy, it can’t sit under the mattresses forever.

Unfortunately, you know what that means.

We believe if excess reserves are declining,  it may signal the massive liquidity created by the Fed over the past few years is starting bite and beginning to leak into the economy as credit expands.   When the economy begins to accelerate the leak could turn into a flood and that is what, we think,  some at the FOMC fear.  That is, the excess reserves turning into high powered money.

Here’s what it looks like, broadened out for the past 5 years.

Just got the monthly e-newsletter from North Carolina Treasurer Janet Cowell. While I am finding a few more reasons now and then not to completely agree with her, I do believe she has done a great job as State Treasurer over the past four years, proving to be a strong and resourceful financial manager and politician.

I also believe that had chosen to run for Governor or Lieutenant Governor, there is a good chance she might have won (unlike soon-to-be Former Gov. Perdue, who is acting quite delusional this week).

Regardless, Treasurer Cowell’s latest message is one of the most unusual you are likely to receive from an elected official, executive or legislative. It’s introspective without being too self-centered, eliciting strength and confidence while upholding a balance of humility.

The full text is included below (cannot post a link, had to copy and paste). You will quickly surmize that Treasurer Cowell has grown into the role, and while not exactly noticeable on the outside (because she was already in good command when she took office), the Erskine Bowles’ protoge believes she has matured and learned a great deal over the course of her first term in office.

Reading the words, I recognize something else. Whether she wanted the role or not, Janet Cowell is not the public face and leader or the Democratic Party in North Carolina.

Technically, Secretary of State Elaine Marshall and Attorney General Roy Cooper are longer-serving and more prominent Democrats in the Council of State. However, with the Governor’s Office and General Assembly now solidly under Republican control, and conservative policy finding success as legislative action, fiscal policy and its impact on state obligations and responsibilities will become the centerpiece of statewide debate in the coming years.

Treasurer Cowell has maintained a reasonable, calm approach over the past two years as the Republican-controlled General Assembly battled and eventually neutered Governor Perdue on most issues, including the state budget. Moving into the start of the McCrory Administration and the return of the long term, the agenda appears to be focused squarely on North Carolina’s fiscal policy, notably reforming the state tax code.

Earlier this month, Treasurer Cowell penned an editorial picked up by several newspapers across the state expressing concern about Washington’s inability to reach a solution to the legislative clustermuck known as the “fiscal cliff.” Without resorting to tired rhetoric, Cowell focused squarely on the impact the coming tax and budgeting quagmire could have within North Carolina’s fiscal policy.

“As North Carolina State Treasurer, I am concerned about potential impacts on our pension fund, our bond rating and the state budget.

“With time running out before year-end, investors get nervous, causing market volatility and accompanying unpredictable pension returns. If returns are low, North Carolina’s taxpayers will need to make up the difference.

“Punting on the fiscal cliff would send rating agencies the wrong message – that our federal government is truly dysfunctional. As Alan Krueger, Chairman of the Council of Economic Advisors, put it, the message would be that government cannot solve the problems it is there to solve. If the federal rating is downgraded another notch, North Carolina’s AAA bond rating will be automatically knocked down a rung on the ladder making it harder to fund roads, schools and other capital improvements.”

Cowell also proved to be relatively accurate in her predictions of what the lack of a “deal” from Washington would mean to broader markets.

“So far, world markets have not reacted strongly to the lack of urgency from Washington. But the markets will take notice the closer we get to December 31 without a solution. The question we face is whether to go over the cliff and deal with our issues only after being compelled by a financial crisis or preemptively address the problem by putting on the brakes now and walking away from the cliff.”

To be clear, Treasurer Cowell did advance the notion of increasing top marginal income tax rates as part of a plan to address the problem. While I do not agree with that specific approach, her justification was tied to the need to reduce the Federal deficit, where she and most rational people on both sides of the aisle believe action must be taken.

“Federal debt now stands at 70 percent of GDP, the highest level since 1950. Over 10 years, federal deficits must be reduced by $4 trillion if the debt to GDP ratio is to be stabilized or reduced. If the debt as a percent of GDP is not reduced, fiscal crises will become more frequent and the ability of policymakers to respond will become severely limited.”

More than likely, the Treasurer will find herself in a position of having to make sure the Republican’s tax and budget proposals this year achieve desired economic growth objectives while avoiding deterioration of the State’s fiscal condition. With Democrats in the General Assembly virtually unable to do anything with respect to counter-legislation, and progressive social activist groups only likely to contribute political theatre to the debate, Treasurer Cowell will be the only respected “opposition” to majority proposals.

Even then, her role will be that of a Devil’s advocate, should she be able to prove that proposals to abolish the state income tax or eliminate funding in certain areas pose a fiscal risk to the State. Luckily for her, Governor McCrory has a record of bipartisanship and responsible governance as Charlotte Mayor, and will probably listen to Treasurer Cowell as he moves forward with the General Assembly on a bold fiscal agenda.

At the same time, McCrory will need Cowell’s support and logical, data-driven approach to address other critical fiscal issues, including upholding the State’s excellent credit rating and addressing long-standing issues involving pension benefits. Specifically, the Governor and Treasurer will need to bring the legislature and state and local government workers together to craft a permanent plan to address employee retirement and cover liabilities associated with health care benefits for retired state workers. Continued pressure from the Governmental Accounting Standards Bureau (GASB), ratings agencies and Congress to emphasize accurate reporting and conservative approaching to calculating unfunded liabilities and annual contributions will only complicate this process.

Once the new year rolls around, Treasurer Cowell will find herself among the familiar surrounds of an office she has grown into and gained respect for. She will also find herself as the only credible “break” on the legislative train Republicans probably have in mind for 2013.

Reading between her lines, it appears the she is well aware of and preparing for the challenges ahead.

Text of Cowell’s December E-Newsletter:

My best gift

My best gift of the season came in the form of observations from several people that I respect noticing that I have changed, evolved, and grown in my office.  The feedback means the world to me because it recognizes a lot of effort and growing pains during my first four-year term as North Carolina’s State Treasurer.

More broadly, this provides hope that all of us have the capacity to do things differently, move outside of our comfort zones. Given challenges in unemployment, education, healthcare, and budgets here at home in North Carolina, along with fiscal cliff and debt ceiling negotiations in Washington, our capacity and willingness to learn and change is a welcome message and will keep us moving in the right direction.

The phrase “Dance With the One Who Brung You” is popular, but not always good advice. Certain skill sets bring you so far in life, but must be complimented to remain competitive and at a top level. In my case, singularity of focus, “heads-down” intensity, and independent-mindedness helped me improve operations in the Department of State Treasurer. However, I realized in my first two years that I needed some new dance partners to be more effective for the people of North Carolina. I adapted to spend more time outwardly focused and utilize partnerships with the best and brightest of our state, ensuring we are always aligned to make the best decisions for North Carolina.

A number of you receiving this email were catalysts for my personal change on issues ranging broadly from increased public speaking on issues affecting North Carolinians to pushing the limits of physical fitness outside of the office. I am incredibly grateful for those of you who have believed in me, advised me, worked alongside of me, and made me laugh along the way. One friend even told me he was going to tell people he was a senior advisor to the State Treasurer. “On fiscal matters?” I asked.  “No,” he replied, “on wardrobe.”  While that may be further down my priority list, the care to make things better down to that level of detail is refreshing and appreciated.

This is not to say that I do not have room for growth and a need for improvement.  However, I do believe that we should all recognize and celebrate life’s small (and medium-sized) victories.  Being State Treasurer has given me a front row seat to fiscal matters and, right now, there is more to worry about than celebrate.

While we have many things to be grateful for here in North Carolina, there are a number of pressing issues facing us. We need to create more jobs. One of the biggest missed opportunities is better maximizing the good ideas coming out of our universities. We have increased our high school graduation rate to 80%, but need to continue to increase the number of students graduating from our community colleges and universities with job-ready skill sets. We need to collectively improve our health to better our quality of life and reduce health care costs.  Given our past successes at reinvention when needed, I am optimistic about North Carolina’s capacity to change to make us even stronger and better prepared for the future.

At the National level, our federal leaders must find the will to change how they have been conducting business, because their current approach is not working.  A down payment is desperately needed on our national debt and we must create a long-term framework for reducing that debt. Otherwise, our debt payments will crowd out investments in things like education and research and development that will provide a brighter future for our children.

As we ring in the New Year and bring in new leaders at the federal, state, and local level, my hope is that we individually and collectively do things differently and strive for better results. And as we work together to find solutions, I hope that we celebrate our victories, large and small, and recognize the efforts and growth around us.  I look forward to working with you, as we continue to build and maintain a fiscally strong and prosperous North Carolina.  I am glad we are on this journey together.

God Bless.

Janet Cowell

Speaker Boehner’s cave on tax hikes for millionaires signals that the debate is now about tax policy. Spending policy is off the table, an unfortunate result that proves the Speaker’s incompetence. If Republicans want to avoid outright conservative rebellion, they at least ought to be bold and creative. It seems to work for Progressives. Some suggestions: 1. Eliminate the payroll tax. Give wage earners and small businesses a permanent tax cut and eliminate a major point of contention in tax policy subterfuge. You can also now go ahead and eliminate the EITC now. 2. Establish a “floor tax” on all income of 1% or 2%. This way, everyone pays into the same pool. 3. If you’re going to raise tax rates (argh), do it across the board. Split the difference to where they are now and where they were under Clinton. Same for corporate rates. 4. Instead of taxing capital gains, let’s tax capital acquisitions. The rate would be much lower, but the frequency of payment would be greater. All, the acquisition, rather than the sale, has a greater impact on public policy and government service demand. 5. Eliminate deductions for interest payments on private debt. Why are we rewarding this behavior, again? This could also keep us from raising tax rates. 6. Be serious about tax reform. Sunset the entire tax code for 3/31/15 with no extensions. We need an overhaul, simplification, and focus on tax application to activity that creates burden for government. 7. Cut spending. Demand 15% cuts in non-defense discretionary. Offer 5% in defense. We can accomplish that by getting out of Afghanistan, and then some. 8. Raise entitlement ages for both Medicare and Social Security. The goal should be that those currently under 50 should receive social security no sooner than 72, Medicare no sooner than 70. Means testing social security eligibility, or offering a benefit alternative (tax credits on taxable retirement income) would also help. 9. Be prepared on debt. Low Treasury interest might help the Federal bottom line, but it’s killing responsible savers. We need to set aside the money to enable an average yield of 5% on Treasuries. 10. Long term, spending MUST be curtailed. Historic averages show we can manage in the range of 14-16% of GDP. We need to be back to 16% by 2018. 11. Hold firm on stopping the resurgence of the Death Tax. It’s immoral.

Investors are likely not thrilled about the face that Obama has another major challenge to handle even before his newly-acquired second term commences in January.

Wells Fargo joined Fitch and just about everyone else is clearly expressing considerable concern over the Fiscal Cliff:

“The reality was an election focused on social issues as opposed to the tough economic and budget issues facing the nation. The result is that we maintain the same partisan environment for at least the next two years. The focus now shifts towards the impending fiscal cliff of tax increases and spending cuts. The uncertainty about the future path of spending and tax policy will continue to weigh on economic growth as Congress attempts to strike a longer-term deal.”

Are they optimistic?

“Given the ongoing divisiveness within Congress we have increased our probability that the nation goes over the fiscal cliff (40 percent probability). The absence of clear direction from the electorate on economic policy and long-term fiscal policy will make it more difficult, but not impossible, to come to a short term deal. The challenges that policy makers face over the next several months are immense.”

But we’ll get this solved, right?

“After the first of the year look for both parties to sit down and work towards a longer term agreement which will most likely consist of some modest tax increases and some modest spending reductions within a framework for long-term deficit reduction. The tax increases will include the expiration of the payroll tax cut, extended unemployment benefits and the corporate “bonus” deprecation tax credit. We expect some cuts to defense spending and modest cuts to non-defense spending but these cuts will be watered down.”

Could’ve shared this a week or two ago, guys.