Financial Review

Who’s Buying Whom

Sinclair Noe — April 2, 2015

 

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DOW + 65 = 17,763
SPX + 7 = 2066
NAS + 6 = 4886
10 YR YLD + .03 = 1.90%
OIL – .81 = 49.28
GOLD – 1.10 = 1203.00
SILV – .18 = 16.86

Iran and six world powers, including the US, has agreed to a framework for a final deal on Iran’s controversial nuclear program. The understanding still needs to work out some details but it paves the way for the start of a final phase of talks that aims to reach a comprehensive agreement by the end of June. The agreement concludes weeks of intense negotiations and comes two days beyond the initial March 31 deadline for an outline deal.

Iran has accepted limitations on its enrichment capacity that include retaining only one enrichment facility. Europe and the United States will end nuclear-related economic and financial sanctions on Iran under the future deal after the United Nations’ nuclear agency confirms Tehran’s compliance with the deal.

The standoff over Iran’s nuclear program has dragged on for more than a decade. In November 2013, both sides concluded a preliminary agreement that froze some of Iran’s most sensitive nuclear activities in return for limited sanctions relief. The parties also agreed to reach a conclusive deal by June 2015.

Shortly after the agreement was announced, President Obama read a statement in the Rose Garden of the White House, saying the framework agreement on Iran’s nuclear program as a “good deal” that would block Tehran from obtaining an atomic weapon and make the world safer – a better option than another Middle East war. Obama said there was always the possibility Iran would try to cheat on the deal. But if it did so, he said, the agreement’s framework of inspections and transparency would make it far more likely the United States would know about it, and any US president would still have “all of the options that are currently available to deal with it.”

The situation in Yemen continues to deteriorate. Houthi fighters and their allies seized part of Aden, a strategic port city. Aden lies near the Bab el-Mandeb Strait, which is one of the world’s oil chokepoints. Most exports from the Persian Gulf that transit the Suez Canal and SUMED Pipeline pass through Bab el-Mandeb.

Gunmen from the Islamist militant group al Shabaab stormed a university in Kenya and killed at least 150 people this morning, 80 others were injured in the worst attack on Kenyan soil since the US embassy was bombed in 1998. The gunmen spared Muslim students and either killed Christian students on the spot or took them hostage. The 15 hour siege ended when police and soldiers killed the four gunmen.

Greece has submitted a new list of reforms to its creditors. Greece’s government provided a lengthy list of reforms, which included new revenue streams. The plan also proposes an increase in spending on some government programs. An unnamed eurozone official noted, the proposals are a “very long way from being a basis [for a deal].”  Meanwhile, The European Central Bank has increased its emergency assistance to Greece. Greek banks are now eligible to receive $77 billion through the ECB’s Emergency Liquidity Assistance program. The measure provides more liquidity for the country’s struggling lenders.
 
The Labor Department reports 268,000 people applied for unemployment benefits in the period stretching from March 22 to March 28, down 20,000 from the prior week. For four straight weeks initial claims have tracked below 300,000, a key threshold typically associated with a strengthening labor market. New applications for benefits are also running about 19% below year-ago levels.

The employment report for March will be released tomorrow morning, even though the markets will be closed in observance of Good Friday. Estimates for job gains are now running between 240,000 and 255,000. Yesterday, ADP said job creation in March was the weakest in 14 months.

The Commerce Department reports factory orders rose 0.2% in February, breaking a six-month streak of declines. However, January’s data was revised to show a 0.7% decline instead of a previously reported 0.2% drop. Excluding transportation, orders rose 0.8% in February. Shipments rose 0.7%.

The U.S. trade deficit declined by $7.2 billion, or 17%, to $35.4 billion in February from a revised $42.7 billion in January. The trade deficit is now at its lowest level since 2009, largely because of lower oil prices; however another possible cause for the lower trade numbers could be the lingering effects of a port slowdown on the West Coast; many companies complained of a shortage of key imported materials or saw their unsold products slated for export pile up on docks as negotiations dragged on.

Yesterday we told you that California was enacting mandatory water restrictions in response to the state’s worst drought, so it seems inevitable that we would start hearing stories of H20 abuse in the Golden state. The first culprit on the block: Nestle, the Swiss food giant, and also a major player in bottled water. Seems Nestle drew 50 million gallons from Sacramento sources last year, less than half a percent of the Sacramento Suburban Water District’s total production. It amounts to about 12 percent of residential water use. In other words, Nestle may be bottling more than locals drink from the tap. Consumers can only blame themselves, of course, for buying so much bottled water. The average price for a gallon of the bottled water is $1.21. For just $1.60, Californians could purchase 1,000 gallons of tap water.

Union Station is the railway and subway line that serves Washington DC; it is right next to the US Capitol and the SEC. And there is now an advertisement on the walls of Union Station featuring the cartoon likeness of Securities and Exchange Commissioner Mary Jo White dressed as a superhero, urging White to rein in corporate campaign contributions.

The Supreme Court ruled in the 2010 Citizens United case that companies and unions could spend unlimited money on election ads. While companies are required to report donations made through political action committees, they don’t have to report contributions to third parties, including industry groups such as the US Chamber of Commerce, which fund ads for and against candidates; this is often called dark money.

Supporters of the SEC’s involvement say shareholders deserve to know about political activity that could be contrary to shareholders views or possibly offend customers and impact a company’s sales. Skeptics, including many business groups and securities lawyers, say political spending is an insignificant cost.

So far, Commissioner White doesn’t think corporate campaign contributions are important enough to disclose because they don’t “primarily inform investment decisions.” Which is absolutely true; nobody has information on the contributions so there is no information to inform a decision. If you are the shareholder in a company, it just seems that you should know which politicians you are buying.

An incredible 97 percent of Americans, Democrats and Republicans alike, agree: the time has come to end government corruption in America. The only people who don’t want to see an end to corruption are the politicians. It seems unlikely that our current Congress, hot off the heels of the most expensive midterm election in US history, will usher in reforms to limit special interest money in politics; the dark money from mega donors has already started to pour in for the 2016 presidential election.  Since the SEC doesn’t quite understand that sunshine is the best disinfectant, about the only way to shine a light on dark money is through executive action. With just the stroke of a pen, there’s something President Barack Obama can do today to help fix the problem. He can issue an executive order requiring the political spending of government contractors, which includes many of our country’s biggest corporations, be disclosed.

An executive order would expose this spending to the light of day and allow the public to follow the money. It would help restore a democratic process that all Americans can believe in. The basic idea would apply to all contracts of $5 million or more and to aggregated donations of $10,000 or more from directors, officers and/or any employee of the corporation or its subsidiaries; it would require that the head of the corporation and its subsidiaries attest that all donations, including dues to agencies or associations with a history of electioneering, are fully disclosed. To remain compliant with federal law, it would mandate disclosure after the contract is awarded. It would archive all data in a searchable, downloadable format on the data.gov website. Voters would know which corporations are trying to buy political influence and could call them out on it.

After all, government contracts provide funding for critical services and should go to companies best-suited to do the work, not those that can best game the system. All dark money is concerning. But when it’s from a federal contractor and could be used or perceived to be used in an attempt to sway the contract-award process itself, it’s particularly alarming because it has the appearance of conflict of interest. But it rises from alarming to obscene when the donated money is skimmed from a government subsidy or tax exemption. The upshot is a closed loop in which taxpayer money flows in and out of politicians’ pockets and back to the corporate bribers.

The Supreme Court has underscored not just the constitutionality but also the importance of the disclosure of political spending. Justice Anthony Kennedy wrote about just this in his majority opinion for the Citizens United ruling in a section that eight of the nine justices joined — all but Clarence Thomas. The court noted that transparency allows voters to “make informed decisions and give proper weight to different speakers and messages.” Justice Kennedy wrote: “Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.” That sounds good, but it hasn’t happened.

There is no single solution to the problem of Big Money corruption in politics but closing your eyes doesn’t make the problem go away; shining a light on the problem would at least let us see who’s buying whom, and who’s selling what.

Wednesday, March 26, 2014 - Render to Caesar

by Sinclair Noe

Financial Review

DOW – 98 = 16,268
SPX – 13 = 1852
NAS – 60 = 4173
10 YR YLD - .03 = 2.70%
OIL + 1.03 = 100.22
GOLD – 5.90 = 1306.80
SILV - .27 = 19.84

Durable goods orders increased 2.2% in February, ending 2 straight months of declines. Durable goods are items like refrigerators, cars, and airplanes that are built to last for several years. But we need to dig into this report just a little; orders for non-defense goods, excluding aircraft, were actually down 1.3%. This might also indicate that first quarter business investment is weak.

The US Census Bureau began releasing data from its 2012 Economic Census, a survey of American businesses taken every 5 years. The enormous boom in domestic oil and gas production helped make the mining, quarrying and oil and gas extraction industry one of the fastest growing sectors of the US economy. The number of businesses rose 26% from 2007 to 2012, employment in the sector rose 24% and revenue surged 34%. Meanwhile, from 2007 to 2012 manufacturing lost 2.1 million jobs, now down to just 11.3 million people employed in manufacturing.

The finance and insurance sector shed 390,000 jobs between 2007 and 2012 and industry revenue fell by $137 billion, nearly 4%. But revenues in 2012 were still up 61% from 15 years earlier. There were one million retail stores operating in 2012. But the retail trade sector shed 65,000 establishments and nearly 778,000 jobs from five years earlier. Internet-based selling was something of a bright spot, with the number of “nonstore retailers” rising 12%, though employment was basically flat. The health care and social assistance sector is the nation’s largest employer, with 18.6 million workers in 2012. That’s up 11% from five years earlier, and revenue for the industry rose 23% to just over $2 trillion.

President Obama said after a summit with top EU officials that Russian President Vladimir Putin had miscalculated if he thought he could divide the West or count on its indifference over his annexation of Crimea. The United States and the European Union agreed to work together to prepare possible tougher economic sanctions in response to Russia's behavior in Ukraine. The sanctions could possibly include the energy sector.

Yesterday, the Supreme Court went back to revisit the Affordable Care Act, hearing the consolidated arguments in Sebelius v. Hobby Lobby and Conestoga Wood Specialties Corp, in which the owners of the for-profit businesses Hobby Lobby and Conestoga claim they should be allowed to deny their employees health insurance coverage for certain types of birth control based on the owners' personal religious beliefs.

 In enacting the ACA, Congress required large employers to provide basic preventive care for employees. That turned out to include all 20 contraceptive methods approved by the Food and Drug Administration. Under the law, religious nonprofits were exempted from this requirement, but for-profit corporations were not. Hobby Lobby's attorneys argue that the law violates the company's constitutional right to religious freedom by forcing it to cover all forms of birth control or pay steep fines.

This is a very interesting case on several levels. The Supreme Court, in business cases, has held that "incorporation's basic purpose is to create a legally distinct entity, with legal rights, obligations, powers, and privileges different from those of the natural individuals who created it, who own it, or whom it employs." In recent constitutional law cases, however, the justices seem to have forgotten this basic principle of corporate law. In Citizens United, the court effectively held that corporations enjoyed the same free speech rights as ordinary individuals.

Now, in the Hobby Lobby case, the owners of the craft store chain want the court to again forget about the basic principles of corporate law and decide that corporate personhood extends beyond free speech to religious freedoms. It seems a bit of a stretch. Hobby Lobby’s owners certainly have constitutionally protected religious rights, but Hobby Lobby's owners aren't required by the law to do anything. The legal duty falls on Hobby Lobby, the company, not its owners. If Hobby Lobby fails to provide the required insurance, the company, not the owners, is responsible.

The Hobby Lobby case would require the Supremes to "pierce the corporate veil"; legalese for looking behind the corporation's legal identity and basing a ruling on the interests and desires of the owners of the firm, but Hobby Lobby's owners only want to pierce the veil for this one issue, birth control, while maintaining the protections of the corporate form for everything else, including limited liability. The whole point of corporations being “people” is that they are distinct from their owners, officers, and employees.

Hobby Lobby should only have the rights of legal personhood that are essential for its operations. Supreme Court Chief Justice John Marshall wrote nearly 200 years ago, "Being the mere creature of law," the corporation "possesses only those properties which the charter of its creation confers upon it either expressly or as incidental to its very existence." In Citizens United, the Supreme Court said this includes some limited speech rights, as we ordinarily expect firms to advertise and communicate with employees and customers.

Not everyone, or even a majority, agree with the Citizens United ruling. A February 2010 ABC News-Washington Post poll found 80% of Americans opposed Citizens United and 72% support the idea of a legislative workaround to reinstate the limits the court lifted. And expanding corporate personhood to religious liberty, well that’s even more of a stretch.

Until 1990, the court applied a tough test to examine laws that disadvantaged people's religious beliefs. Then, the justices changed direction in a case involving penalties for the use of peyote as part of a Native American religious ceremony, the court ruled that as long as a law that applies generally to all citizens is neutrally applied, it is constitutional, even though it may have some unhappy consequences for some believers. 

Congress didn’t like the decision, and in 1993 passed the Religious Freedom Restoration Act. Under the act, if a law imposes a substantial burden on the free exercise of religion, it has to meet a high threshold for justification. Hobby Lobby claims the religious practice of the corporation now faces a substantial burden. And if there is a burden, can the government justify it with a “compelling state interest” and the “least restrictive means” of reaching it.

The case raises some interesting philosophical arguments that began with the liberal justices peppering Hobby Lobby’s lawyers with slippery-slope hypotheticals.  If Hobby Lobby can deny coverage for contraception, why couldn’t a Christian-Scientist-owned company deny health insurance completely?  What if a Muslim-owned company wanted to make employees were burqas on the job? What then?

 “How does a corporation exercise religion?” that was a question posed by Justice Sotomayor yesterday.

Justice Anthony Kennedy, who many expect to be the swing vote in this case, questioned both sides aggressively. Kennedy asked why the company couldn't just choose not to provide health insurance at all, pay a tax and then raise salaries to allow employees to purchase health care on their own. Assuming that would be a financial "wash," Kennedy asked, "Then what would your case be?"

And that may very well be the key question of the day, for two reasons. First, is it a “substantial burden’ for a company to not offer health insurance to its employees? For Hobby Lobby they are looking at about $26 million in taxes, but that is cheaper than the cost of the insurance; a bigger burden is the loss of competitive advantage. Justice Kagan, in particular, effectively said “so what?”  But is that really true? Is it really a trivial thing to not offer a desired benefit to employees?  I guess we’ll see in June. The second reason is that the individual mandate is a tax.

Let’s take the way-back machine to the summer of 2012. And we land on the steps of the Supreme Court in Washington DC. Chief Justice John Roberts has just issued a decision in the case of National Federation of Independent Business v. Sebelius. Surprisingly, Roberts sided with the 4 liberal justices to determine that the Affordable Care Act is constitutional and that the individual mandate is not valid as an exercise of Congress’ commerce clause power but the majority upholds the mandate as a tax. 

Chief Justice Roberts wrote in the controlling opinion: "The individual mandate cannot be upheld as an exercise of Congress's power under the Commerce Clause. That Clause authorizes Congress to regulate interstate commerce, not to order individuals to engage in it. In this case, however, it is reasonable to construe what Congress has done as increasing taxes on those who have a certain amount of income, but choose to go without health insurance. Such legislation is within Congress's power to tax."

Obamacare, or the Affordable Care Act, relies upon the individual mandate, which basically says you get insurance or pay a penalty, and that mandate is a tax. We all have to pay taxes, individuals and corporations alike. There are many ways the government spends tax dollars that I don’t like; you probably feel the same way; someone might even have religious objections to the way the government spends tax dollars. But we all have to pay taxes; that decision was handed down a long time ago: “Render to Caesar the things that are Caesar’s and to God the things that are God’s.” And we’ll see if the Supreme Court can recognize the difference.