Morning Report: Hillary’s “vision” for corporate America 7/27/15

Markets are lower after Chinese stocks dropped 8% overnights. Bonds and MBS are up.

Durable goods orders came in at 3.4%, a good reading. Durable goods ex-transportation rose 0.8% versus the 0.5% estimate. Capital goods orders rose 0.9% while shipments fell. The Capital Goods number is used as a proxy for business capital investment – businesses look like they might be investing in capacity in the future, but so far they aren’t.

The biggest event this week will be the FOMC meeting on Tuesday and Wednesday. No one expects the Fed to raise rates at this meeting, since there is no press conference. The drop in commodity prices certainly gives the Fed room to hold off on raising rates. Some economists think the Fed might actually be closer to hitting its 2% inflation target than the consensus seems to be. The key is wage growth. And so far, it is nonexistent.

Speaking of commodity prices, here are the states which have the most exposure to commodity prices. The top nine states on the map got at least 10 percent of their gross state product from energy, mining and agriculture last year: Wyoming, Alaska, North Dakota, West Virginia, Oklahoma, Texas, New Mexico, Louisiana and South Dakota. There is a massive spread between the states, with Wyoming getting 36% of its state domestic product from mining and agriculture, versus places like Connecticut, which gets 0.2% from mining and ag. We will get a read on Texas (almost 15%) tomorrow when homebuilder D.R. Horton reports tomorrow morning.

Overall, don’t sweat the drop in commodity prices on the economy. While it does hurt earnings in the oil patch, most people are users of commodities and benefit from lower prices.

Hillary Clinton is going to push her plan to end “corporate short termism,” by raising capital gains taxes. Not sure how that is going to help, but she has her story and she is sticking to it. She is going to review securities regulations in order to help companies defend against activist investors. Not sure what her corporate governance vision is (I am afraid to ask), but essentially her goal is to compel companies to shift the amount they plow into stock buybacks into “investment,” whether that is capital expenditures or salaries. I hope this is just specious pablum for the Democratic party base – because it demonstrates a gross ignorance of how companies make decisions. Not only that, but government induced “investment” creates gluts which cause bad busts. Always has, always will. We are still digging out from the last glut (residential real estate).

30 Responses

  1. Frist. I would also add with Hillary’s corporate governance idea is that corporations are incorporated at the state level and the laws are implemented by the state. For some reason, most corporations are incorporated in Delaware.

    As far as I know, there is no “federal charter” for a corporation.

    Note that abolishing the state charter and implementing a Federal one has long been a goal of the left:

    http://www.amazon.com/Taming-Giant-Corporation-Ralph-Nader/dp/039300872X

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    • At the turn of the century, New York and Illinois had truly restrictive corporate laws. Delaware revised its chartering to streamline corporations, which essentially puts more control in management, which must jump through fewer hoops. After Delaware did this, most of the then prominent corporations became chartered in DE.

      The ABA’s Model Corporation Act is generally a streamlined DE type affair. Many western states adopted DE like platforms. TX is a DE type state. So is AZ. But NY, IL, and CA remain hold outs for red tape enhanced corporate governance.

      So there are major corps at home in TX and AZ, for example, as well as DE, but few claim NY, IL, or CA.

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      • I should add that the one issue that seems to me to be improperly resolved in Citizens United is that a state should have the right to create a vehicle to invest in entrepreneurship/commerce/business that has limited entity level speech rights, and the right to create a separate vehicle for the purpose of investing in a business that is essentially one of press or speech or religion, with full 1st A rights. If a state can abolish a corporate structure entirely it should be able to define it. Of course, if corporate owners want the right to control the entity’s speech with investor funds and the state doesn’t grant it then they can incorporate in a state that does. Right?

        Seems like a state issue to me except for the entities that own media and production companies, churches, political organizations, etc.

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        • Mark:

          I should add that the one issue that seems to me to be improperly resolved in Citizens United is that a state should have the right to create a vehicle to invest in entrepreneurship/commerce/business that has limited entity level speech rights

          How can that be if the first amendment has been incorporated by the 14th to apply to states?

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        • Definition issue. State can create entities of various types, as you well know. There would be no incorporation issue for an entity that was created not to have general free speech rights by definition. It doesn’t limit the rights of individuals.

          If, however, the entity was a specific purpose political, or press, or religious entity I think incorporation would apply.

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        • Mark:

          Definition issue. State can create entities of various types, as you well know. There would be no incorporation issue for an entity that was created not to have general free speech rights by definition.

          When I made essentially the same argument regarding Obergefell (ie SSM was a definitional, not an equal protection, issue) you called it a circular argument and said that it fails in light of equal protection. How is this different?

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  2. “Not sure how that is going to help, but she has her story and she is sticking to it.”

    Reminds me of how Bill Clinton was going to curtail excessive executive compensation by disallowing the tax deduction for any salary over $1 million.

    We all know how well that turned out.

    http://www.washingtonpost.com/blogs/wonkblog/wp/2012/08/16/bill-clinton-tried-to-limit-executive-pay-heres-why-it-didnt-work/

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  3. I’m thinking this doesn’t end well:

    “Chinese Shares Tumble Again
    By NEIL GOUGH
    JULY 27, 2015”

    http://www.nytimes.com/2015/07/28/business/international/chinese-stocks-plummet-in-shanghai-and-shenzhen.html

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  4. Re China, the mood of investors over there is “Why doesn’t the government do something about falling share prices” They really have the communist mentality that government can set prices.

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    • Brent:

      the mood of investors over there is “Why doesn’t the government do something about falling share prices” They really have the communist mentality that government can set prices.

      Substitute “rising executive compensation” (or, really, any number of other things) for “falling share prices” and you could be talking about the modern Democratic party in the US.

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  5. This should go over well:

    “The activist behind the videos, David Daleiden, has said he has enough covertly recorded footage for perhaps a dozen videos that he could release, one a week, for the next few months. Planned Parenthood has told Congress that it believes the next installments could have a racial element to them, with its employees possibly discussing the different characteristics of the extracted fetal tissue based on race. The group also says it knows that Mr. Daleiden or his colleagues were admitted into a clinic area that processes tissue after abortions, and it believes they may have obtained footage of that as well.”

    http://www.nytimes.com/2015/07/27/us/politics/republicans-alter-script-on-abortion-seeking-to-shift-debate.html

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    • The NYT, waterboy of the left..

      Not shown in the videos is the doctors’ insistence that they would not profit from tissue donation, which is illegal, and that their motivation for collecting donated tissue was scientific, not financial.

      This is a straight-up lie. The full, un-edited raw footage, including everything the doctors said, was released at the same time as the shorter, edited clips. A transcript of the full videos was also released. Funny how the NYT doesn’t explain how it knows what wasn’t included in the shortened videos.

      How ironic that the NYT needs to withhold relevant facts in order to accuse someone else of withholding relevant facts.

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  6. Lots of caterwauling in the press about illegal filming, but press was silent on Romney’s 47% remark and when Mother Jones secretly taped a McConnell meeting on dealing with Ashley Judd.

    When damaging audio / video hits a republican, MSM concentrates on the content
    When damaging audio / video hits a democrat, MSM concentrates on process

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    • Brent:

      When damaging audio / video hits a republican, MSM concentrates on the content. When damaging audio / video hits a democrat, MSM concentrates on process

      Yup. The strategy is so obviously transparent.

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  7. I hadn’t seen this:

    “Last week, the Equal Employment Opportunity Commission dropped an astounding ruling: By a 3-2 vote, it concluded that “sexual orientation is inherently a ‘sex-based consideration,’ and an allegation of discrimination based on sexual orientation is necessarily an allegation of sex discrimination under Title VII.””

    http://www.theatlantic.com/politics/archive/2015/07/legal-rights-lgbt-discrimination-religious-freedom-claims/399278/

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    • jnc:

      “Last week, the Equal Employment Opportunity Commission dropped an astounding ruling: By a 3-2 vote, it concluded that “sexual orientation is inherently a ‘sex-based consideration,’ and an allegation of discrimination based on sexual orientation is necessarily an allegation of sex discrimination under Title VII.””

      Add that to the already overflowing pile of evidence confirming that we are no longer governed by either elected representatives or the constitution.

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  8. JNC, If I am on the first trial court to hear the EEOC’s ruling challenged, EEOC loses.

    I think orientation=gender will not fly under the statutory definitions.

    Scott, I was going to repeat back your marriage argument in advance but decided to wait to see if you thought it was parallel. In my view it is not, because corporations are legal fictions created by state law, and what rights and privileges we give them is not coextensive to the rights and privileges of human adults.

    However, it is inescapable that certain corporations must have free speech rights in the political context; eg., newspapers, incorporated political parties, churches, cable TV companies, and so many more.

    A state could define out a group of corporations that is, fictional entities that limit the liability of their managers, that have very limited rights; say, for example, the right to own graveyards and be “non-profit”. In fact, states do that. I would see no problem with a state limiting such a vehicle’s freedom of speech in exchange for the limited liability and escape from state taxation of the real property.

    I could see a mineral rich state, like Texas, saying if you want to drill on TX public land and at the same time be free from individual liability we will provide you with such an entity, but it cannot as an entity devote cash to the political process. If you want to drill on public land and give to the Land Commissioner or the Railroad Commission or the AG or the Governor you cannot be liability shielded.

    That to me was the weakness in the sweep of CU, a case whose narrow holding I applaud.

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    • Mark:

      Scott, I was going to repeat back your marriage argument in advance but decided to wait to see if you thought it was parallel.

      Lol. Great minds….

      In my view it is not, because corporations are legal fictions created by state law, and what rights and privileges we give them is not coextensive to the rights and privileges of human adults.

      That applies equally to marriages, does it not?

      BTW, I am somewhat playing devil’s advocate here, since I think the two arguments are parallel, and so I think your argument about state incorporation is as legitimate as mine is about SSM (which I obviously think is correct). So in a country where the constitution was properly understood and adjudicated, I would agree with your point. But within an interpretation of the constitution that holds that a state cannot constitutionally define legal marriage as it sees fit, I doubt that it can be legitimately argued that a state can nevertheless define legal incorporation as it sees fit.

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  9. Hillary Clinton is going to push her plan to end “corporate short termism,” by raising capital gains taxes. Not sure how that is going to help, but she has her story and she is sticking to it

    Two thoughts. The first is that preferential treatment of capital gains income is to have a sliding temporal scale with only long term cap gains getting the Full Monty. That does target “corporate short termism”. Mind you, the last thing we need is to once again complicate the tax code. I’d go with zeroing out corporate taxes (which don’t bring in that much anymore anyway) and taxing cap gains as ordinary income after indexing for inflation.

    The second one being that we’ve had an extended experiment in reduced taxation of cap gains and the bread and honey have yet to flow. S’allright. Have fun arguing in the negative gents.

    BB

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  10. @Fairlington Blade: “Mind you, the last thing we need is to once again complicate the tax code. ”

    They’re going to ban you from DC if you keep talking like that, mister.

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  11. The first is that preferential treatment of capital gains income is to have a sliding temporal scale with only long term cap gains getting the Full Monty. That does target “corporate short termism”.

    Why do you think the tax rate a stock investor pays will influence how management runs the company and allocates capital?

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  12. An activist trade usually takes a long time to play out. You have to establish a position, start dialogue with management – you never go in guns blazing from the get-go – if anything you are trying to get them to institute a share buyback or spin off an underperforming business line or sell the company. These things take time.

    The old days of Carl Icahn cashing in for some quick greenmail are gone, and IIRC, the short swing profit rule is still in effect for 10% holders who hold less than 6 months. Greenmail is fast, catalysts are not.

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  13. @ScottC: “Third PP/fetal harvesting video released. Seems like this is going to be a weekly event for some time to come.”

    I’m guessing the left out the parts where, at the beginning and the end, the PP people explained that the following was a improv dialog they were doing for a script they are working on about a dystopian future where hospitals traffic in body parts. Fraudulent!

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  14. @ScottC: “An interesting critique of, and questions for, the libertarian argument against state recognition of any marriage.”

    Obviously, privatizing marriage is insufficient, and marriage should be forbidden!

    Somehow, I don’t think that would work out.

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  15. Hey Brent. The comment was sparked as your post left the impression over-simplified Clinton’s proposal. It is a straw man to claim that Hillary thinks raising the cap gains rate will reduce short term focus. Her position is more nuanced and does address short term vs. long term cap gains. I make no argument about how management runs the company and allocates capitol. I would make the argument that management does respond to influence of outside investors in pursuit of short term gains. Affect that and you do affect behavior.

    BB

    Like

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