New York Magazine – The Frustrated CFO

Amendment to My Post on Vogue Covers, etc.

Those who have read it may remember that I specifically noted in that post that the possibility of diminishing number of the Confused Liberal Hipsters who misguidedly uphold Lena Dunham in high esteem as their feminist hero can be just my wishful thinking. Still, I feel obligated to tell my readers that yes, indeed, it was nothing more than a momentary slip into an illusion that people may be getting a little bit less stupid.

I cited New York Magazine's long-time silence about Girls and its creator as a hopeful sign. Well, I spoke too soon: In the current issue The Approval Matrix placed that (I mean the image in the picture) on the Brilliant side.

Then again, they might've been sarcastic… Like in, "brilliantly exploitive and shockingly repetitive," or something? You never know nowadays – hipsters don't possess genuine humor. Thanks, Tina Fey! And guess what? See the article below.

Lena Dunham Hosting SNL on March 8!

Quote of the Week: “Man of Steel” and New Hollywood Economics

"Watching the unprecedented spectacle of this Superman picture, I thought of the producer Lynda Obst's new book, Sleepless in Hollywood, in which Obst explains why studios are making so many action-heavy, 3-D, Imax monstrosities in lieu of anything else: This is what plays in the rest of the world, especially China, from which an astounding 80 percent of studios' profits now come. The greed on display extends to the product placements. Amid the explosions and flying debris, the Sears, 7-Eleven, and IHOP logos are visible from all angles. Critics and even the American public might be cool to this War of the Worlds take on Superman, but if Asian markets are onboard, it's pop-the-cork-and-green-light-the-sequel-time: truth, justice, and the Chinese way."

David Edelstein

New York Magazine

June 24 – July 1, 2013 issue

The Lopsided View of Corporate Taxation

In October 24th issue of New York Magazine, Andre Tartar's Intelligencer column featured a black-background Darth-Vader-sinister entry, disdainfully called The Freeloading Playbook (see the page's image to the left). It presented four "tax-dodging" schemes employed by international corporations. I have quite a few problems with the piece, but will focus on the misleading interpretations that I believe to be the most damaging to the education of general public on such important subjects as political economy and corporate taxation.

First of all, as far as an average reader is concerned, the implications are that the corporations are engaged in unpunished tax-evasion practices. This is a gross distortion of truth. We can argue for years about the nature of trickery, but the fact is that the Internal Revenue Code had deliberately created these loopholes to accommodate the international expansion of the US business, and the companies simply utilize the opportunities the tax laws allow them. I assure you that there are other ways to reduce taxable income, including transfer-pricing of inter-company transactions (between the US parent and foreign subsidiary, or other way around).

Secondly, "freeloading" by definition means living off somebody's generosity. Way to further confuse clueless Zucootti-Park affectionadoes! Whose generosity we are talking about here? Those who get the biggest chunks of the revenue derived from corporate taxation? The military complex? Government-subsidized industries like automaking and agriculture? Chinese bankers (the interest on their loans to the US government must be paid)? Welfare recipients?

Also, I am absolutely appalled by the fact that the companies that reinvest their earnings into their international value chains are thrown onto the same page with actual schemers who creatively avoid taxation (still legitimately, though) through M&A transactions and intellectual property licensing. Notice how for "Double Irish," "Killer B," and "Deadly D" Mr. Tartar came up with singular examples – Google, IBM, and Eli Lilly respectively, while for earnings reinvestment he chummily states, "like, everyone."

Yes, everyone, including thousands of international small businesses who set up foreign subsidiaries as their distribution arms to sell US products abroad. (These structures are so common that I used one of them as a typical example in my book CFO Techniques– see the illustration below.) So, they don't repatriate all of their money because they incur operational expenses overseas in the normal course of business. That doesn't mean that they should be compared with the 500 super-rich companies.

M. Guzik, "CFO Techniques," Apress, 12/02/2011; Figure 5-1.

What exactly Mr. Tartar and others like him would like to propose? That establishing foreign subsidiaries for the sake of running more efficient businesses should be prohibited altogether by law, like it was in the Eastern bloc countries during the communist rule? Or that we allow double-taxation? Guess what? Business super-powers will survive anyway, but the small businesses exposed to such treatment would cease to exist.

And why nobody questions the incredible fact that in this supposed bastion of free-market economy we have practically the highest corporate taxes in the world – up to 38% federal, plus up to 12% state? So, in some localities there are companies who end up paying 50% of their income to the government. We have over 6 million companies with less than 100 employees in this country, and they are suffocated by these rates. Why don't we approach the taxation problem from that side?

Those who have at least rudimentary understanding of commercial principles and really care about our economy should be arguing for the protection of small businesses every chance they get, instead of throwing around meaningless and confused statements like the ones in the "Intelligencer."

Perversity of Super-Rich: Walmart

Since Walmart and their subsidiaries (including Sam's Club) are public companies, the Waltons (Jim, Alice and S. Robson) are on the Forbes' billionaires list – numbers 20, 21, and 22 at $21 billion each. That's their holdings in Walmart stock. Well, let's say there is a few more billions in their private holdings. Does not matter. When it comes to bargaining for the Walmart's interests they come as one, so to evaluate their real power we should combine their wealth. That puts them into competition for the first place on the world-wide list – definitely above Bill Gates and Warren Buffet. No question – a very power family.

Many people have problems with Walmart for many reasons – they destroy local business, they discriminate, particularly against women (Funny how that class action suit was dismissed by the Supreme Court on account of women being too different to represent a class. Well, they all have vaginas, don't they?) But you cannot deny the fact that they are the country's largest employer with a steady growth. Remember my previous New-York-Magazine-Intelligencer-prompted post The New Economic Reality of Unemployment? 2.1 million people – where would they go, if it was not for Walmart? Of course, most of them make very little money, but it's still more than the government's help.

Anyway, it's a free country and I love capitalism (not the bastardy, distorted, perverted paper version we have now, but the real demand & supply model). Then again, if they push out of business your local bakery, there is no way you will ever be able to get the same quality bread in Walmart. So, that's kind of sad. But as long as they compete fairly…

Well, that's a bit of a problem. Look, now they are planning on coming to the place that cultivated boutique retailing for decades now, my hometown – New York City. And there is nothing fair about the way they try to get in. As a matter of fact, they do it in the most perverse way – by buying their way through resistance with charity donations. According to Eric Benson's Intelligencer report from the last New York Magazine shown here (you can also read it here Big-Box Rolling), since they started campaigning for the location in Brooklyn, they have spent $13 million on charitable giving in New York. Which small farm-to-table store can compete with that?

And I am sure there are plenty of people who think it's a good thing – "they are helping…" They are helping themselves to increase those $260 billion of annual revenues – that's what they are doing. They did not give a penny to those charities before and, I am sure, if someone told them "No" today, the donations would stop immediately. How sick is that? You cannot openly bribe the officials, so you do this? That's not charity, that perverse marketing, and they shouldn't be allowed to use it as a deduction on their tax return.

Well, what can we do? They are super-rich. As I said in my last post, they can do WHATEVER THEY WANT.

The New Economic Reality of Unemployment

A couple of weeks ago New York Magazine used The Hiring Gap chart (see picture) as their Intelligencer topic. It compares domestic employment powers of ten "most valuable" ( in terms of their market capitalization) public companies in America in 1964 (converted into 2011 dollars) and now. Even though the numbers on their own are very striking and Andre Tartar's few-lines of commentaries and footnotes cut right through the fact that

"being a top American business no longer… means employing lots of American workers,"

the data left my calculating mind somewhat unsatisfied; it begged for further interpretation.

First of all, it's the damned "market capitalization" crap, which nothing more than a perceived value of the company by investing public – the very same public that cannot evaluate companies on its own and follows the leads of their brokers, WSJ analysts, CNBC (especially if they are doled out by sexy Maria Bartiromo or engaging Jim "Mad Money" Cramer), etc. Thankfully, there is an instrument we can employ to make these numbers somewhat more real – Price-Earnings Ratio:

Here is the new ranking of the 2011 listing, based on the companies' earnings.

Only three giants retained their places in this modified view: Exxon, Berkshire and Google. And, by my standards, those three are overpriced anyway: any stock with P/E ratio higher than 11 is overpriced. Google with 20 – ridiculous. Of course, it's not as bad as some other stocks, like Wynn Resorts, for a example, with a preposterous 60. It always shocked me that people buy stocks like that and then act all surprised when their savings go, "Bye-bye."

Another interesting angle of the chart is its reflection of the fundamental changes in industrial mix of Large-Cap companies, which speaks volumes about this country's economic and social environment. The only two companies present on both lists are GE and IBM. In 1964 we did not have any financial institutions big enough to claim not just one, but two spots in the top 10. The three tangible goods manufacturers that drove the US to its economic dominance in the 60s are gone off the list – GM, Dupont and Kodak. So, is the telecommunication super-power of the time – AT&T. Now, we have Apple and Microsoft, dividing the world into two camps of PC vs. Mac users. And isn't it comforting to know that as far as our OIL-dependence is concerned, we are still at the same point as we were nearly half a century ago?

Now, the focal point of the piece – the dwindling number of the jobs infused by these companies into American economy. In accordance with proper statistical rules, let's explain away the two companies with the highest and the lowest number of workers. Walmart employs 2.1 million of people, but it is irrelevant, and not because their average salary rate is one of the lowest in the country, but because their expansion put out of business smaller chains and thousands of independent retailers. Google, on the other hand, generates the majority of its revenue without any human participation, so I am surprised even by the 24K number.

Look at our beacons of stability, though – GE's number practically did not change and IBM employs nearly three times more people now than they did 47 years ago. Holla to that! The rest of them… well, we all know the story – there are three reasons for jobs going away and never coming back:

Technological advancements contributing into increased efficiency.
Outsourcing = jobs going abroad.
Globalization of manufacturing and support services = jobs going abroad.

At the time this issue of New York Magazine came out, the unemployment rate was at 8.8%. Now it's 9%, and I believe that unless something changes fundamentally in our economic structure, it is only going to get worse. The new reality is that we cannot look at the giants whose operations financed through their publicly-traded stocks as the source of new jobs.

As long as investors listen to analysts' opinions and follow the "trends," the large companies' executives will continue applying their hardest efforts to minimization of costs in order to preserve their multi-million compensation packages. The workload will continue being exported abroad and jobs will disappear.

At this point, we can only rely on small and midsize American business for the influx of new jobs. That's where the efforts must be concentrated: helping the existing smaller companies' survival and stimulating creation of new entrepreneurial businesses.

Those who read this blog consistently know that I am developing a product that will help small and midsize businesses in their daily struggle for success, assuming I manage to solicit sufficient venture capital.

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