Wednesday, January 18, 2017

Is It Possible To Outmaneuver The Corporate State

I recently came across this incredible video. In it, Thomas Linzey and Mari Margil make an argument for democracy over the corporate state with regard to local agricultural rights.

There are those that believe this to be frivolous debate, however, I believe we have entered a state of crisis. Consumers are starting to make the connection between political action and purchase decisions. Investors are too. The corporate state does not know what to do. All it knows is that candy is scarce and margins are not what they used to be.


The Mentality of the Corporate State

The corporate state has the mentality of a powerful, fat, two year-old with a mind that could match any modern day legal genius. The legal genius loves candy and is near death, but is too young to listen to reason. Death would be a sad end for such an impressive creature and yet we must do something about its lack of morality if it is to survive. We must give it an education; teach it right from wrong. As investors and consumers, we need to figure out a way to push the corporate state into the next phase of development before it sacrifices our democracy for another piece of candy.

Thomas Lizeny and Mari Margil, along with the Community Environmental Legal Defense Fund (CELD) are attempting to use the law as a way to implement a development program on the corporate state at the local level. While I love what they are doing, I believe it will be ineffective from a legal perspective. No law is going to stop the two year old legal genius from getting to the candy.

It seems logical that the only way to stop a legal structure is with the law, but the corporation is actually very strong legally -- emboldened, as Linzey and Margil state above, by the constitution that appears to be working perfectly. In this vein, and in the vein of Achilles heel finding, the law may not be the best way to change the corporate state. Indeed, it is unlikely that the Achilles heel of a legal structure is the language of the legal structure.

The bad news is that as much as Linzey and Margil try to affect change via the Community Environmental Legal Defense Fund (CELD), it is doubtful that they will ever be able to outmaneuver the law. The good news is that the consumer holds all rights to the only thing the corporate state craves, profitability.

What does this mean from a sustainability perspective? It means if the corporation is concerned about the investor, and the investor is concerned with profit, then the consumer is all powerful. If the consumer is only interested in companies that respect local nature rights, then that's what the corporate state must produce. It is up to the consumer to provide the incentive structure for the corporation.


Best Strategy Moving Forward

The main issue for those of us trying to put some reigns on the corporate state (for its own good I might add) is coming up with the best strategy. We need to create a new incentive structure for the corporate state, one that is incentivized by the health and well being of a democracy.  I believe the best strategy is not legal, but consumer driven. In particular, it is based in knowledge and community education.

Ironically, the CELD may be able to affect more change through its ability to educate than in its ability to beat the corporate state with the law. It will be, as Margil alludes to in the retelling of an Ethiopian saying, the corporation that does not see how the water it swims in is changing -- waters that are not swayed by law, but consumer demand. The more the CELD spreads the word, the more educated and knowledgeable the consumer will be and the more the waters will change. Each battle lost by the CELD will lead to the winning of the war.


Next Post: Can the Corporate Citizen Be Charged Like An Ordinary Citizen

What's hard to understand is that corporations, while legally considered a person, are not. The corporation is driven by profit and profit alone. In my next post I will explore a few ways to change the incentive structure including the comparison of corporate and citizen rights. If corporations are people, they should receive all the advantages and disadvantages of citizenship.

Perhaps the best way to get the corporation to argue against citizenship is to start treating it like one.

Tuesday, January 3, 2017

A New Kingdom: Can You Profit From The New Corporate State


In the lecture above, Noam Chomsky discusses the state of human relations and our existence within an international and historical context.

The most interesting aspect of the lecture is the discussion of the corporate state and its ownership of over 50% of the world's assets. Since corporations own more than the collective state, perhaps it can also be said that the world has a new king.

Kings and Corporations

Our historical record tells us that kings and their nobility once ruled the world. The king had unlimited power. The nobility helped the king to carry-out his/her mission of gaining greater power. This has been an effective power-grabbing model over the centuries and we continue to use the same model today, but in a slightly different way. Instead of kings we have investors. Instead of nobility, we have corporations.

Why Is This Important

To impact change we must know who is truly in power. This isn't a referendum on the corporate state. It isn't bad or good. It is an acknowledgement of the emergence of a new power. The top 12 companies in the world by market share are the owners of the new corporate state.

The corporate state has no official geography and its constitution is a compilation of trade deals. Each corporation is a noble and at the head of all nobles sits the king. The king, in this case, is the investor and the religion of the investor is profitability.

In many ways, the relationship between investor and profitability is a beneficial one. Profitability, and the solutions that drive profitability, provide direct access to the king. Even more powerful is the realization that profitability is driven by 'the people' buying the product.

Though there are many loopholes in this new form of government, profitability is more reliable than the whims of the king. Whatever you believe, we have a stable system for progressive change, but it is important to pull the right lever; it is important to know the role of profitability in our new kingdom.

The Top 12 Corporate Nobles of the Corporate State

Top 12 Companies by Market-cap as of 1/2/2017:

Company NameIndustryPrior Close

Mkt Cap 
AAPLApple Inc.Communications Equipment116.73

622.4 B
MSFTMicrosoft CorporationSoftware & Programming62.90

489.0 B
XOMExxon Mobil CorporationOil & Gas Operations90.35

374.6 B, Inc.Retail (Catalog & Mail Order)765.15

363.5 B
JNJJohnson & JohnsonBiotechnology & Drugs115.49

314.1 B
JPMJPMorgan Chase & Co.Investment Services85.89

307.3 B
GEGeneral Electric CompanyAerospace & Defense31.71

280.5 B
NSRGY Nestle SA (ADR)Beverages (Nonalcoholic)71.395

277.0 B
WFCWells Fargo & CoRegional Banks54.84

275.4 B
FBFacebook IncComputer Services116.35

272.3 B
TAT&T Inc.Communications Services42.66

261.9 B
GOOGL Alphabet IncComputer Services802.88

237.7 B

These 12 companies own a great deal of wealth in the world and the owners of the corporate state have full control over it. When the price of stock in these companies falls, it impacts the entire economy, which means the owners of the corporate state are the investors.

The good and bad news is that investors are almost entirely concerned with profitability. In this way, profitability can be a double-edged sword as investors often decide to choose short-term profitability over long-term firm viability. In other words, the going concern of the firms above is not a large concern for the average investor with the ability to get in and out of stock positions at the click of a mouse. What investors will grow to count on, however, is the impact of consumer demand on earnings and stock price. The irony is that as we enter into a new era of a corporate state, never before in history will the consumer have more power.

How Can Investors Profit From The Coming Trend

Investors reward profitability, so those companies that are able to stay in touch with consumer demand will be the rulers of the new corporate state. This may sound grim to some, but it gives hope that the world can change if the investor does. Even more interesting is the connection between investor and consumer. It is the investor that can decide to move funds to smarter, more agile pockets. For example, I advise my clients to move away from business models driven by store count and price comparison like Wal-Mart and Dollar General, to business models driven by speed and agility, like Amazon.

Saturday, June 18, 2016

FOMC Sees Fed Funds Going To 4% by 2018

Yesterday the FOMC provided a statement about the fed funds rate. The decision: No change.

Janet Yellen gave remarks and answered questions regarding the FOMC's decision to hold rates at this lower bound. Yellen fielded several hard questions from the audience, like "Do you think the Fed overstepped it's bounds in the AIG bailout?" and "Are you aware that housing prices and rents are squeezing the average consumer?" Yellen answered the questions head on, except for a question regarding whether or not the IMF had any business making recommendations about the US Federal Reserve. This question and the subsequent answer were lost.

The main takeaway, the clear message that Yellen was trying to relay, was that any decision to move rates would be "data driven", which is to say that the Fed will base its decision on the data and nothing else. It is a marvel how the Fed can say this and then say that rates will most likely go up before the end of the year. The disconnect is that Q1 data was bad, but the FOMC insists it's transitory, so we'll see.

 Perhaps the most interesting part of the presentation was the dot plot below. It's from a survey of FOMC participants on the timing and amount of rate action over the next 2 years and it's the pace or the trajectory that's fascinating, which is to say that by the end of 2017 the plot shows a fed funds rate hovering around 3-4%, which means at least 3.25 - 4.25 for the IOER. Yellen was surprised by the pace as well and alluded to it in her speech. Whatever the case, if rates do rise at this level banks will have field day.
One interesting note is that the effective fed funds rate is creeping up on its own -- hitting .14% yesterday after hovering around .12% since the beginning of the year.

Friday, June 17, 2016

FOMC Statement Countdown, New Regulatory Rules For Lg/Sm Banks, Construction's Up, Employee Retention's Up & Ohio-based Firm Caught In Ponzi Scheme

  • Waiting on the FOMC to release a Statement about the fed funds rate hike at 2pm today. In the minutes from the last meeting, the Committee alluded to providing more information in the Statement regarding rate hike timing so this could be a very interesting read. The fed funds rate, which has been hovering around .12% - .13% for the past 6 months, popped up to .14% yesterday confirming that banks are easing on lending even without a rate hike.
  • The Federal Reserve Board, FDIC, and OCC finalized revisions to regulatory capital rules adopted in July 2013. The rules apply to bank holding companies with at least $250 billion in total assets and will go into effect on October 1, 2015.  
  • The FDIC approved a proposed rule on risk-based assessments for banks with less than $10 billion in total assets. "In particular, the proposal would base assessments on a model estimating the probability of failure using data from the financial crisis and prior years," said FDIC Chairman Martin J. Gruenberg at an FDIC Board Meeting. "These contemplated improvements would allow assessments to better differentiate riskier banks from safer banks, and allocate the costs of maintaining a strong Deposit Insurance Fund accordingly," he said. It is important to note that the rule appears to be "revenue neutral", but it will add a premium to small banks with riskier profiles which will increase the cost of capital.  
  • The Department of Commerce released the New Residential Construction report for May 2015. Building permits for private owned subdivisions were up 25% over last year, and 2.6% for single family approvals. Housing starts are up over 5% and housing completions are up over 14%. New Residential Construction data for June will be released on Friday, July 17. 
  • The supplemental survey to the June Empire State Manufacturing Survey and Business Leaders Survey was published yesterday and focused on recruitment and retention of workers. ~44% of those surveyed in the service sector and ~34% in the manufacturing sector said that their firms planned on increasing headcount. Only 11% and 13% of manufacturers and service firms reported that they planned on reducing employment. 
  • The SEC announced charges against Ohio-based Equity Trust Company which allowed Ephren Taylor and Randy Poulson to push a Ponzi scheme on more than 100 investors. “We allege that Equity Trust failed to protect the interests of its customers when it acted as more than a passive custodian,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “When custodians like Equity Trust are aware of red flags suggesting an ongoing fraud, they must take action to try to prevent it.” A public hearing will be scheduled before a law judge.

Thursday, June 16, 2016

Federal Reserve Defends AIG Bailout, Production And Manufacturing Down, SEC Charges Trader $2.8M, And New Investment Alert For Seniors

Did the Fed act beyond it's legal authority when it bailed out #AIG? Maurice R. Greenberg, the former chief executive of the American International Group, argues just that in a class-action lawsuit against the government in which he demanded $40 billion -- Starr International Company, Inc. v. the United States. At first the lawsuit was deemed ridiculous but then it started gaining traction. On Monday, the judge finally made a ruling which agreed that the Fed had overstepped its legal authority, but also said shareholders were better off having had the bailout and so no amount was awarded. This is what the Fed had to say in response
The Federal Reserve strongly believes that its actions in the AIG rescue during the height of the financial crisis in 2008 were legal, proper and effective.  The court's decision today in Starr International Company, Inc. v. the United States recognizes that AIG's shareholders are not entitled to compensation for that decision, and that the Federal Reserve's extension of credit to AIG prevented losses to millions of policyholders, small businesses, and American workers who would have been harmed by AIG's collapse during the financial crisis.  The terms of the credit were appropriately tough to protect taxpayers from the risks the rescue loan presented when it was made.
Still, the verdict may set an interesting precedent for those that believe the Fed has gained too much power over the past 5 years with Dodd-Frank and voting power over the IOER. 

Source: Federal Reserve June 2015 Empire State Manufacturing Survey
The Fed released the Industrial Production and Capacity Utilization index (G.17), a measure of capacity utilization for manufacturing, mining, electric and gas utilities. The industrial sector accounts for a large part of national output over the course of the business cycle so G.17 is used as a way to forecast structural changes. Industrial production decreased 0.2 percent in May after falling 0.5 percent in April. I'm confident this trend will reverse soon due to improved labor conditions. The NY Fed released the June 2015 Empire State Manufacturing Survey which showed declining business condition in New York. The index fell five points to -2.0. 

The SEC charged Helmut Anscheringer, a Swiss trader, with trading on insider information ahead of Apple's (Nasdaq: APPL) decision to purchase AuthenTec Inc. Anscheringer purchased stock and call options in AuthenTec Inc. after hearing that Apple wanted to buy the company. A few days after Anscheringer purchased the options and stock, the purchase was announced; Apple would buy AuthenTec Inc. for $355 million in cash which caused the stock price to jump almost 60 percent. Anscheringer made more than $1.8 million on the transaction. He has agreed to pay $2.8 million to settle charges.

The SEC issued an investment alert for seniors. More and more seniors are the target of investment fraud. This alert provides five red flags for seniors when making an investment decision. If you are a senior, or if you care for one, please read this alert.

Finally, GAFI recently published a guest post on SeekingAlpha titled US Bancorp: One Of Buffett's Favorite Banks Still Undervalued By 38%. The post argues that the discount rate for banks and US Bancorp in particular, should be lower than other companies and banks.

Saturday, June 11, 2016

Banks Are Transferring Regulatory Risk to 3rd Parties & Debt Growth Rate Hits 10-Yr Low Due To Government Spending

The Office of Financial Research published a brief titled More Transparency Needed For Bank Capital Relief Trades.  The brief suggests that banks are meeting regulatory capital rules by transferring credit risk to third parties. The paper uses data collected from 18 banks that purchased $38 billion in credit protection. The authors also attempt to estimate the impact of these third party transactions on a banks’ risk-based capital ratios. While this may represent a hole in regulatory policy, its impact is negligible due to the level of capitalization/liquidity in the market.

Source: Federal Reserve, Z.1 Release
The Federal Reserve published a statistical release update for Z.1: Financial Accounts of the United States Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts. As shown to your right, it provides an update on household net worth and non-financial debt at the business, state, and federal level. On an annual basis, the statistic hasn't been lower than 3% for at least the past 10 years, however, Q1 of 2015 showed total growth in debt as 2.8% due primarily to a large drop in federal government spending, which is partially offset by the large increase in the growth of debt at the state and local government level.

Friday, June 10, 2016

Southwest Has Fastest Growing GDP, Nicholas Lattanzio Accused of Operating Phony Hedge Fund

  • The BEA said that GDP increased in 48 states in 2014. The data was made available today and shows that professional, scientific, and technical services were the leading contributors. Real GDP grew 2.2% for the entire US in 2014, and 1.9% in 2013. The fastest growing region was the Southwest region at 4.3% due to contributions from mining in Oklahoma and Texas. Per capital GDP ranged from a low of $35,551 in Mississippi to $66,160 in Alaska. Starting in September the BEA will release quarterly GDP by state.  Tables 1–4 within the release provides greater detail. You can also visit the BEA's Web site at
  • The SEC Charged Nicholas Lattanzio, a phony hedge fund manager in New Jersey, with attempting to defraud small businesses with the Black Diamond Capital Appreciation Fund. According to the press release he defrauded small businesses out of $4 million and used funds to "purchase a million-dollar home in Montclair, N.J., a $124,000 luxury car, and $100,000 worth of merchandise from Tiffany & Co.  He also paid off more than $760,000 in credit card debt, withdrew approximately $570,000 in cash or checks written to himself and his girlfriend, paid more than $30,000 to a yacht broker, and funded his children’s private school tuition and his membership at an exclusive golf club." To read more about this store click here.
  • The FDIC will be meeting on June 16 and the meeting will be available live via the following link:!/channel/1232003497484/Board+Meetings.

Thursday, June 9, 2016

SEC Charges #AZN Inside Traders & 8 Others In Unrelated Securities Fraud Charges Across The Country, #Florida, #NorthDakota, #Kansas, #Nebraska, #Oklahoma, #Arizona, #New York, #Colorado

The SEC charged Michael J. Fefferman, senior director of information technology at Ardea Biosciences Inc, and his brother-in-law Chad E. Wiegand with insider trading. Ardea Biosciences was eventually sold to AstraZeneca PLC (NYSE: AZN). Wiegand, a stockbroker, purchased Ardea and tipped fellow stockbroker Akis C. Eracleous off about the deal.  The alleged insider trading ring amassed $530K in illegal profits. “As a corporate insider, Fefferman breached his duty to Ardea’s shareholders by tipping confidential information about significant corporate events before they were announced,” said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office. All three have settled with the SEC.

The SEC also charged the following people with various unrelated forms of securities and/or wire fraud:

  • Frederic Elm f/k/a Frederic Elmaleh, 45 resides in Fort Lauderdale, Florida. AKA, Elm Tree Investment Advisors, LLC, 45, Ponzi-like payments. Sanctions have been ordered.
  • Robert H. Medhus is a 67 year old resident of Jamestown, North Dakota - 13 counts of securities fraud, sentenced to serve ten years of incarceration.
  • DeVon J. Carlson, age 55 is a resident of Shawnee, Kansas, two counts of securities fraud, sentenced to serve 32 months of incarceration and ordered to pay restitution in the amount of $231,078.
  • Brian J. Schuster, age 41, is a resident of Ashland, Nebraska, four counts of securities fraud, sentenced to serve between 80 months and 16 years of incarceration.
  • Jason Matthew Pennington age 43, is a resident of El Reno, Oklahoma, charged with wire fraud, sentenced to serve 42 months of incarceration.
  • Rebecca L. Engle, age 61, is a resident of Green Valley, Arizona, Engle pled no contest to two counts of securities fraud, sentenced to serve between three and six years of incarceration.
  • The ELIV Group, LLC and Scott Valente, Valente is 57 years old and is a resident of East Greenbush, New York, fraudulently lured approximately eighty individual investors, sanctions have been imposed.
  • Clinton D. Fraley, age 38 is a resident of CaƱon City, Colorado, one count of securities fraud in violation, sentenced to serve 12 years of incarceration and ordered to pay restitution in the amount of $617,710.

Wednesday, June 8, 2016

Fed Research Shows Drop In Oil Prices Due To Increased Global Supply & Inflation Expectations Were Up 3% in May

  • Liberty Street Economics, the research leg of the NY Federal Reserve published an article titled Is Cheaper Oil Good News or Bad News for U.S. Economy? The authors use correlations of oil price changes with different variables to show that the fall in oil prices is due primary to increased global supply. They also speculate that the effect of the supply shock is expansionary, but will have a "relatively modest stimulative impact on economic activity, which will peak around mid-2015." According to the post, the effects of the price decrease should fall off by early 2016. 
  • The results of the May Survey of Consumer Expectations show that one-year ahead inflation expectations rose to 3.0%. Median household income increased slightly, with more significant increases for lower income households. Household income growth expectations also increased slightly to 2.9%.

Thursday, June 18, 2015

SEC Charges 36 Firms In Massive Muni-Underwriting Shakedown Including Citigroup, Merrill, Morgan Stanley & Goldman Sachs

The SEC announced enforcement actions against the banks listed below. These are actions specifically for violations in municipal bond offerings. What's interesting about this case is that banks got off easy.

As a way to incentive banks to self-report material misstatements and omissions in muni-offerings the SEC offered firms favorable terms for self-reporting. This is referred to as the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.

“The MCDC initiative," said SEC Chair Mary Jo White, "has already resulted in significant improvements to the municipal securities market, including heightened awareness of issuers’ disclosure obligations and enhanced disclosure policies and procedures. This ongoing enforcement initiative will continue to bring lasting changes to the municipal securities markets for the benefit of investors.”

LeeAnn Ghazil Gaunt, Chief of the Enforcement Division’s Municipal Securities and Public Pensions Unit had this to say, “The settlements announced today reflect these underwriters’ cooperation in self-reporting their own misconduct and agreeing to improve their procedures going forward. Because these 36 firms underwrite a substantial portion of the country’s municipal bonds each year, we expect a large number of bondholders will benefit from the resulting improvements in due diligence and disclosure.”

The firms did not admit or deny the findings, but agreed to "cease and desist" from any future violations -- typical legal doublespeak.

The maximum penalty for each firm was $500,000.  Of the 36 firms charged, 8 received the maximum penalty.

Link to the SEC’s orders and penalty amounts:
•           The Baker Group, LP – $250,000
•           B.C. Ziegler and Company – $250,000
•           Benchmark Securities, LLC – $100,000
•           Bernardi Securities, Inc. – $100,000
•           BMO Capital Markets GKST Inc. – $250,000
•           BNY Mellon Capital Markets, LLC – $120,000
•           BOSC, Inc. – $250,000
•           Central States Capital Markets, LLC – $60,000
•           Citigroup Global Markets Inc. – $500,000
•           City Securities Corporation – $250,000
•           Davenport & Company LLC – $80,000
•           Dougherty & Co. LLC – $250,000
•           First National Capital Markets, Inc. – $100,000
•           George K. Baum & Company – $250,000
•           Goldman, Sachs & Co. – $500,000
•           Hutchinson, Shockey, Erley & Co. – $220,000
•           J.P. Morgan Securities LLC – $500,000
•           L.J. Hart and Company – $100,000
•           Loop Capital Markets, LLC – $60,000
•           Martin Nelson & Co., Inc. – $100,000
•           Merchant Capital, L.L.C. – $100,000
•           Merrill Lynch, Pierce, Fenner & Smith Incorporated – $500,000
•           Morgan Stanley & Co. LLC – $500,000
•           The Northern Trust Company – $60,000
•           Oppenheimer & Co. Inc. – $400,000
•           Piper Jaffray & Co. – $500,000
•           Raymond James & Associates, Inc. – $500,000
•           RBC Capital Markets, LLC – $500,000
•           Robert W. Baird & Co. Incorporated – $500,000
•           Siebert Brandford Shank & Co., LLC – $240,000
•           Smith Hayes Financial Services Corporation – $40,000
•           Stephens Inc. – $400,000
•           Sterne, Agee & Leach, Inc. – $80,000
•           Stifel, Nicolaus & Company, Inc. – $500,000
•           Wells Nelson & Associates, LLC – $100,000
•           William Blair & Co., L.L.C. – $80,000