Archive for September, 2014

Thank you, Mr. November

The moment is still etched in my memory.

The Yankees trailed Arizona by one game going into game 4, and it looked as if they would be down by two.

It was only through gutsy pitching in game 3 that prevented the Bombers from reaching the brink of elimination in the 2001 World Series.

The Yankees were down going into the ninth inning of game 4, but a home run by Tino Martinez tied it and set the stage for the first major league baseball game ever to slip into November.

Game 4 started on Oct 31st – the baseball season shut down for a week after the terrorist attack on the World Trade Centers on 9/11, pushing back the playoffs. Derek Jeter was having a dismal time at the plate against Arizona to that point.

As Jeter came to bat in the 10th, the clock chimed 12 times over the PA system to herald the historic chronological milestone.

He worked the count brilliantly against Byung-Hyun Kim after being down two strikes with two outs. It was 3 and 2. An out would push the game into the 11th inning. Mariano Rivera would have had to take the mound again. The ace reliever had already saved game 3 with two innings of work and had one more this evening.

After fouling off a pitch hard down the right field line, he was ready for Kim’s next offering.

Jeter, a right-handed hitter, took it to the opposite field again. This time, he straightened it out and lifted it higher. It sailed several rows back behind the fence. Game over. The rest is history. Mr. November was born….and my primal scream of victory could be heard throughout Valley Village. Just ask my wife. She was ready to call 911.

Jeter was a career 300 hitter. His stats in post-season play were even better. He tops most of the offensive categories for all playoff levels combined, and fares well in those limited to the World Series.

His calm and professional demeanor ranks with the best.

I was privileged to have followed the fortunes of the Yankees from the Mantle-Maris-Ford years, through the successful, but turbulent, years defined by Reggie Jackson, Thurman Munson and Billy Martin, to the Jeter led class which included Mariano Rivera, Andy Pettite, Jorge Posada and Bernie Williams. The last group was one of the best to come up through the Yankee farm system. With the exception of Pettite, whose time with the Yankees was interrupted for a few seasons with Houston, the five played their entire careers in New York.

Jeter was named captain of the Yankees in 2003. He had the longest tenure of any in the franchise’s history. Don Mattingly preceded him, but had to retire in 1995 due to back problems. The position was vacant until Jeter was named to fill the role. One wonders how much better the Yankees would have been with both Jeter and Mattingly playing together into the late nineties.

It will be a few years before the Yankees can assemble another winning combination, but they will. History and tradition assures it.

And Jeter will serve as their model.

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President Obama delivered some overdue tough and frank talk today at the UN.

He vowed to fight the ISIS “Network of Death” and urged Muslims to resist the call to Jihad. He backed his words up with another round of air attacks on ISIS assets. This came on the heels of attacks against the Khorasan group, a very small band of hardened terrorists virtually publicly unheard of until recently.

However, despite his hardened tone, the President may have over-delivered on his ambitions to destroy and degrade these perverse criminals.

ISIS is the closest thing to a terrorist nation in the world. It has a functional leadership hierarchy, infrastructure, an organized fighting force and money. Unlike other terrorist movements, it is a political and geographic entity which is in the business to secure territory and expand its control both psychologically and physically. It is not one content with operating out of caves and remote areas as al-Qaeda is.

This makes the current round of aerial assaults a viable tactic. Today, an oil refinery under the control of ISIS was hit, taking a bite out of the group’s revenue stream and fuel supply chain. It hasn’t been since World War 2 that an enemy’s industrial facilities have been primary targets.

But what happens after we have hit the brick and mortar assets?

Well, it is likely, then, ISIS will adopt the Khorasan model and operate out of small, but dangerously effective, cells. There is no shortage of suicidal lunatics willing to execute the most heinous attacks against people of goodwill.

With or without intervention of US ground troops, both ISIS and Khorasan will continue to operate with near impunity.

What Obama needed to say….no, demand….was that the Arab nations take the lead in relentlessly attacking every follower, every cell associated with these deranged fundamentalists. The destruction must come from within the region to be even somewhat effective.

More importantly, Arab governments need to emerge from the Dark Ages and introduce basic freedoms in their societies. Otherwise, there will always be willing recruits for new and deadly movements.

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Bernie’s Big Spin

As with many of you, my Facebook news feed is splattered with exaggerated, if not false, claims. There is almost always a partisan political motive behind these memes.

The most common ones I encounter involve variations of the following:

– Planes did not crash into the World Trade Towers on 9-11.
– President Obama is a Muslim
– Vladimir Putin is the Antichrist

OK, the last one is probably true.

The latest rage is a quote from Senator Bernie Sanders.

“One out of four corporations doesn’t pay a nickel in (federal income) taxes.”

Is there some truth to this statement?

It depends on how you slice and dice the stats, and the Senator is performing some surgical slicing.

The data behind the seemingly stunning assertion include firms with legitimate losses; that is, after you subtract the cost of goods sold and overhead, such as salaries, office rent, professional services, etc, there was no profit to report. Understandably, when you have no profit, there is no tax. It works that way for small businesses as well.

The ratio might be closer to 1 out of 16, but no worse than 1 out of 6, according to an analysis by PolitiFact.com.

But the complexity of the tax code makes any analysis, including the one underlying Sanders’claim, sketchy.

For one thing, too much weight is given to rules that defer taxes. For example, accelerated depreciation merely reduces taxes in the early life of an asset, but the benefit turns around in the later years and results in a lower deduction. I would hardly call that tax avoidance.

The steady growth of S Corporations further muddies the waters as more corporate earnings are shifted to individuals. The S type became the most prevalent form of corporate entity in 1997. S corporations do not pay income taxes. Instead, the earnings from this corporate type are passed directly to the owners, who report them on their individual returns.

S corporation owners must either be citizens or residents, so all income is within reach of the IRS. Owners cannot be corporations or partnerships.

The impact of investment tax credits need special consideration. These credits are incentives for companies to reinvest in assets that improve productivity. They represent a permanent reduction to corporate taxes – the savings will never be reversed in subsequent years as deferred benefits are.

Credits are allowed for certain types of equipment, solar energy installations and even film production. The government assumes an economic benefit will be derived from such investment. To at least some degree, that is true. When analyzing whether corporations are understating taxable income, these credits need to be considered and effectively added back as if they were not used.

Even those corporations that truly bypass the IRS by funneling income overseas cannot avoid entirely shielding their income from United States income taxes. The dividends they pay are taxable to the shareholders.

The point I am making is that politicians can play it fast and loose with the numbers depending on the range of data they select, just as MSNBC and Fox dissect the news to support their opposing points of view.

So please think twice before you share out of context “truths” you receive on Facebook.

Remember, the more astonishing the assertion, the more likely it should be discounted.

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Most people I know, including many in the Neighborhood Council system, would support an increase to the minimum wage.

But $13.25 or $15.00 per hour?


They, as I, realize it is not quite what the politicians make it out to be.
Increasing the minimum wage that dramatically will not be the beginning of the end to poverty, much less the end.

The effect will not be uniform; there will be winners and losers for both employers and employees. This will be very evident on the extremes – large firms who do not rely heavily on unskilled or low-skill labor will most likely absorb the additional costs with little effect on margins and employment.

Small businesses with modest margins will certainly reduce staff or perhaps go out of business. Not a good prospect for anyone.

Even those businesses who can handle the increased costs may gradually alter their hiring criteria. At $13 to $15 they will expect employees who can add to productivity, are flexible and have potential to advance and handle more complex duties. You may find some college grads who have heretofore been underemployed taking jobs they would have otherwise ignored, thereby displacing the most unskilled workers.

The effects will vary considerably by company and industry, but it is a certainty that a measurable number of unskilled workers will join the ranks of the unemployed.

The big question is the twilight zone of employers who will be able to cover most of the additional costs, but will not be able to remain as competitive. Fast food franchises come to mind, but any small business will face a challenge. Some will not have the option to raise prices, or even if they did, the increase will be limited by market forces.

In effect, we will see zombie firms staggering through an apocalypse of near failure – one that will ultimately lead to their final demise as sure as a bullet in the brain kills the undead in The Walking Dead.

One of the ways a profitable firm can meet its end is by technical default on its bank loans.

Lower margins can cause a company to miss making certain key financial ratios as required under lending covenants – this is an example of a common technical default.

Several years ago, I spent many months modeling debt workout scenarios for troubled fast food franchises whose profit margins were declining due to a problem with suppliers. Working closely with the franchisor, our team was able to formulate viable solutions for most franchises, but there was a cost. The least profitable locations were eliminated (along with the respective jobs), losses would usually result on the sale of stores or select assets. Everyone took cuts in pay. More restrictions were placed on the owners.

Refinancing terms would stretch payments out over a longer term, improving cash flow, but making the prospects for future expansion more difficult.

The alternatives were not good. Failure to eliminate the technical defaults would almost always lead to the dissolution of the franchise…… and there were those beyond any form of assistance.

So, while some minimum wage employees will enjoy a better life, many will have trouble scraping up money to buy a higher-priced burger and will be edged out of the employment market by more qualified candidates.

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The Tesla gigafactory deal negotiated by Nevada and Elon Musk, as it turned out, amounted to gigabucks. About $1.25 billion…..or was it really that much?

Trying to interpret the true value of incentive packages offered by governments is anything but a science.

Tesla's factory will be off of I-80, just east of Sparks.

Tesla’s factory will be off of I-80, just east of Sparks.

The truth is, the costs and benefits of these deals range between hard reality and hypothesis.

On the debit side of the ledger, it comes down to how opportunity costs are viewed. Opportunity cost can best be defined as the benefit of the next best alternative when one is deciding among multiple uses for a limited resource.

In the case of Tesla’s selected site for its factory – the Reno-Tahoe Industrial Center, just nine miles from Reno, is a diamond in the rough. Actually, it is much less than rough with infrastructure in place to handle any sizable operation. It is ready to go. All it needs is business worthy of its capacity.

The Economic Development Authority of Western Nevada claims the center has already produced 1,000 jobs. I always take numbers provided by governments and trade associations with a grain of salt, but it is evident that jobs are being created there and many are coming at the expense of California.

So what is the opportunity cost associated with the Tesla deal?

Sales and property tax relief are by far the largest components of the $1.25 billion incentive package.

Undoubtedly, other firms will be interested in relocating an existing line of business or establishing a whole new operation at TRIC or other locations in Nevada, but what are the chances of one moving in with the potential of creating over 6,000 jobs and several billion dollars worth of improvements sometime in, say, the next ten years?

Pretty slim for any state, I’d guess.

So the potential next best alternative would be relatively low compared to Tesla as far as generating new property and sales tax revenues. Therefore, Nevada is not sacrificing as much revenue as the tax abatement offered Tesla suggests. Let’s say the combined taxes of other possible ventures could potentially reach $500 million, that might amount to a more reasonable estimate of what the state is sacrificing.

Allow me to digress – Sierra Nevada Corporation, which is headquartered in Sparks, is one of three finalists for the space shuttle’s replacement vehicle. However, that contract is not subject to incentive packages. It would be another feather in Nevada’s cap, though, if SNC were selected by NASA.

On the credit side of the ledger, not all the benefits will accrue at once. The 6,000 plus new jobs will acrete over a number of years, but construction jobs and materials purchases would ratchet up quickly, then decrease as the time draws closer to the commencement of operations. So there should be a stream of new employment and investment at a decreasing rate for several years, followed by a period of robust growth as production steps up.

Besides the increased spending activity from construction activities and employment, there will certainly be a boost to the real estate market in the region. I would expect most of the initial housing needs could be absorbed by existing stock between Carson City and Reno/Sparks. This will increase property values and, obviously, bump up property tax collections.

Once Tesla becomes entrenched and production approaches a sustainable level, new housing tracts will be constructed in Washoe and Storey Counties. Here again, how many will depend on the actual direct or ancillary jobs created.

Overall, there is adequate infrastructure in the region to support Tesla. Reno-Tahoe International Airport and the freeways have the capacity to absorb growth. No need for the state to spend any great sums for upgrades.

I have only provided a rough sketch of the impact. It is difficult to envision the ripple effect.

Only time will tell if the pros outweigh the cons, but the prospects are better than fair in the short run and even better over the lifespan of the product – the electric car will play an increasingly important role in our society. Musk might very well be in the position Henry Ford was in when the Model T rolled out in 1908.

And Nevada might be in on the ground floor.

But the ground floor is pretty large; there is room for more players.

Will California reconsider its comparatively unfriendly business climate, or will it risk losing future opportunities to other states?

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Governor Brown and the legislative leadership in Sacramento are a day late and many dollars short….again.

If I were them, I would not indulge in any gaming activities in Nevada or they may lose the clothes off their backs.

Today’s leak that Tesla has awarded Reno, Nevada the lucrative battery manufacturing facility still needs to be confirmed. The deal is subject to review by the Nevada legislature. Governor Sandoval has arranged for a short special session starting next week to review the terms of the deal.

Some critics think it is too big a price to pay. Incentives are estimated around $400 million.

That’s a lot of dough, but the construction of a $5 billion gigafactory and 6,500 good, permanent jobs has its benefits. The payroll alone could be worth $325 million per year – we are not talking minimum wage jobs here, even at $15 per hour. That’s a lot of potential spending along with property and sales tax revenue, even more when you consider the ripple effect throughout the state’s economy.

The payback may take several years, but Tesla has plans to market more affordable versions of its electric vehicles, which will certainly increase sales dramatically. The long-term prospects for employment and tax revenue, then, are good.

While Nevada and a few other states were busily preparing to win Tesla’s business, Governor Brown and company puttered around, perhaps more interested in spending a fortune on high-speed rail, a system that will require heavy subsidies.

This is not the first time Reno has trumped California. In 2012, Reno offered $89 million to Apple to build a $1 billion data and purchasing center in the metro area. Hundreds of well-paying jobs will result. The project is well underway.

Apple, as Tesla, is headquartered in California. Who knows if those companies might pull a Toyota and move home office operations as well.

So why was Jerry and the Sacramento clan dickering when Nevada, Arizona and New Mexico were aggressively courting Tesla? The legislature adjourned without addressing a bill that would have attempted to quicken the environmental review.

It would be unfortunate if environmental issues caused a roadblock. Granted, producing batteries is not exactly the greenest of processes, but if you consider the carbon footprint of the vehicle’s end-to-end production and useful life, it still would be an environmentally friendly product.

Once again, unless the Nevada legislature nixes the deal, it appears that our leaders have misplaced priorities, yet again.

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