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Michael Chandler
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I have been a registered investment advisor since 1989, Currently owner and founder of Dogwood Capital Management
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  • Have It Your Way, Mr. President

    There goes Burger King! This is just one of many --- and probably one of many more to come. Corporate inversions are here to stay, in the absence of corporate tax reform. Burger King will be relocating its country of domicile to Canada by way of a purchase of Tim Horton. Don't be surprised if Pfizer makes another attempt to relocate its corporate headquarters abroad also. Many believe Pfizer will make another attempt to purchase AstraZeneca. The Obama administration is in a full court press to block these multinational corporations from moving abroad and thereby avoiding excessive corporate tax rates here in the United States. The President and Treasury Secretary Tew are claiming it is unpatriotic for these companies to avoid US taxation. Ironic, if you remember that the US was born in a tax revolt against Britain.

    So let me get this right. Here in the United States our corporate tax rates are 35% for multinational corporations. In most of the developed world, corporate tax rates run from 20% to 29%. Granted, we have a tax code littered with special tax credits and deductions for many US corporations. In most cases they don't come close to offsetting the 10% to 15% difference between American and non-American tax rates. By the way Canada's corporate tax rates are at 15% for multinational corporations. Some pundits have written of late that we are only talking about losing $2 billion in tax revenues to corporate inversion.

    So what's the big deal? The big deal is that multinational corporations domiciled here in the United States have stashed almost $2 trillion in foreign banks from net income earned abroad. If these corporations were to repatriate this money by bringing it back to the United States, it would be taxed again at corporate tax rates. Keep in mind these earnings were taxed by the countries in which these corporations earned that income. This is clearly double taxation. Many folks --- including journalists who don't have significant experience in this specialized field --- simply don't realize that corporations pay taxes on the dividends they pay out to their shareholders . . . and that the very same money is then taxed a second time, when the individual recipient of the dividend is once again taxed on it! This is clearly double taxation, right here with our own country.

    Did you know that six out of the seven G7 countries only tax income that is earned inside their own borders? Guess who is the one holdout? You got it, USA . Not only do we have the highest tax rates in the world, but we also tax all income earned throughout the world when the dollars are brought back to the United States. This is American "exceptionalism" in the worst possible sense of that term!

    Common sense suggests we could create a number of good-paying jobs with that $2 trillion now residing --- or being reinvested --- on foreign soil. But these corporations have no incentive to take those dollars earned abroad and reinvest them in America. Why would they do so?

    You see, folks --- in the long run, it's not about the $2 billion in lost tax revenues, and it's not about potential tax revenues lost by keeping corporate profits where they were earned --- in foreign banks. As President Bill Clinton would have said, "It's the jobs stupid."

    Another economic consequence to these corporate inversions could be US dollars leaving this country being repatriated in the country of corporate domicile with no tax consequence.

    It's time for comprehensive corporate tax reform here in the United States, if we are ever to become competitive again with the rest of the developed world. We need a level playing field to bring jobs and manufacturing back to the United States. We have been losing our manufacturing base for many years now. We need a level playing field to compete with the rest of the world for those manufacturing jobs.

    I could tell you that, in my 26 years in the financial service industry, I have never seen a government as anti-business as the one we have right now. But the reason for the anti-business attitude is troubling and unprecedented --- it seems to be rooted in an ideological rigidity and a simplistic naiveté that are not susceptible to compromise.

    I'm not saying we don't need government oversight, but the mounds of government regulations Corporate America now has to deal with are ludicrous. It's time we grew our manufacturing base back to levels we once enjoyed. To accomplish this, we must be competitive with the rest of the world. Our economic well-being depends upon it.

    Sec. Tew you say it is unpatriotic for these multinational corporations to leave this country to avoid excessive taxation. Yet there is nothing illegal about these companies taking a common sense approach to their own financial situation. This country was built upon capitalism and free enterprise. In my opinion making good common sense decisions regarding your economic well-being is doing nothing more than following the principles that made this country great.

    Mr. President, Secretary Tew and Congress, it's time for us to rebuild this country economically. A good start would be corporate tax reform. Until then corporate profits will continue to be reinvested outside the United States . . . just as Burger King is doing.

    If we don't reform our corporate tax system . . . then we'll all HAVE IT YOUR WAY, Mr. President.

    Aug 28 1:59 PM | Link | Comment!
  • The Unraveling Of The Affordable Care Act

    Over the past few months I have had the privilege of speaking about the Affordable Care Act (ACA) to groups of individuals and business owners. If I could describe in one word the overwhelming response to ACA, it would be total CONFUSION.

    At present there's a lot of talk about the failure of technology in the enrollment process. True, the website rollout was a disaster, but it's fixable. My focus today is on more fundamental issues, those essential to the long-term success of the ACA.

    Some folks don't think we need healthcare reform in this country. Yet when 48 million people are uninsured in America, something is clearly wrong. The top five countries in annual per capita spending on healthcare are: USA $8400.00, Luxembourg $6700.00, Morocco $5900.00, Norway $5300.00, and Switzerland $5200.00. The figures make the case for reform, but the cost creates a crisis in the uninsured community. We need healthcare reform --- the real question is whether ACA is the answer or simply a chassis for reform.

    This reform depends on two major components. To bring down the cost of insurance premiums, which has escalated due to rising medical expenses, ACA must do all it can to make the uninsured enroll in one of the ACA programs. The 26-34 year old age group is the key demographic. A whopping 28% of this group are uninsured --- partly because they can't afford the premiums, and partly because they think they don't need health insurance. They're young enough to still feel invincible. But ACA must target this group and get them enrolled if ACA is to succeed.

    The Affordable Care Act has attempted to address the affordability issue in two ways --- first by expanding Medicaid, and second by using tax credits.

    ACA makes health insurance available to those making up to 133% of the Federal Poverty Level (NYSE:FPL). To date, this has failed miserably. Meanwhile, Medicaid is a program administered by the states, using some matching funds from the Federal Government. In the Supreme Court Ruling on ACA, the court ruled that the Federal Government could not mandate participation at the state level. About half of the States have elected not to participate in neither the Medicaid expansion nor the ACA exchanges. In either case, doing so would stress state budgets and probably increase taxes. On Monday, November 11, State of Kentucky, which runs its own ACA exchange, said 40,572 residents had enrolled, including Medicaid and private insurance enrollees. Of these 40,572 enrollees, 33,561 enrolled in Medicaid and 7011 in the ACA health plans. This lopsided enrollment suggests why half the States elected not to participate.

    The second way ACA addresses affordability is to give tax credits to those making up to 400% of the Federal Poverty Level. This in effect lowers the cost of the premiums. ACA also puts caps on out-of-pocket expenses for this group. Keep in mind you only get these credits if you enroll in the ACA exchange --- in fact, you must enroll in at least the "silver plan," which covers 70% of medical costs.

    But there are still those who think they are too healthy to need medical insurance.

    Many 26-34 year olds consider themselves healthy. Many will elect to simply pay the annual tax penalty of $695.00 for individuals and up to three times that amount per family ($2085.00). That number for individuals is only $95.00 in 2014, however --- it graduates up to $695.00 in 2016.

    These penalties are not very punitive compared to the cost of health insurance. And when these "invincible's" do get a chronic illness, nothing stops them from enrolling in the exchanges at that time. Remember, there are no pre-existing conditions.

    A failure to get the healthy individuals into the exchanges will be its downfall, because it will lead insurance carriers to increase premiums next year to levels never seen before.

    There are 82 key components of ACA. To date, 41 have missed their implementation deadline, or have been delayed altogether. Now we have yet another delay --- the new guidelines have dictated to the insurance industry that they must only issue new plans that have no underwriting (i.e., no pre-existing conditions). Many persons have not had their existing policies renewed, simply because those policies were not compliant with the new law. Just recently the President extended for one more year the ability to maintain your existing plan, since he had earlier promised that you would be able to do so. There was a tremendous backlash from all those who were notified that their plans were being canceled. The State of Delaware has reported just 126 people enrolled in the exchanges, while 12,000 people have received cancellation notices.

    The cost associated with the issuance of new individual plans is extreme. What happens to an individual plan issued with no underwriting? Costs go up significantly. This rate increase will eventually drive individuals into the ACA exchanges. In one of the three findings in a study done by the Society of Actuaries back in March 2013 states; "Under the ACA, the individual non-group market will grow 115% from 11.9 million to 25.6 million lives; 80% of that enrollment will be in the exchanges."

    The second part of ACA tries to address the need to curb medical costs. Based on what we know so far, it appears the Act will force individuals and small businesses into the exchanges. It will probably be successful in its efforts, but it will still need some major revisions.

    Probably an additional effort will be made to eliminate or restrict fees for service. Instead we may see some version of the old HMO concept, where providers are compensated by a portion of the premiums paid. Any attempt to go to this model will require that two things happen first:

    1) Full transparency in pricing. All providers must inform the patients of the cost for each procedure and open up competition among providers.

    Insurance carriers will demand this, and they will direct their members to the most cost-effective providers. Hospitals will compete with other hospitals for all procedures. Doctors will be forced to do the same. Probably this should have been done a long time ago. The AMA has blocked the transparency issue for many years. Unnecessary procedures will no longer be ordered under an HMO type model. In all fairness to the medical profession, tort reform will be necessary. The cost of malpractice insurance has skyrocketed, and many doctors, as a result, are refusing to buy malpractice insurance.

    2) To succeed in an HMO type system, emphasis must be placed on wellness and not on crisis health management.

    Medical providers have built their practices on treating symptoms. We as a society have driven this practice. We very seldom go to the doctor for wellness checks and physicals unless mandated by a job requirement, life insurance standards, or participation in some athletic activity. Under the HMO model, physicians will be accountable for the patient's wellbeing. The healthier their patients, the more profitable their practice will be.

    This system could cause some additional issues, such as doctors becoming more selective regarding patients they treat. In some cases, diagnostic tests or procedures may not be ordered when they are actually needed. Such a development would essentially reverse decades of medical practices.

    Eventually, we may end up with some blend of the HMO with some type of price controls to drive down medical costs.

    Many believe ACA was designed to force, ultimately, a single-payer system, much like the Medicare and Medicaid systems we have today. The fact that Americans are being forced into the exchanges could add credence to that theory. ACA as it now stands will not survive without major reforms. We are currently witnessing its unraveling on many fronts.

    We desperately need major healthcare reform. There are many issues in the Affordable Care Act that need to be addressed and fixed. Some may argue for a complete overhaul. It is tragic that both sides of the aisle in Washington cannot put aside their own political agenda to fix an issue that affects every single American citizen, and may very well be the most important long-term issue facing our country today.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Nov 22 6:56 AM | Link | 2 Comments
  • Tighten Your Seatbelt Bumpy Road Ahead

    It's our favorite time of the year again when our elected officials get to decide on extending our debt by way of a continuing resolution (NYSE:CR). The Federal Reserve already has the markets skittish. I wonder if S&P and Moody's have their sharpies out with a yellow highlighter, ready to mark down our sovereign debt rating.

    President Obama is saying undo sequestration or I will not sign any continuing resolution. The Republican house is saying eliminate funding for Affordable Care Act or no continuing resolution.

    We are about to find out how strong Speaker Boehner really is, when it comes to rallying the troops in the house. He is asking for a short term resolution.

    "The president is desperate to get rid of the sequester. . . so desperate that he says he will shut down the government if Congress follows the law and funds the government at the levels his sequester mandates. The president's threat to shut down the government if we implement his sequester is not a defensible position. The American people won't stand for it, and we're not going to be swayed by it. When we return, our intent is to move quickly on a short-term continuing resolution [CR] that keeps the government running and maintains current sequester spending levels. Our message will remain clear: Until the president agrees to better cuts and reforms that help grow the economy and put us on path to a balanced budget, his sequester - the sequester he himself proposed, insisted on, and signed into law - stays in place."

    Speaker Boehner went on to say he prefers to continue to find flaws in the healthcare bill to force the President to continue to postpone crucial provisions in the legislation.

    "We will also continue to implement the plan to stop Obamacare that I outlined last month. The delays the administration has been forced to implement in the health-care law have given us a golden opportunity to talk about fairness: "If big business gets relief from the president's health-care law, families and small businesses should, too." This message strikes a chord with Americans. When people hear it, it resonates. The president has already signed seven bills delaying or repealing parts of his health-care law. We're going to keep the pressure on the president and Senate to act on the delay bills that passed the House in July with significant bipartisan support. You may have seen Shelly Moore Capito do this in Saturday's GOP weekly address. We're going to keep holding votes that chip away at the legislative coalition the president is using to force Obamacare on the nation."

    Well, there you have it right from the Speaker's mouth. I don't really believe they will shut down the Government, but it seems fireworks are coming. I really don't believe S&P and Moody's will downgrade our sovereign debt either unless the economy turns decisively down. I do think there is much more to be said about the strength of the recovery and the combination of forces causing a drag that could be with us for some time to come.

    I am not of the camp that expects inflation to be a driving force in the future, in fact my concerns are quite the opposite. Yes I know the Federal Reserve has been a printing press pumping liquidity in the economy. Under normal circumstances these Fed actions would cause a great deal of inflation. There are some underlying forces keeping that in check.

    Fifty five Percent of our economy is driven by Government spending. There are at least a number of constraints being placed on government spending. First we have the sequestration forcing government cuts in spending as well as tax increases.

    Secondly, the implementation of the Affordable Care Act is at least a stealth tax which has held back Corporate and Business spending. The cost of health insurance is going to go up nationally. You simply cannot issue a policy with no underwriting (no pre-existing conditions) without your cost going up. This is a direct cost to employers and employees alike. That is money that will not go directly into the economy by way of consumption.

    These are a few of the constraints being placed directly on the economy by Congress. Keep in mind all of these are pushing against the Federal Reserve's efforts to fuel the economy, and as the result we have tepid economic growth of 1 to 2.5% GDP. Just yesterday in a speech Dallas Fed President Richard Fisher said that the US Politicians have undermined the recovery. As you can see there is a push pull dichotomy going on between Fiscal and Monetary policy.
    My real concern is the precipitous fall of real income since 2008 as pointed out by the most recent statistics from the Census bureau through June of 2013.

    New estimates derived from the Census Bureau's Current Population Survey by Sentier Research indicate that the real (inflation-adjusted) median annual household income in America has fallen by 4.4 percent during the "recovery," after having fallen by 1.8 during the recession. During the recession, the median American household income fell by $1,002 (from $55,480 to $54,478). During the recovery-that is, from the officially defined end of the recession (in June 2009) to the most recent month for which figures are available (June 2013)-the median American household income has fallen by $2,380 (from $54,478 to $52,098). So the typical American household is making almost $2,400 less per year (in constant 2013 dollars) than it was four years ago,

    I know we have seen a fall in unemployment over this period of time as well as an substantial increase in job creation. I have seen many other real improvements in the economy. At the same time, last week we all witnessed a significant fall in retail spending across the board. I can't remember the last time I saw negative comparable store sales at Wal-Mart. Folks Wal-Mart accounts for 20% of retail sales in this country.

    I may not be the brightest soul but common sense tells me if you don't have demand for your goods and services how in the world can the prices of goods and services increase. It seems you would have a mountain of surplus inventory to hold down prices across the board.

    Near term our dysfunctional government will cause a significant increase in volatility over the issues I have discussed above. I think it very important we look past this noise and look at the underlying issues driving the economy. We are still in a slow growing economy. I don't believe overheating is going to be an issue. Consumption on the other hand will be. In almost all cases during the second quarter reporting season I have seen falling revenues and relatively good earnings. This can't go on forever, at some point in time businesses must grow their revenues. My advice is to keep your eye on the big picture and less on the noise coming out of Washington. We need to keep in mind that half of the sales and earnings of S&P 500 come from overseas and we are clearly seeing a turn around in Europe.

    From an investment standpoint look through the noise and expect mid to high single digit returns for 2014. Until then expect a bumpy road.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Aug 27 3:25 PM | Link | Comment!
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