Some Common Cents for May 26th, 2017

This week, a reporter friend of mine asked my thoughts on the prospects of traditional banks and credit unions getting into, what can only be called, the payday lending space IF the Administration’s regulatory reform proposals get through the Congress. It seems some banks have made overtures about doing just that, but this is very anecdotal and far from the norm. Frankly, I am kind of professionally ambivalent on the matter, but I still gave these bullet points to him:

  • Due to the costs associated with extending credit, it is hard to imagine banks falling over themselves to start making a bunch of $300 two week loans for business purposes.
  • There is a difference between making a small, short-term loan for an established client and making one to a stranger off the street.
  • At a 10% annual rate, a $500 two-week loan generates about $2 in interest for the lender. Can they originate, underwrite, and service the thing for that of money, let alone overhead? Candidly, it makes more business sense to let people bounce checks.
  • There is a difference between what the company spokespeople say and the what the CFO offices think. Guess who normally wins that argument.
  • Those banks which enter this lending arena will do so up to the point where they maximize their Community Reinvestment Act rating, and probably not much more than that. That is cynical but honest, and better than nothing. …Read More…

Norris: Corporate America can’t hit snooze button on economy

Recently, a reporter called to ask my thoughts about the ongoing scandal in Washington surrounding former FBI Director Jim Comey, the Russians and the White House. Is it enough to cause the stock market to crash? In so many words, my response was simple: “only if it causes a slowdown in economic activity and a corresponding drop in corporate profitability. Absent that, long-term, no.”

Obviously, his follow up question was whether the turmoil would put the Administration’s tax reform proposals in jeopardy on Capitol Hill. Basically, would the rest of the GOP jump from a sinking ship, or something along those lines? That was fair enough, and I hope my response was as well: “I have a better chance of being named Pope by Christmas than that package has of getting through the Congress as is.” Not surprisingly, that quote didn’t make it into his column.

In truth, I probably came across as amazingly cavalier, and we will see if he calls me again anytime soon.

(Read the full article as previously published in the Montgomery Advertiser on May 23rd, 2017)

Some Common Cents for May 19th, 2017

This week, I had a brief discussion with a very bright individual regarding future economic growth and potential investment opportunities in the United States. His comments were in complete alignment with my thoughts: moving forward, there will be two types of companies which will matter: 1) disrupters, which are companies providing technologies, products, and/or services which fundamentally change our lives and how we conduct business, and; 2) base, which are those providing the essentials of our day to day lives.

Frankly, we agreed this is already the way it is.

Intuitively, there will be a small number of true disrupters, which means there were be a lot of base companies. As a result, the competition between the latter will simply be for market share, as opposed to absolute growth in any one economic sector. By the time the dust settles and the smoke clears, a large segment of current corporate America will be, as Charles Dickens might have said, “without a situation.” The trick will be choosing the likely winners and avoiding the losers, but make no mistake about it: unless the government gets involved and/or there is an evaporation of capital in the global economy, there will be an enormous amount of consolidation in the US economy over the next decade as corporate Darwinism weeds out those ‘stuck in the middle’ firms.

Historically, this would suggest there would be an enormous amount of merger & acquisition activity, and there might be. However, I believe it is more likely the healthier firms in an industry will be far more apt to let lagging firms fail on their own, as opposed to buying their capacity. Why? Because there is already ’too much’ capacity in much of the economy. Currently, Sears Holdings is a perfect example. …Read More…

The opinions expressed within this report are those of John Norris as of the initial publication of this blog. They are subject to change without notice, and do not necessarily reflect the views of Oakworth Capital Bank, its directors, shareholders, and employees.

John Norris: Value is in the eye of the beholder

Recently, I was at my parents’ house, and my father pointed to a smallish watercolor on the wall. He said that it had been a wedding present for my grandmother during the Great Depression, and that it could possibly be the most valuable thing in their house. That certainly piqued my interest.

Frankly, the painting seemed pretty pedestrian to me, but I am admittedly no expert. So, I googled the artist’s name on my phone, and found there to be no shortage of their work available for sale for about the cost of an oil change. Apparently, these had been somewhat mass produced back in the day, and popular with young homeowners and newlyweds.

When I showed him the results and suggested the real value of the painting was sentimental, the old man wasn’t thrilled. However, I wasn’t trying to be difficult. I simply had access to pertinent information in the palm of my hand with very little effort. At a yard sale, I would put a $25 price tag on the thing, but I would never do that. (Read the full article as previously published in the Montgomery Advertiser on May 16th, 2017)

Some Common Cents for May 12th, 2017

To read the headlines, you would assume the French Presidential election and the Administration’s sacking of Jim Comey as the Director of the FBI were the big stories for the week. However, both were sort of non-events for investors, or should be. First, the French election was basically a foregone conclusion. The issue wasn’t whether Macron would win, as everyone expected he would. The bigger issue was by how much he would win. It was an appropriate amount to suggest the status quo would remain the status quo, if you catch my drift.

As for Comey, I have been doing this a pretty long time, and I can’t remember an instance when the Director of the FBI was a topic of serious consideration or debate for investors. They are generally not in a position to directly impact corporate profitability, let alone monetary or even fiscal policy. Certainly, you can make some ‘slippery slope’ arguments, and take the ramifications of Comey’s firing to an illogical conclusion. However, where the rubber meets the road, this was/is more of a political story, as opposed to either economic or financial.

So, what was the big news?

Lost in shuffle were the earnings reports of some old-school, retail heavyweights. J.C. Penney (JCP), Macy’s, Dillard’s, and Kohl’s, basically the last of the publicly traded, significant, anchor department stores, with the exception of Sears, all announced their 1Q earnings. I will cut to the quick: the numbers weren’t great, particularly for JCP and Macy’s. Kohl’s and Dillard’s were arguably better than you might have expected, even if only in private. Even so, the markets have taken the sector out back this week, quite possibly more than the results would warrant. Actually, you can strike the phrase “quite possibly.” …Read More…

The opinions expressed within this report are those of John Norris as of the initial publication of this blog. They are subject to change without notice, and do not necessarily reflect the views of Oakworth Capital Bank, its directors, shareholders, and employees.

Some Common Cents for May 5, 2017

Years ago,  I tied myself in knots over little league baseball. Gosh, it seemed so important at the time, and my son was a pretty decent player. However, I resisted the siren song of hiring batting and fielding coaches for my son, despite much advice such things were absolutely necessary for his success. Perhaps he would still be playing the game had I done so. Only The Shadow knows, but I doubt it.

My contention was, and still would be, a batting coach will potentially improve an already good hitter, but, and here is a country cliché for you, you can’t make a silk purse out of a sow’s ear. If a kid doesn’t have some minimum level of eye-hand coordination, no amount of ‘coaching’ is going to turn them into a great player. For my part, I thought it an extraneous expense in the 2nd and 3rd grades, but would have willingly shelled it out had my son stuck with the sport up to middle school. He didn’t, and I didn’t force him to do so.

That old bumpkin phrase about silk purses and sow’s ears is pretty appropriate for a lot of things in life, whether it be elementary school athletes, local economies, or even individual companies. There has to be something from which to build. …Read More…

The opinions expressed within this report are those of John Norris as of the initial publication of this blog. They are subject to change without notice, and do not necessarily reflect the views of Oakworth Capital Bank, its directors, shareholders, and employees.

John Norris: Alabama has two economies

Over the years, readers have asked me to be more of a homer in my columns, meaning I should accentuate the positive to a much greater degree than I do. When I respond, I typically say I can rah rah with the best of them. However, in my opinion, we get enough of that already. Besides, ignoring problems doesn’t make them go away.

We know our state lags the national averages in a lot of economic measures. There is little reason to list all of them here. Still, the data suggests Alabama basically has two economies: one for our metropolitan areas and another for everyone else.

If you happen to live in one of the five largest metro areas in our state, life is actually pretty good. These are: Birmingham, Huntsville, Mobile, Montgomery, and Tuscaloosa (the Big 5). According to the data I could glean from the Census Bureau and the Bureau of Economic Analysis, the Big 5 represented 53.9% of the state’s population and 67.8% of its economic output in 2015.

That year, if my math is correct, the Big 5 had a per capita Gross Domestic Product (GDP) of $46,238 in constant 2009 dollars. This would have ranked somewhere between Kansas and Wisconsin, which aren’t our normal comparisons, and be good enough for 28th place nationally. Further, it would be well above Georgia, Tennessee, Florida, and, as you might imagine, Mississippi. Rah rah, right?  (Read the full article as previously published in the Montgomery Advertiser on May 9th, 2017)

Norris: Washington should focus on economic growth

A lot of folks have asked my opinion on the Administration’s tax reform proposals. I think I have surprised them with my less than sophisticated response: anything is better than doing nothing. As the old saying goes, if you are standing still, you are falling behind.

In helping run a trust and wealth management department, our Byzantine tax code benefits me professionally. I couldn’t argue otherwise and keep a straight face. Folks will go to some lengths to either postpone or try to avoid paying a hefty tax bill, and this often includes various trust accounts and other tax deferred vehicles. That shouldn’t come as a shock, but as I tell everyone: “the IRS will eventually get its money, even if it has to wait a while.”

I guess you can say I have seen how some of the sausage is made, and it detrimentally impacts the free flow of capital throughout our economy.  (Read the full article as previously published in the Montgomery Advertiser on May 1st, 2017)

Some Common Cents for April 28th, 2017

A lot of folks have asked my opinion on the Administration’s tax reform proposals. I think I have surprised them with my less than sophisticated response: anything is better than doing nothing. As the old saying goes, if you are standing still, you are falling behind.

In helping run a trust and wealth management department, our Byzantine tax code benefits me professionally. I couldn’t argue otherwise and keep a straight face. Folks will go to some lengths to either postpone or try to avoid paying a hefty tax bill, and this often includes various trust accounts and other tax deferred vehicles. That shouldn’t come as a shock, but as I tell everyone: “the IRS will eventually get its money, even if it has to wait a while.”

I guess you can say I have seen how some of the sausage is made, and it detrimentally impacts the free flow of capital throughout our economy.

With that caveat out of the way, I did some math a little while ago regarding Federal tax receipts as a percent of Gross Domestic Product (GDP). I ran the numbers as far back as I could easily get the data, which was slightly before World War II. This was after the worst of the Great Depression, but before the boom in economic activity the war engendered.

Over all those years, regardless of the marginal tax rate structure, it seems Washington collects anywhere from 18-19% of our overall economic output. This percent goes down during periods of economic distress, but rights itself as the economy improves. Of course, tweaks in the code can lead to changes in Washington’s portion, but we are ordinarily talking basis points as opposed to percentage points.

Basically, there is a strong correlation, almost perfect, between economic growth and absolute tax receipts. They go up together, and go down together. Duh. Therefore, Washington’s focus should be on economic growth, as it collects more money when the economy is making more of the stuff. Again, duh. …Read More…

The opinions expressed within this report are those of John Norris as of the initial publication of this blog. They are subject to change without notice, and do not necessarily reflect the views of Oakworth Capital Bank, its directors, shareholders, and employees.

Some Common Cents for April 14th, 2017

A couple of weeks ago, we raised a little cash in the vast majority of our client accounts. In the grand scheme of things, it was relatively minor across the board. While we would ordinarily send out an email detailing our actions, we didn’t this time as we didn’t want anyone to misprocess our actions as “the sky is falling.” Thus far, the trade has been mostly a wash in terms of overall portfolio performance.

Currently, the general consensus of our investment team is we would be more inclined to reduce our overall allocation to equities than add to it, at least in the short-term. However, no one believes a massive correction is imminent either. The reason is pretty simple: the economy appears poised for continued moderate/mediocre growth. This should provide a base, of sorts, for corporate earnings. As long as this remains in place, another 2008 or even 2002, which is what most investors fear, isn’t terribly likely outside of a major, global conflagration.

Even so, in order for the markets to have another strong leg up, two things must happen: 1) 1Q 2017 reported earnings have to come close to or exceed some pretty lofty expectations, and; 2) at some point in the not so distant future, Washington HAS to start addressing and/or tackling some measure of meaningful tax reform. I am not sure which is more important than the other, as they are both critical.

First things first, it is too early in the 1Q earnings season to make a clear determination, but initial observations suggest things are at least okay. Tax reform? As I type, I am not clear on where that stands other than the somewhat vague promises about ‘later this year’ and ‘not before August or September.’ Perhaps I have missed a story with specifics or didn’t get the meeting invite from the White House; I don’t know which. …Read More…

The opinions expressed within this report are those of John Norris as of the initial publication of this blog. They are subject to change without notice, and do not necessarily reflect the views of Oakworth Capital Bank, its directors, shareholders, and employees.