Mr. Norris oversees the wealth management and investment services for the company. He has over 19 years experience in the money-management industry. Prior to joining Oakworth, Mr. Norris was chief economist, chairman of the investment strategy committee, and a senior fund manager for Regions Financial Corporation's Morgan Asset Management (MAM) subsidiary. Prior to joining MAM, Mr. Norris served as chief investment officer for The Trust Company of Sterne, Agee & Leach, Inc. He started his professional career in 1991 with Mercantile-Safe Deposit & Trust Company in Baltimore, Maryland, as an institutional fixed income portfolio manager. Mr. Norris frequently appears in various national and local media as an expert on the economy and the markets, and is currently a guest columnist to the Montgomery Advertiser's Sunday business section. He was named to the Birmingham Business Journal's (BBJ) "Who's Who in Banking & Finance" for 2004, the BBJ's "Top 40 Under 40" for 2007, and served on the Birmingham Chamber of Commerce's Council of Economic Advisors for a number of years. Currently, he serves on the finance committee and as trustee for the IPC Foundation. He received his Bachelor of Arts in 1990 from Wake Forest University and his Master of Business Administration in 1994 from the University of Baltimore.

Mr. Norris oversees the wealth management and investment services for the company. He has over 19 years experience in the money-management industry. Prior to joining Oakworth, Mr. Norris was chief economist, chairman of the investment strategy committee, and a senior fund manager for Regions Financial Corporation's Morgan Asset Management (MAM) subsidiary. Prior to joining MAM, Mr. Norris served as chief investment officer for The Trust Company of Sterne, Agee & Leach, Inc. He started his professional career in 1991 with Mercantile-Safe Deposit & Trust Company in Baltimore, Maryland, as an institutional fixed income portfolio manager. Mr. Norris frequently appears in various national and local media as an expert on the economy and the markets, and is currently a guest columnist to the Montgomery Advertiser's Sunday business section. He was named to the Birmingham Business Journal's (BBJ) "Who's Who in Banking & Finance" for 2004, the BBJ's "Top 40 Under 40" for 2007, and served on the Birmingham Chamber of Commerce's Council of Economic Advisors for a number of years. Currently, he serves on the finance committee and as trustee for the IPC Foundation. He received his Bachelor of Arts in 1990 from Wake Forest University and his Master of Business Administration in 1994 from the University of Baltimore.

Some Common Cents for July 28th, 2017

Recently, on Mondays, I have been sending out a quick memo to our client advisors about the potential news items for the week. Here is what I out this week:

Gang:

The big news this week will be the FOMC meeting on Wednesday. FOMC is an acronym for ‘Federal Open Market Committee,’ which is the committee which sets interest rate policy at the Federal Reserve. All too often, the media mistakenly refers to the FOMC as simply “the Fed.” So, put that in the ‘for what it is worth file.’

In any event, the futures markets is currently putting a 0.0% likelihood the FOMC will raise the overnight lending target this week and a 0.1% chance it will cut. Essentially, the markets aren’t anticipating any real action out of the FOMC, but there will be a lot of interest in what the official statement will say after the meeting is completed. Specifically, folks will want to gain any insight into how, when, and how fast the FOMC intends to unwind a portion of the quantitative easing program(s). While this seems to be pretty straight forward to me: allow securities to mature, collect the money, fork over the profit to the Treasury, and delete the remainder through a keyboard strike. Shoot, if ‘they’ can create money out of thin air, they can delete it just as easily.

Typically, they release the statement around 1:00 central….so be looking for it if you have interest. For grins, the markets put the chances of another rate hike by the end of the year at a ‘coin flip.’  Perhaps the statement will give some insight one way or the other, but the markets aren’t expecting it to do so.

Also, we will get the first stab at 2Q 2017 Gross Domestic Product (GDP). The consensus estimate is the economy grew at a 2.5% annualized rate during 2Q, after a very pedestrian 1.4% rate for 1Q. Unless the headline is way off the mark, one way or the other, the GDP report probably won’t move the markets significantly, as it seems most folks don’t delve into the details of the report to get a true understanding of the health of things.

Finally, the Durable Goods Orders report and the sentiment gauges come out this week. Like the GDP report, these won’t move the markets if they come in somewhat close to expectations. The Durable Goods Orders report has the potential for the biggest vagaries, as the markets are estimating a pretty gaudy 3.7% for June. This HAS to be due to aircraft orders, as the auto industry has been slowing this entire calendar year. We shall see.

In the end: the FOMC dominates; GDP comes in second, and the Durable Goods Orders report comes in a distant third (but does have the potential to cause some problems).

Oh yeah….one more thing: Amazon releases its 2Q earnings on the 27th, and this will get a lot of press.

Take care, and have a great week.

Norris

As you can tell, this is somewhere in between travelogue and in depth academic analysis. However, I don’t intend for it to be the latter. Also, if you followed the economic reports and FOMC this week, you will see I was directionally accurate regarding, well, just about all of it. Full disclosure, predicting this stuff is almost like writing horoscopes: you make it broad and vague enough to be mostly right on most things. Unlike horoscopes, I rarely write about “meeting someone new in business,” or stuff along those lines.

What I got wrong or, better put, gave short shrift to was Amazon’s earnings release. I also failed to mention Alphabet’s (Google). The latter was a rookie mistake, and I am no longer a rookie. No excuses.

In case you have missed the headlines, both Alphabet and Amazon disappointed the markets with their 2Q 2017 earnings. I won’t mince words: Amazon whiffed and Alphabet didn’t, in my opinion. In fact, I have been kind of at a loss as to why the markets have treat Alphabet the way they have this week. After all, we ALL knew the company was going to take an earnings hit due to a recent EU ruling against the company, to the tune of, literally, $2+ billion. Apart from that, you know, the report looked pretty good or, worst case, within proverbial “spitting distance” of decent. I guess that is what happens when investors expect perfection, or close to it, as opposed to pretty good or spitting distance.

By comparison, Amazon’s revenue was slightly better than expected, slightly, but the company’s net income was well off estimates, well off. In fact, Earnings Per Share (EPS) were something like 72% less than what analysts had forecasted. The reasons for this are, not in any particular order: 1) an increase in sales & marketing expenses (second highest quarter); 2) a sharp increase in research & development (all time high by far), and; 3) a surprisingly high, to the point where it doesn’t make sense to the naked eye, income tax expense (again, another all time high).

Regardless of the reason(s), at the end of the day, the only thing that matters is what the company drops to the bottom line. Will the sharp increases in sales & marketing and research & development lead to increased revenue in the future? Probably, but we don’t know that right now. Is the 66% income tax rate for 2Q a “make whole” for previous quarters? While I haven’t read the official explanation, this undoubtedly something to do it. At the end of the day, a 72% negative earnings surprise will get folks’ attention, and it did.

As I type, Amazon is down a little over 1.5% in today’s trading, which is actually quite an improvement on where it opened the session, about $30 per share. Really? How can a company perform so much worse than expectations, and be down as little as it is at 12:30 CDT. While 1.5% in the red isn’t fun, the company reported net income was over $500 million less than Wall Street thought it would be. What’s more $197 million in profit on $37.995 in total revenue is so many peanuts, a net income margin of around 0.50%. I mean, investors would take just about any other ‘consumer cyclical’ stock behind the proverbial woodshed for a miss such as this.

Why aren’t they?

Obviously, you can’t get into the minds of every investor but I imagine it has to do with two things in particular: 1) folks believe Amazon is a ‘disruptive’ company which is fundamentally changing our lives and how we conduct business, and; 2) because of this investors don’t want to realize a significant tax bill over one quarter of disappointment, much of it due to things which could increase company performance moving forward.

Consider this: assume you bought 50 shares of AMZN on 12/31/2014, less than 3 years ago, at $310. You cost basis would be $15,500. As I type, again, a share goes for around $1,030. So, your investment is now worth $51,500. Congratulations on your $36,000 gain!!! If you own it in a taxable account and hit the 25% Federal marginal tax rate, you will pay at least 15% Federal tax and 5% state tax. So, expect to write checks totaling $7,200 or so. That would make your “beak even” share price on your Amazon holding equal to $886….or an extra 14% back from your sales price.

That is a hard call to make when you believe in the company, any company. What can you buy which will guarantee you a 14%, or higher, return than Amazon over a short period of time? Say 4% annualized over a 3-year window? Since we don’t guarantee anything in the investment industry, the answer is simply nothing. Therefore, lots of folks are taking their beating today, and maybe even into next week, because they will take a more severe beating next April IF they don’t.

Foolishness, this tax.

This is the problem with the capital gains tax. It inhibits the free flow of capital throughout the financial system. It penalizes you for making the right decision, or at least the right decision for you at any given time. As such, it is an incredibly punitive tax, and, quite possibly, my least favorite of the lot. Yes, I dislike the capital gains tax even more than the estate tax, particularly from an economic and investment perspective.

Basically, I would argue the capital gains tax encourages detrimental behavior. If I had a dollar for every person I knew who held onto dot.com stocks until it was “too late” between 2000-2002 and the folks who kept their ‘bank’ stocks during the worst of it in 2008, I would have a nice tidy sum of money. The story was always the same. Initially, they didn’t want to sell it and pay the tax. Then, they figured they had already lost so much money, on paper, they might as well hold onto it in the hope ‘it would come back.’ Some did and others didn’t.

A perfect example is the gentleman a co-worker of mine went to visit in Atlanta back when I was with another employer at the very start of 2000, the first week in January. His tech company had recently gone public, and his private banker invited us over to explore hedging options for him and his $25-30 million worth of stock and options. Since it was a new, small company, an exchange fund probably wasn’t an option, scratch the probably. Further, a derivatives market didn’t exist. So, buying a whole bunch of puts wasn’t an alternative; not that he had the cash to do so in any event. He was company stock rich, and that is about it.

What to do? Well, we had studied the company and had a pretty firm suspicion there wasn’t anything to it. There was NO way it would ever grow into its valuation with its business model and primary products. There were too few of the latter and not enough potential clients, period. It was a very finite target market. I forget the specific numbers, but it was losing something like $2.0 million on $1.0 million in revenue. However, it still had a market capitalization approaching $2-3 billion, if not more.

It was a completely ridiculous situation.

So, we recommended he sell as many shares and cash out as many options as he could as soon as he could. At the time, it was trading around $20/share, or thereabouts, and he looked at us like we had a 3rd eye in the middle of our forehead. Naw, he was visibly angry with us, as was his private banker (technically our co-worker). What kind of advice is paying, quite literally, millions of dollars in tax? If the dull memory serves, our advice would have netted him something like $8-9 million, with a tax bill of between $3-4 million (he couldn’t do all of it for legal reasons). Had we lost our blankety-blank minds? Who makes such a preposterous recommendation? Pay the government $3-4 million dollars? Brother, he was indignant

While he didn’t physically throw us out of his office, the meeting was over pretty soon thereafter, as in about 5 minutes. Unfortunately for the guy, so was his fortune. By the end of the year, the stock was trading at $0.66. I mean, it turned over fast, going from $22 on 1/7/2000 to about $6 on 6/30, then $2 at the end of 3Q 2000. Brother.

While the company never went completely under, it was touch & go for long years, before selling to another company for $1.85 in 2008. At worst, he would have been around $6 million better off had he listened to what we said. According to the banker, which we called late in that year, he rode that bad boy all the way down. So much so, he was no longer even a prospect for the bank. Craziness.

I am certain you can think of other examples, and I have digressed mightily this afternoon.

In the end, this week largely went as anticipated, with the possible exception of Amazon’s earnings release and Alphabet’s… to a lesser degree. However, I would stop short of calling either worrisome, at least at this time.

So, there you have it. The predictions can be  pretty vague by design, just as the explanations are boring for the same reason.

 

Norris: Income inequality is about to accelerate

The other day, I saw an advertisement on the television for a company which delivers snacks to your house. While I doubt executive management would put it like that, that about sums it up. My initial reaction was: “Are are we really so lazy we can’t even go to the store to stuff our face between meals?”

My second one was wondering where the pretzels and ranch dressing were. What was this with all the healthy stuff and the theatrics with the cocoa powder? They were talking about snacks, right? Then it dawned on me; maybe I just don’t get it. Perhaps I have become the crusty old man who used to walk to school uphill both ways in the driving snow and pouring rain.

To be sure, there are great changes afoot in our country’s economy, and maybe snack delivery is one of them. I strongly believe technology has advanced to the point where all but a small percent of the workforce is completely fungible. A somewhat larger number of folks realize they are, and take steps to differentiate themselves. However, I would argue the majority of American workers either don’t truly appreciate their redundancy.

(Read the full article as previously published in the Montgomery Advertiser on July 25th, 2017)

Norris: Why has Alabama’s employment rate spiked so dramatically?

In my last column, I mentioned how Alabama seems to be on an employment tear thus far in 2017. While I have read numerous articles and scoured any number of websites, I can’t seem to find an ironclad business reason why the state’s labor market has strengthened so dramatically in such a short period of time.

Consider this: according to the Bureau of Labor Statistics’ Household Data survey, the national economy created roughly 812,000 new jobs during the first five months of the year. Not bad. For its part, using essentially the same methodology, Alabama had 41,464 new workers during that same period. This works out to be around 5.1% of the national total, and is an eye-popping number.

First things first, Alabama is still heavily rural. According to 2010 Census, about 40% of Alabamians lived in non-urbanized areas. Further, agriculture, forestry, and so-called related industries employ a lot of folks around here. So, it isn’t all that surprising many counties in Alabama see spikes in employment staring around March which generally taper off by October. Obviously, this coincides with the planting, growing and calving seasons.

(Read the full article as previously published in the Montgomery Advertiser on July 21st, 2017)

Some Common Cents for July 14th, 2017

The other night, I dreamt a massive meteor hit the earth. Since I typically dream in comedy and am not prone to worrying during waking hours, this was both a departure from the norm and somewhat disconcerting. After all, not much good will come out of a cube with 1 mile edges hurtling into the earth from deep space at what could only be described as a very rapid rate of speed.

Perhaps my dream had something to do with recent articles I have read about some really cool developments in astronomy. Maybe it had something to do with the wall of worry over the North Koreans, and others. It very well could be my subconscious is deeply discouraged by what passes for leadership these days, at all levels of society. You know, it is likely an amalgam of numerous peccadillos in the transom of my mind. I have no idea, and I suppose it really doesn’t matter.

After all, the sun will rise in the East tomorrow.

If it doesn’t, the effect to my personal well-being of being hurtled forward at 1,392.26/kilometers per hour while I slept will take care of any temporal worries I might have had. Huh? Well, Birmingham is at 33.5207 degrees latitude, and the speed of the rotation of the earth where I live is equal to cosine(33.5207) times 1,670/kilometers per hour (which is the speed of rotation at the equator). For the sun to not rise in the East, the earth would have to stop revolving. Voila. …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: Fundamental flaw in minimum wage debate

A group of economists recently released a research paper that suggested Seattle’s increase to a $15/hour minimum wage has had a negative impact on the lowest skilled workers. It would seem the market clearing rate for unskilled labor out there is around $13/hour. Up to that level, hourly workers largely benefited from the gradated rate increases, in aggregate. Past that, the report implied the well-intended $15 minimum wage has had some ironic consequences on a decent segment of the local unskilled workforce.

Intuitively, this makes sense.

A major problem with the debate about minimum wage laws is it assumes companies pay workers for their time. They don’t. They pay them for the economic value of their labor, and time is simply a way of measuring it. We can legislate an hourly price floor all we want, but we can’t dictate the actual hourly value of individual workers. If someone is worth, say, $12/hour to an employer, the government can mandate $15/hour all it wants. That person will eventually be out of work, because no business is going to continually pay them more than they are worth.

(Read the full article as previously published in the Montgomery Advertiser on July 10th, 2017)

Some Common Cents for July 7th, 2017

I have recently written about the potential for some form of consolidated government in the Birmingham metropolitan area. For those not in the know, many, if not most, of our suburbs have incorporated themselves over the last 70+ years. The endgame has been a relatively diminished ‘center city’ surrounded by fully functioning municipalities with their own unique identities. Tens of thousands of people, if not hundreds of thousands, in the metro area might not even step foot anywhere in the City of Birmingham  in any given week, if not month, such is the fragmentation.

As a result, I would argue there really isn’t a strong unifying factor when it comes to the metropolitan area as a whole, as compared to some other cities. Essentially, what is it other than proximity which makes us “Birmingham”? What difference does the, say, ongoing revitalization of the Avondale neighborhood mean to someone from, say, Argo, Trafford, West Jefferson, Lipscomb, or even Hoover? I can’t answer this question, and that is big part of the problem with the ideal of a Greater Birmingham.

However, knowing, or admitting, there isn’t a definitive common community thread in our area is also the biggest argument in favor of creating one.

This week, I had a couple of conversations with various people about North Korea. To a person, they were scared about Pyongyang’s potential to upset the global economy, let alone rain down nuclear death & destruction with what one would assume to be its increased missile technology. Clearly, the Kim family is getting more ink in the US press than it has in some time.

But what is the real likelihood North Korea will start an unprovoked (depending on your definition of the word) war, nuclear or conventional, against South Korea and the United States? Also, what is the purpose of these displays of military strength? What is the definition of success here? …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 June 30th, 2017

I am able to track how many people who directly receive Common Cents actually go to the trouble to open it. Last week, I apparently touched on a subject of particular interest, because the number of ‘click throughs’ was significantly higher than it has been in, quite literally, months. If you didn’t read it, it was about the discussion surrounding a consolidated form of local government for the Birmingham metropolitan area (MSA).

More specifically, the debate seems to be about a consolidation within Jefferson County (the County), which includes the City of Birmingham (the City) and a whole host of separately incorporated municipalities. In fact, greater “Birmingham” is more appropriately defined as the Birmingham-Hoover metropolitan statistical area, which is the Census Bureau’s actual classification. However, most folks outside of the state probably aren’t familiar with Hoover, which is Alabama’s sixth largest city with roughly 85,000 residents.

Like many cities/towns in the County, Hoover has its own school system which helps shape its identity as a community. Ultimately, these separate school systems are and will be at the heart of the debate about a consolidated form of government in our area. Many of these areas pay significantly higher property taxes than the remainder of the state, with a large percent of the revenue going to fund (and control) their own boards of education. Perhaps as a result, some of these systems score very highly on state and national exams, far better than the outside world would think capable of public education in Alabama. …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: Creativity should matter more in Alabama’s economy

Years ago, I had an internationally recognized economist tell me it didn’t matter if the U.S. physically manufactured a single thing. After all, the value added proposition of many finished products, if not most, is in the design, engineering and technology. In her way of thinking, the production process is a means to an end, and people don’t really pay for it. They pay for the creativity behind the product or service.

If this seems a little strange, ask yourself: Do you know who made, say, your iPhone? I mean the actual names of the people making the component parts on assembly lines around the world, specifically for your unit. Of course not. However, who created it? That is a much easier question to answer, isn’t it?

If you don’t think it is, how about this: When you pay for a light bulb, are you paying for the glass and the packaging, or are you paying for the technology that provides the light?

(Read the full article as previously published in the Montgomery Advertiser on June 26th, 2017)

Some Common Cents for June 23rd, 2017

This is sort of part one in an intermittent series.

Recently, I received an email with a link to a study about the need for a consolidated form of government in the Birmingham metro area (MSA). For those of you not familiar with Birmingham, most of the suburbs have incorporated themselves. All of them have their own fire and police departments, and the larger, wealthier ones have their own school systems. Some of these cities/suburbs, have been around for a long time, with mine having incorporated itself back in 1942. As a result, while we all live in “Birmingham,” most of us actually live in other cities or towns, most of them with their own separate identities.

To that end, the population of the City of Birmingham (the City) only makes up less than one-fifth of the population of the entire MSA, and even less of the larger still consolidated statistical area (CSA). As for Birmingham’s media market, the City constitutes only about one-seventh, from the numbers I have read.

Obviously, and admittedly, this means there is a fair amount of duplication of effort and inefficiency in the delivery of public services across the MSA, let alone a lack of coordination in business development efforts. As for the latter, it isn’t uncommon for suburban cities to ‘duke it out’ for retail and local business relocations. After all, it doesn’t benefit, say, Trussville when a new Walmart, or something, opens in Pelham or Gardendale. In fact, you could sensibly argue it potentially hurts it economically. …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.

Norris: Federal Reserve is walking a tightrope

Last week, the Federal Reserve raised the overnight lending target rate between member banks by 0.25 percent, and said it wants to remove some of the stimulus it provided with its quantitative easing programs. Put another way, it wants to take some of the excess cash out of the banking system over time. To do this, it will sell some of its bond holdings, or simply not reinvest them as they mature. The cash it receives from this will presumably vanish with the press of a keystroke, and any net profit will go to the Treasury.

Academically and in practice, there is more to it than that. However, that is a decent enough explanation for cocktail conversation, if you are so inclined to discuss monetary policy at social events. Trust me, I wouldn’t advise it unless you want to be lonely by the end of the evening. The only way I can think of to bore people more would be to quote Alfred Lord Tennyson during the conversation: “Theirs not to reason why, Theirs but to do and die.”

Frankly, that little snippet sums things up rather nicely I think. But what is the end result?

From a purist point of view, the Fed’s actions will ultimately slow the growth in the money supply. This is an effort to keep inflation in check, and will be effective as long as there isn’t a massive drop in the supply of goods and services due to events outside of the Fed’s control. Secondly, they have thus far telegraphed their intentions to keep from shocking the business community, and thereby disrupting future hiring and capital projects.

If it seems like the Fed is walking a tightrope, I guess it kind of is.

(Read the full article as previously published in the Montgomery Advertiser on June 19th, 2017)