Our Interview with Jon Heller

Jon Heller, a financial planner and longtime financial writer, was kind enough to interview us for his Cheap Stocks blog. Jon’s a smart, interesting guy who shares our passion for deep value investing, and we recently spoke with him about our investment philosophy, our current outlook, and a couple of favorite names in our actively managed Opportunistic Portfolio. We’re also happy to note that the interview was picked up by the Seeking Alpha website.

URLs:

http://stocksbelowncav.blogspot.com/2009/05/cheap-stocks-interview-art-patten_26.html

http://seekingalpha.com/article/139767-interview-with-art-patten-president-of-symmetry-capital

DISCLAIMER: The foregoing information does not construe an offer to buy or sell securities, nor is it a recommendation to follow any investment strategy. Clients and/or principals of Symmetry Capital Management, LLC may hold long, short, or derivative positions in any of the securities mentioned.

DISCLOSURE: As noted in the interview, certain clients of Symmetry Capital hold positions in HIMX, RMT, and THMD.

Lomborg: The Climate-Industrial Complex

An important op-ed in the WSJ today from Bjorn Lomborg, a European social scientist despised by many (unfortunately) for his sobriety on climate change policy. He cleverly sees a broad parallel between current impetus on climate change and the “military-industrial complex” that arose during the Cold War. As President Eisenhower famously warned, that relationship created a “disastrous potential of misplaced power,” and required an “alert and knowledgeable citizenry” to keep it in check. In Lomborg’s piece, you’ll see many of the concerns we’ve raised regarding the momentum behind climate change policy, with some supporting anecdotes:

• Political agency risk  
• Profiteering and rent seeking
• Enron as the poster child of “regulatory business”

Lomborg also cites research that questions the all to frequent “green collar jobs” mantra. As we’ve pointed out, the important question is what the net effect on employment is (green collar jobs created less other collar jobs lost). He concludes, ”[T]he partnership among self-interested businesses, grandstanding politicians and alarmist campaigners is an unholy alliance.” 

Of course, Lomborg is probably well aware that his arguments will do little to sway true believers on either side of the issue. In fact, it’s likely to have the opposite effect, as research into political beliefs demonstrates:

…when partisans face threatening information, not only are they likely to “reason” to emotionally biased conclusions, but we can trace their neural footprints as they do it.

When confronted with potentially troubling political information, a network of neurons becomes active that produces distress…

The brain registers the conflict between data and desire and begins to search for ways to turn off the spigot of unpleasant emotion…

Not only did the brain manage to shut down distress through faulty reasoning, but it did so quickly… The neural circuits charged with regulation of emotional states seemed to recruit beliefs that eliminated the distress and conflict partisans had experienced when they confronted unpleasant realities. And this all seemed to happen with little involvement of the neural circuits normally involved in reasoning.

…Once partisans had found a way to reason to false conclusions, not only did neural circuits involved in negative emotions turn off, but circuits involved in positive emotions turned on. The partisan brain didn’t seem satisfied in just feeling better. It worked overtime to feel good, activating reward circuits that give partisans a jolt of positive reinforcement for their biased reasoning.

Here’s a challenge to climate skeptics reading (and writing!) this post – try to avoid the partisan rationalization trap! Is climate change worth worrying about? You bet. In fact, what we like about Lomborg is his centrism and sobriety. Yes, he’s a reviled scourge of climate change proponents, and a comforting presence to skeptics and deniers. But if the latter read him more carefully, he would probably be loved by no one – which makes him all the more compelling, in our view.

URLs:

http://online.wsj.com/article/SB124286145192740987.html

http://www.bbc.co.uk/blogs/newsnight/2007/08/the_political_brain_by_drew_westen.html

http://www.youtube.com/watch?v=8y06NSBBRtY

No Love For Financial Services

InvestmentNews.com reports that in a recent Harris Interactive survey, the financial services industry earned an approval rating of only 11%, which ties it with tobacco. That might not be as ironic as it seems, as both industries are probably viewed as causing more harm than good to their customers. Nicotine can have beneficial short term effects on mood, at the cost of emotional crashes, dependency, higher heart disease and cancer risk, and an ongoing cash drain. Talented financial services reps can lift clients’ moods in the short term, but too many clients end up worse off due to bad decisions, inattention, dependency, and excessive layers of (sometimes excessive) fees (i.e., an ongoing cash drain).

To be fair, the survey responses almost surely were inspired by institutional and economy level malfeasance and errors of judgement, as AIG was the lowest ranked financial services firm in the survey.

Whatever the perceptions behind the survey responses, it should be a wake up call to the industry.

URLs:

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090429/REG/904299977/1094/INDaily03&ht=

Stepping onto the Tax Tightrope

President Obama is scheduled to unveil a plan to increase federal business tax revenues this morning (“Obama to crack down on business taxes”). We’ve written about business and corporate taxes frequently, because we believe they are critically important to this country’s economic and political future.

Tax evasion does occur, occasionally on a massive scale. But it’s impportant to distinguish between evasion and avoidance. A profit oriented enterprise essentially has to avoid taxes, whenever it can do so legally, and our federal tax code clearly embodies this idea. The problems that Obama is focusing on relate to the inescapable reality that other countries also have tax policies, and that those policies can attract otherwise taxable business income away from the United States. The resulting phenomenon is known as “tax competition”. In general, businesses love it, and bureaucrats hate it.

To the extent that businesses take advantage of international tax competition in ways that lack substance (i.e., evasion), stepped up enforcement makes sense, as long as there’s a reasonable expected return on the resources invested. But what constitutes evasion? And who should the benefits of stepped up enforcement accrue to? Therein lie the risks, in our view.

First, the AP reports that Obama will seek to change at least one underlying legal principle:

Obama also planned to ask Congress to…implement a major shift in the way courts view guilt…Americans would have to prove they were not breaking U.S. tax laws by sending money to banks that don’t cooperate with tax officials. It essentially would reverse the long-held assumption of innocence in U.S. courts.

Perhaps there’s a valid debate here, given the extra-legal nature of some tax havens to U.S. law. We’ll leave that to the legal philosophers. More important to us is the philosophy (philosophies, really) that will drive the eventual outcomes, and how they will impact long term U.S. competitiveness.

For example, based on the plan as telegraphed by the administration, there’s little attention paid to the fact that a successful crackdown on tax evasion and avoidance should help lower the burden on those businesses not engaged in such activities. In technical jargon, a broader tax base should mean a lower tax rate. This mimics the philosophy embodied by Rep. Rangel’s Ways and Means Committee since 2006, where the ultimate objective is increased public revenues, with scant lip service paid to increased U.S. competitiveness. It also echoes the plans to impose a cap and trade system without any announced intention to ease taxes or other regulations in order to offset the additional burden on the private sector (as we’ve pointed out before, taxing businesses for legitimate externalities – like CO2 if it is indeed the bugaboo it is reported to be – makes sense, and should precede any other kind of tax).

The worst case outcome here is that the overall tax burden on profit seeking business activity in the U.S. will become even less competitive than it currently is. If such a situation persists, it will mean lower domestic investment at the margin, with less employment, lower incomes than would otherwise exist (including to the U.S. Treasury!), and a significantly lower ability to meet looming demographic and other public sector challenges.

Secretary Geithner has just started his remarks…let’s hope for the best, or at least something better than worst…

POST PRESS CONFERENCE: The President said some of the “right things” that were not in the AP article, including an emphasis on making tax burdens fairer, and making the business tax system more efficient. These principles leave the door open for reforms that would not be a worst case outcome. The competitive position of the U.S. in attracting private capital will almost certainly continue to erode, as the rest of the world closes the various competitive gaps. Tax reform and other public policies can either accelerate or dampen this process. Like so many other policy measures now underway, we’ll have to wait and see what the sausage factory produces.

ON LABOR INCOME vs CORPORATE PROFITS: An important debate often left out of tax reform sound bites relates to who bears the burden of business taxation (see this Glen Hubbard op-ed, for example). There’s still plenty of debate over whether corporate taxes impact labor income and wages significantly (our two cents is that in a world of multiple open economies, the impact on labor would be pronounced, moreso than for private, non-fixed capital). But whatever one’s view, it does not appear that the current direction of the President’s tax reform is going to provide much help for some important Democrat constituencies – namely, the working poor and certain unions. For example, the administration plans to make R&D business tax credits permanent, financing them with “crackdown” revenues. And while one of this country’s biggest competitive advantages is the capacity of its labor force to provide high value added production – President Obama has observed this in prior speeches, and frequently makes the case for increasing that advantage through education and other policy reforms – R&D credits will have minimal impact, if any, on the availability of opportunities for unskilled and low skilled workers (one could even make a case that they are marginally negative). In one recent paper on who bears the incidence of corporate taxes, it was estimated that workers bore between 45 and 75 percent. Thus, if the pending reforms are not well designed, the majority of any crackdown effects are likely to fall on wage earners — the very people that the majority party claim to represent — rather than on business owners (of course, the labor-capital dichotomy is not quite what it used to be, as many workers are also owners of business capital, eg, when one owns shares in one’s employer – but clearly, unless their labor income is less than the income from their shares of stock, the corporate tax hits them hardest in their paycheck – and it hits non-capital owning workers most).

URLs:

http://news.yahoo.com/s/ap/20090504/ap_on_bi_ge/us_obama_taxes

http://online.wsj.com/article/SB118541232986178417.html?mod=opinion_main_commentaries

www.people.hbs.edu/mdesai/PDFs/Labor%20and%20Capital.pdf