Tuesday, July 13, 2010

Corporate CEOs Won't Invest in America, Why Should You?

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009).

There is no end of economists, analysts, and reporters filling the air with investment recommendations. Is the stock market oversold? Should we invest for inflation or deflation? And so on.

That is talk. American CEOs are voting with their feet. Since they aren't investing in the United States, does it make sense for the individual stockholder or bondholder to do so?

One armchair columnist told his readers to ignore corporate whiners. Those overpaid stuffed shirts will always gripe, goes his argument. The columnist may have a point, but also an inconsistency. The columnist, who is also an economist, has skewered CEOs in the past for cashing out their stock options as quickly as possible. There is much truth to that. But, it is not in a CEO's interest to publicly denounce the Obama administration, which still has over two years to hand out and withhold favors. It is the favoritism that the CEOs are denouncing, either directly or by implication.

Corporate managers lived through the last episode of blatant favoritism, during the final months of the Bush administration. In the fall of 2008, when credit was scarce, the Treasury Department and Federal Reserve decided which companies would receive loans and government guarantees. Those that fell under the umbrella paid around 5% interest on their debt. Those not so blessed paid 15%, or went broke.

From an option-grabbing, foot-out-the-door view, the outspoken CEOs are acting against their personal interests. That may be one reason so few CEOs have condemned current administration policy. The outspoken bosses manage companies with long histories. Most are at least a century old. They may have a better historical sense of their position: politicians and bureaucrats come today and are gone tomorrow. To survive for such a long period, these companies need to change and to change often.

From an investor's view, the United States as described by the CEOs, deserves a long-term "sell" recommendation. These companies are moving capital and jobs to Asia, which is a comparative "buy." For Americans frustrated by the hopeless domestic job market, Asia receives a "look."

Most forthright is David Farr, President, Chairman and CEO of Emerson Electric Corporation, a 120-year-old manufacturer with over $21 billion in annual sales. Emerson's headquarters is in Chicago, Illinois, but maybe not for long:

"Why would any CEO invest one penny in the US? There is not one reason based on the new rules of the game."

- David Farr, CEO, Emerson Electric, quarterly conference call, May 2009

Even the corporations that threw themselves into the government's arms are now having second thoughts. In 2008, government appendages extended lines of credit to General Electric, another 120-year-old company. (It employs 304,000 people, with over $150 billion in annual sales.) This was an unenviable position but one that General Electric's CEO Jeffrey Immelt adopted without hesitation.

David Farr would probably commit hari-kari before entering such an arrangement. Following is from a speech Farr delivered at the November 2009 Baird Industrial Conference held in Chicago (noted by Andrew Upward, the industrious author of the twice-daily Fidelity Capital Markets' letters): "My job is not to shrink and roll over for the U.S. government. That is not my job. That is not what I get paid to do....I don't want government handouts. I can do without them."

The federal government guaranteed General Electric bonds, a precaution that GE bondholders might have insisted upon in the best of times, since General Electric's solvency required it to consistently roll over $100 billion (billion with a 'b') in the commercial paper market. Beggars can't be choosers, as Jeffrey Immelt made clear in GE's 2008 annual report: "The interaction between government and business will change forever.... [T]he government will be... an industry policy champion; a financier; and a key partner."

As an aside, the chairman of General Electric could have made this statement anytime since World War II, perhaps even from World War I, when General Electric president Gerard Swope helped to organize American industry to send armaments Over There. For those interested, stop by a library and flip through Fortune magazines from the 1950s. Reading isn't necessary; look at the ads. The government and large businesses were Siamese twins. The armchair economist's contention that CEOs always gripe is the opposite of the truth. CEOS may play golf with the president but rarely censure their commander-in-chief.

On July 1, 2010, the Financial Times reported a heartening display of retro-capitalism on Immelt's part. Quoting from the FT, Immelt "had harsh words for Barack Obama, US president, lamenting what he called a 'terrible' national mood and expressing concern that over-regulation in response to the global financial crisis would damp a 'tepid' US economic recovery. Business did not like the US president, and the president did not like business, he said."

There was no hesitancy on the part of Edward S. Lampert, CEO of Sears Holdings Corporation, a combination of the Sears, Roebuck Company (117 years old) and Kmart (born 113 years ago as the first S.S. Kresge five-and-ten-cent-store). Sears Holdings employs 322,000 people and produced $47 billion in 2009 sales. In Sears' latest annual report, Lampert lectured the parasites who are making out well from the financial crisis. Lampert is best known for running one of the largest hedge funds (ESL Investments, which houses Sears Holdings), so blasting regulators, government officials and investment firms was not in his personal interest. The armchair columnist is not a fan of billionaire hedge fund managers, but it is Lampert who stands up for the huddled masses while the government-Wall street-media echo chamber does its best to strip them clean.

A portion of Lampert's diatribe in Sears Holdings 2009 annual report:

"Business leaders, regulators, public officials, and journalists have become an echo chamber of self-support and self-congratulation, whether on TV, in print or at numerous conferences. Their words and their actions are often self-serving (whether right or wrong), and they are typically regarded and reported on as if they were obvious and selfless. They get repeated as if there were no alternative views or possibility of error in their thinking. Dominant narratives develop and get defended primarily by repetition and secondarily by attacks on those who disagree with those narratives. When these favored people and views become endorsed in laws and regulations, some may benefit, but many get harmed.

"There are several examples of issues that have been smothered by dominant narratives. Accepting these narratives without critical evaluation can be a contributing factor to some of the negative unexpected consequences they produce. Did the seizure of Fannie Mae and Freddie Mac (the largest nationalization in our country and likely in history) calm or ignite fear in the financial markets and did those urging or supporting the seizure profit from it? Has raising minimum wage rates helped or harmed the individuals that those advocating such policy intended to help? Is there any link between a higher minimum wage and high unemployment? Has the consolidation in financial services helped or hurt depositors and borrowers? Why were some institutions saved and others seized, merged or left to fail? How does regulatory and policy uncertainty impact investment and risk-taking in society?"

"I fear that Americans have been provided a false choice between a little more and a lot more regulation and taxes. We keep hearing more ideas to create jobs and generate growth that almost exclusively require more government spending. Jobs can come from government, but those jobs get paid for by taking money from the private sector, reducing the private sector's ability to provide jobs. On the other hand, there are many who believe that less regulation, less government interference, less arbitrary regulation when it does exist, and lower government spending will generate more growth and more jobs. I agree with those views."

Lampert, or at least Sears, is more-or-less stuck in the United States. That is not true of other companies. Andy Grove, co-founder and past chairman of Intel Corporation, was interviewed by Bloomberg news on July 1, 2010, an interview which is worth reading in full. ["How to Make an American Job Before it's Too Late"] Grove explains, using past examples from other manufacturing industries, that when production leaves, the engineers, researchers and capital investment follow. Grove also discussed the social consequence of abandoning manufacturing:

"Today, manufacturing employment in the U.S. computer industry is about 166,000 - lower than it was when the first personal computer... was assembled in 1975.... You could say, as many do, that shipping jobs overseas is no big deal because high-value work - and much of the profits - remain in the U.S. But what kind of society are we going to have if it consists of highly paid people doing high-value-added work, and masses of unemployed?"

Paul Otellino, the current CEO of Intel (with annual sales of $35 billion), warned of jobs going overseas in a recent speech: "A new [world scale] semiconductor factory built from scratch costs about $4.5 billion - in the United States. If I build that factory in almost any other country in the world, where they have significant incentive programs, I could save $1 billion [From tax breaks]."

Ivan Seidenberg, CEO of Verizon (which can trace its origins to Alexander Graham Bell, employs 217,000 people, and posted $107 billion in sales during 2009), spoke before the Economic Club of Washington in his capacity as president of the Business Roundtable on June 22, 2010. Seidenberg listed the reasons investors should take a break from the U.S. stock market. From the Wall Street Journal's summary:

"The Obama administration has created 'an increasingly hostile environment for investment and job creation.' The U.S. corporate tax structure is a 'major impediment to international competitiveness.' The government should 'stop trying to micromanage industries.'"

Seidenberg was seconded by Dan DiMicro, CEO of Nucor Corporation (20,000 employees, with $11 billion in annual sales, and a history that stretches back to Ransom E. Olds' REO Motor Car Company, founded in 1905).

"I completely agree with what Ivan was saying about how the government needs to be removing itself from the private sector. For a long time they worked through diplomacy, negotiation, and compromise. But the crisis we're in today is of such magnitude that we have to have action in support of the private sector in a bold and out-front manner."

Armchair economists and opinion-makers toy with their self-serving theories, basking in the glow of tenure and popularity and reminding the public how brilliant they are. Most have never held a real job in their lives. They know next to nothing about how people think outside their atrophied circle, yet, set society's course from opinions bouncing through the echo chamber of self-support and self-congratulation.

David Farr has a business to run. He described the reason he is moving Emerson Electric to Asia at the Baird Industrial Conference last November:

"What do I think Washington is doing right now? Washington is doing everything in their manpower capability to destroy U.S. manufacturers. Cap and trade, medical reform, labor rules, whatever they want to do, raise taxes. They're just going to destroy jobs.... What do you think I'm going to do? I'm not going to hire anyone in the United States. I'm moving. So they're doing everything possible to destroy jobs....we employ 125,000 people worldwide. So I do know what the (expletive) I'm talking about."