Apple wants a tax break...

In my MBA class last night, we talked about corporate tax rates and in particular why some companies don't seem to be paying taxes anywhere close to the listed rate.  Case in point, in the most recent year, Apple paid an average tax rate of about 25%, while it is clearly in the 35% bracket.   Of course what is happening is that Apple (and many other firms) take advantage of off shore tax shelters.  In Apple's case, this is Ireland.

One of my students asked the question - "how is Apple going to get its money back to the US?" and in today's news we have a possible answer - as  Tim Cook (Apple CEO) says he'll repatriate these off shore dollars if the US Government taxes them at a single digit rate.

Increasing alternative investments in public pension plans

The NC State legislature is considering increasing the pension fund's allocation to alternatives to 40%. As reported in Pension and Investments magazine, the state is also looking to allow the fund to hold on to assets if they exceed the allocation target.  The idea here is to avoid selling assets whose weights have increased because of high performance.

As Andrew Stilton (in his blog) notes, increasing the allocation to alternatives may not be such a great idea.

The problems are pretty simple:
1. Alternatives are very expensive - they have fees that can easily exceed 2%
2. The fee structure is such that you pay higher fees when performance is good, but you don't get a fee refund when performance is bad.   From the manager's point of view this is "heads I win, tails you lose".
3. Alternatives are very illiquid.
4. There is no free lunch in terms of performance.  To think that you will get higher performance from alternatives without some additional risk is pure folly.
5. Did I mention that these investments are expensive?

I personally think that relying more on alternatives is the wrong approach - a more conservative approach that focuses on traditional assets while paying the lowest fees possible makes more sense.

Underlying this move is a problem that plagues all state pension plans - that the expected return is set too high.   Given that long term bond rates are less than 2%, there is little chance that most funds will achieve their return objectives which are typically in the 7-8% range.   Of course the other options (higher taxes, higher payroll contributions, lower benefits) are all politically unacceptable.  (I've blogged on return assumptions in the past here.)

Incidentally - Stilton's blog "Meditations on Money Management" is excellent - highly recommended.





5/7/13:edited - to note that the legislation hasn't passed the house yet.

Twitter hoax flash crash and algorithmic trading?

Was the recent twitter hoax market crash due to algorithmic trading?

More on high frequency trading here, the flash crash and me on the radio talking about it a while ago.


Incidentally - the WSJ "Money Beat" blog aggregation is very good.

Top 10 highest paid college majors.

Engineering, computers and finance.

Optimal Capital Structure and Apple.

Today Apple announced a $17 billion bond issuance to allow it to return capital to shareholders and at the same time increase the firm's leverage.    Even with this issuance, AAPL will still have a very low debt to total assets ratio of about 10% based on book values and a mere 4% based on market value.

For most firms, the optimal capital structure (i.e. the blend of debt and equity) is not zero debt.   We know this because the Trade-Off theory states that firms should trade off the benefits of debt (interest tax deductibility) against the costs of debt (mainly bankruptcy costs).  The optimal capital structure results in the highest firm value because it minimizes the firm's cost of capital.   Students of corporate finance should fully understand what is going on here  -- we discuss this in great detail in my MBA class.

Clearly AAPL has a way to go before bankruptcy costs loom, but in the meantime the positive stock price reaction observed today confirms that the firm is moving in the right direction.

The retirement gamble

The investorcookbooks blog has an interesting post on a recent Frontline TV documentary called "the Retirement Gamble"   The documentary is a must see for anyone saving for retirement - i.e. pretty much everyone.  

The take away is: Buy Index Funds and avoid fees.  Of course readers of this blog will know that I preach those two ideas every chance I get.

Here's the link to the documentary - you can watch it on your computer.

A couple on statistics - yes statistics.

First: Nate Silver (the guy who predicted the election) crunches the numbers on the recent senate gun control vote.  Of interest to me was that Nate is a Stata guy (you can tell by his output).

Second, Montse Fuentes, Prof of Statistics at NCSU has a column on why statistics is the hot job in this area.

90% Debt, GDP growth and MS Excel errors.

I hadn't been paying that much attention to this, but it turns out that a well cited statistic is that countries that have debt that is 90% of GDP grow slower than lower debt countries.  Hence a strong reason for reducing federal debt...or so it would seem...

The original idea was put forward in a paper by two Harvard economists, Carmen Reinhart and Ken Rogoff, and since then it has been very popular with the Tea Party crowd as a reason why federal debt is a "bad thing".

Unfortunately, it turns out that the analysis was wrong.  The researchers apparently missed some observations, used a somewhat dubious weighting system and worst of all made a fundamental excel error.

I am not sure what is more shocking, that Harvard economists would make such analysis errors, or that they are actually using Excel as their primary analysis tool.

Full details in the LA Times here, and a more detailed analysis of the errors are here.  Both articles are well worth reading.



(Thanks to my colleague Srini for sending me the link)

"All washes - half price, every day" - JC Penney's failed strategy.

On a recent road trip in my home state of NC, we passed through a small town with a puzzling sign outside of a small laundry.   The handwritten sign said:

All washes - half price, everyday.

My first reaction was - what a stupid marketing strategy!  Surely customers would see through it.  But then I realized that this is exactly the strategy that JC Penney has used for years.  The retailer's recent deviation from this strategy led to a near collapse of its stock price and the firing of its CEO.

Read more about why Penney's customers are like laundry customers in rural NC.

Potential, possible, or probable predatory scholarly open-access journals

Of interest to academics:  It turns out that there is a who industry of less than reputable journals that are all about making money and will take any research (even plagiarized work).  An example is given here.

And here is a full list of potentially dubious journals.