Content provided by Paul Vaaler of the Carlson School

Snowy greetings to ‘CCO listeners. March is the month of state wrestling, basketball, and hockey tournaments. Those tourneys promise athletic excellence and more than a few surprises on the floor, court, and ice. And typically, they promise a snowstorm or two to make the drive down to the Twin Cities from Chisholm or up to the Twin Cities from Albert Lea just a bit more “interesting.” This week has already seen one of those storms to go with the wrestling tournament. Another one’s inevitable during the basketball or hockey tournaments. It’s just part of the deal.

Kind of like corporate tax cuts and stock buy backs –there’s a transition for you! The Republican Congress’ tax reform package saw a reduction in the corporate income tax as well as other incentives to let larger, often multinational corporations repatriate and declare formerly “trapped” foreign cash at lower taxable rates. That’s good news for big companies like Minneapolis-based Target and even better news for big multinational companies like 3M. So what will those companies do with the cash windfall? President Trump and other proponents of the corporate tax reduction promised more job-creating and productivity-enhancing investment by those firms. But at least so far, that’s not the trend. Instead, those big corporate beneficiaries are doing what they did the last time many such tax breaks came their way in 2004: stock buy-backs. That’s right, Target, 3M, and many other big firms in our state and country are using the extra cash to buy up their stock and prop up their share price rather than invest it in new plant, property, equipment, innovation, and jobs to support those activities. Here’s where you learn more about that stock buy-back trend: https://www.wsj.com/articles/boom-in-share-buybacks-renews-question-of-who-wins-from-tax-cuts-1519900200?mod=djem10point. So far, corporate stock buy-backs by firms in the S&P 500 have exceeded $200 billion in value. That’s double over last year. So who are the winners? Not workers, unless they are getting paid a lot in stock individually or collectively through an employee stock ownership plan (ESOP). Almost certainly not firm innovators like scientists in a corporate lab. And certainly not the country if the public policy aim of the corporate tax cuts was to spur innovation and employment. The big winners are big individual and institutional investors with more valuable stock portfolios…and top management. The CEOs of Target, 3M, and other S&P 500 firms can tout their “value creation” strategy, which is really just a simple process of reducing the number of outstanding shares in their firms. There’s nothing wrong with top managers and big shareholders looking out for themselves. But there’s something pretty seriously wrong with this trend if our public policy aim with the corporate tax cut was to make US corporations more competitive globally.

Speaking of 3M, they have a new CEO-designate. The current COO (since last year), Michael Roman, has been named by current CEO Inge Thule and the 3M board as the next CEO of the Maplewood maker of a broad range of industrial and consumer goods. Here’s where you can learn more about the leadership succession process that will move Roman into the CEO’s office in July and Thule to a board position: http://www.startribune.com/3m-taps-michael-roman-to-be-next-ceo/475874513/. This transition was no surprise. Roman had been COO with day-to-day oversight of most national and international operations. His background is similar to Thule’s: +30 years working at 3M; an engineer by training; stints in different 3M businesses in Maplewood and overseas. His accession to the top spot in the firm signals no big changes in a near-term strategy characterized by selective business portfolio acquisition and divestiture, expansion in emerging-market countries, cost control, and…stock buy-backs. That strategy and a steadily expanding US economy in the past decade have seen modest but steady increase in revenues and earnings per share in the $2.00-2.50 range since 2012. What will Roman do differently from Thule in the near term? I’ll bet very little. And given the lack of volatility in 3M’s stock price this week, I’d say that 3M shareholders agree with me.

Last week we declared war…on Canada? Our neighbor to the north seems to be the target of a trade war started by President Trump. The weapons of war are tariffs, that is, taxes we charge on imports to make them more expensive (and less desirable) than equivalent domestically-produced goods. Trump has pledged to impose a 25% tariff on imported steel and a 10% tariff on imported aluminum. Many observers jump to the conclusion that these weapons are directed at China, Mexico and other lower-wage countries that “dump” commodities on US markets and contribute to the decline of domestic firms in regions like our own Iron Range. The reality is that Canada is our biggest steel exporter. We imported about $5.3 billion in steel from the Great White North. South Korea was second with $3.11 billion. China is a distant fifth as they account for only $1.96 in steel imports to the US. Here’s where you can learn more about the steel industry and US import trends: http://money.cnn.com/2018/03/02/news/economy/steel-industry-statistics-us-china-canada/index.html. So who wins from this new tax on imports? Almost certainly, US domestic steel and aluminum producers do. That means firms on Lake Superior like Cliffs Resources and others in and around the Iron Range. Except, the steel Cliffs produces isn’t necessarily the kind used for defense-related projects President Trump is supposedly protecting with these tariffs. So don’t expect a big bump in demand with a bump in investment and employment in that region. Here’s what we should expect if Trump’s import taxes go forward: 1) higher prices on everything that uses steel and aluminum –construction, housing, automobiles, practically every type of durable product we use; and 2) retaliatory tariffs and quotas on products we export like Minnesota-grown soybeans (to China as discussed here: https://www.wsj.com/articles/u-s-china-trade-war-could-hinge-on-feeding-pigs-1519881647) and high-tech goods (to European Union countries and Canada). The last time we declared war on Canada was in 1812. It didn’t go well for us then –Canadian-based soldiers burned down the White House in 1814. This war is unlikely to end much better notwithstanding President Trump’s assurances that his wars are “easy to win.” Let’s not start one in the first place.

February used to be the month when Hollywood released films with little box office potential. It was the month for releasing the “artsy” movies from overseas, and US movies that somehow never came together but needed to be released so that some of their costs (but not all) could be recouped. But not in 2018. A few February releases have turned out to be blockbusters. A case in point: Black Panther, which is near $900 million in receipts globally since release a few weeks ago. Here’s where you can learn more about the latest Marvel studios hit: https://www.forbes.com/sites/scottmendelson/2018/03/05/black-panther-box-office-more-records-and-milestones-as-it-nears-900m-worldwide/#595a157466e8. Hollywood used to wait for the summer to release such big-budget projects, thinking that 13-23 year-old target audiences needed better weather and no school to get to the multiplex. Apparently, that’s outdated. Marvel movies have a multi-generational appeal –after all, those super-heroes appeared in printed comic books read by the parents and grandparents of those 13-23 year-olds long before those same super-heroes came to the silver screen. Black Panther has also brought new audiences from communities of color to the suburban multiplex, so it’s proving socially inclusive as well as financially lucrative. Not bad anytime. Incredible for February.

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