Intended and Unintended Consequences: The ‘Darden Approach’ to Obamacare

Intended and Unintended Consequences:  The ‘Darden Approach’ to Obamacare 

Courtesy of Dr. Paul Price 

One of the few bright spots for job creation over the preceding year or two was the hospitality segment. This includes restaurants, hotels, bars, etc. Most of the work comes with low base pay. Tip income makes up a majority of the employees’ total compensation.

Managements were happy to add workers as business conditions permitted. Obama’s reelection cemented the fate of his new healthcare monstrosity. It now will be implemented and that’s very, very bad news for the restaurant industry.

Why is that? Many fast food and casual dining chains generate decent revenues but low net profit margins. Some, like McDonald’s (MCD), have been offering employees low-priced but relatively bare-bones health care policies on a voluntary sign-up basis. That was affordable both for low-wage employees and MCD.

Obamacare takes away that option. Minimum coverage requirements under the ACA [Affordable Care Act] mean that (post-January 1, 2014) those limited coverage plans can no longer be offered.

So much for that infamous claim, “If you like your present health plan and want to keep it… you can.”

The ACA requires that full-time employees must be enrolled in an approved healthcare plan or the employer will be subject to a $2,000 per head penalty (now called a tax by the Supreme Court). Worse still, the definition of full-time has been dialed back to just 30 hours a week.

At November’s Restaurant Finance & Business Development Conference Darden Restaurants’ (DRI) test plan was much discussed. They are reducing hours of employees to below 30 to limit the number of employees who would be eligible for coverage.

Darden is the parent of Olive Garden, Red Lobster, Longhorn Steakhouse, Bahama Breeze and other chains. They employee about 185,000 people.



Can employers simply wait until 2014 to make adjustments to their employee hours? No. The ACA has a look-back period to keep businesses from doing exactly that. Determining if a worker meets that 30-hour threshold will be done using their 2013 hours worked.

The cost of providing an approved policy will likely be well above the $2,000 tax imposed. Employers have a huge incentive to purge their businesses of scheduled workers with 30+ hour schedules. That means many people will be getting hours cut back now, in 2012, in order to avoid being classified as full-time in 2014.

Instead of helping waiters, greeters, kitchen staff and busboys become more prosperous ObamaCare may well curtail their ability to work as many hours as they would prefer.

It might also deprive business owners of the chance at rewarding their best workers with maximum earnings power. The cost differential between part-time and full-time might be the swing factor separating profitability and bankruptcy.

Brad Richmond, Darden’s CFO, was asked whether reducing hours will allow the restaurant to maintain customer engagement and employee satisfaction. “I think it’s going to be very hard,” he said. “They work 30 – 35 hours for a reason.”

Another potential strategy discussed at the conference? Don’t provide health insurance at all. From a strictly economic viewpoint paying the $2,000-per-year, per-employee tax penalty for not providing coverage might well be the best choice.

Alexis Becker, of accounting firm SS&G, noted that most scenarios find paying the penalty will be cheaper for employers than providing coverage.

The ACA only covers employers with 50 or more workers. Franchise owners will be loath to exceed, or even approach this potentially business- lethal number.

That could mean cutting back on overall operating hours or running with much leaner staffing levels. It also makes opening new units much less attractive. All three of those trends are bad news for workers and jobs. 

Most franchiser owners keep each unit as a separate legal entity in order to avoid triggering the 50-employee rule. Rumors have been floating around about new government regulations that would  lump multiple units back together for ACA purposes.

That would be an absolute dagger to the heart of owners of these multiple units with segregated legal ownership.

Hasn’t our president been saying since 2008…“Job creation is my #1 priority”? Obamacare is a job killer.

Actions speak louder than words. 

No matter how this ultimately plays out, it will be a huge headwind for the profitability of this industry. Avoid stocks in this group until they start pricing in the future bottom line hits.


Dr. Paul Price, at Beating Buffett Blog, and Market Shadows,  Nov. 15, 2012

Guest Post: Ceilings, Cliffs And TAG – 3 Immediate Risks

Via Lance Roberts of Street Talk Live,

The recent market sell-off has not been about the re-election of President Obama but rather the repositioning of assets by professional investors in anticipation of three key events coming between now and the end of this year – the “fiscal cliff”, the debt ceiling and the expiration of the Transaction Account Guarantee (TAG).  Each of these events have different impacts on the economy and the financial markets – but the one thing that they have in common is that they will all be battle grounds between a divided House and Senate.  

While there has been a plethora of articles, and media coverage, about the upcoming standoff between the two parties – little has been written to cover the details of exactly what will be impacted and why it is so important to the financial markets and economy.

Fiscal Cliff

One of the primary reasons for the market sell off since the announcement of QE3 has been in anticipation of the some of the largest tax hikes in the history of America which will take place at the end of the year.  These tax hikes will impact families and businesses, the middle class and the rich, the economy and the markets.

In 2001, and then again in 2003, President Bush and Congress enacted tax cuts to help restart the economy post the tech bubble, 9/11 terror attack and recession.  Primarily these tax cuts were focused on small business owners, families, and investors and, while dubbed the “Bush Tax Cuts” became the “Obama Tax Cuts” when they were extended in 2010.  

On January 1, 2013 the biggest hit to the economy will come from the increase of personal income tax rates.  The top income tax rate will rise from 35 to 39.6% which is a 13% increase in taxes for the majority of small businesses that create roughly 70% of the employment in the U.S.  However, more importantly, the lowest rate will jump a whopping 50% from 10 to 15%.  

At the same time many of the itemized deductions and personal exemptions will also expire which has the same mathematical impact as higher marginal tax rates.  The table below shows the effective changes.



The important point not to be missed is that higher taxes are likely coming regardless of any potential “deal” in regards to the “fiscal cliff.”  Higher taxes means less dollars going to consumption which is what creates the much needed demand on businesses to warrant increased employment and production.  Higher taxes on businesses reduces the dollars available for capital investments, expansions and production.  The net effect of higher marginal tax rates combined with new, or higher, taxes will slow economic growth and reduce revenue to the government.

Furthermore, higher tax rates on savers and investors, will reduce dollars flowing into the financial markets as dollars seek the lowest cost of investment.  Furthermore, with interest rates already low, rising taxes makes capital investments less profitable.  Therefore, capital will remain mired in “cash” rather than being deployed in productive investments which would spur future economic growth.

Obama stated repeatedly during the Presidential debates that he would not raise taxes on the “middle class” yet there are twenty new, or higher, taxes in Obamacare that will impact a broad cross section of the population.  Some of these have already gone into effect such as the tanning tax, the medicine cabinet tax, the HSA withdrawal tax, W-2 health insurance reporting, and the “economic substance doctrine”, however, more will go into effect on January 1st including the Medicare Wage and Salary Tax and the Medicare Investment Tax as detailed in the table above. Furthermore, medical device manufacturers will have to pay a new 2.3% tax on their products which will ultimately be passed along to the middle class through higher premiums.  Industry analysis suggests that this tax alone will lead to losses of more than 43,000 jobs and over $3.5 billion in compensation.

Lastly, one of the biggest tax tragedies coming from Obama’s healthcare plan is the “Special Needs Tax”.  There are thousands of families with special needs children in the United States, and many of them use FSAs to pay for special needs education.  Under current tax rules families can make unlimited contributions to FSA’s to fund a broad spectrum of needs from treatments to education.  Under Obama’s new plan these FSA’s will be capped at $2500 and then indexed to inflation after 2013.   This is an effective $13 billion tax hike for these families.   

The impact of all of these taxes is that there will be less money for individuals and businesses to spend and invest in the coming months ahead if the “fiscal cliff” occurs in full.  This equates to roughly a $537 billion dollar hit to GDP in 2013, equivalent to a 3.5% reduction, which would push the economy into a deep recession.  

Debt Ceiling

At the same time as Congress will be discussing what taxes to raise, keep or reduce – they will also be forced to deal with an impending debt ceiling debate.  As a brief reminder the “debt ceiling” debate during the summer of 2011 pulled the financial markets lower by 10% in just three short weeks as the stand off between the House and Senate led to threats of U.S. default and ratings downgrades.  With the Treasury Department once again warning congress that the debt ceiling will be hit by the end of November, well before the original estimation of 2013, the stage is already set for another showdown between President Obama and the conservative Republicans. 

The debt ceiling is a statutory limit set by Congress.  The statutory limit of debt issuance by the Government has been raised over the years by Congress as the country has grown.  A common misconception is that by raising the statutory limit that Congress is authorizing NEW spending – this is not the case.  Congress must raise the statutory debt limit to cover spending that Congress has ALREADY committed to spending such as Social Security, Medicare, and Defense.  

The chart below shows the history of Federal debt issuance as compared to the statutory limits set by Congress.



The problem, of course, is in the acceleration of spending.  While the current Administration is busy convincing the American public that the “rich” just need to pay their “fair share” the simple reality is that the U.S. faces a “spending problem.”  While increasing taxes sounds like a simple solution on the surface, as discussed above, it leads to lower economic growth rates as each dollar that is diverted into taxes removes a dollar from savings or productive investments.

Currently, it requires every dollar of revenue brought in from taxes just to cover non-discretionary spending.  This leaves all discretionary spending coming from the issuance of additional debt.  From 1993 to 1997, during the Clinton’s two terms as President, the debt ceiling was raised 4 times for a total increase of $1.8 trillion.  President Bush then raised it during his two terms 7 times for a total of $5.37 trillion.  Obama, during just one term as President, has increased the debt ceiling 6 times for a total of $5.08 trillion.  The current run rate of debt increases is clearly unsustainable in the long term.  

The negative impacts of debt on economic growth are not widely discussed (see Debts and Deficits: Killing Economic Prosperity) but prior to 1980 it took roughly $0.50 of debt to create $1 of eocnomic growth.  The current Administration has increased Federal debt 45%, along with roughly $29 trillion of other funding, bailouts and stimulus, to garner a total of 7.1% economic growth during that period – or roughly $5.40 of debt for each $1 of economic growth.  That really isn’t a good return on investment.



The last debt ceiling debate ended with a steep market sell off, contracting economic growth and a downgrade by Standard & Poors of the U.S. debt rating.  In the end the debt ceiling was increased. No budgets were adopted. Spending continued and debt now exceeds 100% of GDP at $16.25 Trillion.  

The battle lines are once again being drawn with the Republican controlled House pushing back against the Democratic Senate demanding cuts in spending, tax code reform and no increases in taxes.  The Senate wants the debt ceiling raised without spending cuts and tax rate increases.  Fitch and Moody’s has warned of downgrading U.S. debt if the “fiscal house” is not put in order but Obama is demanding higher taxes on the “rich” and is unwilling to compromise on entitlement programs.

For investors this is round two of the same boxing match that ensued last year.  Ultimately, the debt ceiling will be raised.  The U.S. will NOT default on its debt (we are a sovereign currency issuer and as such can print money to meet our obligations) and the U.S. will not go bankrupt. However, the rhetoric of such things happening, combined with the potential delay of resolving the “fiscal cliff,” could well create a sharp selloff in the financial markets.


While everyone is afraid of falling off the “fiscal cliff”  there’s another issue looming large into the end of the year that could put further financial strains on the economy and the financial markets.  The Transaction Account Guarantee (TAG) program, which was initiated at the height of the credit crisis when depositors were fleeing banks for fear they would go under, is set to expire at the end of this year.

The TAG program was put into place by the FDIC to up regular deposit insurance from $100,000 to $250,000 and unlimited insurance for all non-interest bearing transaction accounts.  It is the second part that’s most important as it comes to an end.  

When the unlimited insurance expires the cash of corporations, businesses and depositors, which totals more than $1.4 trillion, becomes uninsured.  This could create some serious negative repercussions for small to medium size financial institutions which could be impacted by deposits fleeing into the safety of short-term U.S. Treasuries. 

There are two negative consequences for the economy and the financial markets.  The first is that many small and medium size financial institutions could face solvency issues leading to another, yet much smaller, financial crisis in the U.S.   Secondly, the too-big-to-fail (TBTF) banks which are primarily responsible for the last credit crisis are likely to become too-BIGGER-to-fail.  As the unlimited insurance on their deposits expires businesses will move money elsewhere, and since the Government has already proven that they will not allow the biggest banks to fail, they are the most likely recipients of fund flows.

The problem, for the financial system and the economy, is that as TBTF banks continue to swell the risk of another financial catastrophe increases. As the guarantees vanish depositers will likely move money to money market funds which requires fund managers to invest that capital for a return.  With an ever increasing cash balance the options for investment becomes more restricted and requires excessive risk taking.  History, as a guide, tells us that the TBTF banks are not good risk managers, aka JP Morgan’s London Whale,  and the next time a financial crisis occurs – a bailout may simply not be an option. 

For individuals this also means that borrowing and transaction costs will continue to escalate.  This cost, like higher taxes, reduces the savings available for consumption and investment leading to reduced aggregate end demand and lower economic growth.

Likely Outcome

These are the three big risks going into the end of the year as I see them – and each one has the ability to impact the financial markets and the economy.  Combined they could be disastrous.

While it is highly expected that the Obama, and the Senate, will find common ground with the Republican led house – this is an assumption that I would not be so sure of.  Congressional elections are coming up very soon and the “Tea Party” candidates were sent to Washington with a mandate to get Washington into fiscal order.  The House already rolled over once during the previous debates in 2011 on the promises of spending cuts being made.  The Administration failed to follow through.  Therefore, it is highly likely that this particular debate on the fiscal cliff, and the debt ceiling, could turn out much more contentious than expected.

Do not misunderstand me.  A deal will eventually be reached and the debt ceiling will be raised.  The U.S. will not default on its debt and the country will not be forced into bankruptcy.  However, the impact to the financial markets, and ultimately the economy, from a prolonged battle could be far more damaging that investors currently believe.

Furthermore, taxes will go up in 2013, of this I am sure.  The reality is, however, that most of the current tax rates will likely be extended short term along with a deferral of the taxes imposed by ObamaCare into 2013.  There will also be spending cuts that will agreed to which will likely be more symbolic in nature than effective.  Reduced defense spending is almost a given but that will have a direct, and negative, impact on economic growth. 

The financial markets and economy are currently under attack from a recession in Europe, a slowdown in China, rising costs, high “real” unemployment, and the potential for sharply rising taxes at a time when income growth is stagnant.  The risks of a recession are rising as earnings are rapidly deteriorating – quite simply this is a formula for a more protracted market correction.  

I remain hopeful that our elected leaders will allow cooler heads to prevail and that they will begin to work towards solutions that alleviate some of the risks of economic contraction while setting forth logical plans for fiscal reform.  However, while I am hopeful of such progress, “hope” is not an investment strategy to manage portfolios by.  If I am right things are likely to get worse before a resolution is reached – but maybe that is why the “investment professionals” have already been heading for the exits.

Photos From Gaza

Most have read about the events in Gaza over the past three days, for the most part insulated and buffered by a distance of several thousand miles and one or more oceans, from what is rapidly becoming ground zero of a new and most deadly escalation in the center of the Middle Eastern powder keg. Few, however, have witnessed and documented it quite as well as French photographer Anne Paq and her collection of photos below.

Pictures from Gaza via Chroniques de Palestine:














Guest Post: Very Few People Understand This Trend…

Submitted by Simon Black of Sovereign Man blog,

There are only a few people who get it: the era of cheap food is over.

Global net population growth creates over 200,000 new mouths to feed ever single day. Yet supply of available farmland is diminishing each year due to development, loss of topsoil, peak production yields, and reduction in freshwater supply.

Then there’s bonehead government policy decisions to contend with… like converting valuable grains into inefficient biofuel for automobiles. Paying farmers to NOT plant. Banning exports. Etc.

Of course, the most destructive is monetary policy. The unmitigated expansion of the money supply has led to substantial inflation of agriculture commodities prices.

These fundamentals overwhelmingly point to a simple trend: food prices will continue rising. And that’s the best case. The worst case is severe shortages. This is a trend that thinking, creative people ought to be aware of and do something about.

One solution is to buying farmland overseas. It provides an excellent hedge against inflation, plus it’s one of the best (and most private) ways to move money abroad, out of the jurisdiction of your home government.

In a way, overseas farmland is like storing gold abroad. But unlike gold, it produces a yield, ensures that you have a steady food supply, and even provides a place to stay in case you ever need to leave your home country.

So where are the best places to buy?

After travel to over 100 countries, looking at more properties than I can count, and investing in quite a few of them, I’ve come up with a few top picks that meet the following criteria:

  • cheap land costs
  • low operating costs
  • highly productive soil
  • low political risk (confiscation, regulation, market interference)
  • foreigner-friendly ownership rules
  • clear water rights
  • climatic stability

Believe it or not, these simple requirements eliminate most of the world. Much of central and Eastern Europe is too politically risky. Western Europe and the US tend to be cost prohibitive. Most of Asia disallows foreign ownership of farmland. Etc.

But there are still several places that remain. I’ll share two of them:

1. Chile. No surprises, Chile ticks all the boxes. Land costs are very reasonable, and operating costs are low. The soil in regions 6, 7, and 8, is some of the most productive on the planet. And best of all, Chile has some of the clearest, most marketable water rights in the world.


Another great thing about Chile is its location; it’s counter-seasonal to the northern hemisphere, so Chilean harvests tend to come at a time of tighter global supplies, pushing up prices.


As an example, we’re currently harvesting blueberries at our farm in Chile’s 7th region. Global blueberry supply is tight in November, so the price we receive is 35% higher than if we were in the northern hemisphere.


See for more information, it’s a fantastic resource.


2. Georgia. This may be shocking to some, but Georgia is a stable, growing country that’s definitely worth betting on.


Putting boots on the ground there, it’s clear that Georgia is on an upward trajectory with a bright future, much like Singapore was decades ago. Taxes are low, and the country is open to foreigners.


In fact, the government realized that they have tremendously high quality farmland, yet limited expertise in farming. So while most nations shut their doors to foreigners owning strategic farmland, Georgia went abroad actively seeking foreigners to come to their country.


They hit the jackpot in South Africa, offering land, financial incentives, and even citizenship opportunities to South Africans who would move to Georgia and work the land.


Land costs in Georgia are very low; top quality crop land costs about $3,000 per acre, compared to $10,445 in Iowa, or $12,000 in California. Yet simultaneously, yields are very high for everything from corn to wine gapes to peanuts, on par with both of those states.


It’s definitely a contrarian agricultural investment worth considering.

Newly Public Ruckus Blames IPO Bomb On, Wait For It, Hurricane Sandy

If the entire world goes full retard, is any individual instance of full retardedness unique? This is what today’s IPO bomb, Ruckus, which despite (or probably due to) much praise and lauding from CNBC’s Bob Pisani, bombed 20% on its first day of trading, is hoping for. The company which picked the wrong time and wrong place to go public and thus, to realize first hand that the US stock market has for years not been a market in any normal sense of the word, but merely a HFT-manipulated policy vehicle for the central planners, decided to pull ye olde scapegoating trick, and blamed it on, cerebral hemorrhage spoiler alert, Hurricane Sandy.

From the WSJ:

[RKUS] has been among the more closely followed public offerings this winter. The San Francisco-based company aims to improve spotty commercial wi-fi coverage for customers such as Time Warner Cable TWC -0.37%, and sports for the first nine months of this year a top-line revenue growth rate of 91% so far this year, compared to last year, according to its prospectus.


But during the critical road show phase of an IPO, when a company is shopped around to potential institutional investors, its executives had their plans interrupted by Superstorm Sandy, which pushed the deal back a week, according to Selina Lo, Ruckus’s chief executive.


Had the deal come a week or two earlier, it may have avoided some of the broader market turbulence that has helped drive its stock down in the first day of trading.


Stock have tumbled since the election, and Ruckus’ IPO “certainly was impacted by the macro environment,” Ms. Lo said. “Some investors were preoccupied.”


“A number of companies this week have pulled back, but we decided to go because there was a lot of investor interest,” said Ms. Lo.

It turns out there wasn’t. But who is to say an executive is at fault for taking a horrible executive level decision. Nobody, that’s who.

What is more relevant is if corporate success or failure now depends solely on what phase moon is in, the direction the wind is blowing, and who won Ohio, maybe it is time to stop pretending the market is a market, stop pretending that this time it’s different and a centrally-planned market can possibly work 100% historical failure rate notwithstanding, and just shut it all down and call it a day.

But in the meantime, why take responsibility for anything – just do what the US government itself is now doing with every worse and worse data point, and blame it all on a regional storm. Surely, the company’s shareholder team will be delighted with this explanation and do nothing to shorten Ms. Lo executive career. Because after all, when other people’s money is at stake, who really cares.

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