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May 10, 2021,06:43pm EDT

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May 10, 2021,06:35pm EDT

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May 10, 2021,06:10pm EDT

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May 10, 2021,06:06pm EDT

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Two months after the Texas power grid froze up during a historic deep freeze, two months after legislative hearings and firings and finger pointings, on a mild day in mid April, the Electric Reliability Council of Texas, of ERCOT, again sounded alarms last week that electricity was in tight supply. How can this happen?

ERCOT’s excuses rang hollow and included an uncooperative cold front that increased power demand more than anticipated, and the fact that a quarter of power plants were unavailable because of maintenance ahead of the summer heat. 

ERCOT’s solution to the risk of outtages was to temporarily jack up the prices generators could charge, in hopes that they would send more electrons onto the grid. The first screen shot below show the price boost, to $2,000 per megawatt hour ($2 per kilowatt hour), at 5:25 pm. Again, there were no blackouts at this time, and electricity demand did not outstrip supply.

ERCOT justifies this high transient price on the basis that high prices will incentivize power generators to invest in new plants, or at least crank up the ones they already own. But a funny thing happened when prices hit $2,000 the other day — there was no supply response. More power did not arrive on the market. Indeed, it takes years to build new generators. Mere hours or even a week of price gouging consumers are not enough to encourage new investment.

Maybe that’s because generators appreciate the huge Catch-22 in effect here. Higher prices should bring more generation into the market. But when it does, the extra capacity will end up driving down the price. If anything, there is a massive financial incentive for generation companies to withhold generation.

This isn’t mere conjecture. It has happened before in Texas when GDF Suez gamed in 2013. Did it happen on April 13?

We can’t yet say. There can be many manifestations of collusion. Generator companies can signal each other in the market what they intend to do. “Joe” plans to run today, but “Sally” is off. “Deidre” will be off Tuesday, but “Bob” will run. “Rick” will not fire up for the weekend, so that “Louis” wins in the futures markets. If bridge games can be rigged with codes and signals, electricity markets can be rigged.

Suppose the ERCOT market was forced into corner on April 13.  It may have been done by generation companies deliberately holding back power to drive the price up. Those units running at the height of the crisis could book great profits. Under this hypothetical scenario, perhaps some participants bought futures on the commodities exchanges to profit from the planned withholding. This practice is called cross market manipulation, and it is prohibited under federal laws. 

How would we look for it? For Tuesday, April 13, ERCOT published a list of generation plants that were available to produce electricity. Under ERCOT’s Orwellian doublespeak, it is called the RUC list, for Reliability Unit Commitment. These are units (i.e. power plants) that were available for this event, but, irrationally, their owners had decided to forgo the profits of turning the plants on, perhaps in order to profit elsewhere from either futures contracts, or real-time or day-head ERCOT price and dispatch signals. So ERCOT had to order them online for RUC for capacity. 

Generators have in the past lobbied and won the stipulation that when their plants are ordered on-line for RUC capacity that they receive the highest price available, i.e. the price cap. So a generator that gets RUC’ed online for capacity receives $2,000 per megawatt hour instead of, let’s say, the $35 per megawatt hour it actually costs to run these plants.

This sets up misincentives, like the kind of electric power short squeeze that Enron’s traders could have only dreamt of two decades ago. This about it: if a power producer operates a lot of plants, and knows he can drive the price up to $2,000 per mwh by keeping a few of them offline on a mild April afternoon and triggering the price cap, he’s incentivized to do so.

Among the losers in this scenario — first are the average Texans who would prefer not to overpay for power, and who want nothing more than for the lights to go on when they flip the switch. Second are the small, struggling retail power providers who are already on the brink of financial disaster from February. Third are the regulators like the Public Utilities Commission and the Independent Market Monitor who have lost the respect of market participants for failing to enact common sense oversight.

ERCOT’s data shows that the number of power plants deliberately staying offline on April 13 after their their warnings would have been plenty to ease the supply shortage and keep the price down.  

Texas grid regulators owe it to the state to determine whether any of these market participants had ulterior motives that informed their decisions to keep power offline. A quick inquiry into whether market manipulation occurred would investigate whether any parties trading on commodities exchanges had prior knowledge of the operation of these listed generators in much the same way that the Securities and Exchange Commission finds insider trading. 

The SEC, the Commodities Futures Trading Commission, the FBI, the U.S. Department of Justice, local district attorneys and the Texas Rangers could clear the air quickly. State investigations may actually drive those with knowledge of wrongdoing to speak. Why? There is no white collar wing in the Texas prison system.

The game of withholding power to drive up prices is not new to Texas nor to other markets. Enron taught California the lesson in 2000-2001. It is a taught in MBA programs. It is the outcome predicted by John Nash in his Nobel work “Non-Cooperative Games.”  

But there’s more. As the green ERCOT map below shows, at 6:05 PM, the crisis had passed. Statewide, the market was clearing at less than $100 per megawatt hour, and the market was in balance. But ERCOT applied something they call “Real-Time Price Adders” — boosting power prices by hundreds of dollars per MWH in some areas. But why? The generators were already by then producing enough electricity at the lower price. This is just like the lumber store continuing to price gouge homeowners for batteries and plywood even after a hurricane heads out to sea and evaporates.

Even before last week’s hijinx, Texans have paid $28 billion more for power this year than they would have under an old fashioned regulated market. Don’t expect them to stand for it.

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Kohl’s and a group of activist investors are doing a well-publicized dance that will likely result in a contested board election on May 12^th. Despite reports in the Milwaukee Business Journal of “constructive conversations”, Kohl’s amped-up it’s defensive posturing last week.

The activist group led by Macellum Advisors GP LLC. which purchased 14.7 million Kohl’s shares (9.3 percent of Kohl’s outstanding stock) has been overly critical of the company’s trajectory. The group notes sales have essentially remained static since 2011 with compounded same store sales declining by 0.6 percent over the decade-long period. They also state that the company has between $7 and $8 billion in non-earning real estate assets that could be put to work to revitalize the operation and better position the company long-term.

That same group made similar advances on Bed Bath & Beyond in 2019, resulting in new board members being seated and its founders given “forced retirement.” This set the stage for Target TGT veteran Mark Tritton to assume the CEO post, and begin a fundamental overhaul of the retailer from an operational, product, and merchandising standpoint. I and many industry observers believe that these moves have placed BB&B BBBY on a path of promise and profitability, as recently reported.

Red Letter Day

On March 24^th Kohl’s sent its shareholders a proxy letter, lobbying heavily against the efforts of the activist group’s attempts to elect five new board members to the Kohl’s board. In summarizing the proxy letter, Kohl’s states “’Activists’ slate threatens to disrupt Kohl’s momentum; and activists offer no new value-creating ideas.” And, in a somewhat cheeky admission it further states “Kohl’s remains open to new ideas that could enhance shareholder value.”

The proxy letter further lays out the key points the activists have put forth that underlie their position, along with an explanation of how Kohl’s’ “previously announced plans” address the same issues. They include: Inventory turns, SG&A Costs, Marketing Strategy and Effectiveness, Merchandising, Loyalty and Value, and Capital Allocation.

Merchandising Products versus Stocking Goods

As Storch Advisors Jerry Storch reported in a recent Yahoo Finance Live interview, Kohl’s is “still a kind of a quasi-discounter and quasi-department store…but they have the department store illness.” I would tend to agree. And one of the key symptoms of that illness is, they like many other failing retailers, is a focus on “stocking goods” rather than “merchandising products.”

To elaborate; for store-based retail to survive and prosper, the stores must elevate the customer experience beyond, a three-dimensional e-commerce website. Merchandising implies a mixture of art and commerce. It includes contextual theming, storytelling, cross selling and solution-based rather than product-based retailing.

For all, but the most down and dirty dollar destinations, these fundamentals are no longer just “a nice touch” but they have become table stakes. These are the same tools that department stores used to employ; Nordstrom JWN still does. And to Kohl’s great disadvantage, these visual merchandising techniques (among other things) are what Target does with great élan.

Springing Forward

Ironically, getting back to the Kohl’s chart of “stated plans” that accompanied the proxy letter, they actually propose “Creating a more simplified and inspired shopping experience through greater storytelling and merchandising customer solutions.” I could not have stated it better, myself. So, what is keeping them from executing?

When comparing how Kohl’s and Target have handled their most recent spring product offerings, it is a virtual case study in contrasts between selling commodities, and merchandising products in an inspired manner. Target is celebrating the season with a coordinated line of fresh goods, bright graphics, and product vignettes. While Kohl’s has stacked patio chairs and pillows in proximity of a sign reading “patio”, like a page on the net. One inspires, the other tires.

Fashion with Passion

The Irish value-priced fashion retailer Primark recently opened its first midwestern store, a 35,000 sq. ft. outlet on Chicago’s State street. And by the looks of the images in a recent press piece they too have a fresh approach that Kohl’s could learn from.  

Their girl’s department is open, transparent, inviting and nicely adorned by some great graphics and clean visual merchandising. Like the rest of the well-merchandised store, it says value, without appearing cheap. In contrast, Kohl’s treats its kid’s product in the same tight, opaque, and maze-like manner as they tend to do throughout.

The Chicago Primark store is situated just 100 miles south of Kohl’s Menominee Falls, Wisconsin headquarters. It seems like a deserving destination for a group of socially distanced Kohl’s executives in a caravan of Sprinter vans. Chi-Town field trip!

Hard Case for Hard Goods

The Macellum Advisors position began with a detailed letter sent to the Kohl’s board dated February 22, 2021, and reported on by CNBC. Among other things, it listed criticisms contributing to Kohl’s stagnant sales. These included “a repetitive and over-assorted collection, disappointing new brand launches, private label failures, losing market share in the home category, confusing promotional and loyalty programs.

Cracking the home-goods code is another area that Target has shined and Bed Bath & Beyond is upping its game. Kohl’s and Target’s approach to the home category is similar as their respective outdoor living presentations. Target has embraced the category with high design, an edited offering, tasty graphics, and bright colors. Kohl’s on the other hand, as their sign says, is selling tools and gadgets. It is the contrast between solution-based merchandising which is value-added, and product-based retailing which is readily commoditized.

The most repeated mantra I heard from my many valued mentors was “retail is detail.” It’s a tough game, and getting tougher, but the rule book’s been written and re-edited.

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The Federal Reserve balance sheet has been expanding since August 2019. Back then the balance sheet totaled $3.76 trillion. On March 22 it was up to $7.72 trillion. As the Fed increased total assets, the stock market traded higher. This should continue as the first quarter of 2021 ends this Wednesday.

The Dow Jones Industrial Average (.DJI) and Dow Jones Transportation Average (.DJT) set all-time intraday highs on Thursday, March 18 at 33,227.78 and 14,364.35, respectively. These highs were just below their annual risky levels at 33,425 and 14,424. The S&P 500 (.SPX) set its all-time intraday high of 3,983.87 on March 17, above its annual risky level (now a pivot) at 3,932.

Nasdaq Composite (.IXIC) set its all-time intraday high of 14,175.12 on February 16. Its monthly risky level for March is 14,195. The Russell 2000 Index (.RUT) set its all-time intraday high of 2,360.16 on March 15. This is well above its annual and monthly risky levels at 2,120 and 2,193.

Performance among the averages is quite different. The Russell 2000 is up 12.5% year-to-date compared to the Nasdaq up just 1.9%. The Nasdaq is 7.3% below its high.

Here’s today’s scorecard:

The weekly charts are no longer positive.

By definition, a weekly chart is positive when an index is above its five-week modified moving average (MMA) with its 12-week slow stochastic reading rising between 20.00 and 80.00. A reading above 80.00 is overbought. A reading below 20.00 is oversold.

The weekly chart for the Dow Jones Industrial Average is positive but overbought. The average above its five-week modified moving average at 31,889. Its 200-week simple moving average lags at 25,904. The 12-week slow stochastic reading is overbought at 85.34. My proprietary analytics show quarterly and semiannual pivots at 31,052 and 31,459 with an annual risky level at 33,425.

The weekly chart for the S&P 500 is positive but overbought. The index is above its five-week modified moving average at 3,881.43. Its 200-week simple moving average lags at 2,948.35. The 12-week slow stochastic reading declining at 78.53 moving below the overbought threshold of 80.00. My proprietary analytics shows a semiannual value level at 3,511.43 with a quarterly pivot at 3,836.19, and an annual risky level at 3,932.35.

The weekly chart for the Nasdaq Composite is negative. The index is below its five-week modified moving average at 13,238.20. Its 200-week simple moving average lags at 8,510.82. The 12-week slow stochastic reading is declining at 54.19. The Nasdaq was in an inflating parabolic bubble with a reading above 90.00 in mid-February. My proprietary analytics shows quarterly, annual and semiannual value levels at 12,789.26, 12,000.71, and 10,972.72.  

The weekly chart for the Dow Jones Transportation Average is positive but overbought. The average is above its five-week modified moving average at 13,685.00. Its 200-week simple moving average lags at 10,509.38. The 12-week slow stochastic reading is overbought at 91.49. This reading is above 90.00, putting the average in inflating parabolic bubble formation. My proprietary analytics shows semiannual, and quarterly pivots at 12,314.56 and 12,003.69, with an annual risky level at 14,424.55.   

The weekly chart for the Russell 2000 is positive but overbought. The average is above its five-week modified moving average at 2,216.50. Its 200-week simple moving average lags at 1,579.00. The 12-week slow stochastic reading is overbought at 84.01. At the high this average had a reading above 90.00, making the Russell 2000 an inflating parabolic bubble. My proprietary analytics shows quarterly and semiannual value levels at 1,840.34 and 1,711.55, with an annual pivot at 2,120.34.   

The closes on December 31, 2020 were inputs to my proprietary analytics and resulted in monthly, quarterly, semiannual and annual levels. Each uses the last nine closes in these time horizons. The monthly level thus changed in February and March.

New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

The stochastic reading covers the last 12 weeks of highs, lows and closes. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an inflating parabolic bubble formation that is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered as being too cheap to ignore which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

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On March 11th, 2021, President Biden signed the latest COVID-19 stimulus package, known as the American Rescue Plan Act of 2021. The Act comes just in time, because many COVID-19 relief measures were set to expire on March 14th.

The American Rescue Plan Act authorized and allocated $28.6 billion to the Restaurant Revitalization Fund program. Monies from this fund are to be paid as tax-free grants to restaurants, bars, and associated food and beverage related businesses in order to provide them with compensation for their reduced revenues of 2020. With recent studies estimating the number of restaurants and bars in the U.S. at 1,000,000; this law allots roughly $28,600 for each eligible entity. Entities that receive funds under this program may use them for continuing operating expenses and for certain other permissible expenditures which are detailed further below.

In order to receive this grant, the applicant must verify under penalty of perjury that the funds are reasonably necessary to support the ongoing operation of the business. Restaurants that are profitable and well capitalized are not going to be able to satisfy that requirement and may risk white-collar prosecution and penalties. The grants given are going to be in the public record and competitors will likely report their colleagues if they believe that the funds were not necessary. This is unlike the PPP program where there are safe harbors for loans under $2 million dollars under certain circumstances. No such safe harbor presently exists under the necessity requirement. The details of the Restaurant Revitalization Fund are discussed below.

Is My Restaurant or Bar an “Eligible Entity” for purposes of qualifying for the Restaurant Revitalization Fund?

The Act provides a broad definition of what is considered an “eligible entity” for the purposes of the Restaurant Revitalization Fund. A non-exhaustive list of these entities include:

• restaurants;
• food stands;
• food trucks;
• saloons;
• inns;
• taverns;
• bars;
• brew pubs; or
• similar places of business in which the public or patrons assemble for the primary purpose of being served food or drink.

The American Rescue Plan Act of 2021’s language dealing with “eligible entities” reads as follows:

(4) ELIGIBLE ENTITY.—The term “eligible entity”—

(A) means a restaurant, food stand, food truck, food cart, caterer, saloon, inn, tavern, bar, lounge, brewpub, tasting room, taproom, licensed facility or premise of a beverage alcohol producer where the public may taste, sample, or purchase products, or other similar place of business in which the public or patrons assemble for the primary purpose of being served food or drink;

(B) includes an entity described in subparagraph (A) that is located in an airport terminal or that is a Tribally-owned concern

For the purpose of the Restaurant Revitalization Fund, an affiliated business is a business that an eligible entity has an equity or right to profit distributions of at least 50 percent or has the authority to control the direction of the business since before March 13, 2020.

A publicly traded company is one that is majority owned or controlled by an entity that issues ownership shares and whose securities are listed on a national securities exchange.

Section 124.3 of Title 13 defines a tribally owned business as “any concern at least 51 percent owned by an Indian tribe”.

The new law also details what businesses do not qualify as eligible entities. These entities include:

1) “state or local government-operated businesses”;

2) businesses that “own or operate (together with any affiliated business)” more than 20 locations, regardless of whether those locations do business under the same or multiple names;

3) businesses with a pending application for or have received a grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (title III of division N of Public Law 116-260); or 4) publicly-traded companies, by reason of the following language under the Act: or

4) publicly-traded companies (franchisees of publicly-traded companies may still qualify).

In addition to qualifying as an eligible entity, a business must also show that they have suffered a pandemic-related loss. In order to do so, an entity only needs to show that they had less gross receipts in 2020 than they did in 2019, but PPP loan proceeds are considered to be revenues for purposes of this calculation.

Therefore, under this new law, if your business kept the same pricing, sold one less side order of fries in 2020 compared to 2019, and received no PPP loan, your restaurant has suffered a pandemic-related loss. While it is easy to have a pandemic-related loss under this provision, the law does require a good-faith showing that the receipt of funds under this section is necessary to continue business operations in the current uncertain economic times.

Additionally, your entity must not have previously applied for or received a grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act.

For eligible entities that were not in operation for all of 2019 or just opened in 2020, the bill provides the following guidance to determine if they have suffered a pandemic related loss:

(B) if the eligible entity was not in operation for the entirety of 2019—

(i) the difference between—

(I) the product obtained by multiplying the average monthly gross receipts of the eligible entity in 2019 by 12; and

(II) the product obtained by multiplying the average monthly gross receipts of the eligible entity in 2020 by 12; or

(ii) an amount based on a formula determined by the Administrator;

How Much Will My “Eligible Entity” Receive?

Based upon the above you should know if an eligible entity qualifies to receive Restaurant Revitalization Funds. The next question is how much will be received.

The general provision is that an eligible entity is able to receive an amount equal to the suffered pandemic loss, but not exceeding up to $10 million for each eligible entity or $5 million per physical business location.

In order to calculate the loss in revenue an eligible entity suffered in 2020, a taxpayer must first subtract 2020 gross receipts from 2019 gross receipts. As noted above, this amount of losses must be reduced by the amount of loans received from either the First Draw or Second Draw of PPP loans in 2020 or 2021. It is worth noting, however, that Economic Injury Disaster Loans (EIDL) or funds received through the Employee Retention Tax Credit (ERTC) program will not count towards reducing revenues. If you would like to know more about the EIDL program, click HERE. For more information on the ERTC program, click HERE.

What Can The Restaurant Revitalization Funds Be Used For?

Restaurants who receive Restaurant Revitalization Funds can use them for a wide variety of “eligible expenses” that are either incurred as a direct result of, or during, the COVID-19 pandemic in order to maintain business operations. The Rescue Act lists these expenses as follows:

(A) Payroll costs.

(B) Payments of principal or interest on any mortgage obligation (which shall not include any prepayment of principal on a mortgage obligation).

(C) Rent payments, including rent under a lease agreement (which shall not include any prepayment of rent).

(D) Utilities.

(E) Maintenance expenses, including—

(i) construction to accommodate outdoor seating; and

(ii) walls, floors, deck surfaces, furniture, fixtures, and equipment.

(F) Supplies, including protective equipment and cleaning materials.

(G) Food and beverage expenses that are within the scope of the normal business practice of the eligible entity before the covered period.

(H) Covered supplier costs, as defined in section 7A(a) of the Small Business Act (as redesignated, transferred, and amended by section 304(b) of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Public Law 116–260)).

(I) Operational expenses.

(J) Paid sick leave.

(K) Any other expenses that the Administrator determines to be essential to maintaining the eligible entity.

How Long do I have to Use my Funds?

As the bill is currently written, the “covered period” is scheduled to end on December 31, 2021, which means any unused funds must be returned on that date. However, the section leaves the Small Business Administration the authority to extend this period as far out as 2 years after the Rescue Act is signed into law.

There is no definition in the statute that defines when the Covid-19 pandemic will end, as Congress is clearly not psychic. Restaurants, bars, and other eligible entities may be well advised to spend the money earlier than later in case the current crisis is over by June or July.

What Types of Restaurants Will Get Priority?

The Small Business Administration will begin by prioritizing eligible entities owned by women, veterans, and businesses that are socially and economically disadvantaged. The specific language establishing this initial period is provided below.

A) IN GENERAL.—During the initial 21-day period in which the Administrator awards grants under this subsection, the Administrator shall prioritize awarding grants to eligible entities that are small business concerns owned and controlled by women (as defined in section 3(n) of the Small Business Act (15 U.S.C. 632(n))), small business concerns owned and controlled by veterans (as defined in section 3(q) of such Act (15 U.S.C. 632(q))), or socially and economically disadvantaged small business concerns (as defined in section 8(a)(4)(A) of the Small Business Act (15 U.S.C. 637(a)(4)(A))). The Administrator may take such steps as necessary to ensure that eligible entities described in this subparagraph have access to grant funding under this section after the end of such 21-day period.

What Should I Do Now?

It is still unclear when the applications will open for this new round of funds that will become available to Americans, although Rep. Earl Blumenauer (D – Or.) stated in a press conference on March 10th that he expects the grant applications to open “within weeks, not months.”

For individuals and businesses who have not yet applied for federal grants, it is important to register to receive a DUNS number, which is a nine-digit ID number that is necessary for registering on Grants.gov. Click HERE for more information on the DUNS Number system.

Individuals who qualify for PPP loans and the RRF grant should still apply for both even though the RRF grant total is reduced by the amount of PPP loans received, as PPP loans will be forgiven if the funds are used appropriately and in a timely manner. The PPP is a much larger program than the RRF, which will likely run out of funding relatively quickly, and is available to a wider array of struggling entities. For a discussion on recent changes to PPP loan rules governing sole proprietors and independent contractors, click HERE.

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I recently had a startling experience, one that haunts me and which I believe has major implications for the state of our economy. 

I was in serious discussions with top executives at a major U.S. corporation discussing specific operating principles for stakeholder capitalism. My colleagues and I were describing how a corporation should engage in practical, constructive terms with each of seven critical stakeholders, including ways to measure progress by both management and the board. It was general enough to be applied to any corporation, big or small, valid across any industry. It is the first practical step for business since The Business Roundtable issued their seminal brief in 2019,  calling for a redefinition of the corporation to serve all of its stakeholders, not just the shareholders. The top executives were very excited by the plan I shared. They had discussed it with their CEO and he agreed it was a “great idea” and they wanted to pursue it. The CEO wanted to meet with me and my partners at JUST Capital to agree on next steps. We were excited indeed to engage with their top CEO. Then, a few days later, we got word that the CEO was still very interested but given his schedule, we couldn’t meet for some 3 weeks.

Alas, this experience is not unique. 18 months after that bold statement of purpose by the BRT, talk of stakeholder capitalism is pervasive, but action is nearly absent. Most business leaders admit it’s probably a good idea. But when asked what it really means, the answers are vague. Many say they already take good care of their people. A few dared to measure just how well their people are doing and found that a large minority of their workforce were shopping using food stamps. Is that really surprising? In 2018, the Fed reported that 40% of Americans would be forced to borrow if faced with an unexpected expense of just $400. The current business governance is pressuring CEOs to allocate just over 90% of operating profit to shareholders. R&D spending is down, basic research is down, patents are down, productivity is down, wages for American workers have been flat with inflation for 40 years. As a result, nearly three-quarters of America’s workers are disconnected from their enterprises. And 13% actively work against the interests of the company. All these facts are pre-pandemic.

Then, Covid came. And it woke us all up for a while. We saw this brutal inequality live on the TV screens. The pain, the suffering, these job losses, those now homeless because they couldn’t pay their rent or their mortgages. The miles long lines of cars waiting for hours, or even days to get a box of food from the food bank. Meanwhile our shareholder primacy capitalism produced an additional $1.06 trillion dollars’ worth of wealth in just under nine months for America’s 651 billionaires according to a recent report titled, “Billionaire Bonanza” from the Institute for Policy Studies. Collectively, their net worth now exceeds 4 trillion dollars.

I find this revolting. And while I hope the spectacle that we witnessed will wake us up for a while, I’m afraid that it won’t. It certainly didn’t prompt the CEO I met with to put this issue on his agenda any quicker.

Too many corporate executives today seem content to pay lip service to the idea of stakeholder capitalism, but far too few are ready to take any definitive action. Most of us CEOs haven’t worried about communities or societies for 40 years or more, when they began following the doctrine of Milton Friedman who famously stated that the purpose of the corporate was to generate profit for the shareholder. My fellow CEOs, C-Suite mates, and families are doing just fine during the pandemic in our isolated country homes powered by the internet’s 5G juice.

But, Capitalists, we must now awaken – and awaken for good.

A shareholder primacy governance for America business must die. The socio-economic carnage it helps produce for most Americans and society as a whole is beyond any challengeable proposition. We must embrace and protect capitalism and identify a more promising and constructive governance to produce the needed, turbocharged inclusive prosperity and growth at this pivotal moment in our history.

I’ve spent the past five years working toward this better version of capitalism and in the process became a director of JUST Capital, not-for-profit organization founded by the brilliant financial entrepreneur, Paul Tudor Jones and led by an extraordinary CEO, Martin Whittaker. JUST Capital has been in touch with over 100,000 Americans, to annually assess how Americans believe a JUST company should behave.  Using this criterion, the organization then annually ranks the top 1000 corporations (the Russell 1000) by the people’s criteria. This now annual ranking has caught the attention of both the public and the media and businesses have become increasingly interested in how to become more just. It was the exact goal that JUST Capital had hoped for.

Recently, JUST Capital’s citizen/consumer driven notions of justness, The Business Roundtable principles of August 2019, and the multiple stakeholder governance “Stakeholder Capitalism” (and other efforts—conscious capitalism, inclusive capitalism, etc.) converged. Importantly, the specific criteria were remarkably similar: take care of the workers, pay them fairly, provide appropriate benefits, do not discriminate on gender, race, sexual orientation, age, etc., produce safe, quality products; care for the environment and more. Out of all this, has come a sense that stakeholder capitalism’s seven stakeholders (customers, workers, shareholders, the corporation itself, vendors/suppliers, the environment, communities) must all be considered by any corporation. There’s a process of optimizing all stakeholders. There must be measurements and transparency on how a corporation treats each stakeholder. The perspective is also one of longer-term value creation. There’s a recognition that there’s synergistic value creation capability among a number of the stakeholders. And JUST Capital has just written the operating principles for stakeholder capitalism – the very plan that was presented to the CEO who was “interested” but couldn’t make time for three weeks to learn more.

I contend that we simply cannot wait any longer.

Last year, Microsoft MSFT was number one on Just Capital’s list of companies and in accepting that award, its CEO Satya Nadella sounded to me, like an advertisement for stakeholder capitalism. He said, “I think it’s fair…in the midst of his pandemic …to essentially have a referendum on capitalism. We all have to recognize: What is the core social purpose of a corporation? I always go back to that social contract with the world around us. That, to me, is at the core of the license to operate. If you stay grounded on it, the thing that comes naturally is a sense of purpose, to be able to ask and answer that existential question: Why do we exist? It’s not the surplus you create in your enterprise, it’s the surplus that’s created around you that matters the most.”

Business leaders like Nadella are rare. The rest must become wide awake to what’s happening in America today. The inequality issue must be addressed with urgency. Business must play the lead role in this area. Business must pay people fairly, and the minimum wage must become a realistic “living wage” relative to the location where people live and work. Proper benefits are also critical. We the business community must help improve this country’s diversity, inclusion, and yes, belonging. Only a few short years away, the majority of America will become today’s “diverse” citizens. Business must set the tone and provide opportunity for these groups of non-white Americans to truly belong. We have no choice. Economically and politically we are increasingly a multiracial, multigender community and society. Our business governance must recognize this reality. 

Capitalism as a system, does not need democracy to function. But any functioning democracy in the 21^st Century must adopt some form of stakeholder capitalism to survive, let alone thrive. This is not an academic concern. In the next two or so years, if business does not produce inclusive growth, the new Administration will fail, and our democratic society will be at grave risk. Society and business, like it or not, are linked together. So, wake up CEOs—quickly. The future of business and the nation will depend importantly on you.

We must accept that our version of capitalism of the past 40 years has been a driver of inequality. The American spirit of entrepreneurship can lift us to new level of reimaging a society of better educated youngsters, regardless of family income, where everyone can reach ever closer to their ultimate potential. The sense of common good must return and equal opportunity can become our nation’s aspiration. 

The pandemic stripped away our illusions about ourselves, our inequality, and the destructive forces of shareholder primacy. The time is now for business leaders to not just talk but embrace the idea of stakeholder capitalism and help create the road map critical to its success.

Capitalists, awake. The time to act is now.

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The Paycheck Protection Program (“PPP”) was implemented to provide businesses, and individuals having trades or businesses, with financial assistance in order to keep their businesses open and their payroll intact. 

Many businesses and individuals who had no need or limited need for a PPP Loan applied and received one anyway, notwithstanding limited vocal admonitions and some tweets from Marco Rubio to the effect that the loans should only be taken if necessary. 

I will be giving a free 30-minute webinar on Saturday, March 6th at 9 am EST which can be registered for by emailing info@gassmanpa.com with ERC in the subject line. Those who email will also receive a White Paper on the Employee Retention Credit that can be read side by side with this article.

By way of background, independent contractors and sole proprietors are individuals and married couples who have reported their trade or business income on the Schedule C of their Form 1040 individual tax return.  This includes individuals or married couples who have one or more limited liability companies that are solely owned by the individual or married couple and thus disregarded for income tax purposes.  

In an Interim Final Rule announcement on Wednesday, March 3, 2021, the SBA issued new rules which provided a number of important changes for independent contractors and sole proprietors, which are discussed below.

1. “Gross Income” Instead of “Net Profit”

The SBA determined that many independent contractors and sole proprietors were not able to borrow sufficient amounts because their net income was nominal, because of operating expenses that had to be paid, regardless of the slow down or shut down resulting from the Covid-19 crisis. 

In an Interim Final Rule announcement on Wednesday, March 3, 2021, the SBA issued new rules which will permit independent contractors and proprietors who filed Schedule C business returns as part of their Form 1040 income taxes to base their PPP loans on “gross income”  (Line 7) in lieu of the former measurement of “net profit” (Line 31) for their first PPP loan, if no loan has yet been received, and/or for their Second Draw PPP Loan, if a first loan has been received and used. The gross income reported on Line 7 will still be capped at $100,000, so the maximum loan a Schedule C taxpayer may receive remains $20,833. 

Until the issuance of this new Interim Final Rule Schedule C filers could receive a PPP loan based upon 20.833% of the net profit shown on Schedule C of the Form 1040 of the proprietor or independent contractor, but not exceeding $100,000. 

This was based upon what was shown as net profit on the Schedule C, which basically consists of revenues, minus normal business expenses. 

2. What if I Already Received a Loan?

Unfortunately, sole proprietors and independent contractors who have already received a PPP loan before March 3rd, 2021 cannot amend the loan application to make up for the difference, but if the sole proprietor or independent contractor had a 25% reduction in revenue for any quarter of 2020 as compared to the same quarter in 2019, they can receive a Second Draw PPP Loan as described above.

3. Necessity Requirement

The new Interim Final Rule also addresses the question as to whether a loan can be taken by a sole proprietor or an independent contractor who has significant income, given that the PPP rules prevent loans made to borrowers where the advancement is not “necessary to maintain the ongoing operations of the business.” To read more about the necessity requirement, click HERE.

The FAQs, which were updated on March 3, 2021, to account for recent updates, now indicate that “for Second Draw PPP Loans, all borrowers must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The FAQs also state, however, that “because Second Draw PPP Loan Borrowers must demonstrate that they have had a 25% reduction in gross revenues, all Second Draw PPP Loan Borrowers will be deemed to have made the required certification concerning the necessity of the loan in good faith.” This applies even if the loan exceeds $2,000,000, which is the safe harbor that applies for First Draw PPP Loans.  In addition, the updated FAQs also provide that the First and Second Draw loans will not be aggregated for purposes of applying the $2,000,000 safe harbor for First Draw PPP loans.  

The question that still remains is whether the SBA has the authority to implement this rule since the statutory language still requires PPP borrowers to certify that the loan was necessary to support the ongoing operations of the business. 

4. Is it $2 Million? $150,000? What the Heck!

The Interim Final Rule points out that the safe harbor that the SBA provided to borrowers in May of 2020 indicated that loans with an original principal amount of less than $2,000,000 would not be questioned by the SBA, although the necessity of such loans may be questioned by other governmental entities, or possibly whistleblowers. 

The Interim Final Rule indicates that the safe harbor from scrutiny by the SBA as to the necessity of a loan will not apply for independent contractors and sole proprietors that report more than $150,000 of gross income on their Schedule C and elect to use gross income to calculate their loan amount.  The Interim Final Rule states that: 

[T]he use of gross income by Schedule C filers may, in some cases, increase the risk of waste, fraud, or abuse, because it will substantially increase the maximum loan amount for relevant applicants, and in some cases an applicant’s gross income may not accurately reflect the extent to which a PPP loan is necessary to support the ongoing operations of the applicant’s business. To mitigate this risk, if a Schedule C filer elects to use gross income to calculate its loan amount on a First Draw PPP Loan and the borrower reported more than $150,000 in gross income on the Schedule C that was used to calculate the borrower’s loan amount, the borrower will not automatically be deemed to have made the statutorily required certification concerning the necessity of the loan request in good faith, and the borrower may be subject to a review by SBA of its certification. The safe harbor that SBA previously provided for borrowers that, together with their affiliates, receive PPP Loans with an original principal amount of less than $2 million, will not apply to Schedule C filers that elect to use gross income to calculate their loan amount on a First Draw PPP Loan if they report more than $150,000 in gross income on the Schedule C that was used to calculate the borrower’s loan amount. SBA is eliminating the loan necessity safe harbor for these borrowers as they may be more likely to have other available sources of liquidity to support their business’s operations than Schedule C filers with lower levels of gross income. SBA will review a sample of the population of First Draw PPP Loans made to Schedule C filers using the gross income calculation if the gross income on the Schedule C used to calculated the borrower’s loan amount exceeds the threshold of $150,000.

Since the safe harbor is reduced only if the borrower elects to use gross income to calculate the loan amount, any borrower with net income exceeding $100,000 should use net income to calculate their First Draw PPP loan amount.  Since the maximum loan amount is limited to $20,833 the loan amount would be the same, but the borrower would have the ability to rely on the $2,000,000 safe harbor that applies to the necessity of the loan.  

5. Form-a-mania!

The SBA has developed a new borrower application form, SBA Form 2483-C, for First Draw PPP Loans borrowers that elect to use the new gross income calculation rules.  These borrowers will be required to disclose their total amount of gross income on the Form. 

In order to download a PDF of this new Form, click HERE.

The new rules also explain how employer health insurance, life insurance, disability insurance, vision and dental insurance contributions, along with W-2 wages paid to non-owners factor into the determination of loan amounts and forgiveness for independent contractors and sole proprietors.

6. Choice of 2019 or 2020 Schedule C

Until the passage of the December 27th Economic Aid Act, PPP rules permitted borrowers to receive a loan based upon 20.833% of their net income amount as indicated on Line 31 of their 2019 Schedule C tax return. It was not necessary to have the return filed with the IRS as long as a draft good-faith Schedule C had been completed.

Now borrowers will have their choice of using their 2019 or 2020 Schedule C to determine the amount of their First Draw PPP Loan, if not already received, and the Second Draw PPP Loan, which they can qualify for by verifying that their gross receipts from the trade or business have been reduced by at least 25% when comparing the second, third or fourth quarter of 2020 compared to the same quarter of 2019. 

For example, if Joe Carpenter had gross receipts from carpentry services as measured under the rules of $100,000 per quarter in the second, third and fourth quarter of 2019 and only had $74,000 of gross receipts in the second quarter of 2020, then Joe Carpenter can qualify to receive a Second Draw PPP Loan, even if his volume in the third and fourth quarter of 2020 was more than $100,000 a quarter.  

Now, as described below, Joe’s Second Draw PPP Loan can be based upon 20.833% of the greater of his 2019 or 2020 gross income from Line 7 of the Schedule C or net income from Line 31 of the Schedule C, but not exceeding $20,833. 

If Joe properly fills out his forgiveness application after waiting at least 10.9 weeks from the time that he receives his Second Draw PPP Loan, then the entire loan will automatically be forgiven, because the rules provide that Joe is considered to have paid himself such amount, as compensation, regardless of what he does with it. 

As further described below, if Joe’s gross income on Line 7 exceeded $150,000 for year 2020, and Joe used his gross income amount to apply for the loan, then the loan is presumed not to be necessary to support the ongoing operations of the business.  Joe may therefore be audited by the SBA, and may be called upon to prove that the loan was “necessary to support the ongoing operations of the business.”  

Please note that these rules are complicated and that one size does not fit all.  Please confer with a professional advisor or a bonafide advisory service before proceeding. 

I will be providing more detail with examples in later articles, but the bottom line here is that independent contractors and sole proprietors who did not take initial PPP loans by reason of having limited net income should immediately look into applying for loans now, in addition to Second Draw PPP Loans that can be taken based upon gross receipts, regardless of whether the sole proprietor or independent contractor received a previous loan based upon net income or gross income. 

I released another article that discusses the Interim Final Rule’s change to allow delinquent student loan borrowers and borrowers with non-financial fraud felony convictions in the last year to receive PPP loans. You can read it HERE.

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