2010's Person and Story of the Year, Plus a Bubble-Bursting Prediction for 2011
My answers: Steve Jobs, record corporate profits and a bursting of the commodities bubble.
Person of the Year
In my humble opinion, the businessperson of 2010 was Apple (AAPL) CEO Steve Jobs. His numbers were outstanding, but the one that matters most is the number of popular innovations he has spearheaded since his return to Apple's helm.
Unlike the leaders of so many other companies, Jobs has figured out how to spend profits developing innovative new products that people want to buy. Many CEOs make more money than Jobs, but not one can come close to him in talent at the most important task a CEO has: continually reinventing the company so it doesn't rest on its previous successes.
Apple's financial success is exceptional for a company of its size. For example, in 2010 its revenues grew 51% to $65 billion, while its profits were up 71% to $14 billion. Apple's market capitalization rose 54% to $299 billion. This makes Apple about $120 billion more valuable than IBM (IBM), which is 50% bigger on a revenue basis but grew by only about 1% in 2010.
The source of Apple's greatness is its products. It sold 7 million iPads in the first half of 2010. I didn't understand why anyone would buy one, and I still don't have any desire to own one -- but I'm clearly in the minority. And despite losing market share to Google's (GOOG) Android, Apple sold 47 million iPhones in 2010.
Let's contrast Apple's performance with that of perpetual design laggard Microsoft (MSFT). CEO Steve Ballmer -- who owns $11.4 billion worth of stock and makes $1.3 million a year, has overseen a mere 6.6% rise in Microsoft stock price over the last five years. Over that period, its revenues grew at a 9.3% average annual rate, and its profits climbed at an 8.9% annual rate.
But in the same time, Jobs -- who holds $1.8 billion in Apple stock and made $1 a year -- oversaw a 355% rise in his company's stock price. Apple revenues skyrocketed at a 36% annual rate, while profits grew 60% a year. Jobs is the best that American management has to offer, and the contrast with Ballmer demonstrates that management genius can't be bottled -- you either have it, or you don't.
Story of the Year
That story is record corporate profits. With the economy growing at around 2% in 2010, corporations are on track to report $1.66 trillion in profits for the year, and they've stored nearly $2 trillion in cash on their books. In short, companies have never been healthier in the history of this country.
What's most frightening about this for anyone below the executive level of these companies -- including the 9.8% of Americans who are unemployed -- is that this corporate health comes at a serious cost to society. First, those executives are paying record low tax rates on their winnings. And companies are jumping through hoops to keep those profits overseas, where they won't be taxed, avoiding $25 billion a year in federal taxes, according to Edward D. Kleinbard, a University of Southern California law professor and former chief of staff of the congressional Joint Committee on Taxation.
More important, companies are raking in those record profits by squeezing workers. As I wrote on DailyFinance, hours worked are going up, while unit labor costs fall. And companies aren't going to go back to hiring full-time employees as long as they can get people to do jobs on a freelance basis or part-time, or outsource the work to countries with lower labor costs.
There's a lot I can't predict about what will happen in 2011, but I am growing increasingly confident about one thing: The commodity bubble will burst. As I noted in a DailyFinance article back in October, commodity prices for items like corn, cotton, copper, gold and others hit records in 2010.
The cause of those price spikes was a combination of demand exceeding supply and a weak dollar. For example, cotton prices hit a 143-year record high in October 2010 due to strong demand from China and very poor harvests in the cotton-growing regions of India, Pakistan and China.
Moreover, since these commodities are traded in dollars (like crude oil), when the U.S. currency weakens, their prices go up. Thanks to the nation's massively accommodative monetary policies -- including short-term interest rates near zero, an $858 billion tax compromise and $600 billion worth of quantitative easing -- many investors are betting on a weaker dollar.
So, Beijing is raising interest rates in an effort to deflate its bubble. If the interest rate hikes don't reduce inflation there, eventually the population could become very difficult to govern -- resulting in an unpleasant conflict between China's authoritarian political system and its capitalist economy. If the resulting instability leads to a decline in Chinese demand, those betting on a weak dollar and ever-rising commodities prices could be in for a world of hurt.
Until then, 2011 is likely to feature 3% GDP growth in the U.S. as all that monetary stimulus boosts consumer spending, which grew so handily during the holiday season.
Finally, one bonus prediction: As I wrote here in September, if you're looking to profit from stocks in 2011, you could do worse than owning shares of midsize tech companies likely to be bought by the industry's four horsemen: IBM (IBM), Oracle (ORCL), Hewlett Packard (HPQ) and Intel (INTC).