From today's ContraryInvestor on more stimulus:
Going For Broke?...Back last May, we penned an open access monthly piece comparing the stimulus to come from the Administration and the Fed to the X-Games. Extreme was our characterization. Never in modern history have we witnessed a Fed Funds rate as low as we now experience. Never in recent history have we witnessed an Administration pull off significant fiscal policy measures three years in a row. It's hard to imagine how the environment could become more stimulative, right? Well start imagining. In literally the last week+ the Senate and House have been busy little beavers in terms of enacting or initiating various pieces of legislation. The "Homeland Investment Act" is probably the next big thing in terms of proposed stimulus aimed directly at the heart of corporate P&L's. Last Wednesday (Oct. 1), the Senate Finance Committee passed this act which essentially allows US multinationals a six month window to repatriate offshore profits at a 5.25% tax rate as opposed to the standard 35% corporate tax rate. Bush has already "winked", delivering his informal approval for this plan. As it now stands, many multinationals choose to leave profits overseas and reinvest these sums in foreign countries. The alternative is bringing these profits home and coughing up the corporate tax while going through customs, so to speak. The NY Times estimated that if this Act makes it all the way through various legislative channels, multinationals may repatriate up to $400 billion of profits held overseas. Of course the thought here is that multinationals will bring profits home on the cheap and reinvest these proceeds here in the US. Theoretically, the hope is that corporate capital spending picks up and jobs are created. If passed, it will be interesting to see what really happens. As you know, a good chunk of corporate investing in physical assets these days is already happening on foreign soil. Why would corporations shift conceptual gears now? Moreover, if corporations bring profits home, they could choose to pay down debt, fund underfunded pension plans, etc. Not that these are bad things, but they are real alternatives to capital spending and job creation. Although it can certainly be characterized as a windfall to corporations, it looks like this Act will come to pass at the moment. Plain and simple, more stimulus is on the way. Just how many multiple points is this worth on the S&P?
Also last week, the House passed the "American Dream Downpayment Act". You can just see this one coming, right? It's a $400 million deal that will give up to 80,000 low-income and first time buyer households help in coming up with the down payment for the purchase of a home. The quick math is $5,000 per household. It's the Senate's turn next to throw holy water on this piece of legislation. It's no wonder Fannie and Freddie have been rallying lately. After all, isn't lending to a whole new round of rock solid future credits just what FNM and FRE have been waiting for? And finally, just yesterday the House voted to offer corporations a more lenient formula for calculating pension funding obligations over the next two years. It sunsets after two years, but is thought to be worth near $25 billion in funding requirement relaxation over that time frame.
Simply put, the X-Games aren't over by a long shot. Remember, these are the kind of sound bites that momentum driven financial markets feed upon. The powers that be are going for broke in order to goose the economy and financial markets.
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