I think Mike Hartman at the Financial Sense WrapUp yesterday made an excellent point about continued dollar strength due to repatriation. It appears that many more companies than perceived took advantage of it and the window is open till October 22.
financialsense.com
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American Jobs Creation Act of 2004
Earlier I said the dollar, stocks and bonds should all be lower, but they’re not! WHY?? In a nutshell, the Jobs Creation Act of 2004 gives U.S. corporations a tax break on repatriated earnings from foreign subsidiaries. Normally the money that comes home to the parent U.S. corporations is taxed at 35%, but on October 22, 2004 the legislation was passed reducing the tax to 5% until Oct. 22, 2005. In my research I found that though the legislation was signed into law, there was no guidance from the government until early this year. It is estimated that as much as $400 billion could come back into U.S. dollars…some already has, but based on the late guidance, the money was “back-loaded” to come in right about NOW…and there could be a rush in October to take advantage of the enormous corporate subsidy the Federal government has offered. When the foreign currencies are sold, dollars are bought to bring the money home. The money coming in is expected to lower interest rates by moving into bonds, and could add as much as 5% to 6% to the S&P500 stock index.
It looks like the Bill was presented in 2003 as the “JOBS” Act, meaning “Jumpstart Our Business Strength Act of 2003." I don’t believe the legislation was passed in 2003, but later morphed into the American Jobs Creation Act of 2004. I cite the prior legislation because I found a great report from Decision Economics as to the economic impact of the repatriated funds. Here is an excerpt of the analysis with a link to the full article:
Macroeconomic Effects of a Temporary Reduction in the Tax Rate
on Repatriation of Foreign Subsidiary Earnings
Allen Sinai, Decision Economics, Inc.
The Jumpstart Our Business Strength (JOBS) Act (S. 1637), as reported on October 2, 2003 by the Senate Committee on Finance, provides for a temporary one-year reduction in the tax rate on above average repatriated earnings of U.S. foreign subsidiaries, to 5.25% versus the current 35%. The purpose is to provide stimulus to business spending and the U.S. economy through increased outlays on capital goods, more business-to-business purchases, improved cash flow, strengthened corporate balance sheets, and higher employment.
Based on surveys of U.S. multinational companies performed by Price Waterhouse Coopers, LLC and J.P. Morgan Securities, estimates based on the surveys, and analyses of how the unrepatriated funds have been, and are being, used abroad, anywhere from $265 billion to $406 billion of repatriated funds could occur, relatively quickly, after passage of the Act. Using a lower end of the range estimate of $300 billion of repatriated funds, an estimate of J.P. Morgan Securities, and assuming an effective date of January 1, 2004, simulations were performed with a large-scale quarterly macroeconometric model of the U.S., the Sinai-Boston (SB) Model, to estimate approximate effects of the JOBS Act. (Note: the estimates are now between $300 to $500 billion.) Please click on the link if you want to see the detailed breakdown for the estimated effects of the of the repatriated funds.
I realize this WrapUp is getting a bit long, but please bear with me. It is important to see what this legislation was really all about and what it can do for third quarter profits! The following snippets from an article on tude.com gives you some of the flavor of the legislation that was pawned-off as a Jobs Creation Act:
THE "AMERICAN JOBS CREATION ACT OF 2004" DOES CREATE JOBS. OVERSEAS.
You'd think with a name like that, it would be a bill for creating jobs in America, wouldn't you?
Instead, it's cover for corporate pork and subsidies for off-shore jobs.
This bill, created in the House a couple of years ago, includes $43 billion for off-shore subsidies, as well as enough pork to provision every luau in the world for decades.
It passed the Senate on October 11th as a bipartisan rip-off (no gridlock here, folks). President Bush signed it into law on Friday.
And now there's even more corporate pork, pork that has little to do with trade and jobs, but everything to do with campaign contributions and the selfish interests of your Congressmen.
"Among the biggest winners was General Electric Co., which stands to save as much as $8 billion over 10 years on its foreign operations.
"Before they were finished, lawmakers went far beyond the original game plan, adding scores of special tax breaks for makers of bows and arrows, operators of NASCAR race tracks and importers of ceiling fans, among others. One of the biggest was a $10-billion buyout of the holders of coveted tobacco quotas ... nearly 500 individuals, companies or estates will get more than $1 million.
And this from the Wall Street Journal:
"A key to the bill is its elastic definition of manufacturing. In recent weeks, as the bill moved through Congress in an election year, the term was stretched to accommodate a range of interests. 'I think you'll find that manufacturing grew a little bit beyond what Webster said,' Sen. Grassley observed dryly over the weekend.”
"One tax-committee staffer put it more cynically: ' Everybody with a Republican lobbyist is a manufacturer.'”
"Under the bill, farmers, oil producers and software producers are deemed manufacturers. So are architects and civil engineers who do work in the U.S. for U.S. construction projects. Construction counts as manufacturing, too, as long as it involves "substantial renovation," not "mere cosmetic changes such as painting," according to the House-Senate conference committee's 600-page explanation of the 650-page bill. Among the beneficiaries of those provisions are giant Bechtel Corp. and Halliburton Co.”
"Making, renting and licensing movies constitutes manufacturing, too -- as long as the movies don't show 'actual sexually explicit conduct.' Though the Senate initially sought to exclude newspapers and other media that are 'primarily topical or transitory in nature,' the final bill deems them to be manufacturers as well.’”
I did some more digging for information to see if I could find any actual results from companies that have already repatriated funds. I found this little nugget on what the legislation can do for a company’s bottom line:
Tuesday, March 8, 2005
CMS Energy profit soars on repatriated funds
Associated Press
JACKSON -- CMS Energy Corp. on Tuesday posted a fourfold jump in fourth-quarter profit, helped by a repatriation of funds from its foreign units and the resulting lower taxes.
For the quarter, the electricity and natural-gas company's earnings rose to $49 million, or 24 cents a share, from $9 million, or 5 cents a share, a year earlier.
Ongoing earnings for the quarter were 20 cents a share, compared with 22 cents a share a year ago. Ongoing earnings measure operating financial performance, unaffected by discontinued operations, asset sales or other items
Analysts polled by Thomson First Call had called for fourth-quarter earnings, excluding items, of 18 cents a share.
The results for the latest quarter included a benefit of $21 million, or 12 cents a share, from a planned repatriation of $80 million from the company's foreign units and lower deferred taxes due to tax provisions from the American Jobs Creation Act.
CMS Energy surprised the Street with earnings of 24 cents when they were expecting 18 cents per share. The company bumped their bottom line by 30% with the repatriation of a measly $80 million. How many billions do you suppose our big oil conglomerates can bring home. They have had RECORD PROFITS, and now get their taxes cut from 35% to 5% for all their offshore business. As the article above emphasizes, even Haliburton is considered a manufacturer!! They got uncontested contracts to rebuild parts of Iraq, and can now bring home the profits nearly tax-free!
From yet another article I found a quote from Senator John McCain, (R-AZ) who did not vote on the bill. Senator McCain called the legislation, “the worst example of the influence of the special interests I have ever seen.”
We are getting ready to close the books on the third quarter in just a couple weeks. Based on the bumper earnings for CMS Energy, I have to assume the BIG, BIG multinational conglomerates could bring in some surprise numbers when earnings come out in October. A few of the corporations that will benefit the most are listed in the articles above, but use your imagination to think what Exxon, or Coca-Cola, or Gillette, or Haliburton, or GE could do with some short-term accounting games.
As most of you know I am quite bullish on gold and silver, and I’ve been gathering long positions in Swiss francs and yen. These positions are highly sensitive to changes in dollar strength/weakness. We are entering the seasonal period where gold and silver usually perform well and many market players are looking for $500 gold by the end of the year. The bull will try to shake everyone off before the big move higher, so remember you have to hold on for the full eight seconds if you want to hear the whistle blow! Today cash gold could not break through the $450 level and cash silver tried five times to crack the $6.99 level, but met selling each and every time. More on the metals next week….in the meantime…much patience is required!
Late addition: Gold could not take out the spot $450 level and silver could not get above $6.99 during the New York session, but when trading opened in Australia, gold took-off and now stands at above the $450 mark with spot silver at $7.03. Let’s see what tomorrow brings!
I presented the info on the American Jobs Creation Act because it could well come into play as we approach the end date of October 22 for the big tax breaks and corporate-pork subsidies. If Alan Greenspan maintains the façade of being hawkish on inflation at the next meeting in six days and we get a last minute wave of dollar buying due to repatriated funds, we could see a surprise dollar rally. Longer-term the dollar must be devalued. That is why we are putting so much pressure on China to revalue the yuan. We MUST devalue the dollar….it’s just the timing that can be a bit tricky, especially with China’s lack of cooperation!! Does the Fed loosen-up to help the economy, or remain on a measured pace to defend the dollar? I still say the Fed will do what it has always done…inflate, inflate, and inflate some more, as they meet with banks behind closed doors just in case we get some ugly credit defaults.
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