Other British Papers Gloat About Implosion Of News Of The World

There's No Reason To Believe A Tax Repatriation Holiday Would Benefit U.S. Markets Or Currency


Republicans and Democrats in the US Congress are having a difficult time agreeing on changing a law that will allow the federal government to pay for what it has already spent. However, there does seem to be bipartisan support for giving American companies a tax holiday to repatriate funds that have been kept abroad. The discussion has been taking place for the better part of the first half, but recently more attention has been given to it by policy makers, business leaders and economists.

Economists at some of the largest investment banks conclude that such a tax break would be materially beneficial to the dollar and U.S. asset markets. Some have gone so far as to compare it favorably to QEIII. As often seems to be the case, the risk is that the advocates of a corporate tax holiday and their allies and benefactors in Washington and Wall Street typically embellish and exaggerate the implications.

I will argue that the impact of a corporate tax holiday on the dollar and U.S. stocks will be sufficiently negligible for medium term investors who should not be distracted by this and instead focus on the real drivers of exchange rates and equity valuations.

Déjà Vu All Over Again

In part of 2004 and all of 2005, American companies were allowed to repatriate their foreign retained earnings at a tax rate of 5.25%. This was often compared to the 35% tax schedule rate. This exaggerates the savings to business because few businesses pay the tax schedule rate due to numerous exemptions, loopholes and the untold hundreds of millions paid to accountants and lawyers to develop tax minimization strategies. A recent academic study concluded that the average effective tax rate of large US corporations is closer to 22.5%.

The tax holiday at the time was justified on grounds that it would create 500k jobs in two years. This did not happen. A 2009 NBER paper concluded that nearly every dollar that was repatriated generated about a dollar in payouts to shareholders, in the form of share buyback programs and dividends.

Technology and pharmaceutical companies are believed to have the most retained earnings then and now. Reports of their lobbying efforts now would seem to lend credence to that understanding.

The NBER study found that none of the top ten companies in terms of repatriation during the holiday expand their American work force. A large pharmaceutical company, for example, repatriated about $16 bln during the last tax holiday and reduced its workforce, increased its dividend and boosted its share buyback program. A large hardware maker repatriated $14.5 bln and cut its US workforce by 14.5k.

QEIII

A highly regarded economist, Allen Sinai of Decision Economics, has a somewhat more favorable read of the results, yet he acknowledges that the share buybacks violated the intention of the legislation. However, and, this is what present day advocates are emphasizing, not jobs and investment, but Sinai ultimately fell back on the wealth effect.

If the repatriated funds are used to buy back shares, the reduction in the number of shares is good for the overall stock market and share holders displaced, will either buy other shares, invest in other assets or consume. Each of these of course has a desirable impact on the economy. It is in this regard that references to QEIII are made.

As new investment and job creation were exaggerated so was the impact on the wealth effect and the overall stock market. In 2005, the S&P 500 rose 3%. Perhaps, in fairness, one would want to take the anticipation-effect. The S&P 500 rose almost 9.4% from the middle of 2004 through 2005. While this is better, it is below the long-term historical average.

The tax break on repatriated earnings did not appear to boost US personal income significantly. Consider that personal income rose at an average rate of 0.45% in 2003 and 2004 (adjusted for the one off $32.6 bln dividend payment by Microsoft at the end of 2004, which did not at the time, nor in hindsight, look to be a result of the tax holiday). The comparable pace in 2005 was almost 0.50%.

The rise in income was more a function of wages than dividends. Consider that the US economy created an average of 113k private sector jobs a month in 2005 after 110k private sector jobs a month in 2004 and 100k in 2003. Not only were there more workers, but they were getting paid more. Average hourly earnings rose 1.8% in 2003, 2.5% in 2004 and 3.2% in 2005.

Dollar Exaggeration

This seems to be nearly universal opinion that a tax holiday on repatriated earnings would be dollar positive. Here too skepticism may be good for one’s financial health.

The potential amounts are quite substantial. Most estimates suggest that American corporations have $1-$1.5 trillion in retained earnings abroad. Foreign operations account for about a quarter of the S&P 500 profits according to recent estimate, which is nearly twice the proportion of a decade ago. However, Robert Pozen of the Harvard Business School and Brookings Institution told Bloomberg reporters in late June that figure may be almost $2 trillion.

There is no reason to believe that the full amount would be repatriated. Given the incentives of the corporate tax code, funds in relatively high tax centers are more likely to be repatriated than those in low tax centers.

According to an IRS report, roughly 40% of the earnings retain abroad are in 5 low tax centers (Switzerland, Bermuda, Ireland, Luxembourg and Cayman Islands). That still leaves $600 bln-$1.2 trillion. In comparison, after adjusting for the prevailing average, about $300 bln appears to have been repatriated in 2005.

In that year the dollar rose about 15% against both the euro and yen. Economists not only disagree with what is going to happen in the future, but they disagree what happened in the past. Many observers see the dollar’s performance during that repatriation and claim a causal relationship.

There are several problems with such a claim. Most fundamentally, many do not fully appreciate that for a dollar-based; the overwhelming majority of the foreign retained earnings are already denominated in dollars. To do otherwise is to take on foreign exposures needlessly, which is something that would potentially add to the volatility of earnings to the dismay of Treasurers and investors. The repatriation is largely a transfer of Eurodollars into a domestic dollar account. It does not change the supply/demand for dollars or require portfolio rebalancing.

Some small fraction of those retained foreign earnings may be in denominated in foreign currency. One large investment bank estimated this to be as little as 10%. This seems high, but even if true that would bring the repatriation that would impact the dollar to $60-$120 bln.

That sum would seem substantial for almost any other market, but not the foreign exchange market, where the average daily turnover is estimated by the Bank for International Settlements at $4 trillion and the dollar-euro exchange rate accounts for 37% alone. The US dollar is still on one side of more than 90% of the foreign exchange transaction.

There is a more compelling explanation of the dollar’s rally in 2005 than the Homeland Investment Act. The Federal Reserve was raising interest rates. The Fed’s tightening cycle began in June 2004 when Fed funds were hiked 25 bp to 2.25%. At every FOMC meeting thereafter in 2004 and through 2005, a 25 bp hike was delivered, with the Fed funds rate finished 2005 at 5.25%. A Fed rate hike does not seem likely for at least the better part of the next year.

There was another development in 2005 that may have helped the dollar and has some significance today. In 2005, referendums in France and the Netherlands rejected the institutional reforms embodied in a European constitution. In some ways the roots of the current political and economic crisis in Europe can be traced to then.

Conclusion

It is not clear that there is a political consensus for a stand-alone tax holiday. There may be support as part of a larger corporate tax reform effort. If it is enacted, job growth and capital investment are unlikely to be aided, if for no other reason than the lack of capital is not the reason for the jobless recovery and sluggish investment.

Acknowledging that companies are likely to use the funds to pay shareholders directly or indirectly is an exercise in turning a necessity into a virtue and is similarly exaggerated. The stock market’s performance in 2005 and rise in personal income do not appear to have been bolstered by the repatriation. The impact on the dollar is even less clear, with its 2005 appreciation more likely a function of the tightening of US monetary policy throughout the period. The dollar may rise if and when a new tax holiday is granted for corporations' retained foreign earnings, but it is unlikely to be the cause.

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Commodities Technical and Fundamental Analysis for July 8, 2011


Oil Technical Analysis for July 8, 2011


Light Sweet Crude

The CL rose on Thursday, pushing past the $97.50 area, and looks like it is trying to get to $100 in the short-term. We have shown massive bullishness, and it appears that we will continue to go north. We like buying dips, and don’t sell at this point.

Brent

If the CL had a good day, the Brent market had an outstanding one. The candle is long, green, and full. This is a great sign that the bullishness is a new phase of buying, and it appears that $120 is a given at this point. We buy dips, or closes above the $120 mark at this point.

 

Oil Fundamental Analysis for July 8, 2011


Crude oil prices rose on Thursday despite the lower than expected drop in crude oil inventories as reported by the EIA, as better than expected labor data from the United States boosted confidence and led investors to target higher yielding assets, moreover, investors were feeling optimistic over the outlook for economic growth amid signs economic activities could pick up in the second half of this year.

The ADP employment report showed U.S. private employers added 157,000 jobs in June, well above median estimates of 70,000 jobs, while the EIA report showed that crude oil inventories fell last week by 0.9 million barrels, above the expected drop of 2.5 million barrels, and following a drop of 4.4 million barrels in the prior week.

Investors will be eyeing key data from the labor market in the United States, where the U.S. Non-farm payrolls are expected to show U.S. employers added 105,000 jobs in June, and if the Non-farm payrolls show similar strength to that shown in the ADP, we should expect crude oil prices to extend the rise on Friday.

Friday July 08:

Canada’s jobs report will be released at 11:00 GMT, where the unemployment rate is expected to remain unchanged at 7.4% in June, while the net change in employment is expected to show a rise by 15.0 thousand jobs, compared with the prior rise of 22.3 thousand jobs in May.

At 12:30 the jobs report will be the focus for the current state of the labor market. The Nonfarm payrolls are expected at 105,000 following 54,000 and unemployment to hold at 9.1%.

Private payrolls are expected to rise to 125 thousand following 83,000 and manufacturing payrolls to maintain the weakness and rise by 5,000 jobs only.

At 14:00 the wholesale inventories is due for May and expected at 0.6% following 0.8% and at 19:00 GMT consumer credit also for May is expected to slow to $4.0 billion from $6.247 billion.

Natural Gas Technical Analysis for July 8, 2011

 

The natural gas markets fell hard on Thursday, but managed a bounce in late trading. Because of this, we have formed a hammer-shaped candle on the daily chart, and right where you would want to see it. The $4 mark has held, and it looks like we may see buying come into the marketplace. The breaking of Thursday’s highs would be a buy signal, and a sign that we may reenter the previous consolidation area between $4.20 and $4.40 or so.

Natural Gas Fundamental Analysis for July 8, 2011

 

Natural gas pricesfell on Thursday after the EIA report for natural gas inventories showed a bigger than expected rise, where natural gas stockpiles increased last week by 95 billion cubic feet, compared with median estimates of 82 BCF, and the prior estimate of 78 BCF, which put strong downside pressure on natural gas prices.

Moderating weather conditions should keep the negative pressure on natural gas prices , since demand for power-plant fuel will ease, and that should pressure natural gas prices to drop.

Gold Technical Analysis for July 8, 2011

The gold markets rose again on Thursday, but slowed their progress. As a result, we actually saw the market go negative at one point. However, as buyers came back in, it formed a hammer on the daily chart. It looks a lot like the $1,525 level is set to hold at the moment. However, with non-Farm Payroll coming later in the day, we think that the market is on hold until we see what comes of the numbers. We like buying, especially on dips.

Gold Fundamental Analysis for July 8, 2011

 

Thursday was not as much of a positive day for gold with slowing haven demand on eased jitters, which stripped the metal of upside support.

On Thursday market jitters eased with the ECB’s decision to suspend the minimum credit-rating threshold on Portuguese government debt which is used as collateral in the refinancing operations as the ECB is confident in their financial program and their commitment to austerity measures, boosted confidence in the market and eased debt woes.

Further support to the sentiment was seen from the upbeat ADP figures that eased jitters for Friday’s jobs figures, which also pressured the metal to maintain a tight trading range.

On Friday, Asian markets are expected to trail the positive sentiment which already was seen on Thursday as they downplayed the chances for China to raise rates again this year which was also negative on Gold. The metal will fluctuate on the back of the jobs report and eased debt woes, if the sentiment remains as positive as it was initially in reaction to the ECB’s decision.

The metal is pressured by the eased jitters and losing grounds even with a weak dollar, which if the jobs figures came also positive tomorrow might further pressure the metal on the positive sentiment and reversing from haven demand, though some upside support will be seen from

rising commodity prices

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Jeff Saut: 7 Reasons To Be Bullish


Jeff Saut, Chief Equity Strategist at Raymond James, says the recent move in stocks is not likely to be followed by a large decline.  Instead, he says the markets are likely to to take a breather before resuming the uptrend.  He cites 7 primary positive catalysts that should bolster the market:

“Accordingly, one would expect the equity market to pause, and/or pull back, from here. Yet, we don’t think any pullback will gain much downside traction because the news backdrop is likely going to get much more positive. Indeed, the Greek “can” has been kicked down the road, gasoline prices have declined 15.8% from their early May “highs,” auto production is slated to ramp 23%+ next month, Japan’s economic numbers are getting better, the world’s “mean men” are falling like dominos, capex is geared to surge since the era of 100% expensing ends soon, and when the debt ceiling is increased the stage should be set to drive stocks higher.”

Source: Raymond James

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The Texas Surge: Is America Headed South?

Population Headed SouthIt's hard to pick the geekiest group in the federal government, but the Census Bureau is a good bet: Every 10 years, the little agency tucked inside the Department of Commerce gathers a seemingly endless quantity of data about the American populace, which it then cross-references into a mind-boggling group of tables that link race, gender, location and a mass of other information. Using the census, one can find the most populous place in the country (Los Angeles) and the fastest growing (Kendall, Ill.), the youngest state (Utah) and the oldest (Maine). For those looking to expand their dating pool, it can, quite literally, tell you where the boys are (Alaska) and the best place to find all the single ladies (Washington, D.C.).

One of the most interesting pieces of data is also one of the wonkiest: The nation's center of population. Essentially, this is the average location of all Americans, the spot where a population map of the United States would perfectly balance. With every census, the center moves a few miles west, pushed along by territorial expansion, economic rumblings and mass migrations. In a single, slightly meandering line, the ever-shifting population center manages to encapsulate over 200 years of American history, while giving a shadowy glimpse into the country's future.

To make it even clearer, the fine folks at the Census Bureau have tabulated 220 years of population center data into a single, interactive infographic:



History Writ Large

Often, American history is presented as a disconnected series of episodes -- Westward Expansion! The Civil War! The Great Depression! -- that are custom-made for social studies classes, but not all that useful for constructing a larger narrative. But the slow movement of the population center tells a different story, showing the steady progress of the country as America has expanded ever westward and -- for the last 90 years -- southward.

This isn't to say that there haven't been dramatic moments: Between 1850 and 1860, California statehood and the gold rush propelled the population center 80 miles to the West, its largest jump ever. A decade later, postwar industrialization in New York, Chicago and other northern cities led to the biggest northward shift ever. But for the most part, the movement has been slow and steady. From 1910 to 1920, in fact, it almost stood still, barely moving 10 miles as massive immigration into New York balanced out the call of the West.

And what about now? Over the last 10 years, with jobs fleeing from the pro-labor, union-friendly North to the right-to-work South, the population center has had its sharpest southward movement in history. While booming housing markets in Nevada, Arizona and Utah have drawn millions of new residents, the biggest shift has been in Texas, where a combination of cheap labor and tax incentives have pulled in more than 4 million new residents.

The Texas surge, in fact, may be the biggest trend revealed by the population center's latest move. Culturally, America has tended to focus on its coasts, but California's budget woes and deflating real estate bubble seem to be putting some tarnish on the Golden State. Meanwhile, with industrial disinvestment and high land values holding back expansion in the Northeast, it seems unlikely that New York's anemic 2.1% population growth will provide a counterbalance to the emerging South. The big question is: With money, the economy and the population heading South, will America's cultural center of gravity follow?

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

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This Former Figure Skater Is Now The Brains (And Face) Behind One Of The Top-Downloaded iPhone Camera Apps


Lisa Bettany

When Lisa Bettany's skating partner accidentally dropped her on the ice eight years ago, the Canadian figure skater had no idea that the back-breaking fall would ultimately lead to a lucrative new career as a developer of iPhone apps.

But Bettany, 29, not only got back on her feet but took advantage of her seven-year recovery to master photography, start a blog, and, two years ago, partner with an international team of six developers to create Camera+, the top-ranked camera app in Apple's iTunes store. The app, which gives iPhone and iPod Touch users the ability to enhance, edit and share photos via Flickr, Facebook, and Twitter, has been downloaded more than 3 million times since it launched in June 2010. The 99-cent app, designed to turn iPhones into high-quality digital cameras, has generated close to $2 million for Bettany and her partners in less than a year. That's after Apple's 30% cut.

As the app's leading web evangelist, Bettany has earned roughly $400,000 so far thanks to the 20% revenue share she negotiated with the app's developers. The former linguistics grad student who once struggled to pay the bills as a freelance journalist and photographer is now literally making money while she sleeps.

"I'm so used to being poor," says Bettany, whose Mom was paying her rent until the royalty checks starting arriving last August. "Now my bank calls me up all the time and asks, 'What's all this money?'"

Bettany's apps-to-riches story is becoming increasingly common. With Apple recently celebrating the 10 billionth download to its iTunes store, creative young software developers are rushing to cash in on the latest digital business trend. With low development costs, a worldwide customer base and instant distribution, the creator of a successful app can hit it big without raising venture capital, hiring a sales force or recruiting a pricey management team.

John Casasanta, co-founder and chief of tap tap tap, the three-year-old company that developed and owns the Camera+ app, says he gives his developers a share of the app's revenues instead of a guaranteed salary in order to lower the costs associated with developing the apps and pump out more apps in less time. This arrangement also allows the company to grow through cash flow, not venture capital.

"We've found this model to be extremely effective for us because it helps everyone involved do their best work," Casasanta says.

Bettany is not your typical geek. A woman, a social networker and the self-described "face of the app," her elfin good looks, whimsical how-to videos and intimate knowledge of apps and iPhones (her father, a professor, introduced her to Apple when she was two) have helped her stand out in a sea of largely anonymous tech bloggers. When her blog, MostlyLisa.com, began to gain traction several years ago, she was invited to be a guest on tech podcasts such as MacBreakWeekly and This Week in Tech. Lisa was the host and producer of the TWiTnetwork's weekly photography show, Mostly Photo, and hosted a popular gadget show in Canada called "Get Connected" which ran on Spike, BNN and CTV.

Bettany's photos, tips and inspirational story have led thousands of followers to join her on Twitter and Facebook. In 2008, Casasanta spotted her Twitter Avatar (a wacky photo of Bettany wearing a Viking helmet) and invited her to join the team of developers that was building Camera+ figuring that her zany sense of humor and in-depth knowledge of photography and the iPhone would help his developers create a more popular app. After a year of 12-hour days and nightly brainstorming sessions with developers all over the world, Camera+ was born.

"It's really a team effort," says Bettany, who responds to roughly 200 messages a day from the app's users and doubles as Agent Sophia in The Heist, a popular iPhone game created by tap tap tap's sister company, MacHeist. "We each put in as much effort as we can to earn our share."

Here are Bettany's three tips for other entrepreneurs looking to make it big in apps:

1. Be prepared to adjust your pricing. No matter how great your app may be, nobody's going to buy it if it's too expensive and gets buried in a sea of cheaper, more popular tools. The Camera+ app originally sold for $2.99, with the idea that iPhone users would pay more for a premium app. When sales failed to take off, the price tag was cut to 99 cents and the app shot up to No.2 in the iTunes ranking. Photo contests and buzz from tech blogs have helped, too. 

2. Turn your fans into evangelists. Bettany uses her blog to offer tips and tricks on how to use Camera+ to create great photos and encourages fans to download the latest free upgrade. When iPhone users socialize their photos, it also builds buzz for Camera+. 

3. Find developers who complement your skills. Bettany credits her app’s success to partnering with a talented and creative development team that spans the globe from Austria to New Zealand to San Francisco. Development sessions take place overnight on iChat and Skype, and everybody gets a say in how the app gets built. "We certainly have arguments [over which features to add]," she says, "but we're all passionate about creating great apps."

This post originally appeared at Entrepreneur

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