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  • A Calm Session By WSS Research Team 0 comments
    Dec 4, 2012 9:27 AM | about stocks: ITW, JNJ, GE, MSFT

    Carlos Guillen

    Equity markets look to be indicating a start in winning territory to today's trading session with the Dow futures up over ten points. But the main driver for the rest of the week will be jobs. This is a big week for economic data, but we don't really get any this morning.

    So far, all indications for this coming Friday's jobs reports have not been positive. Just yesterday, we saw that the employment component of the Purchasing Managers' index (PMI) registered 48.4, decreasing 3.7 percentage points from the prior month, which is the index's lowest reading since September 2009 when the Employment Index registered 47.8. Initial claims data have also been trending higher with the initial claims' four-week moving average surging to 405,250, increasing from the prior week's average of 397,750 and reaching the highest level since September 1, 2011, when the moving average was 408,250. Of course, one of the reasons for the increased level of initial claims is because of the Sandy super-storm, but nonetheless, it still means people are hurting.

    Also disappointing most recently was that consumers' outlook for employment, the economy, and their personal finances declined in November. Late last month, the University of Michigan Consumer expectations index decreased to 77.6 from 79.0, landing lower than the prior estimate of 80.8. One of the main reasons for this decline was that consumers are increasingly worried about the upcoming Fiscal Cliff dilemma.

    Speaking of the so called Fiscal Cliff, it appears that things still remain the same, which is a lot of talk but nothing concrete in terms of results. On one side, House Republicans have proposed a new 10-year, $2.2 trillion cut in expenses ($800 billion in new taxes) that focuses on increasing the eligibility age for Medicare and lowering cost-of-living hikes for Social Security benefits. On the other side, Democrats are focused to hiking taxes by $1.6 trillion over the coming decade but largely exempt Medicare and Social Security from budget cuts. So with both sides focused on different goals, America approaches the fiscal cliff scenario that threatens to sink our economy by over 4% in terms of GDP contraction in 2013.

    With very little in term of major economic news coming out today, markets will continue to remain at that calm before the storm level. But markets will be more volatile starting tomorrow with ADP employment data coming out, followed by the next day with Challenger Job cuts data, and culminating with the government's jobs data on Friday. It should be noted that Street estimates are not favorable as they see the unemployment rate increasing to 8.0% for November, up from 7.9% in October.

    Fiscal Cliff Hang Gliding
    David Silver
    (click to enlarge)

    The big news yesterday, besides the subpar economic data, was Speaker of the House, John Boehner's counter proposal to avoid the Fiscal Cliff. While I don't think the plan would actually fix many of the problems that we are facing as a nation, it is a great starting point, much better than the kitchen sink offer from President Obama. On the Closing Bell yesterday on CNBC, Bill Griffeth made a great point about why the government is letting the Fiscal Cliff go to the last minute. He said (and I am paraphrasing), you don't study for a final a year and a half in advance. I thought it was a great point, but at the same time, why does it take a day for each side to bring something to the negotiating table. I have said it before, but I really don't want to know what is going on in the negotiations. If the media knows about it, there are going to be reactions, and then Grover Norquist is going to get more air time blaming some Republicans for turning their back on their party, when in reality, these are Representatives (and Senators) of the American people, not the Republican party.

    Taxes, We Talkin' About Taxes?

    OK, enough about politics. There was a good article in the Wall Street Journal this morning about the amount of cash that American companies are keeping overseas. Companies in the U.S. have to borrow money at home to pay for share repurchases, dividends, and pension contributions. There is an impressive list of companies that many thing epitomize American industry, which have most of its cash overseas

    * ITW: 0% of its $2.1 billion in the US
    * JNJ: 0% of its $24.5 billion in the US
    * GE: 33% of its $85.5 billion in the US
    * MSFT: 13% of its $66.6 billion in the US

    Money that is made overseas, if it wants to be repatriated (essentially be brought back into the United States), it will be taxed at the corporate 35% tax rate (less the tax rate it was charged where it was earned). I know we are on a taxing binge right now, but why not close many of the loopholes for some of these companies and lower the corporate tax rate. So instead of a Company like GE paying no taxes at all, it actually pays a lower rate on the money it earns in the United States and it makes fiscal sense to bring the $55 billion in cash that it is holding overseas home. Many companies are keeping this money overseas to fund growth overseas, just imagine if that cash was able to be brought home relatively cheaply, how much of that cash could be used to fund growth in this country! This is just the ramblings of one man, but I think my arguments make sense. Imagine the additional revenue the country could get from corporations that have an effective tax rate lower than Warren Buffet or Mitt Romney. GE's effective tax rate during 2011 (I know its old news) was 5%. According to Nerdwallet.com (great website name), the top ten most profitable companies in the US during 2011 were ExxonMobil XOM, Chevron CVX, Apple AAPL, Microsoft MSFT, JPMorgan JPM, Wal-Mart WMT, Wells Fargo WFC, ConocoPhillips COP, IBM, and GE. The following table shows pre-tax earnings, the tax provision (and the tax rate) as well as the actual taxes paid to the U.S. government (effective tax rate).


    Stocks: ITW, JNJ, GE, MSFT
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