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Repatriation and Tax Reform / Initial Jobless Claims / Global Interest Rates and more…

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United States

One of the important aspects of the upcoming tax changes is repatriation and the territorial tax reform which would make the flow of company capital more agnostic as to where it’s held which in turn provides a more efficient flow of this capital. As I always like to do, I need to provide perspective to those who just assume that this is new found cash that will come back to the US will be used for only stock buybacks or some other corporate use, assuming much of it comes back. A lot of it likely will but I also want to point out that many companies have already front loaded repatriation via large debt raisings that were used to mostly buy back stock over the past few years. Let’s look at 4 large tech companies and their balance sheet activities over the past 3 years:

Using last 3 year reporting period,

  1. Apple added $95b of cash and $77b of debt and now has $260b of cash ($240b of it overseas) and $108b of debt
  2. Microsoft added $40b of cash and $63b of debt and now has $140b of cash ($122b of it overseas) and $85b of debt
  3. Oracle added $15b of cash and $22b of debt and now has $67b of cash ($52b of it overseas) and $53b of debt
  4. Cisco added $18b of cash and $12b of debt and now has $70b of cash ($65b of it overseas) and $33b of debt

In total over the past 3 years, these 4 companies have added $168b of cash to their balance sheets and $174b of debt. Thus, one could argue that much of their repatriation has been spoken for via the rise in debt which was then used mostly for stock buybacks. These 4 companies sit on $537b of cash but $279b of debt. Rock solid balance sheets still but just some perspective.

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Initial jobless claims totaled 272k, 2k more than expected and up from 260k last week. Obviously the data is being skewed by the rise in claims in Texas, Florida, Puerto Rico and Georgia. The 4 week average did rise to 278k from 269k as the 236k print of August 25th and thus pre Harvey drops out of average. Continuing claims, delayed by a week, fell by 45k after rising by a like amount in the week prior. Bottom line, outside of the affected areas, the level of firing’s remains modest.

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The goods trade balance for August was lower than expected at $62.9b vs the estimate of $65.1 and July was revised lower. Exports got back most of what it lost in July while imports fell. This should lead to a modest increase to Q3 GDP estimates which had fallen to 2.1% from Atlanta Fed and 1.6% from the NY Fed.

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Also possibly lifting Q3 GDP estimates was the 1% m/o/m increase in August wholesale inventories, well more than the estimate of up .4%. Retail inventories jumped by .7% driven by a 1.2% rise in car/parts inventories for reasons we all know (but could be partially relieved post Hurricane Harvey). Both this figure and the trade numbers are of course pre Hurricane.

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While very old news as we are just about done with Q3, the Q2 GDP figure was revised up by one tenth to 3.1%. The y/o/y increase was 2.2%.

None of these data points today are market moving and rarely are.

 

Asia

Global interest rates continue to adjust higher to the possibility of a fiscal jolt to the US economy. Let’s again start in Asia where yields were higher across the board. Japan’s 40 yr yield was up by 3.5 bps to 1.10% and that is less than 1 bp from the highest level in 19 months. The Australian 10 yr yield was higher by 7 bps to a 6 month high. The German 10 yr bund yield is kissing .50% for the first time since July 31st and is up by 3 bps today and 10 bps over the past 3 days. The US 10 yr yield is up by 3 bps too to 2.34% and has risen 11 bps in the past 3 days. The US 2 yr yield is at 1.48-1.49%. I said it yesterday and I’ll say it again today, when doing your spreadsheet on what US corporate earnings will do in response to the tax cut please don’t leave every other line item equal. At least on the interest expense side remember that US businesses have $13T of debt, up 30% from 2008. Also, if the demand for labor is going to increase further and we actually start getting faster wage gains, US companies pay out $7T in labor costs. Bottom line, lower taxes and making America competitive again is very much needed but its impact on company income statements is not all else equal.

Europe

The European confidence index for September rose 1.1 pts to 113, 1 pt more than expected and is the best level since May 2007. All 5 components consisting of manufacturing, services, consumer, retail and construction were up m/o/m. With respect to inflation, “selling price expectations firmed across all surveyed sectors, in line with higher price expectations among consumers.” Bottom line, the region’s economy is still on track for 2%ish growth which is great for Europe at the same time the ECB is running emergency policy and why they are announcing a tapering 4 weeks from today. The euro is lifting in response to this number and inflation stats in a variety of German states which held steady in September.

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Along with the rise in US inflation expectations in the TIPS to the highest since May, the euro 5 yr 5 yr inflation swap is quietly up another 2 bps to 1.65%, also the highest in almost 7 months.