Financial Review

Taxman Bites Apple

Sinclair Noe — August 30, 2016

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW – 48 = 18,454
SPX – 4 = 2176
NAS – 9 = 5222
10 Y + .01 = 1.57%
OIL – .70 = 46.28
GOLD – 12.70 = 1311.50

Since July 8, when the S&P rose 1.54%, that index hasn’t moved more than 0.9% in any given day, and most of those changes were slight gains, including 10 all-time highs. Since Brexit, the S&P 500 has now gone 43 straight sessions without a daily decline greater than 0.7%.

Compare that with the first 43 days of this year when it happened 15 times. For the month of August, the S&P 500 has managed to gain just 3 points, which means it is about as flat as it can be.

EU antitrust regulators have ordered Apple to pay up to €13-billion-euro ($14.5-billion dollars) in taxes to the Irish government after ruling that a special scheme to route profits through the country was illegal state aid. The EU Commission says Apple paid an effective corporate tax rate of less than five-one-thousandth of a percent (0.005%) on its European profits in 2014.

Apple has previously said it received no special treatment in Ireland. Apple’s tax arrangement with Ireland also meant the company avoided taxation on almost all profits from sales of its products in the EU single market, as the sales were recorded in Ireland rather than in the country where the transaction took place. Apple and Ireland said they would appeal the decision.

Ireland’s Finance Minister said he would fight the European Commission ruling that would force Apple to pay taxes to Ireland, even though €13-billion-euro in back taxes is more than twice the country’s entire 2015 corporate tax take and equivalent to about $3,000 for every man, woman and child in Ireland.

Apple is one of more than 700 U.S. companies that have units in Ireland, employing a combined 140,000 people. The government maintains that even if it were to take the cash, European rules mean it would have to use the money to pay down some of its €180 billion euros of national debt rather than fund spending.

CEO, Tim Cook wrote an open letter about the tax ruling and in it he said that Apple “in Ireland and in every country where we operate, follows the law and we pay all the taxes we owe.” And that is probably very true; no reason to doubt that Apple has hired top accountants and attorneys to figure out all the legal loopholes. And now the EU is closing one of the loopholes.

Tim Cook, that is to say Apple, has reacted with outrage, saying the decision would “upend the international tax system” and promising to appeal and overturn the decision. No doubt years of legal fees lie ahead for all involved. But the writing has been on the wall for Apple’s convoluted corporate structure in Ireland for years.

In 2013, a US Senate committee found that Apple pushed its foreign profits into a “stateless” company, one that paid no taxes anywhere, while using an intellectual property agreement to shift US profits to the subsidiary. In 2015, the EU released its own investigation, with more specificity: Apple had negotiated two special deals with Ireland that allowed it to allocate profits to this untaxed company.

The U.S. Treasury Department said it was disappointed with the European Commission seeking to force Apple to repay tax breaks given by Ireland and the case could undermine the “spirit of economic partnership between the U.S. and the EU.” In other words, the Treasury hopes to collect taxes on Apple’s overseas cash hoard someday and they don’t want to see that money going to Europe. Plus, any money Apple pays in taxes to the EU is deductible from Apple’s US tax bill.

Apple has its tax issues in Ireland but it will hope to put all that behind it next week as a new iPhone is expected to be announced. After all, as long as Apple is selling iPhones, $14 billion is not that much. What will an iPhone 7 look like? Pretty similar to an iPhone 6 but new features will likely include waterproofing, stereo sound, a touch-sensitive home button, a dual-lens camera, and due to its thinner chassis, the headphone jack will be removed. The starting point for storage on the new entry-level model is thought to be 32GB, up from 16GB.

New MacBooks, iPad features and a monitor may also be in the works from Apple – but at least some of those devices may not be seen until after the company’s Sept. 7 event. A thinner laptop, a faster iPad display to work with Apple Pencil, and 5K monitors are among the updates coming to Apple products. But the MacBook, which some tech bloggers had thought might come alongside the iPhone 7, is more likely to be released in October.

Voters are heading to the polls for Senate and House primaries in Arizona. Locations of polling places are assigned by address. The location that coincides with your registered address (on your voter information) is where you can cast your vote on election day. Arizona law allows any voter who is registered as independent to cast a vote in the primary election, but independent voters must choose a Republican or Democratic Party ballot at the polling place. The polls close at 7 PM.

The S&P CoreLogic Case-Shiller 20-city composite of existing home prices recorded a 0.8% gain in June and a 5.1% year-on-year advance; that’s down from a 5.3% pace the prior month. Home prices in three U.S. cities – Denver, Seattle and Portland, Oregon – showed the highest year-over-year gains. Housing prices in Phoenix were up 5.1% over the past 12 months.

The Conference Board’s consumer confidence index rose to 101.1 in August from a revised 96.7 in July. That’s the highest level since September 2015. Short-term expectations regarding business and employment conditions, as well as personal income prospects, also improved, suggesting the possibility of a moderate pick-up in growth in the coming months.

Americans’ view the economy right now was the strongest since before the Great Recession. The present situation index, a measure of current conditions, climbed to 123 from 118.8 and hit the highest level since late 2007. What consumers expect six months down the road, however, was less optimistic. The future expectations index edged up to 86.4 from 82, but it was still well below the post-recession high.

Fed Vice Chairman Stanley Fischer says the US job market is nearly at full strength and the pace of interest rate increases by the Federal Reserve will depend on how well the economy is doing. The Fed has signaled since March it would lift rates twice this year, but investors have been skeptical. Fischer did not comment on the timing of the next Fed rate hike but said “we choose the pace on basis of data.”

The U.S. Labor Department’s monthly employment report on Friday is expected to show the economy added 180,000 jobs in August.  At the end of the day, it always comes down to the jobs number. Yellen can try to persuade us that the case for a rate hike is strengthening, and the other policymakers can chime in with their two cents. But they are all held hostage to the government’s jobs numbers on Friday.

Anything strong (250,000-300,000) and you won’t need anyone from the Fed telling us they are going to raise in September. The number will say it all: below 200,000, and it’s back to a December-only hike.

Trade talks between the European Union and the United States should be halted and a new set started, France’s trade minister said on Tuesday, adding his voice to calls from within Germany for an end to the negotiations. Three years of talks on a Transatlantic Trade and Investment Partnership (TTIP) have failed to resolve multiple differences, including over food and environmental safety.

Critics say the pact would hand too much power to big multinationals at the expense of consumers and workers. But despite a weekend comment by Germany’s Economy Minister that the talks had “de facto failed”, and today’s comments by the French Trade Minister, the European Commission says negotiations are making steady progress and there is an outline of a future agreement.

More than 76,000 people have signed a petition demanding former European Commission President Jose Manuel Barroso be stripped of his pension after taking a job at Goldman Sachs. Organizers plan to present it to current leaders of the EU institutions at the end of September. Critics claim the role is inappropriate given Goldman’s role in the U.S. subprime crisis and Greek debt talks. That’s one way to stop a revolving door.

The FDIC reported that U.S. banks earned $43.6 billion in the second quarter, up from $43 billion a year earlier. Around 60 percent of banks reported an increase in profit from a year earlier. However, the impact of low oil prices on energy companies led banks to continue to post bigger losses on commercial and industrial loans. Only 4.5 percent of banks were unprofitable, down sharply from 5.8 percent in the second quarter of 2015.

Countries including the U.K., Australia and Taiwan have issued travel advisories for tourists to Singapore after the city-state announced a further increase in Zika cases. Singapore’s Ministry of Health confirmed 15 more people with locally-transmitted Zika, bringing the total number affected to 56. Health officials think they will identify even more positive cases.

FINANCIAL REVIEW

Lather, Rinse, Repeat

Sinclair Noe — November 4, 2014

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

Financial Review

DOW + 17 = 17,383
SPX – 5 = 2012
NAS – 15 = 4623
10 YR YLD – .01 = 2.34%
OIL – 1.31 = 77.47
GOLD + 2.90 = 1169.20
SILV – .11 = 16.13

Election Day 2014! We should all be very, very happy. Forget about red and blue, we can all count our blessings because the campaign ads on radio and TV are going away. There is one redeeming thing about this whole election. It will be over in a few hours. Say hallelujah!

Or you could say that it’s amazing that anyone bothers to vote given that our choices are between tweedle dumb and tweedle dumber. Still, I went to the polls today, early, and I cast my ballot. I was the only voter voting. In a few hours we’ll get the results. And the most likely result is that not much will change, despite the drama and despite hundreds of millions to persuade you. It takes a fortune for a politician to get beat these days, but most of the money isn’t real, it’s magic money that doesn’t belong to anybody, or at least nobody is willing to admit they spend money on politics. We’ve got the best politicians money can buy.

The present split Congress is the least-productive in US history. Regardless of the election’s outcome, the 114th Congress is unlikely to be any more productive than the 113th. Maybe that’s good news; when they do something is when they become dangerous. There are plenty of issues worthy of intelligent discussion and debate, however that never seemed important in this midterm election. That we have been burden with such an abundance of bull and still survived just shows we are a super nation.

Lather, rinse, repeat.

Let’s look at the economic news.

Home prices were down slightly in September, according to Corelogic prices were down 0.1% for the month and that resulted in year to year growth of 5.6%, the slowest pace in 2 years. So, the rate of growth in home prices has clearly slowed. For Arizona, home prices are still down 30% from the peak.

New orders for US factory goods fell for the second straight month, down 0.6% in September. August’s orders were slightly revised to show a 10.0 percent fall instead of the previously reported 10.1 percent decline. The decline in orders was led by aircraft, machinery, capital goods and computers and electronic products.

Yesterday we reported that auto sales were up in the third quarter, but the car companies are calling them back faster than they can sell them. Toyota is recalling 5,850 vehicles because of a possible loss of steering control. Ford is looking at 5 recalls totaling 202,000 vehicles for a variety of issues, including an incorrect repair of a steering problem in a previous recall.

Oil futures dipped under $76 a barrel for a while today. If there was any doubt on which country Saudi Arabia was targeting with their price shattering oil production, there is not any doubt now. While Russia, Iran and Venezuela might turn out to be collateral damage in the Saudi oil production surge, the message that Saudi Arabia is trying to send is directed to the US shale producers. The Kingdom made no secret of their displeasure yesterday when they cut oil prices to US buyers while raising them for everyone else in the world. Saudi Aramco next month will sell its Arab Light to clients in Asia for 10 cents less than Middle East benchmarks, the November discount was $1.05 yet it lowered prices for all grades to the US.

The plan is to maintain market share in the US and bury the US energy producers. The Saudis fear predictions that US oil imports could fall to zero by 2037 as a reason they need to nip US oil producers in the bud. They are threatened by US oil production and they are acting to try to break the US producers back. That is one of the reasons todays balance of trade numbers weren’t much higher, even in the face of a strong dollar. The US not only has reduced oil imports but has become a major exporter of oil products.

The nation’s trade deficit increased 7.6% in September to the highest level since the late spring as exports to Europe, China and Japan all fell. In turn, this will likely lead to a lower revision of third quarter GDP; probably a drop from the 3.5% initial estimate, down to about 3%. In September, the trade gap climbed to a seasonally adjusted $43 billion from a slightly revised $40 billion in August. Yet if petroleum is excluded, the nation’s trade gap climbed to $47.2 billion in September to mark the highest level in seven years. Here’s the downside of a strong dollar: US exports of goods fell 3.2% with China, 6.5% with the European Union and 14.7% with Japan.

It’s not just a strong dollar but a combination of weak global economies. Today the European Commission said the Eurozone will need another year to reach even a modest level of economic growth. The new forecast calls for 0.8% growth across the Eurozone economy this year, and just 1.1% growth next year.

The Independent Evaluation Office of the International Monetary Fund issued a report that basically says the IMF did a poor job responding to the financial crisis; the IMF ignored its own research and pushed too early for richer countries to trim budgets. They admit the IMF was overly concerned about high debt levels and large fiscal deficits, and urged countries like Germany, the United States and Japan to pursue austerity in 2010-11 before their economies had fully recovered from the crisis. At the same time, the IMF advocated loose monetary policies to sustain growth and boost demand in advanced economies, initially ignoring the possible spillover risks of such policies for emerging market countries. In 2012, the IMF finally admitted that it had underestimated how much budget cuts could hurt growth and recommended a slower pace for austerity policies. But its auditor said the IMF’s own research showed this relationship even before the crisis.

The European Central Bank meets Thursday to try and figure out their next course of action.

Lather, rinse, repeat.

While every major economy in the world has followed essentially the same monetary policy since 2008, their fiscal policies have been very different and the divergence in outcomes, especially when we compare the United States and Europe, has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks.

Countries that took emergency measures to reduce public borrowing have mostly suffered weaker growth, as in the case of Britain from 2010 to 2012, Japan this year and the United States after the 2013 “sequester” and fiscal cliff deal. In more extreme cases, such as Italy and Spain, fiscal tightening has plunged them back into deep recession and aggravated financial crises. Meanwhile countries that ignored their deficit problems, as in the United States for most of the post-crisis period, or where governments decided to downplay their fiscal tightening plans, as in Britain this year or Japan in 2013, have generally done better, both in terms of economics and finance.

When faced with private sector deleveraging, there are limits to the persuasive powers of low interest rates to revive private economic activity; low rates may help in an inflationary environment, but in a deflationary environment, spending is needed to stimulate demand. With interest rates at or near zero, private demand cannot be simulated with further rate cuts and this means that monetary easing can no longer offset fiscal tightening. As a result, any reduction in budget deficits becomes more and more deflationary. The flip side is that fiscal expansion could truly provide economic stimulus without the worry of interest rate increases. That doesn’t mean that we will see fiscal expansion to correct the problem, just because there is indisputable mathematics to support it.

Lather, rinse, repeat.

JPMorgan Chase has added $2.4 billion to its estimate of the amount of legal costs it may face. That figure was disclosed yesterday in a securities filing in which the bank also formally acknowledged that it was facing a criminal investigation by the Justice Department into the behavior of traders in the foreign exchange market. In the past few days, Citigroup, Royal Bank of Scotland, HSBC, and Barclays all announced new reserves totaling more than $2.3 billion to deal with investigations into foreign exchange rate manipulation. Deutsche Bank added more than $1 billion to legal reserves for the expected cost of settlements. The cases involve collusion in the $5.3 trillion daily foreign exchange market to affect rates.

If it sounds familiar, well that is because we have seen settlements like this before. In 2012 Barclays and UBS entered deals to pay fines totaling almost $2 billion; a UBS subsidiary pleaded guilty to rigging Libor. The prosecutors and regulators probably thought the agreements would deter further bad behavior. The deals involved non-prosecution or deferred prosecution agreements. The agreements allow the Justice Department to reinstate charges if there is any future violation of the law. Most important, admissions by the bank as part of the settlement can be used against it as evidence later, essentially stripping the bank of any possible defenses if the case were to proceed further. There is little chance, then, that a bank could fight the charges, so it would have to agree to a new settlement with more onerous terms and a new penalty.

But it turns out that simply slapping the banks with more and bigger fines, does not deter future bad behavior. The government is not required to minimize the collateral consequences of a conviction, and individuals are usually required to fend for themselves if they are convicted of a crime. But the foreign exchange inquiry involves a number of leading global banks, each with thousands of employees worldwide. So federal prosecutors go for punishment that does not threaten the continued existence of one of the banks. In other words, punishment that doesn’t actually punish.

The government has imposed billions of dollars in fines over the past few years for corporate violations, part of an effort to show that no company is “too big to jail”, while steadfastly refusing to actually jail a bank or major bank executives for criminal violations.

Lather, rinse, repeat.