Five Things You Need to Know: American Companies Have Billions In Cash Trapped Overseas
Given our weak and asymmetrical economic recovery, a one-time tax break on overseas cash balances isn't quite as far-fetched as it seemed six months ago.
House of Cards author William Cohan in an op-ed for Bloomberg View makes the case that companies with cash trapped in overseas bank accounts should be given an incentive to bring it back to the US with tax breaks tied to capital reinvestment, hiring and, research and development spending.
"Because of the success of American companies in the global economy, they have billions of dollars in cash trapped in the bank accounts of their subsidiary operations overseas," Cohan writes. "Why not give these corporations the incentive to bring that money home with a tax break, but in exchange demand that they use the cash to, among other things, build new plants and equipment, hire new employees, and invest in research and development?"
Cohan notes that, according to the New York Times, companies such as Apple (AAPL) have $12 billion in cash or cash equivalents overseas, Microsoft (MSFT) $29 billion, Google (GOOG) $17 billion, and Cisco (CSCO) almost $32 billion.
At issue is the present tax penalty for bringing the cash home, up to 35 percent. A possible one-time tax break, considered unlikely months ago, has long been rumored to be on the table in Washington. Given our weak and asymmetrical economic recovery it's not quite as far-fetched as it seemed six months ago. Cohan describes some of the nuances and counter-arguments to the tax repatriation holiday in his op-ed, which is well worth the read.
2. Speaking of Old Tech Stars...
Minyanville Professor Conor Sen directed me to this Wall Street Journal article, which observes that the former growth stocks (those mentioned in number 1) aren't trading like growth stocks anymore, and in some cases their valuations have fallen below the S&P 500.
"Some say valuations have gotten so low that they are likely to rise should there be any stronger signs that the economy isn't mired in a prolonged slump..." Or perhaps if Congress approves a one-time repatriation tax break? Food for thought.
3. Banks Still Hoarding Cash
I ran across a great July 4th post by David Schawel on his Tumblr site, Economic Musings. David rolled up his sleeves and looked at commercial bank loan trend data from the Federal Reserve. If total loans and leases are down 2.4 percent year-over-year (and small bank loan contraction running at an even worse 3 percent year-over-year) even as total bank assets are up slightly, where is the shift out of loans ending up on the balance sheet?
The answer: "[S]mall banks (defined as any bank not in the 25 largest), increased total investment securities by ~12% YoY. Treasury and Agency securities grew 15% while Agency MBS rose 23%. Cash at the Fed also grew ~7%. In aggregate, total commercial banks added a net ~$150 bln over the last year in both Treasury & Agency and Agency MBS. Interestingly, this debunks the somewhat prevalent belief that banks are not purchasers of US Treasuries."
Meanwhile, commercial bank cash is up an astonishing 38 percent year-over-year.
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