Goldman and the rest of Wall Street are smelling the money.
The profits that US corporations earned overseas, and that have remained untaxed in the US, have ballooned to $2.6 trillion, according to Congress’s Joint Committee on Taxation, cited by Bloomberg. This “overseas cash” made it onto Trump’s agenda. Wall Street and our Corporate Titans are licking their chops. They can smell a tax holiday or a new loophole to encourage them to “repatriate” this “overseas cash.”
Goldman Sachs now told its clients what these corporations are going to use this “cash” for. You guessed it: financial engineering.
The exact amount of this “cash overseas” remains a mystery. The numbers thrown around – including the $2.6 trillion above – are guesses. There is no official data. Companies are not required to disclose the details of their assets, in what currencies they’re denominated, or where they’re domiciled.
But in 2004, the last time there was a tax holiday for “overseas cash,” our Corporate Titans “repatriated” $300 billion at a tax-holiday rate of 5.25% and used 92% of if for share-buybacks.
The number of jobs that were promised to be created as a result of this repatriation? Forget it. But the number of share-buybacks soared by 84%.
Now Goldman predicts the same sort of thing in a note to its clients, assuming that the tax holiday or loophole becomes reality in 2017. Bloomberg:
“A significant portion of returning funds will be directed to buybacks based on the pattern of the tax holiday in 2004,” the team, led by Chief US Equity Strategist David Kostin, writes.
They estimate that $150 billion (or 20% of total buybacks) will be driven by repatriated overseas cash. They predict buybacks 30% higher than last year, compared to just 5% higher without the repatriation impact.
Financial engineering comes out on top. “Return to investors,” as Goldman calls it: 42% of the total cash used in 2017 will be dedicated to dividends and share-buybacks, matching the prior record ratio of the glorious acquisition-and-buyback year 2007 before it all fell apart.
Cash used for dividends will drop to 18% of total cash used in 2017, from 19% this year. But cash used for buybacks, which was 26% in 2016 and 24% in 2015, will soar to 30% in 2017, the highest ratio since glory-year 2007.
And investment “for growth” (capital expenditures and research & development) will drop to 52% of total cash used in 2017, lower even the 55% in 2016, matching the record low of the great financial-engineering year 2007. Goldman expects CapEx to drop to 28% of total cash used, matching the low of 2007. And R & D will drop to 11% of total cash used, matching the lowest ratios going back to 2000.
If Goldman is right, this “repatriation” of “cash” will lead to no economic benefits, but plenty of benefits for Wall Street. There are, however, a few wrinkles to it.
The first wrinkle:
On November 5, I reminded the world that this “overseas cash” is neither “overseas” nor “cash.” Much of it is already in the US, in US securities and other investments. I cited the 2013 Senate subcommittee investigation and hearings of Apple. It showed that Apple’s “overseas cash” wasn’t in a bank account in Ireland, where these extraordinarily profitable subsidiaries were located, but in US accounts, invested in US Treasuries, and other securities and investments. What Apple was barred from doing with these untaxed profits was buying back its own shares.
The article was my response to Moody’s report on this overseas cash: “Some falsehoods simply refuse to die,” I wrote. “No matter how many times they get stabbed in the heart, and no matter who stabs them, they rise again in their full glory [read… Come on Moody’s, Spare us these Falsehoods: That “Overseas Cash” is Already in the US].
For 11 days, it was just your crazed blogger against Moody’s and the financial media. Then, on November 16, Bloomberg came out in support. My article had made the rounds. People had checked out the Senate documents I’d linked, etc. Bloomberg added some company-specific details:
Yet at Apple Inc., with the most overseas cash among S&P 500 members, more than 90% of its $216 billion stash is in the U.S. currency, according to former employees who had direct knowledge of the matter and asked not to be identified.
For Microsoft Corp., the second-largest holder of cash abroad, dollar-denominated bonds alone make up 66% of total cash, securities filing shows.
Dollars also make up most of the cash portfolio for Cisco Systems Inc., which has $60 billion abroad, according to the company’s chief executive.
Bloomberg even quoted the same Richard Lane of Moody’s whom I’d quoted on November 5; he’d changed his tune: “None of this information is explicitly disclosed, but most of the money is already in dollar-denominated securities,” he said.
Now Wall Street is smelling the money. Financial engineering would do wonders for fees and stock prices. Which brings us to…
The Second Wrinkle:
This “repatriation” bonanza, with the “overseas cash” already in the US, might not be all that great. Bloomberg elaborated today:
A new note from Morgan Stanley analysts Todd Castagno and Snehaja Mogre says that this is one of the top questions they are receiving from clients, and that most are overestimating how much cash will be brought back from overseas.
“The often cited $2.5 trillion statistic represents accumulated foreign earnings that companies have declared permanently reinvested abroad for GAAP accounting purposes,” they write. “We estimate that only 40% of this amount, or roughly $1 trillion, is available in the form of cash and marketable securities.
Thus, the other $1.5 trillion has been reinvested to support foreign operations and exists in the form of other operating assets, such as inventory, property, equipment, intangibles and goodwill.”
And the Third Wrinkle:
Everyone is hoping that these share buybacks will create a rally in stocks; this type of financial engineering was about the only thing that drove stocks to dizzying heights over the last few years. However, since much of this “overseas cash” is already in US securities and other US investments, companies would have to dump those securities and investments first to free up the cash to buy back their own shares.
Hence, these share-buybacks would entail a sell-off in these other securities. This includes Treasuries, which are very liquid, and corporate bonds, which are not very liquid, and other investments that may not be liquid at all, especially during a sell-off.
Massive corporate selling of this type would send shockwaves through those markets, propel yields higher, raise the cost of funding for Corporate America, and trigger all kinds of market mayhem. It’s hard to imagine that stocks would remain unscathed in this environment for long.
We’ve already seen the Credit Bubble peak. It was marked by “Totally Crazy Lending.” Read… Now it Begins to Unravel