MorningWord 12/2/16: Don’t piss down my back and tell me it’s raining

by Dan December 2, 2016 10:39 am • FREE ACCESS

There are are no shortages of stocks and sectors that are rallying in anticipation of policy changes in the new administration. Biotech/Pharma and Bank stocks were perceived to be the primary future beneficiaries of more lenient regulation, while mega-cap Technology stocks have under-performed as investors fear that the President-elect’s tough talk on the campaign trail regarding manufacturing, immigration and privacy may weigh on the sector in the years to come. What’s odd to me is that corporate tax reform, and the likelihood of an overseas tax repatriation plan, an issue which has garnered increased discussion since the election, overwhelmingly benefit Tech companies like Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN), Cisco (CSCO) and Microsoft (MSFT), and more specifically buoy their stocks, historically, repatriated cash has not been used as intended.

Back in 2004 George Bush and Congress instituted a repatriation tax holiday, per WSJ:

the legislation specified that the funds should be earmarked for activities like hiring workers or conducting research and prohibited using the money for executive compensation or buying back stock. Companies that brought back profits earned abroad saw them taxed at roughly 5%, instead of the top 35% corporate tax rate.

But as Michael Mundaca, then Assistant Treasury Secretary for Tax Policy in 2011 wrote on the Treasury’s blog:

In assessing the 2004 tax holiday, the nonpartisan Congressional Research Service reports that most of the largest beneficiaries of the holiday actually cut jobs in 2005-06 – despite overall economy-wide job growth in those years – and many used the repatriated funds simply to repurchase stock or pay dividends.

Other postmortems on the results of the Tax Holiday showed it to be little more than corporate welfare, per WSJ:

The 15 companies that repatriated the most after the 2004 tax break on the return of overseas profits later cut a net 20,931 jobs between 2004 and 2007 and slightly decreased the pace of their spending on research and development, found the report surveying 19 companies’ activity.


Meanwhile, the top 15 repatriating companies also accelerated their spending on stock buybacks and executive compensation after the tax break. The top five executives at those 15 companies saw their compensation rise 27% from 2004 to 2005 and then another 30% between 2005 to 2006.

Case in point, following the tax holiday in 2004, the largest single corporate beneficiary at the time, MSFT, promptly paid their shareholders (including the two largest holders at the time Bill Gates and Steve Ballmer who pocketed $4 billion combined) a massive special dividend, per the WSJ on July 21, 2004:

In an extraordinary move to shower its cash hoard upon shareholders, Microsoft Corp. said it will make a one-time dividend payment this year of $32 billion and buy back up to $30 billion of the company’s stock over the next four years. The company also said it will double the dividend it pays out annually to $3.5 billion, or 32 cents a share.

The plans, which Microsoft valued at up to $75 billion over four years, are believed to represent the largest corporate cash disbursement in history. They mark a turning point for high technology’s most successful company.

This will likely be the case again, as the sort of manufacturing jobs that the powers that be would like to create to put non-skilled workers to work here in the U.S, are not the ones that these companies could even create. Yeah Apple could assemble iPhones and Macs here (or even build some of the parts), but that’s so far away from their Asian supply chain for most components that it would dramatically raise the cost of these products for the tens of millions of consumers in the U.S. who buy these products.  And then of course most of these manufacturing plants will be automated in the coming years. And that automation is really where the manufacturing jobs are going. The entire world is losing manufacturing jobs. Companies moving those jobs around to squeeze out a few more bucks before robots take over are merely polishing the brass on the job Titanic.

So the biggest beneficiaries from cash return are the shareholders of those companies. Also M&A departments and private investors like venture capitalists, as we’ll see some acceleration in exits after a period of sparse tech IPOs. Oh, and you know what M&A means? Yep… job cuts. The $200 plus billion in semiconductor M&A since the start of 2015 is likely to result in tens of thousands of job cuts here and abroad as these companies maximize “synergies”.

Quoting the classic line from one of my favorite westerns The Outlaw Josey Wales:

Don’t piss down my back and tell me it’s raining

Tech CEOs may hint to uses for the cash (see AAPL’s supposed inquiry about iPhone manufacturing) that speaks to Trump’s populist campaign message, in an effort to secure repatriation. But history shows the C-Level suite will ultimately fall back to their fiduciary responsibility to shareholders rather than act in a manner that contradicts the tenets of free market economics.