Author: Tim

http://online.wsj.com/article/SB10001424052748703803904576152492475125636.html

Earlier this month, Microsoft borrowed $2.25 billion in unsecured debt. What in the world possesses a company with $40 billion in cash and short-term securities to go out and borrow money?

Rock-bottom interest rates are one reason. But the bizarre, byzantine U.S. tax code seems to be another.

The U.S. is the only major country that taxes foreign earnings of its own companies this way. American investors may not come out ahead either.

Microsoft declined to comment on whether its recent borrowing was partly driven by tax considerations. But, like many purportedly cash-rich companies, Microsoft can’t bring home much of its cash without writing a fat check to the Internal Revenue Service.

Politicians have been carping about the more than $2 trillion in cash sitting idle in corporate coffers even as unemployment remains high. But much of that cash isn’t in the U.S.; it is abroad. And it isn’t likely to come back home unless U.S. tax laws change.

David Zion, a tax and accounting analyst at Credit Suisse, estimates that the companies in the Standard & Poor’s 500-stock index have “north of $1 trillion” in undistributed foreign earnings, or profits that have been parked overseas to avoid U.S. tax. Not all of that is cash; some is in the form of inventories or other assets.

U.S. companies are taxed at up to 35% when they bring home the earnings generated through the operations of their overseas subsidiaries. They get a credit for any taxes paid to foreign governments—but, since the corporate-tax rate in the U.S. is one of the world’s highest, most companies are in no rush to bring the money back onshore. By keeping those earnings abroad, U.S. companies can indefinitely defer their day of reckoning with the IRS.

That can put firms in the peculiar position of having tons of cash offshore that they might need but can’t use at home without taking a tax hit.

The U.S. is the only major country that taxes foreign earnings of its own companies this way. American investors may not come out ahead either. In a 2007 survey of executives at more than 400 companies, Massachusetts Institute of Technology economist Michelle Hanlon found that the desire to avoid the repatriation tax led to a variety of distortions, most of which end up making companies less efficient.

For example, among the companies that had brought some profits home to the U.S., 30% had invested in lower-returning foreign assets rather than pay additional taxes to bring overseas profits back onshore. Another 56% had borrowed money in the U.S. rather than bring cash home. And 6% said they had declined to invest in a profitable project in the U.S. when funding it with foreign earnings would have triggered a tax hit.

These perverse effects can extend even to smaller companies. Consider Waters Corp., a laboratory-instrument manufacturer based in Milford, Mass. At last count, Waters had approximately $1.4 billion in earnings locked up at foreign subsidiaries. Of the company’s $830 million in cash and short-term securities, around 80% sits abroad.

Waters borrowed $200 million last year to pay down higher-cost debt and “for general corporate purposes.” Like many U.S. companies, Waters is “building up cash outside the U.S. while borrowing in the U.S.,” says Eugene Cassis, its investor-relations director.

“We’d certainly like to be able to bring some of that money back,” he says. “We would have a greater ability to invest here if we didn’t have to pay a ‘tollgate tax’ to bring the cash home. Current tax policy creates a slight bias towards acquiring technology or assets outside the United States.”

As the great financial analyst Benjamin Graham long argued, shareholders are usually better off when companies hold less cash, rather than more. Too much cash can lead to reckless acquisitions and a fat-and-happy culture of waste.

But, in this case, it isn’t just management that is making companies sit on too much cash. It is tax policy, too. Congress and the White House are discussing whether the U.S. should follow the rest of the world and stop taxing repatriated offshore earnings from companies that already have paid taxes to foreign governments. Some gnarly technical details will have to be worked out if the repatriation tax is to be reduced or eliminated.

Meanwhile, investors should remember that a big chunk of cash on the balance sheet may look tempting but isn’t necessarily there for the taking.

No bioengineered (Genetically Modified Organisms) are in this drink. That’s good, right?

Today zombies do not exist. Nevertheless, we are committed to protecting you from them. That’s good, right?

Then again, a friend of mine did say “I’ve only gotten money from investors that I’ve gone to a concert or gotten drunk with.”

</tongue-in-cheek>

“Collapses are perhaps more apparent than real,” … A closer look demonstrates that complex societies are remarkably insulated from single-point failures, such as a devastating drought or disease, and show a marked resilience in coping with a host of challenges. … “The rarity of collapse due to the resistance of populations to environmental changes or disease is considerable,” …

From “Collapse Was Slow” at Overcoming Bias

Worth remembering next time you find yourself talking to a conspiracy theorist who says the US is going to collapse.

Let’s play a game. We’ll each name three consecutive outcomes of a coin toss (for example, tails-heads-heads, or THH). Then we’ll flip a coin repeatedly until one of our chosen runs appears. That player wins.

Is there any strategy you can take to improve your chance of beating me? Strangely, there is. When I’ve named my triplet (say, HTH), take the complement of the center symbol and add it to the beginning, and then discard the last symbol (here yielding HHT). This new triplet will be more likely to appear than mine.

The remarkable thing is that this always works. No matter what triplet I pick, this method will always produce a triplet that is more likely to appear than mine. It was discovered by Barry Wolk of the University of Manitoba, building on a discovery by Walter Penney.

Run Toppers, from Futility Closet

What makes this recovery different is that it follows a recession brought on by a financial crisis. A growing body of research has found that such recoveries tend to be slower than those after “normal” recessions. Prakash Kannan, an economist at the IMF, examined 83 recessions in 21 rich countries since 1970. In the first two years after normal recessions growth averaged 3.7%. After the 13 caused by crises, growth averaged 2.4%. America has been doing slightly better than this (see chart 1).

The Federal Reserve brought on most post-war recessions by raising interest rates to squeeze out inflation. When the Fed cut rates, demand revived. Financial crises interfere with the transmission of lower rates to private borrowers. People can’t or won’t borrow because the value of their collateral—in particular, houses—has fallen. Banks are less able to lend because their capital has been depleted by bad loans, or less willing because customers can’t meet tighter underwriting standards.

The great debt drag, The Economist

The constitution is a thing of wonder, all the more miraculous for having been written when the rest of the world’s peoples were still under the boot of kings and emperors (with the magnificent exception of Britain’s constitutional monarchy, of course). But many of the tea-partiers have invented a strangely ahistorical version of it. For example, they say that the framers’ aim was to check the central government and protect the rights of the states. In fact the constitution of 1787 set out to do the opposite: to bolster the centre and weaken the power the states had briefly enjoyed under the new republic’s Articles of Confederation of 1777.

The perils of constitution-worship, The Economist

Everyone’s seen the spy movie where the spy knows that it is 37 steps from the front door down the hallway, turn left at the hall with the painting of the old man, 14 more steps, through the door on the right, using the passcode ‘61728’, and that he has 67 seconds to do all this and get back out before one of the two guards comes around the corner.

Much more impressive than the spy movie where the spy knows that he goes inside, turns left, and then goes through the door with the passcode ‘617..something’. Oh and don’t get caught, there might be a guard.

Which spy do you have more faith in? The first, because that spy clearly has a better plan — it’s got more detail. He’s able to be specific about the instructions. You could probably step in for the first spy and pull off the first caper, but not the second.

Specifics are how high performers are able to perform — this isn’t some wobbly idea based on a bad spy movie.

A motorcycle rider does not just follow the track, turning when he sees the corner. He knows the course — he can be specific.

A good motorcycle rider knows that there’s a straightaway, followed by a left and a right, then another bit of straightaway, etc.

A great motorcycle rider knows that there’s a long hard straight, and when he comes up to the ‘250’ marker, to be on the outside right, hard on the brakes down to 65, revs at 4500, through the chicane.

Specifics are good because they can be proven right or wrong, unlike vague statements which can be twisted moment-to-moment.