Apple Is Bringing Its Cash Hoard Home
Financials are booming... The real story on this quarter's big bank losses... 'Repatriation' begins... Apple is bringing its cash hoard home... Doc Eifrig's favorite way to profit from tax reform...
Banks and financial stocks have been soaring...
Since President Trump's election in November 2016, the financial sector – as tracked by the Financial Select Sector SPDR Fund (XLF) – has crushed the overall market. As you can see in the following chart, financials have gained nearly 45%, compared with less than 30% in the S&P 500 Index...
As regular Digest readers know, these companies have benefited from an improving regulatory environment and rising interest rates. This trend likely has further to run... But you may not realize it by recent headlines in the financial media.
You see, many of these firms reported big profit declines this month as fourth-quarter earnings season kicked off. For example, JPMorgan Chase (JPM) reported earnings of $4.2 billion, compared with $6.7 billion in the fourth quarter of 2016. Bank of America (BAC) said earnings were nearly cut in half, from $4.5 billion to $2.4 billion. Goldman Sachs (GS) lost $1.9 billion, compared with a net profit of $2.3 billion. And Citigroup (C) suffered a massive $18.3 billion loss – one of its largest quarterly losses in history – versus earnings of $3.6 billion last year.
All told, the financial sector reported a $29.2 billion quarterly decline in net profit, according to market-data firm FactSet. And it was the only sector in the S&P 500 to suffer a year-over-year decline in earnings last quarter.
What's going on here?
It has to do Congress' new tax law. First is something called "deferred tax assets."
During the financial crisis, banks suffered massive losses from bad bets on mortgages and other debt instruments. While these losses were terrible for shareholders at the time, there was a "silver lining" of sorts... Under U.S. tax law, the banks could convert those losses into credits to offset gains and lower their taxes in the future.
As we've discussed, the new law slashed the corporate tax rate from 35% to just 21%. This is good news for most U.S. companies, including financials. But it has an unusual consequence for these firms...
Because the top corporate rate is now significantly lower, the value of those tax credits is now lower, too. According to generally accepted accounting principles, these firms are required to write down the value of these credits, creating a "loss" in the process. As Bloomberg columnist Matt Levine explained on Friday...
Oh sure if you look at Citi's financial statements, you will see $23 billion of taxes, but it is not like Citi wrote a check to the Internal Revenue Service for $23 billion in December.
Instead, most of that number came from an abstract adjustment to an abstract accounting notion: Citi lost a bunch of money in the past, and it can use those losses to offset its taxable income in the future, and it treats those future offsets as an asset (a "deferred tax asset") on its balance sheet, and when the recent Tax Cuts and Jobs Act reduced the corporate tax rate, the value of those offsets went down, and so Citi had to write down that asset. Even though Citi's future taxes will actually go down, not up.
The tax bill will give Citi more money, but Citi has to account for it as a loss. It is a pure accounting oddity, a set of conventions that produce, in this particular case, a result that is at odds with economic reality.
Some of the big banks are also taking charge-offs related to cash held overseas. That's because the law also includes a one-time 15.5% tax rate on the repatriation of foreign earnings. This money can then be used to boost capital spending or be returned to shareholders.
In short, despite these one-time paper losses, the new law should be another big bullish tailwind for banks.
Our colleague C. Scott Garliss – editor of the Stansberry NewsWire – agrees...
As NewsWire readers know, Scott has been bullish on the financial sector for months. In a private e-mail over the weekend, he explained why he remains extremely bullish today...
For one, a lower tax rate will save these companies huge amounts of money. Even if their businesses fail to grow this year, they're still going to be more profitable.
Plus, higher interest rates will line these companies' pockets. Higher interest rates mean these companies make more money on what they lend. But they aren't passing that along to account holders... So their profit margins will rise.
Finally, while these companies are taking a one-time hit this earnings season, remember that these tax changes will free up significant capital in the future. They can use that excess capital any way they'd like – whether it's to acquire other companies, reinvest in their business, buy back shares, or raise dividends.
I continue to think analysts are way underestimating the positive impact on the economy and the stock market that the tax bill is going to have.
Scott and his team of analysts have kept Stansberry NewsWire readers up to date on the latest news and trends related to the tax bill. You can learn more – and get instant access to the NewsWire for free – right here.
Of course, banks aren't the only companies that stand to benefit from the new tax law...
Any firm with a big pile of overseas cash could be among the biggest winners, too. And at least one is already taking advantage. As the Wall Street Journal reported last week...
Apple said it would pay a one-time tax of $38 billion on its overseas cash holdings and ramp up spending in the U.S., as it seeks to emphasize its contributions to the American economy after years of taking criticism for outsourcing manufacturing to China...
Apple's $38 billion tax commitment is the largest such sum announced in response to the major overhaul of the U.S. tax code that President Donald Trump signed into law late last year. That law included an incentive for U.S. companies to bring home offshore holdings, with companies required to pay a one-time tax of 15.5% on overseas profits held in cash and other liquid assets...
U.S. companies have long pushed for such a change to enable them to repatriate overseas cash without what they considered an excessive tax hit. Apple on Wednesday cited the tax changes as the reason for its $38 billion payment. It didn't say how much of its $252.3 billion in overseas cash holdings it plans to bring home, though it will be the vast majority, Chief Executive Tim Cook told ABC News in an interview.
Our colleague Dr. David 'Doc' Eifrig has been following this trend closely...
And he expects this "repatriation holiday" to drive a wave of cash back to U.S. investors. As he explained in a recent special report for his Retirement Millionaire subscribers...
Many firms pay out a portion of their earnings as a regular stream of dividends to shareholders. However, they can also authorize special, one-time dividends whenever they'd like.
When $2.6 trillion flows back to our shores, we expect the special dividends paid by companies to spike. Some will pay out millions to lucky shareholders.
You see, it's the duty of a company, its management, and board of directors to maximize the value of each dollar it holds for shareholders. If it can't find a good project to invest in, it often just sends investors a check.
This happened before. In 2004, the U.S. held a smaller repatriation holiday. Studies of the results show that 90% of the repatriated profits went to buyback, dividends, and executive compensation.
Doc has singled out 10 companies set to reward shareholders the most from this one-time event...
Of course, he and his team started by identifying those companies with the largest offshore cash piles. But that was just the beginning. More from the report...
Then, we compiled a library of research that determines what an extra dollar in cash is worth to a company. After all, some companies have plenty of cash on hand already, so adding $1 in cash only adds $1 in value. But a firm in need of cash means that an influx improves their prospects, so $1 could be worth $1.20 or even $1.50.
We found that cash levels and the amount of debt had big effects on just what a dollar was worth. We focused on companies that had the most to gain from getting an extra dollar from overseas.
Finally, we ran the companies through our own formulas that determine businesses with the highest-quality earnings, the best finances, and the best prices in the market today.
That left Doc and his team with a diverse group of stocks among technology, health care, and other sectors. These are mostly large, well-established companies – as well as a few smaller names – whose share prices could surge higher virtually overnight.
Learn more about this opportunity – and how to gain instant access to Doc's 10 favorite repatriation opportunities – right here.
New 52-week highs (as of 1/19/18): AbbVie (ABBV), American Financial (AFG), AMETEK (AME), Allianz (AZSEY), Becton Dickinson (BDX), iShares MSCI BRIC Fund (BKF), Morgan Stanley China A Share Fund (CAF), CBRE Group (CBG), Global X China Financials Fund (CHIX), CME Group (CME), WisdomTree Emerging Markets High Dividend Fund (DEM), WisdomTree SmallCap Dividend Fund (DES), PowerShares Chinese Yuan Dim Sum Bond Fund (DSUM), iShares Select Dividend Fund (DVY), Emerging Markets Internet & Ecommerce Fund (EMQQ), iShares MSCI Italy Capped Fund (EWI), iShares MSCI Spain Capped Fund (EWP), iShares MSCI Singapore Capped Fund (EWS), iShares MSCI Brazil Fund (EWZ), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), iShares China Large-Cap Fund (FXI), Alphabet (GOOGL), iShares Currency Hedged MSCI Germany Fund (HEWG), iShares Core S&P Small-Cap Fund (IJR), ETFMG Prime Mobile Payments Fund (IPAY), iShares U.S. Home Construction Fund (ITB), Johnson & Johnson (JNJ), KraneShares Bosera MSCI China A Share Fund (KBA), KraneShares CSI China Internet Fund (KWEB), McDonald's (MCD), iShares MSCI China Index Fund (MCHI), MercadoLibre (MELI), MarketAxess (MKTX), Naspers (NPSNY), NVR (NVR), New York Times (NYT), PowerShares High Yield Equity Dividend Achievers Portfolio Fund (PEY), PNC Financial Warrants (PNC-WT), Ralph Lauren (RL), ProShares Ultra Technology Fund (ROM), ProShares Ultra Health Care Fund (RXL), ALPS Medical Breakthroughs Fund (SBIO), ProShares Ultra S&P 500 Fund (SSO), Stanley Black & Decker (SWK), Sysco (SYY), Guggenheim China Real Estate Fund (TAO), Tencent (TCEHY), Travelers (TRV), Tractor Supply (TSCO), ProShares Ultra Semiconductors Fund (USD), ProShares Ultra Financials Fund (UYG), VF Corporation (VFC), Wal-Mart (WMT), ProShares Ultra FTSE China 50 Fund (XPP), and Direxion Daily FTSE China Bull 3X Fund (YINN).
The mailbag is overflowing with feedback on Porter's latest Friday Digest warning. Send your notes to feedback@stansberryresearch.com.
"Dear Porter, I wish I had known about Stansberry publications before. Because I was steered into GE before I came to know and trust the Stansberry organization. I subsequently lost about 15k before I couldn't take the pain anymore. I am now quite comfortable avoiding and or shorting stocks or options from numerous Stansberry editors. Thank you all for what you do." – Paid-up Stansberry Alliance member Steve J.
"Porter... I'm always ready to learn from what you write. Dumped my GM bonds in time, and escaped that disaster. Have not, and never would consider buying GE. Thousands of thanks to you and your colleagues at Stansberry Research for the great advice I've gotten over the years, and all without the help of a broker, and zero cost for my trades." – Paid-up subscriber D.C.
"Porter, back in the Spring of 2016 my Mom passed away. I inherited her stocks and among them were shares of GE. I immediately put trailing stops on all of her stocks (I was already a Stansberry Student/Learner at the time). Thanks also to you, at about that time I was really starting to grasp better the concepts of risk balancing and had even generated a spreadsheet with individual weighted Beta calculations. To reduce my risk in 'over-invested' stocks (including GE at the time) I started selling calls (an idea sparked by Doc's Retirement Trader). I eventually found my way to TradeStops (thanks to your guidance) and I continued to reduce my holdings in GE by selling calls. But now I was using TradeStops' Risk Re-Balancer, which is a much more elegant way of doing what I was muscling through on spreadsheets. By December of
"I was not aware of your previous analysis on GE. Either I missed it or it was before my time. The point is correct position sizing and stops saved me from a much larger loss. A 'Buy and Hold' strategy would have me down about 50% right now from that investment. Thanks for letting me come along on this journey. I have had to paddle, but you provide a good crew of guides." – Paid-up subscriber Chuck Carroll
"Dear Porter, I owned GE stock, made money, sold it, and would probably have considered getting back in
"Dear Porter, just a quick word of thanks and appreciation for you using your experience and intelligence to help inform us, your readers. There is a quality that you convey that delivers truth (as much as you can see) and care for those that are influenced by, and trust your perspectives and insights. That is why I chose to be a subscriber, and why I thank you for exposing when 'the emperor has no clothes.' May you and your loved ones be well." – Paid-up subscriber Cole Kaplan
"Yup... three times at least I almost bought
"Porter, I'm extremely proud to be one of your avid readers. Unvarnished truth, while wholly unpopular with the masses as it invariably gores someone's ox, is valuable beyond comprehension. While the masses are caught up in trivial things like presidential comments or whatever some celeb is doing, there are some who value truth as it leads to good decisions and prosperity. Operating from a position of lies and distortions leaves you with a portfolio full of Enron and GE.
"I can proudly say that I've recently become an Alliance Member. I thought the day I finally agreed to an Alliance Membership after contemplating the move for years would be my proudest day as a Stansberry subscriber. However, after reading your missive on GE, my estimation of Stansberry Research in general, and you in particular, is now officially off the charts!
"And not for the reason you might think. While your body of research on GE over the years is stellar, you get credit for that, but only marginally so. You've raised the bar to research so high that the GE stuff is EXPECTED, already baked into the price, as they say. The reason my estimation of you has grown so high is that you have been banned from CNBC for 15 years! That single act alone should tell anyone on the fence regarding a subscription that they should get on board.
"One day I'm going to present you with a cocktail of your choosing and shake the hand of the man that got banned from CNBC. Anyone that gets banned from a biased, myopic news source certainly has something worthwhile to say. This subscriber is all ears." – Paid-up Stansberry Alliance member Terry G.
"Porter, I am a new Alliance member... and now I learn that you're persona non grata at CNBC; you, sir, have ascended to even loftier esteem. The GE analysis is spot on as is your opinion on AAL, which is being 'managed to exhaustion' yet again." – Paid-up Stansberry Alliance member Steve T.
"Porter, the sad thing about GE & GM is the collusion of the powers that be to facilitate it. It grieves me to be so cynical, but watching what has been going on for the last 25 years – I don't believe anything that comes from the gov't or media.
"Additionally, I wouldn't hold a stock on which you do your usual thorough research and then issue a warning. You are offended by the lies and corruption. That is one of your admirable traits. I trust that. I'm not brilliant but I'm also not naive. Thanks for what you do. I've come to rely on it." – Paid-up subscriber Carl O.
"Porter, because of your predictions about GE and GM, I've made my investments elsewhere. I've tried to use Financial Professionals several times over the last 5 years, but with your company's analysis and risk quantification from TradeStops, I've beaten the experts every year on net return. Now, I'm doing all the investing myself and have over the last 20 years diversified beyond the stock market into
Regards,
Justin Brill
Baltimore, Maryland
January 22, 2018