My conversations with Apple and Microsoft...

My conversations with Apple and Microsoft... The 'repatriation' issue... Bush-era tax cuts don't matter... What's much worse than 40% taxes?... Doc chimes in (right on the money)... More QE... Shorting China...

 I (Dan Ferris) have been calling big tech companies asking about taxes on foreign earnings and the so-called "repatriation" of foreign-held cash. So far, I've spoken to Apple and Microsoft.

The idea that the big, bad tax man is preventing the "repatriation" of foreign-held cash is questionable, at best. It's my understanding that some companies – like my latest Extreme Value recommendation – routinely bring back every dollar they earn overseas and still earn plenty of money and create plenty of shareholder value.

 First of all, "repatriation" is the wrong term. The money has never been to the U.S., so there's no "re" anything. It's a question of foreign-earned cash and whether it comes over to the U.S.

One popular viewpoint is that the U.S. corporate income tax rate – at 35% – is generally higher than many foreign tax rates. So U.S. corporations will continue to deem much of their foreign earnings "permanently invested" overseas. And indeed, Apple is paying about 24% in taxes due mostly to lower foreign tax rates (or so the Apple rep implied).

According to this line of thinking, the tax issue will make it more difficult for companies to use the cash to create shareholder value, since they are bringing less of it to the U.S. The people I spoke with at Apple and Microsoft suggested a couple of hopeful scenarios for how that foreign-earned cash could end up benefiting shareholders… both of which struck me as total frickin' B.S.

 The gal I spoke with at Microsoft said spending $8.5 billion on the Luxembourg-based Skype, the leading Internet-based phone service provider, was an example of a wise use of foreign-held cash. But Microsoft shareholders would have done a lot better if the blue-chip software firm had brought its $54 billion in foreign-earned cash to the U.S., paid the taxes, and either distributed the rest to shareholders as a dividend or bought back stock.

You don't create lasting long-term shareholder value by fooling around with tax policy. You do it by creating sustainable rises in profits. Microsoft has done very well raising profits (contrary to the consistent expectations of naysayers). But it has failed to follow through by paying enough of its cash to shareholders. The company should be announcing a rather large dividend hike any day now. The larger the increase, the more I'll believe Microsoft understands what I'm telling you.

 As for Apple… the computer and consumer electronics giant has more cash abroad than any other U.S. company I know, about $87 billion. The company representative said Chief Financial Officer (CFO) Peter Oppenheimer expects some kind of lasting tax reform – not a mere "tax holiday" – addressing the foreign earnings of U.S. corporations. If the money were needed, it would be accessed, she said.

But she added, "lots of corporations are waiting" for the tax reforms expected by the Apple CFO. The implication was that the bulk of the money wasn't coming to the U.S. any time soon without tax reform.

At least she admitted Apple would tap the money if needed. But we all know Apple is making plenty of money and won't likely need it. That's bad for shareholders. They'd be much better off if the money were brought to the U.S., the taxes paid, and the remainder used to buy back stock or pay dividends.

 Sooner or later, big tech companies like Apple and Microsoft will figure that out. They've shown they're starting to get it by paying dividends… a rising dividend in Microsoft's case. I think they'll eventually figure it out the rest of the way... and that's why I've continued recommending cash-rich tech companies, like Microsoft.

 There's another huge misconception about taxes going around these days... the idea that the end of the Bush-era tax cuts will decimate dividend investors. If Congress doesn't take action, taxes on dividends will revert from the current 15% to regular income tax rates, which will top out at 39.6%. I addressed this topic earlier this year in Extreme Value...

First, as I reminded readers in March, you have much bigger problems than taxes, and you have them right now: "...since 1965, inflation has been three times worse than taxes for investors... The dollar has fallen about 86% in the last 47 years. Today, it takes about $7 to buy what $1 bought back then."

As for taxes, I said this in March...

 Dr. David "Doc" Eifrig joined the chorus yesterday in the latest issue of his Retirement Millionaire newsletter. He presented excellent data showing that changes in dividend taxes haven't hurt investors' ability to make money by owning great dividend-paying stocks. Doc concludes – refreshingly and correctly – "We have no reason to make any drastic changes to our investments based on the fear of higher dividend taxes. And as always, avoid the emotions of the crowds... They create bad habits for investing."

 Selling or avoiding great dividend-paying stocks because you're afraid of the Bush-era tax cuts expiring is like telling your boss you don't want a raise because income taxes are too high. It only makes sense if the tax rates go to 100%.

I don't like paying 39.6% any more than you do. I pay enough taxes to finance the lives of multiple welfare recipients and unemployment insurance recipients. But I know that the more inflation and taxes eat away at my savings, the more I need stocks that can help me compound my money at high rates. The dividend-paying stocks Doc and I recommend can do that. Contrary to what most investors believe about the importance of the Bush-era tax cuts, you need great dividend-paying stocks more than ever before.

 Taxes are just one of the great, giant bugaboos investors waste too much time worrying about... not unlike the constant jabbering about the Federal Reserve.

 Never one to leave the great bovine herd of market participants hanging for too long, the Federal Reserve today announced a third round of quantitative easing (QE3). It'll start a new program of buying $40 billion worth of mortgage-backed securities every month. That's new money it'll print.

It'll also continue "Operation Twist" to extend maturities of its holdings by replacing short-term bonds with longer-term debt. It'll also keep reinvesting principal payments from current holdings into new mortgage-backed securities. Altogether, the Fed says this'll result in about $85 billion per month of bond buying.

The Fed also said it would keep short-term rates between 0% and 0.25% "at least through mid-2015." The central bank previously said it would keep rates depressed through late 2014.

Why is the Fed doing this? Because that's its job… to print money.

 The Fed says its twin mandates are "price stability and maximum employment." That means it believes it can print money to keep the price of everything rising and it'll try to print enough money so the government can report higher employment statistics.

But reality has the poor Fed in a bind... Jobless claims rose 15,000 to 382,000 in the week ended September 8. That's the biggest jump in nearly two months. Economists surveyed by Bloomberg expected 370,000 claims.

We're supposed to believe that difference of 12,000 means something (which it does not). So Fed Chairman Ben Bernanke said unemployment was a "grave concern." Translation: "Reality is making me look bad. I have a very large printing press in the basement, and I mean to use it."

To no one's surprise, markets bounced higher on the Fed's announcement. The gold and silver bullion funds – GLD and SLV – were up 2% and 4%, respectively, as were many dividend-paying stocks familiar to S&A readers, including Wal-Mart, Johnson & Johnson, Coca-Cola, Procter & Gamble, and Cisco.

 As I've said before, like with taxes, any given Fed decision means a lot less to you than you think. You don't need to "game" Federal Reserve monetary policy decisions and sit by your TV waiting for news about them. Here's what you need to know...

The Fed creates inflation by printing money. That's a simple fact, and it's all you need to know. Stoking inflation is much easier to get away with politically than jacking up taxes. So you get a lot more of it than taxes. That's why, like I said above, inflation is three times worse than taxes.

You don't need to wait for the Fed's next utterance to know what to do about inflation. You just need to make sure you're investing for returns that'll beat inflation and increase the purchasing power enough to counteract the decline in purchasing power caused by inflation.

That's why I'm obsessed with recommending the world's greatest businesses whenever they get cheap. I know other S&A editors keep inflation in mind constantly, too. Helping you earn inflation-beating investment returns is one of the main reasons we're in business.

 Also today, the Labor Department reported the Producer Price Index (PPI) jumped 1.7% in August, the biggest move since June 2009. This is an inflation indicator... As the Fed tries to print the government's troubles away, the PPI ought to keep rising.

 As we've discussed many times in these pages, the slowdown in China is destroying shares of global mining stocks.

As the world's growth engine slows, these commodity companies, which ramped up production to meet growing demand, are stuck with high debt levels and lots of product... Meanwhile, China's not buying. We discussed the Chinese slowdown at length in the August 24 Digest.

 While shares of most commodity companies have fallen (including giants like Vale and BHP Billiton), Fortescue Metals may be the most vulnerable. Fortescue is the world's fourth-largest iron-ore producer. It has a market cap around $10 billion. And 98% of the company's sales come from China.

Master short-seller and noted China bear Jim Chanos, founder of the Kynikos Associates hedge fund, discussed Fortescue at the spring Grant's Interest Rate Observer Conference in New York City.

 Iron ore is one of the most common commodities in the world. It's a low-margin, "boring commodity." And it wasn't until the Chinese growth story dominated the world that iron-ore soared.

 We've presented the below chart a couple times in past Digests, but it's amazing... And gives a clear visual of how insane the iron ore market became. The chart (from Chanos' presentation) shows iron-ore prices going back to 1900. As you can see, the price declined for 100 years... until Chinese growth started making headlines…

 As the chart shows, the price of iron ore collapsed at the same time companies had ramped up production. Back to Fortescue...

When we first wrote about Fortescue in May, the company's market cap was $15 billion. And the company only had $6.4 billion in debt.

Today, Fortescue has shed $5 billion in market cap and ramped up long-term debt to $11.3 billion. And according to a report by the Australian Financial Review, a business publication, the company is asking its lenders to waive debt covenants for the next 12 months. The company confirmed the allegations in a statement...

"Fortescue is in the process of talking to its lenders about potential waivers in the event that covenants are put under pressure by extended volatility in the iron ore market," the company said in a statement released to the Australian stock exchange after the market closed.

Shares dropped 14% to A$2.99 on the news – the biggest decline since December 2008. Here's how shares have performed since we first wrote about Fortescue…

 New 52-week highs (as of 9/12/12): Guggenheim BulletShares 2015 High Yield Corporate Fund (BSJF), Cambria Global Tactical Fund (GTAA), Western Asset High Income Opportunity Fund (HIO), iShares iBoxx U.S. High Yield Fund (HYG), SPDR S&P International Health Care Fund (IRY), iShares Dow Jones U.S. Home Construction Fund (ITB), SPDR Barclays Capital High Yield Bond Fund (JNK), PowerShares Buyback Achievers Fund (PKW), Sequoia Fund (SEQUX), Abbott Laboratories (ABT), Huntsman (HUN), Brookfield Asset Management (BAM), BLADEX (BLX), Chevron (CVX), and GenMark Diagnostics (GNMK).

 Let's hear what you think about Bush-era tax cuts and the "repatriation" of foreign earnings... or whatever else is on your mind… at feedback@stansberryresearch.com.

 "I just wanted to give positive feedback about your customer service support. I spoke to Mary today. She was great. I am getting ready to move and wanted to make sure all my subscriptions were up to date.

"NO Porter I was not canceling just paying my maintenance fee and making my DailyWealth a yearly payment instead of monthly so nothing goes wrong during the move. Please make sure these great folks get credit." – Paid-up subscriber Kurt Smith

Regards,

Dan Ferris and Sean Goldsmith

Medford, Oregon and New York, New York

September 13, 2012