Investors have been hearing for some time now about the hordes of cash being stashed on U.S. corporate balance sheets. In a recent column, The Wall Street Journal’s Jason Zweig explains a big part of why the cash stockpiles are so high — and why that cash might not be benefiting investors anytime soon.
“U.S. companies are taxed at up to 35% when they bring home the earnings generated through the operations of their overseas subsidiaries,” Zweig writes. “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.”
Zweig says the U.S. is the only major country that employs such taxation tactics. And, he says, one study has found that companies’ efforts to avoid the repatriation tax often end up making companies less efficient. Companies are continuing to build up cash outside of the U.S., while at the same time borrowing large sums within the U.S., since interest rates are so low. “Investors should remember that a big chunk of cash on the balance sheet may look tempting but isn’t necessarily there for the taking,” Zweig says.
John Mauldin says markets are overreacting to the turbulence in the Middle East. Mauldin tells Bloomberg that Libya is not a major oil provider for the U.S., and that “in the grand scheme of things all of this will pass”. He also says the unrest could actually have the odd effect of helping balance the U.S. fiscal deficit.
David Dreman says stocks are generally cheap, but he’s still expecting that the U.S. will be jolted by a “really major dose of inflation” at some point down the line.
“I’m not talking about at present — this could be two, three years out,” Dreman tells Forbes.com. “But I think we’re going to have a really major dose of inflation. Will it get as bad as it was from 1977 to 1981? That horrendous period of inflation saw prices go up, on average, something like 9% a year? I don’t think we’ll get up there. But I think we might have some pretty major inflation ahead. That has major implications for both the stock and the bond market.”
Dreman says he’s structuring his portfolios with that in mind. “Again, it’s a few years out, but we might have some pretty serious inflation,” he says. “Stocks are one of the best places to be.” Dreman says history shows that stocks do well during inflationary periods. “They dip when you first see inflation hit,” he says. “That’s happened numerous times here. And it actually happened in a lot of other countries that had hyper inflation. But then the markets start moving up again.”
Yale Economist Robert Shiller says he’s more worried about the housing market than colleague Karl Case. Shiller, who told reporters that he sees a “substantial” chance that real home prices will drop another 15% to 25%, discusses his outlook on Bloomberg. Shiller also talks about the broader economy, and says that the turmoil in the Middle East adds to the chance of a double-dip recession.
While the market is up close to 100% over its March 2009 low, top value manager Donald Yacktman says he’s still finding bargains.
“We have bought Apollo Group — a private universities company — and H&R Block, which does tax preparation work in the US,” Yacktman tells the Financial News. “While the market is a lot higher than it was two years ago, it is unique to see so many large profitable companies selling as cheaply as they are.”
Yacktman’s new purchases have something in common: “They were all cheap,” Yacktman explained, adding, “We very, very rarely sell on a price decline. It’s almost always after a rise in price.”
Each week, we take a look at which stocks John Reese’s Validea.com Guru Strategy computer models have newfound interest in, and which they have soured on. Here’s a look at some of the stocks John’s strategies have upgraded or downgraded today.
Karl Case, co-creator of the S&P/Case-Shiller housing indices, talks about the recent housing data with Bloomberg. Case says it now appears the upturn in the housing market last year was a result of government subsidies. He discusses the factors impacting the market, and says that, while the market has been struggling, there are signs that sentiment is improving.
In a lengthy joint interview with Advisor Perspectives and GuruFocus.com, Morningstar Fund Manager of the Decade Bruce Berkowitz offers his take on the market and several of his main holdings.
Berkowitz, who went heavy into financial stocks after the financial crisis, says he remains confident in his financial holdings. “Loans created and underwritten since 2009, or even at the very tail end of 2008, are good loans, well documented, with better credit quality, better yields, and better fees,” he explains. “You have this digestive period of bad loans, and at the same time you have the ingestion of good loans. …What I’m getting at is enough time has gone by for seasoning. The banks have better balance sheets than I can remember.”
Berkowitz also talks about Europe and its debt problems. He says there isn’t a scenario for Europe that particularly scares him. “There isn’t, given the companies,” he says.
Top fund manager Steven Romick says large-cap stocks are offering better values than other options, and is positioning his portfolio to weather a pullback.
“Large-cap companies are a much greater value, certainly than bonds,” Romick tells the Los Angeles Times, The Times says Romick has about 60% of his portfolio in stocks, “dominated by big names such as Wal-Mart, Occidental Petroleum Corp., Amgen Inc. and PetSmart Inc.” He has 23% of the fund in cash, with the smallest portion in bonds.
Romick tells The Wall Street Journal, meanwhile, that the economic recovery is real, but could come with repercussions. “The recovery is real; there are very real reasons why there is growth,” he says. “There will also be very real ramifications for the manner in which that growth was achieved.”
Mark Headley, who produced a strong track record with the Matthews Pacific Tiger Fund, says many American investors don’t have a good approach to international investing. Headley tells WealthTrack’s Consuelo Mack that while investors tend to take a solid long-term approach when it comes to U.S. stocks, they take a much more “flavor-of-the-month” approach to international stocks, jumping on whatever happens to be hot. Headley says now is a time to be cautious on Asia, explaining that he sees no need for investors to run into Asian stocks, but no reason to run away from them, either. Headley also talks about the importance of diversification, and discusses overall strategy.