What is Tax Inversion?
- What is Tax Inversion? A topic certain to be divisive leading up to and including this year’s mid-term elections is tax inversion. This is defined by Investopedia as “reincorporating a company overseas in order to reduce the burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.” Here’s how it works – a foreign corporate entity buys an American domiciled company with the shareholders of the domestic company becoming shareholders of the foreign entity. The result would be the relocation of the legal location of the company from the United States to another lower taxed country. It is worth noting that the physical structure and operational structure generally do not change. According to Bloomberg, the recent $54.8 billion deal between U.S. domiciled AbbVie (ABBV) and U.K. domiciled Shire Pharmaceuticals (SHPG) will reduce the effect tax rate of the combined entity from 22% to just 13%, saving the company billions of tax dollars and, according to company officials, making it more competitive abroad. This merger, as well as others over the past several months, has heated up the discussion between Democrats and Republicans as well as between many Americans. In fact this past week the debate was again ratcheted up as President Obama responded to a question by CNBC Senior Economics Reporter Steve Liesman during an exclusive interview. Liesman asked the President: that although not illegal, was the process of tax inversion unpatriotic or un-American? President Obama responded, “… what I’m saying is that companies thrive in the United States in part because they benefit from the best university system in the world, the best infrastructure – although I’d like to see us do a little better on infrastructure. You know, there are a whole range of benefits that have helped to build companies, create value, create profits. For you to continue to benefit from that entire architecture that helps you thrive, but move your technical address simply to avoid paying taxes – is neither fair – not – is it – something that’s going to be good for the country over the long term. And this is basically taking advantage of tax provisions that are technically legal – but I think most people would say if you’re doing business here, you’re basically still an American company, but you’re simply changing your mailing address in order to – avoid paying taxes – then you’re really not doing right by the country – and by the American people.” We agree wholeheartedly with what President Obama had to say regarding this matter. However, we will also note that many individuals move to Florida from New York for tax reasons; many corporations move to Texas from New York or from Texas to New York for tax reasons; many corporations are given tax incentives to move to one state versus another; heck, Warren Buffett’s secretary pays a higher marginal rate of tax than he does and on it goes. The bottom line is that both Democrats and Republicans have blocked meaningful individual and corporate tax reform for perceived political gain and until this stops, tax inversions of one kind or another will continue. We suggest politicians get to work and stop shirking their duties which the recent proposal to outlaw such inversions is such an act. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates , Please call 518-279-1044.
- Fed Chair Janet Yellen - "Noisy Data" The Open Market Committee of the Federal Reserve (FOMC), the body that determines the direction of interest rates, concluded its regularly scheduled two-day meeting Wednesday, June 18th. Voting members decided to keep the target level at which member banks loan excess reserves to each other at between zero and 0.25%. This rate, known as the Federal Funds rate, has been at this historically low level since the Fed, under then-Chair Ben Bernanke, lowered it from a target of between 0.75% and 1.00% on December 16, 2008, in order to stimulate economic growth. Also referred to as easy or accommodative, the current policy was set in place to combat the recessionary spiral the economy was tumbling into during the Fall of 2008 as the housing crisis set in. The above is of note due to the dual mandate that the Fed pursues. As amended by Congress in 1977 the Federal Reserve Act stating that “the Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the economy and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” Here it is in English – the Federal Reserve wants sustainable economic growth accompanied by moderate inflation in order to continually stimulate, but not overheat demand. At the current time this dual mandate allows the Fed to define the sustainable pace of economic growth at a real rate of 2.00% (Nominal of 4.00% less inflation) and an inflation rate of 2.00%. At the moment, in part due to the 2.90% drop in the first quarter which many (including us) view as an anomaly, year-over-year economic growth as defined by Growth Domestic Product stands at 1.50%. However, there exists a conflict on the other side of the dual mandate. Janet Yellen, the current Chair of the Federal Reserve looks closely at the Commerce Department’s Personal Consumption Expenditures index which has risen 1.60% over the past year. In addition to this, the Consumer Price Index, a measure of inflation at the Retail Level has risen 2.10% year-over-year. Therefore, the Fed should be reaching a point where inflation is becoming a concern. However, should the Fed begin to raise interest rates to choke off any inflationary tendencies, conventional thinking is that economic growth will begin to stagnate (even more than it has already!). During her press conference following the FOMC meeting, Ms. Yellen observed that “recent reading on, for example, the CPI index have been a bit on the high side, but I think it’s – the data that we’re seeing is noisy. I think it’s important to remember that, broadly speaking, inflation is evolving in line with the committee’s expectation.” Yellen observes that “the Committee has emphasized that we have the 2 percent objective for, as a longer-term matter, for PCE inflation and we would not willingly see a prolonged period in which inflation persistently runs below our objective or above our objective.” The words “longer-term” and “prolonged” in the preceding paragraph provides Yellen and the Fed with enough wiggle room to keep interest rates low even if inflation temporarily moves above 2.00%. We have noted on many occasions that we think this is an appropriate approach as inflating the economy to a certain extent is the safest way to exit this economic malaise. We also believe that this provides a floor under current stock market levels and that the risk/reward ratio remains skewed in favor of continuing to assume risk in your portfolio. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.
- World Cup Fever Once every four years, the US gets gripped by a mild case of World Cup Fever. We stay loosely in touch with results and spend some of our time wondering about Belgium-Ivory Coast while the rest of the world “white knuckles” every set piece and yellow card. Americans tolerate soccer (AKA futbol), while the rest of the world basks in its glow. Why is this? Well, we grow up with baseball, American football and hoops with increasing doses of hockey and lacrosse. Soccer is not engrained in our psyches like it is in Latin America and Europe. Americans find soccer low scoring, boring and hard to understand. American investors can learn something from the rest of the world’s soccer fans. Investing should be like a soccer match, not a basketball game, for the vast majority of average investors. Good portfolios take a while to construct and require patience . Like a well constructed soccer “run,” they oftentimes don’t produce results like a soccer game (some anti-soccer folks would say they NEVER produce results). As a company, we at Fagan Associates emphasize diversification and patience to an extreme, but we feel these attributes enabled investors to weather the calamity of 2008 and enjoy the results of 2013. So, enjoy the soccer, the pageantry and tradition and remember that many times good portfolios can temporarily produce no positive results. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.
- The Miners are Dancing Is this the long awaited migration from bonds to stocks, where interest rates run significantly higher? The stock market rallies as the run up in rates coincides with an improving economy. We have witnessed numerous head fakes over the past year, where the ten-year rate darted higher and the talking investment heads spouted their mantra of “bonds to stocks” rotation. The latest “GOOD” economic news has been the improving sales numbers from automakers. Several sources now project US car sales will approach 17 million annually, spurred on by transformative vehicle technology and (more importantly) an aged car population. Many times there have been so called “tells” signaling higher rates and an improving economy that it is as if all the canaries are keeled over and the miners remain safe and happy deep underground. We have witnessed a stronger utility average, a rallying ten year and weak job numbers all pointing to a stock market correction, yet the market has ground its way higher. Conversely at times we have seen stronger rates supposedly signaling that improving economy, yet somehow rates have remained lodged between 2.5% and 3% on the ten year US treasury. Our biggest concern is this: “ what’s an average investor supposed to do”? What should she/he listen to? What “breaking news” (isn’t there always breaking news?) deserves attention? Here’s our game plan for that maturing CD or that 401k that you have to rollover, or that inheritance that needs a home. IGNORE that short term mentality that sensationalizes daily activity and glorifies trading. It's your money and it shouldn’t be treated like a wad of bills lodged in the pocket of your khaki short- you’ve worked for your portfolio. Our theories are to be disciplined, be diversified and only invest money that you aren’t going to need in the short term. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc . or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.
Reasons for a Historically Weak Economic Recovery
To understand why the current economic recovery has been so weak one must first examine the causes for the preceding recession. First and foremost, let us define a recession in terms that are generally accepted within economic circles, as two consecutive quarters of negative growth in Gross D
Investing in the summer months
Investors Should Not Be Traders
Jack Bogle, founder and retired CEO of the Vanguard Group, was recently honored on the business network CNBC as being one of the “CNBC 25: Rebels, Icons and Leaders.” The list, compiled as a way to commemorate the network’s twenty-five year anniversary, identifies a “ranked list of people tha
The Apple Split
Last week Apple announced a 7-1 stock split, along with its earnings, which coincidentally beat estimates. The split was met with a "ho-hum" mentality. Various investment people pointed to the accounting non-event of a stock split and that the day after a stock split, investors in Apple would feel
The Trouble with Amnesia
Last week an investment advisor Recommended that investors needed to erase their mistakes from their memory in order to be successful in this market. This might work well in real life - erase that powder blue tux worn to the Junior prom or the 20 pounds gained during freshman year at college
Don't Be Smug
Are you thinking that the market is set for the foreseeable future and indices will make and exceed recent highs? Do you talk about stocks with friends and your purchases of "POT stocks" and the 75% gains that you immediately realized? Do you feel smart??? In August of 2011, I was on vacatio
Costly Retirement Plan Mistakes
With the migration from company sponsored Defined Benefit Plans to Defined Contribution Plans such as a 401(k), 403(b) or Deferred Compensation (457), it is critical to choose the correct plan, allocate your assets according to your objectives and designate the appropriate beneficiary(ies). H
Rollover - Size Doesn't Matter
We usually start our commentary with some witty remark, comment or reference (witty in our minds anyway). Writing and blogging about IRAs have us caught up in the rules and the seriousness of billions of investor’s dollars stranded in former employer’s 401ks and retirement accounts. An IRA i
We believe in diversification.Too much is made in the investment world of the BIG CALL. Investment gurus celebrate the hedge fund managers who made killings shorting the mortgage market in 2008 or those nailing the dot.com bubble of the late 1990s, but when those same managers miss markets and mo
Ignoring the Noise
The financial media is permanently on the prowl for the next asset bubble. Everyone wants to make the big call and nail that next bubble. Unfortunately nailing “false” bubbles over the past 5 years has kept many an investor on the sidelines. Bubbles ARE deadly and we don’t want to minimize t
Happy Anniversary S&P 500!
On March fourth, 1957, nearly 57 years ago, the Standard & Poors 500 (S&P 500) was introduced to track the performance of the largest five hundred publicly traded companies domiciled in the United States. A market-weighted index, the S&P 500 has become the barometer of American stock m
6 Investment Moves to Make Now
2014 is well underway, but its never too late to follow through with financial resolutions. If you havent done it already, now might be a good time to consider conducting a personal financial check-up.Here are six things you might want to closer look at. 1. Rebalance your portfolio. Let us as