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Hidden Signs of Strength

 
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arthur
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PostPosted: Fri Dec 17, 2004 10:43 am    Post subject: Hidden Signs of Strength Reply with quote

Hidden signs of strength

By Mark Hulbert, CBS.MarketWatch.com
Last Update: 12:01 AM ET Dec. 17, 2004
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ANNANDALE, Va. (CBS.MW) -- A number of newsletters argued several weeks ago that, because November was such a good month for the stock market, December was likely to be too.

The reason the markets exhibit momentum, as I quoted Ron Rowland of the All Star Fund Trader newsletter in a recent column: They detect trends before they are widely known among the investment public. As a result, it is often the case that "we only discover in hindsight" what is causing a particular sector to move in a certain direction.

This certainly appears to be the case with a development that, up until the last couple of weeks, relatively few investors had focused on -- and the bullish significance of which even fewer appreciated.

This development was the passage on Oct. 22 of the American Jobs Creation Act. Its bullish implications were brought to my attention by Madeline Schnapp, a senior research analyst at TrimTabs Investment Research, and editor of the TrimTabs Personal Income newsletter.

The particular aspect of this legislation that has piqued Schnapp's interest is the one that "allows U.S.-based corporations with overseas operations to repatriate as much as $500 million per year in overseas income at a 5.25 percent tax rate rather than the usual 35 percent tax rate" -- provided that the companies use the repatriated money for certain purposes, "such as job creation and capital expenditures."

If this provision of the new law doesn't immediately jump out at you as having strongly bullish implications for the U.S. stock market, you're not alone. Few have. But Schnapp tells me that after "slogging through" the 650 pages of this legislation, she believes that it "has the potential to be one of the most bullish liquidity factors to impact the stock market next year."

That's because the amount of money that could be repatriated is substantial. Schnapp cites research conducted by Morgan Stanley that estimates that this amount could be as much as $420 billion.

To be sure, not every firm that can repatriate foreign income will choose to do so. But it's clear that many will. In recent SEC filings, for example, Intel (INTC: news, chart, profile) announced that it may repatriate as much as $6 billion of foreign income, and H. J. Heinz (HNZ: news, chart, profile) announced that it may repatriate up to $1 billion.

Based on her research, Schnapp guesses "that approximately $150 billion" of the $420 billion total will be repatriated.

Another imponderable is how the companies will spend their repatriated income. Schnapp notes acerbically that, the legislation's avowed purpose notwithstanding, "no companies have indicated that they intend to use repatriated foreign income to create jobs."

However, in addition to job creation, the legislation also allows firms to spend their repatriated income to "purchase equipment, pay down debt, buy back stock, increase dividend payouts, or fund pension obligations." And if these other companies spend the money on any of these things, Schnapp argues, "it would be particularly bullish for the stock market."

Schanpp hazards a guess that, of the $150 billion that is likely to be repatriated, "$50 billion could find its way into the stock market." To put this sum in context, Schanpp points out that it's equal to about "one month's worth of corporate buybacks."

That's not enough to turn a bear market into a bull market, of course. But Schnapp believes that it is enough to have a substantial near-term impact on the stock market's level.
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