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US Multi-Nationals Bringing the bacon HOME!

For all this recent posting I've done on some of the bad going on, there are things always trying to keep the future positive. HOW??:
The American Job Creation Act, which allows multinational corporations to repatriate -- during the first taxable year after Oct. 22, 2004, which for most companies is 2005 -- foreign accumulated profits that would normally have faced double taxation. Under this law, U.S. companies may elect an 85% dividends-received deduction from a foreign subsidiary, with the remaining portion taxed at the 35% corporate rate, to leave a total 5.25% tax rate on the transaction.

What will happen when profits held overseas find their way home? For global capital flows, the expected magnitude is huge. Investment bank forecasts seem to be settling in at the $350 billion mark. A Feb. 11 report by JP Morgan already identified $112 billion in slated repatriation deals, including $38 billion by Pfizer (PFE), $14.5 billion by Hewlett-Packard (HPQ), and $10.7 billion by Procter & Gamble (PG), alongside Johnson & Johnson's (JNJ) widely publicized $11 billion plan.

Of course, CFOs are paid to push the limits on IRS rules, and we at Action Economics estimate that less than half of the $350 billion in repatriation will finance domestic investment plans that wouldn't have happened otherwise (the IRS claims that their review of each plan will guard against this). But if companies channel even half the $350 billion into the list of acceptable investment strategies for newly initiated projects, you're talking real money. Consider some of the biggest potential consequences:

Foreign exchange: Investment banks estimate that the majority of foreign subsidiary holdings are in dollars. Yet, we might assume that the flow to dollars in the foreign exchange market will reach $100 billion to $150 billion this year, making it about half the magnitude of 2004 foreign central bank intervention to prop up the dollar. THIS WILL STEM THE LOSSES THE DOLLAR IS SUSTAINING, AS THE CHART INDICATES

This shift in cash from foreign to U.S. books will increase debt supply abroad, though a portion of this supply rise would likely be in non-U.S. denominations. The upshot: The program will depress U.S. market yields but raise yields abroad. THE FED CAN CONTINUE TO MOVE SHORT RATES HIGHER BUT LONG RATES WILL FLATTEN AND SO WILL THE YIELD CURVE

The U.S. current account deficit: The Bureau of Economic Analysis is still determining how it will treat these jumbo dividend payments in the U.S. current account and GDP reports for 2005. It appears likely that the bureau will publish a statement alongside, or within, the 2004 fourth-quarter current account release on Mar. 16 that dictates the procedures it will apply for incorporating the repatriation payments. THE MONEY COMING HOME WILL OFFSET THE TRADE DEFICEIT.

BOTTOM LINE: this will add more wind to the US Economic sails. Look for some positive forces against the nightmarish bubble economy..... O

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