Wealthbuilder Stock Market Brief 4th

. May 2014.

A choppy earnings season but the bull remains firmly intact: It was a choppy earnings season but despite its volatility the bull trend remains very much intact.

The Dow Transports and Dow Industrials both are trending upward with higher highs and higher

lows and both indices are in congruence. (Though it must be noted that the Transports Index is

significantly stronger than the Industrials). In addition The VIX remains at historically low levels

and the Advance/Decline line shows no sign of any technical stress what-so-ever.

Despite this strength there are some specific areas of weakness.

One sector experiencing difficulty is technology. It would appear the gloss has definitely come

off silicon valley. Review the charts below of Facebook and Twitter. This weakness is asking

questions of this industry going forward. If a solid recovery is safely in place these media poster-

boys should be “booming”. The chart evidence presented proves they are not. I think the issue

here is overvaluation and the inability of future income streams to validate exorbitant P/E ratios.

This technological weakness is not company specific. The NASDAQ is indicating real technical

weakness. The chart below of the QQQ’s shows that the index is hovering about its 100 daily

moving average. If the price action breaks below this important average and then fails to

consolidate around the 200 daily moving average (which is only 5% lower), it will be very

worrying for the sustainability of this bull market, long term.

Another area of weakness is bio-tech which has technically entered a bear trend. While there has

been a 15% retrenchment from previous highs in the bio-tech ETF: IBB, I still anticipate further

correction.

As suggested in last month’s brief the consumer staples sector (ETF: XLP) has had a positive

season. This I believe is due to rotation by astute money managers into markets offering earnings

consistency. The consumer staples bear trend, which began last autumn, is definitely over.

In the general “blogosphere” for the past 2-3 months there has been numerous stories heralding

the “collapse” of the American real estate market. While these articles make for interesting

reading they are somewhat sensational. The market confidence in this sector remains strong as

can be observed by reviewing the Dow Jones Real Estate Index Fund ETF: IYR below. This year

this ETF is up 11% and technically the trend is powerful. I think this is one of the reasons the

FED is continuing with the QE tapering policy. I think Janet Yellen and her team are genuinely

confident the recovery has legs. Of course should this strength become too robust it will call into

question the continued low interest rate environment.

Of course when that mantra begins to be played out in the media all bets concerning future

market trend will be off ,from my point of view. But that is a discussion for another day.

Dow Jones Transport Index: Daily.

Dow Jones Industrials Index: Daily

Market Volatility Index:VIX: Daily.

A/D: Advance Decline Line: Daily.

Power Shares ETF: QQQ: Daily.

Facebook Inc: Daily.

Twitter Inc: Daily.

Bio-Tech ETF: IBB: Daily.

Consumer Staples ETF: XPL: Daily.

Dow Jones US Real Estate Index ETF: IYR: Daily.

America’s offshore profits:

A couple of months ago I was doing some research for an article on world economic instability.

One of the surprising facts I discovered was that nearly 15 trillion dollars of cash resides in off-

shore tax havens ranging from Bermuda, The Virgin Islands, The Isle of Man, Jersey, The Grand

Cayman Islands, Panama and (surprisingly) Ireland.

This “off-shore” reality is greatly motivated by the fact that even though the American corporate

tax rate is officially 35% approx., “international” branches (affiliates) do not pay this tax until

profits are repatriated. In the main most of the American Fortune 500 earn the majority of their

income internationally, thus in the main they pay no corporation tax on the majority of their

revenue.

Very often these trillions of deferred interest free tax loans remain “abroad” until “tax amnesties”

are arranged. Under such amnesties the 35% rate can be adjusted down to the region of 5%.

(Reference: 2004 Bush tax amnesty “Homeland Investment Act”. The adjusted rate was 5.25%).

Such “amnesties” make a mockery of the official American corporate tax rate.

If these corporations paid the real corporate rate, billions of additional taxes could be collected to

greatly improve America’s fiscal balance sheet. This would allow much needed revenue to be

invested in such areas as infrastructural development. This type of executive action would

ensure that real jobs were created on the American mainland; jobs that play real wages not

subsistence stipends.

A recent post on Zero Hedge picked up on this problem:

“The 15 US Companies With The Most Offshore Profits:

In the aftermath of several recent events such as:

i) the issuance of new mega batch of $12 billion in bonds by a suddenly domestic-cash strapped

Apple,

ii) the repatriation of $9 billion in offshore profits (and payment of $3 billion in taxes) by eBay,

iii) the flurry of pharma M&A deals and reverse mergers in which US companies are re-

domiciled offshore (in low corporate tax hosts like Ireland) to avoid paying US taxes,

iv) the outright use of offshore funds to buy offshore companies such as the GE-Alstom deal

which bypasses the US treasury entirely.

Two questions emerge: who has the most offshore cash, and who is most likely to be the next US

corporation to engage in one or all of the above listed transactions which merely seek to

optimize a company's offshore cash holdings.

The answer is shown on the chart below: this is the list of the top 15 US companies that have the

bulk of accumulated offshore profits, amounting to roughly $1 trillion in cash, which is never

subject to US taxation, and which financial engineers try to generate the highest shareholder

returns on.”

I think this matter of “un-repatriated” taxes is going to become more and more an issue as main

stream media begin to pick up on it.

Surely something is wrong when Federal America has an official business tax rate of 35%

approximately; a rate which is applied aggressively to land based mom and pop small businesses,

yet is never applied to the multi-trillion corporate sector.

Charts: Courtesy Worden Bros.

© Christopher M. Quigley 4th

. May 2014.