As many of you have heard by now, Burger King is moving north of the border.  This was a strategic move not for business purposes, but rather from a tax stand point.  The US took strides last week to make moves like this (tax inversions) more difficult.

So what is the big deal when a US corporation moves out of the country?  Taxes, taxes, oh and did I mention taxes?  Corporations based in the US pay taxes at 39% on earnings regardless of the country where the profits were derived.  This tax rate is higher than that of neighboring countries and is twice as high as the rate charged to European corporations.

If a company derives a large portion of their business from outside our borders, it is in their interest to make the move.   As a result they would only have to pay 39% on the earnings derived from their US operations.  This practice has been on-going for decades.  Recent activity has raised action from the government attempting to close merger and acquisition (M&A) loop holes that provide the opportunity for companies to complete a tax inversion.

In theory the tax savings is then passed on to the shareholders in the form of a more profitable company.  The reduced tax revenue for the US also could be viewed as a stunting of future prospects domestically for that corporation.  If the government truly wants to reduce inversions they will likely have to look at deterrents as well as adjusting corporate rates in order to truly prevent this activity going forward.

The announcement of M&A reform for inversions may have prompted some of the volatility seen last week, however most of it was derived from a sharp fall in durable goods orders, weak existing home sales (relative to expectation), strong jobs data, and weak data out of Europe.

Durable goods orders fell 18.2% in August[1], mostly expected due to a heavy increase in July, however the August decrease was larger than anticipated.  This could put a damper on expectations for Q3 GDP, currently most estimates are projecting between 3% and 4% annualized.  This would be an incredible pace given Q2 GDP was revised up to 4.6% last week after a -2.1% showing for Q1[2].

Housing provided mixed data with new home sales surging 18% and existing home sales falling 1.8%[3].  You could look at those numbers and say that it is more good news than bad… When we put that into actual units that data is not as good.   New home sales increased by 77,000 units and existing home sales decreased by 90,000 units[4]… Essentially a wash.

Strong jobs data with the 4 week average sitting at 298,500[5] reinforces the theory of a healthy (or mending) economy.  Good news, yes, but potentially bad news if it pushes up the time table of when the Federal Reserve may start increasing short term interest rates.

European PMI data weakened in August for both services and manufacturing, 52.8 and 50.5 respectively (over 50 indicates expansionary)[6].  While expansionary in nature there are several countries in the 40’s and the falling rate of expansion raises concern that they will shortly fall into contraction.  This could lead to further action by the European Central Bank (ECB).  In reality, recent activity by the ECB will take a few months of data before it can be tangibly rated as effective or ineffective.

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[1] www.mfs.com

[2] www.investing.com

[3] www.mfs.com

[4] www.investing.com

[5] www.putnam.com

[6] www.investing.com