Tag Archives: economy

The Economy Needs Immigrants (Really)


There’s a reason you’ve been hearing about immigration reform from Silicon Valley entrepreneurs: it’s vital to our economic interest.

There’s also a reason you’re hearing dismay and disappointment from this quarter: just two weeks ago, there were some positive indications from Republicans, who acknowledged that foreign-born entrepreneurs and highly skilled workers should stay in the U.S. Last week, that very positive step forward was utterly reversed – and now it seems likely that no movement on any aspect of immigration reform will come this year (with more than ten months left in 2014, no less!). While it’s worth noting that Senator John McCain has shown leadership on this issue, continuing to push for GOP movement, he is a lonely voice – and giving up on a year’s worth of productivity in February is the height of cowardice.

It’s a shame – because America invests so much in really smart, gifted and motivated foreign-born individuals. In fact, to survive, universities are dependent on foreign students in the science, technology, engineering and math (STEM) disciplines that are so essential to our economy. More than 70 percent of electrical engineering graduate students are from other countries – as are 63 percent of those in computer science, 60 percent in industrial engineering, and 50 percent in chemical, materials, and mechanical engineering, according to a 2013 report. Shouldn’t the United States reap the benefit of that significant investment in education and training?

Entrepreneurs like me want to build and sustain strong engineering and product cultures. It’s not a question of rejecting American citizens, either, in favor of immigrants: our country simply does not churn out enough homegrown talent to meet our needs. If we’re unable to fill these positions with qualified talent, the jobs stay vacant. Our companies then lose ground we cannot afford because we’re making do with short-staffed teams – plus expending considerable time and energy attempting to lure the best away from others. It’s a frustrating, wasteful, and expensive exercise – especially when we could have ample access to very good, very willing, highly educated people. But, of course, they are too often caught in the sticky web of Byzantine immigration policies.

There’s every indication that very skilled foreign-born talent drive innovations that are incredibly beneficial to our economy. 50 percent of PhDs who work in math and computer science jobs – and 57 percent who work in engineering – are immigrants. What do the founders of Google, Yahoo, eBay, Sun Microsystems and Intel have in common? You guessed it: born outside the U.S. Companies like these employ more than 10 million people around the world and generate impressive annual revenue of $4.2 trillion.

The United States rightly thinks of itself as the leading nation of innovators who turn dreams and ideas into reality, revenue and jobs. But without some additional movement on immigration reform – and soon – that position will be much more challenging to maintain.

Photo: Shutterstock

Posted by:Michael Fertik

Bitcoin Is About Convention


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BTC and USD are not as different as you think

Money is valuable because other people use it. In other words, you could also say currency is a convention — currency is valuable because large numbers of people tacitly agree to exchange it, for a variety of goods they hold.

What is less obvious is that the value of other goods in our lives is also a matter of convention. Our diplomas and job titles are only valuable because they meaningfully inform our peers and managers about our skills. Our hobbies and interests are also conventional. Few of us would learn to play a guitar or shoot a free throw, if it didn’t let us interact with the people we spend time with in a way that we like.

Even though there is intrinsic value in being able to throw a ball with coordination, or produce melodious sounds using a musical instrument, we don’t choose our activities based on those attributes. Instead, we follow the guidance of friends and influencers, who tell us about activities and characterize them as either appropriate or inappropriate (tennis, basketball, or lacrosse? planking, owling, or vadering?).

Even capitalism, like other value systems, is a convention. It’s a tacit and often unconscious agreement among most people in the world, that our lives should be dedicated towards creating goods and services which we can exchange with others on the free market. If the vast majority of the world’s population operated under a value system incompatible with economic exchange, you and I would find an economic worldview a lot less appealing.

As humans, we are fundamentally memetic beings. We are only relevant to the world insofar as we can influence those around us, so we make the choices that allow us to best relate to others. Yet we often underestimate the power of convention. We don’t realize how much it determines our tastes and activities, because for most of us it’s more efficient to think of conventions as absolutes.

As a convention, Bitcoin has a lot going for it. It’s orders of magnitude more widely used than anything else which could do its job of facilitating anonymous transactions. It has received widespread publicity, none of which has been damningly negative. Another cryptocurrency would be very unlikely to emerge unscathed as BTC has today. A few other reasons: by now, the currency has a relatively diverse base of both users and speculators, it’s a solid piece of engineering, and at least today, it’s still very similar to cash, so government regulators like the FinCEN do not threaten its legitimacy.

Many people have been writing about Bitcoin from an economic perspective, looking at characteristics like deflation and volatility. The economic thinkers have generally disregarded these social forces. They usually recognize that Bitcoin is not just about economics, but their perspective disregards the very social forces that enabled Bitcoin’s rise. For the foreseeable future, they are far stronger than any theoretical economic concerns.


If Bitcoin is viable as a convention, remember that conventions don’t have to be global to work. Because of limited supply, the price of BTC will never go lower than the amount of money some subset of the world wants to put into it. If the rest of the world considered Bitcoin to be worthless, barring volatility, its users could still rely on it as an exchange medium.

There are still a few reasons the currency could go away.Governments could still pursue regulation or coordinated legal action against the ecosystem. The community could come up with a currency that doesn’t have the deflationary properties of BTC. But doing so in a concerted manner is extremely difficult. Most Bitcoin opponents I’ve heard from have disregarded the fundamental forces making this cryptocurrency successful — and so, my guess is that it will be around for awhile.

Written by

Hacker at AngelList, on leave from Princeton. Make art and practice it.

Updated December 18, 2013
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Chinese investors betting on Detroit comeback, buy up real estate !!!


The following excerpt is from Fox News!

Downtown Detroit is home to one of the worst housing markets in the country, as prices of homes have collapsed and foreclosures have soared in the city’s depressed economy.
But some Chinese investors hungry for real estate are hoping Detroit’s losses will be their gain. After Detroit filed for bankruptcy July 18, Motor City property has been a hot topic on China’s social media platform, Weibo, according to a Quartz.com report.
News of the bankruptcy, coupled with a Chinese TV report in March that claimed you could buy two houses in Detroit for the same price as a pair of leather shoes, has piqued investors’ interest.

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Working Your Way Up In The Fast Food Industry? Sorry But The Statistics Are Against You! (STUDY)


The following content is from the Huffington Post!

When McDonald’s CEO Don Thompson said Wednesday that his company has “always been an above-minimum wage employer,” he pointed out to Bloomberg Television’s Betty Liu that 40 percent of McDonald’s executives started as hourly employees. McDonald’s, he argued, is one of the premier employers for entry-level workers searching for meaningful careers.

“We’re about providing opportunity,” Thompson said. “When we can help people to be able to have viable income, we’re going to continue to do that and we are going to provide opportunities so that a person can rise through the system and gain greater and greater wealth.”

But according to a new study by the National Employment Law Project, the opportunity in the fast-food industry for a burger flipper or cashier to rise up the corporate ladder remains exceptionally rare. Less then 2 percent of fast-food industry jobs belong to the executives cited by Thompson, while more than 89 percent of all jobs in the fast-food industry belong to cooks, cashiers, delivery workers and other non-managerial workers, the NELP study found.

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Thirty Year Mortgage Falls Below Five Percent!


The following excerpt is from USATODAY!

WASHINGTON (AP) — Average rates on fixed mortgages fell for the second straight week, a welcome sign for homebuyers hoping to lock in lower rates that had spiked earlier this month.

Mortgage buyer Freddie Mac says the average on the 30-year loan fell to 4.31%. That’s down from 4.37% last week but nearly a full percentage point higher than in early May. The rate reached a two-year high of 4.51% two weeks ago.

The average on the 15-year fixed loan declined to 3.39%, down from 3.41% last week

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A Year After Its Debut, Facebook Still Looks Overpriced


Is it time to buy Facebook FB +0.46% ?

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A year after its turbulent public debut, shares in the social-networking giant are still 31% below their offering price. Yet, with virtually no earnings over the past 12 months, Facebook’s price/earnings ratio is in the stratosphere—more than 2,000-to-1, in fact—compared with just 19-to-1 for the Standard & Poor’s 500-stock index.

Many of Facebook’s defenders try to wriggle out from this damning comparison by arguing that the company—like most firms in the wake of their initial public offerings—is sacrificing earnings in pursuit of increasing market share. That’s all the more reason to pay attention to a valuation model that is based on sales rather than earnings.

That model also finds that Facebook is a lousy investment for the long term. If it is even close to being correct, Facebook will prove to be an even bigger disappointment to investors than it has already been in its first year as a publicly traded company. After going public at $38 a share, Facebook’s stock plummeted to below $18 before recovering to its current price of $26.25.

Facebook declined to comment.

Behind this disappointment are a number of broader concerns. It very much remains to be seen, for example, whether Facebook can come up with a profitable advertising model for the mobile devices that are fast becoming the dominant way in which its content is viewed by users. Advertising growth in recent quarters has been anemic, and the company has been dogged by a number of privacy concerns.

None of these issues is taken into account by our sales-focused valuation model. The particular version of the model used here was suggested by Jay Ritter, a finance professor at the University of Florida and one of academia’s leading scholars on the IPO market. He says it is broadly similar to the valuation approaches used by many analysts when assessing startups and IPOs.

The model makes just two assumptions: The company’s revenue over the five years following its IPO will grow at the average pace of other companies post-IPO, and on its fifth birthday as a publicly traded entity, its price/sales ratio, a common valuation yardstick, will also be in line with the median.

We know how fast past IPOs grew because of research conducted by Prof. Ritter and two colleagues at the University of California, Davis—Martin Kenney, a professor in the Department of Human and Community Development, and Donald Patton, a research associate in that department. They analyzed 1,700 IPOs in the U.S. between 1996 and 2007, specifically excluding any that were spinoffs, buyouts or rollups, or those older than 30 years when going public, in order to focus on genuinely new firms.

On average, the researchers found, the inflation-adjusted revenue growth rate of these companies in their first year after their debut was 56.6%. This blistering pace gradually declined in each successive year, so that in its fifth post-IPO year the average company’s revenue grew by just 8.6%.

Over the entire five years, the average IPO’s revenue was 212% higher in inflation-adjusted terms than when it came to market. On the assumption that Facebook can match this average growth rate, and assuming 2% inflation, its annual revenue on its fifth birthday will be $11 billion. It was $5.1 billion in 2012.

The other input to the valuation model is the price/sales ratio that Facebook will have four years hence. An appropriate control group to which to turn for guidance are the stocks in the Dow Jones U.S. Internet Index, excluding foreign companies. According to FactSet, the median price/sales ratio of the companies in that industry on their fifth birthdays was 5.87-to-1.

With those two inputs, the model calculates that Facebook’s total market cap in May 2017 will be $64.5 billion, equivalent to a stock price of $26.66—barely higher than its current price. If the model’s estimate is correct, therefore, Facebook’s stock will produce close to a zero return between now and then.

There are just two ways in which Facebook can escape this dismal fate. One would be by growing faster than the average past IPO did over its first five years.

That’s certainly possible, of course. The early signs aren’t encouraging, though. Facebook’s revenue since its public debut has risen 37%, less than the 57% first-year revenue growth rate of the average company going public.

What’s more, Prof. Ritter points out, Facebook was a more mature company, in terms of sales, when it went public than the typical IPO, and younger companies often grow the fastest.

The other way for Facebook’s stock to be higher than $26.66 in May 2017 would be for the company to trade at a higher price/sales ratio. Once again, that is certainly possible. But note that the model already makes the generous assumption of comparing Facebook only to other Internet stocks, which typically have a higher price/sales ratio than stocks in other industries.

The S&P 500′s price/sales ratio, for example, is 1.5-to-1, only a quarter as high as what the model is assuming for Facebook on its fifth birthday. That means Facebook has its work cut out for it if it is to beat the model’s projections.

Even if it doesn’t, however, Prof. Ritter hastens to add, it should not be taken as a criticism of Facebook itself. “It’s entirely possible for a company to have solid growth prospects while its stock is overvalued,” he says. “Facebook could very well be just such a company.”

(VIA. Wall Street Journal)

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Is America In Permanent Decline?


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During a recent interview with a big Los Angeles-area newspaper, a reporter asked me, “Is America now in permanent decline?”

My answer was, “No.” Our country is not in permanent decline. But I’m concerned that our leadership is.

Actually, our leadership in Washington is failing miserably, and there’s little evidence they’re turning it around. Unemployment remains high and is basically stuck there, and GDP is growing at a pathetic 1% — so the country is failing on two of the most important economic metrics. The number of new business startups is alarmingly low, and the pace of startups is the one metric that foretells the rise or fall of America.

Here’s the problem: The very survival of America depends on job growth and GDP. But what are the White House, Congress, and all of the media and talking heads focusing on? Guns, immigration reform, and foreign affairs. Bluntly, none of these issues have much to do with the core drivers or root causes of America’s potential decline.

Worse, Washington and the media are totally out of touch with the public: When Gallup asked U.S. citizens to name the country’s most important problem, the top-of-mind answers were overwhelmingly either the economy in general or unemployment and jobs — 42% between the two responses. Just a paltry 4% named guns as the top problem, and another 4% said immigration. You read that right. And foreign affairs, namely concerns about North Korea, foreign aid, and “focus overseas” came in at 6% total.

What’s more, the vast majority of Americans want Congress and the president to prioritize jobs and the economy.

It’s no wonder. Nearly 20% of U.S. workers say it is “very likely” or “fairly likely” they will lose their job or be laid off in the next year, more than said so prior to the 2008 economic downturn. And more than two in five U.S. workers say that if they were to lose their job, they could go no more than one month before experiencing significant financial hardship.

Interestingly, the third-most important problem was “dissatisfaction with government” (16%). There’s a message in that finding. Our leaders are spending their time on the wrong things. When leaders have their priorities and basic assumptions wrong about what needs to be fixed, the more they lead, the worse things get.

Our founder, Dr. George Gallup, a man with a great sense of mission about democracy, understood this. He said, “If democracy is about the will of the people — then somebody should go find out what that will is.” While he didn’t say, “…and leaders should vote that will in Congress,” he did believe that leaders should be in touch with what 300 million American citizens want and need.

I’m worried right now. On a recent plane trip, I had time to read The Wall Street Journal, The New York Times, and The Washington Post in more depth than usual. This was an eye-opening experience. Turning page after page of all three great papers, I could barely find an article that addressed the current will of the people: jobs and the economy. There was plenty to read about immigration, even though as many Mexicans are now crossing the border back to home as are coming into the U.S. Plenty of articles on guns, even though the homicide rate in America is at a staggering 50-year low. And, of course, much on North Korea and Syria, neither of which has to do with America’s most pressing problems right now.

Washington politicians and media: We have a problem. The country’s citizens are on one page and you’re on another. You all had better get back fast to jobs, jobs, jobs, because if you don’t, the answer to the question, “Is America now in permanent decline?” will become a deadly “Yes.”

(VIA. Jim Clifton – Linkedin – CEO at Gallup)

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H-1B visas: LinkedIn, Facebook lead in lobbying for immigration


WASHINGTON: The television advertisement that hit the airwaves in Florida last month featured the Republican Party’s rising star, Sen. Marco Rubio, boasting about his get-tough plan for border security.

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But most viewers who watched the commercial, sponsored by a new group that calls itself Americans for a Conservative Direction, may be surprised to learn who bankrolled it: senior executives from Silicon Valley, like Mark Zuckerberg of Facebook and Reid Hoffman of LinkedIn, who run companies where the top employees donate mostly to Democrats.

The advertising blitz reflects the sophisticated lobbying campaign being waged by these technology companies and their executives.

They have managed to secure much of what they want in the landmark immigration bill now pending in Congress, provisions that would allow them to fill thousands of job vacancies with foreign-born engineers. At the same time, they have openly encouraged lawmakers to make it harder for consulting companies in India and elsewhere to provide foreign workers temporarily to this country.

Those deals were worked out through what Senate negotiators acknowledged was extraordinary access by American technology companies to staff members who drafted the bill. The companies often learned about detailed provisions even before all the members of the so-called Gang of Eight senators who worked out the package were informed.

“We are very pleased with the progress and happy with what’s in the bill,” said Peter J Muller, a former House aide who now works as the director of government relations at Intel. “It addresses many of the issues we’ve been advocating for for years.”

Now, along with other industry heavyweights, including the US Chamber of Commerce, the technology companies are trying to make sure the law gets passed – which explains the political-style television advertising campaign, sponsored by a group that has revealed no details about how much money it gets from its individual supporters.

The industry also hopes to get more from the deal by working to remove some regulatory restrictions in the proposal, including on hiring foreign workers and firing Americans.

Silicon Valley was once politically aloof before realizing in recent years that its future profits depended in part on battles here in Washington. Its effort to influence immigration legislation is one of its most sophisticated.

The technology industry “understands there’s probably not a tremendous amount of resistance to their part of the bill,” Rubio said in an interview last week, saying he welcomed the industry support. “But their future and getting the reform passed is tied to the overall bill.”

The bill has a good chance of winning passage in the Senate. The hardest sell will come in the House, where many conservative Republicans see the deal as too generous to immigrants who came to this nation illegally.

Rob Jesmer, a former top Republican Senate strategist who helps run the new Zuckerberg-backed nonprofit group that sponsored the Rubio ad, insisted that his organization’s push is based on the personal convictions of the executives who donated to the cause and who believe immigration laws need to be changed. Those convictions just happen to line up with what their corporations are lobbying for as well, he said.

“It will give a lot of people who are educated in this country who are already here a chance to remain in the United States,” Jesmer said, “and encourage entrepreneurs from all over the world to come to the United States and create jobs.”

The profound transition underway inside Silicon Valley companies is illustrated by their lobbying disclosure reports filed in Congress. Facebook’s lobbying budget swelled from $351,000 in 2010 to $2.45 million in the first three months of this year, while Google spent a record $18 million last year.

That boom in spending translates into hiring of top talent in the art of Washington deal-making. These companies have hired people like Joel D Kaplan, a onetime deputy chief of staff in the Bush administration who now works for Facebook; Susan Molinari, a former House Republican from New York who is now a Google lobbyist; and outside lobbyists like Steven Elmendorf, a former chief of staff to Richard A. Gephardt, a former House majority leader who works for Facebook.

The immigration fight, which has unified technology companies perhaps more than any other issue, has brought the lobbying effort to new heights. The industry sees it as a fix to a stubborn problem: job vacancies, particularly for engineers.

“We are not able to fill all the jobs that we are creating,” Brad Smith, Microsoft’s general counsel, told the Senate Judiciary Committee late last month.

Chief executives met with President Barack Obama to discuss immigration. Venture capitalists testified in Congress. Their lobbyists roamed the Senate corridors to make sure their appeals were considered in the closed-door negotiations among the Gang of Eight, which included Rubio and Senator Charles E Schumer, D-NY, who have been particularly receptive.

In the many phone calls and hallway asides on Capitol Hill this year, those lobbyists realized that they had to give a little to get a lot of what they wanted. At the top of their wish list was an expansion of a temporary visa program called the H -1B, which allows companies to hire foreigners for jobs in the United States. There are a limited number of H-1Bs available each year, and fierce competition for them.

Companies like Facebook and Intel use them largely to bring workers to their own offices. Consulting companies like Tata, based in India, use them to supply computer workers at American banks, oil companies and sometimes software firms.

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Critics of H-1B visas point out that they mostly bring workers at the lowest pay scales. The technology industry’s main rivals in these negotiations were lawmakers who have long been critical of guest worker visa programs, chiefly Senator Richard J Durbin and groups that represent American engineers.

Silicon Valley lobbyists told Senate negotiators they agreed that the H1-B visa system had been subject to abuse. Go after the companies that take advantage of guest worker visas and give us the benefit of the doubt, they told the Senate staff members, according to interviews with several lobbyists.

“You know and we know there are some bad people in this system,” is how Scott Corley, the president of Compete America, a technology industry coalition, recalled the conversation. “We are simply trying to make sure that as they are pursuing the rats they are not sinking the ship.”

That acknowledgment, several lobbyists said privately, helped unlock an impasse in negotiations.

What emerged was a Senate measure that allows American technology companies to procure many more skilled guest worker visas, raising the limit to 110,000 a year from 65,000 under current law, along with a provision to expand it further based on market demand. The bill would also allow these companies to move workers on guest visas more easily to permanent resident visas, freeing up more temporary visas for these companies.

But it requires them to pay higher wages for guest workers and to post job openings on a website, so Americans can have a chance at them. And it draws a line in the sand between these technology firms and the mostly Indian companies that supply computer workers on H-1B visas for short-term jobs at companies in the United States.

“This provision accomplishes the goal of discouraging abuse of the program while providing an important incentive for companies to bring top talent to work in the United States for the long term, where they will contribute to our economy,” said Kaplan, the former Republican White House aide who is now the vice president for US public policy at Facebook.

The bill is written in such a way that it penalizes companies that have a large share of foreign guest workers among their US workforces, eventually making it impossible for them to bring in any more. It allows large American companies that have many more American workers to continue to import workers. And it includes a provision that exempts from the guest worker count those employees that companies sponsor for green cards, essentially a bonus to American businesses like Facebook whose workforces are growing fast.

Companies that provide temporary foreign workers say the move is intended to push them out of the American market.

These companies, mostly based in India, have far less good will on Capitol Hill. Their hope now rests with persuading lawmakers that it would be counterproductive to punish them.

“Why are we in the United States? We are there because American corporations want us,” said Som Mittal, the president of the National Association of Software and Services Companies, which represents Indian companies. “We help them become competitive and serve their customers better.”

In interviews, Rubio and an aide to Schumer said the draft bill takes a balanced approach to penalize those who do not hire American workers for jobs here. They say the proposal is good for the country, even as it may benefit American technology firms.

In March, some of the biggest figures in the technology industry, including Zuckerberg, the Microsoft founder Bill Gates and the venture capitalist John Doerr, unveiled a new nonprofit advocacy group, called Fwd.Us, with its first mission being to push Congress to overhaul immigration law. The group has hired lobbyists and a staff of veteran political operatives.

One of its first campaigns was to bankroll the television ad for Rubio. Two other ads backed Sen. Lindsey Graham, R-S.C., and Sen. Mark Begich, D-Alaska, who is considered a critical swing vote, in a state where there are many critics of the legislation. Jesmer said the group spent “in the seven figures” on the ads.

Rubio has been a vocal ally. He says he understands the industry’s need for talent and wants to prevent companies from having to ship work overseas.

To negotiate the details on the immigration bill, Rubio hired Enrique Gonzalez, who took a leave from a law firm that handles H-1B visa applications for many technology companies. Gonzalez said the assignment presented no conflict of interest because he works with universities handling visas, not technology companies.

The fact that technology lobbyists were given an unusual degree of access to the negotiators on the bill is entirely justified, he said.

“Because of the unique needs of the technology industry, the newness of it, the novelty of a lot of the issues they are confronting, I think that was why there were more engaged than some of the other industries were,” he said.

(VIA. Times Of India)

Australian govt eyes Google, Apple tax avoidance

Australian govt eyes Google, Apple tax avoidance


Tech companies are likely to be the focus of an Australian government review into the taxation of multinational corporations, where profits are sent into other countries with a lower tax rate than Australia.

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The so-called “Double Irish Dutch Sandwich” method of funnelling money through other countries from Australia in order to pay a lower tax rate has been a focus of the Australian government for the past few months amid significant tax revenue declines, in a time when the government is seeking to pay down the deficit. The federal government has previously called out companies such as Google and Apple for using this method to pay very low taxes in Australia, despite significantly high revenue from Google’s advertising and Apple’s products sold in Australia.

On Friday, the Treasury Department released an issues paper (PDF) seeking views on whether this is something the government should address.

“Tax laws that allow some companies, such as large multinational enterprises, to access more favourable tax treatment than domestic firms will distort the allocation of scarce resources within the economy, and imposes efficiency costs that are ultimately borne by all Australians,” the paper stated.

Australian govt eyes Google, Apple tax avoidance

“Similarly, gaps in the integrity of the corporate tax system can affect perceptions of the fairness of the overall tax and transfer system, and require other taxpayers to either make a larger tax contribution or accept a lower level of government services.”

The paper seeks to determine whether there is evidence that the practice is eroding the government’s tax base, and what actions can be taken to fix the issue, both in the short term and the long term.

The Australian government has stated that it will take action to ensure the integrity of Australia’s tax system, and guarantee that there are anti-avoidance measures in place.

The paper suggested that in the short term, the government could address gaps in the current system, such as through transfer pricing rules or fast-track initiatives out of the OECD on transfer pricing guidelines.

In the long term, systematic reform to the taxation system, a reform of institutions around taxation, and multilateral reforms have been suggested, as well as fundamental reforms of taxation globally, with bilateral taxation treaties taking into account the digital nature of the world today.

Submissions are being accepted until May 31, 2013. A Treasury Scoping Paper on the issue is due out in June.

(VIA. ZDNET)

Microsoft, AT&T Cross Atlantic for Euro Rates

Microsoft, AT&T Cross Atlantic for Euro Rates


Microsoft Corp. (MSFT) and AT&T Inc. (T) are among U.S. borrowers selling the most bonds in Europe since the start of 2008, taking advantage of record-low borrowing costs that outstrip dollar rates.

Microsoft, AT&T Cross Atlantic for Euro Rates

American issuers raised 17.2 billion euros ($22.5 billion) from bond sales this year, nine times the amount for the same period in 2012, according to data compiled by Bloomberg. The average yield on investment-grade euro corporate bonds fell to an unprecedented 1.75 percent yesterday, or 89 basis points below comparable dollar notes, Bank of America Merrill Lynch indexes show. That’s the biggest discount since June 2010.

The European Central Bank cut its benchmark interest rate to a record 0.5 percent yesterday as it tries to lift the euro- region out of recession, encouraging companies to take advantage of cheap funding. In the U.S., where the economy is expanding at a 2.5 percent annual rate, the Federal Reserve will probably reduce its monthly bond buying in the fourth quarter as it begins to scale back its record stimulus, according to economists in a Bloomberg survey.

“U.S. companies will issue where they think they can borrow cheaply and where there’s significant demand,” said Craig Veysey, the head of fixed income at Sanlam Private Investments Ltd. in London, part of the Sanlam Group, which oversees $72 billion of assets. “The huge drop in yields we’ve seen over the last month, in particular in Europe, would have meant that it’s easy for U.S. issuers to get their deals away.”

Microsoft Bonds

Bond sales from U.S. companies accounted for about 6 percent of total euro issuance this year, from 0.5 percent for the same period last year and the most since about 10 percent in 2008, data compiled by Bloomberg show.
Microsoft raised 550 million euros on April 25 from 20-year bonds in a debut sale in the currency that paid 2.625 percent. That’s the lowest coupon offered in Europe for similar-maturity, non-financial corporate notes, Bloomberg data show. Investors placed 7 billion euros of bids for the notes, according to a person with knowledge of the transaction on April 26.

The debt sale was “opportunistic,” said Peter Wootton, a spokesman for Redmond, Washington-based Microsoft. It will help the company reduce its cost of capital and the pricing was “very attractive” for 20-year securities, he said. Microsoft is rated AAA by Standard & Poor’s and Aaa at Moody’s Investors Service, while Fitch Ratings ranks it a level lower at AA+.

Quality Shortage

“There is a shortage of high-quality credits like Microsoft in Europe, allowing the company to issue at an extremely attractive level,” said Geraud Charpin, a fund manager at Bluebay Asset Management Ltd. in London which oversees $55 billion. “It really showed that there is a glut of money in the euro market that needs to be invested.”

AT&T, the largest U.S. telephone company, raised 1.25 billion euros from 10-year securities in March priced to yield 2.524 percent, according to a person familiar with the matter. That compares with 2.634 percent yield on the Dallas-based company’s $1.5 billion of bonds of the same maturity sold in December, Bloomberg data show.

“We were pleased with the terms of the transaction,” said Sarah Lubman, an external spokeswoman for AT&T based in New York, who declined to confirm whether the company converted the proceeds of its euro bond sale into dollars.

Coca-Cola Enterprises

The cost for companies to convert euro interest payments into dollars has increased from a 19-month low in January. The cost of swapping using the five-year cross-currency basis swap was little changed at 23.5 basis points below Euribor, up from 19.5 basis points on Jan. 30, the cheapest since June 2011.

As of the end of 2012, AT&T had swapped all its foreign currency-denominated debt into dollars using cross-currency swaps, the company said in its annual report on Feb. 22.

Coca-Cola Enterprises Inc. (CCE), the third-largest independent bottler of the bestselling soft drink, sold 350 million euros of 12-year bonds on April 29 to yield 78 basis points more than swaps. That’s less than the 94 basis-point average spread for companies including PepsiCo Inc. (PEP) in Bank of America Merrill Lynch’s Global Consumer Non-Cyclical Food & Drug Retailers and Pharmaceuticals Index, which also contains Atlanta-based Coca- Cola Enterprises’ debt.

Belden Debt

“U.S. borrowers are sitting up and noticing just how strong the euro market is,” said James Tayler, a corporate bond syndicate banker at Royal Bank of Scotland Group Plc in London which helped manage Coca-Cola Enterprises and Microsoft’s deals. “The market is offering strong execution in longer duration trades, where previously tenors of more than 15 years have been the preserve of the sterling and dollar markets.”
The average maturity of bonds in Bank of America Merrill Lynch’s euro index is 5.1 years, compared with 10.1 years for dollars and 12.1 years for sterling securities.

Belden Inc. (BDC), a maker of networking equipment, sold its first euro bonds in March. The company, which has junk ratings of Ba1 by Moody’s and BB at S&P, issued 300 million euros of 10- year securities that were priced to yield 5.5 percent, the same yield as on its similar dollar notes of the same maturity sold in August, according to Bloomberg data.
Average yields on non-financial high-yield bonds in Europe have held within a basis point of the record 5.35 percent low reached on April 29, according to Bank of America Merrill Lynch index data.

European Window

“Belden generates a meaningful portion of its operating income from our European operations,” said Matthew Tractenberg, head of investor relations at St. Louis, Missouri-based Belden. “The debt issued in March allows the company to pay euro denominated interest with those euro denominated profits.”

Investors betting that the ECB would likely cut interest rates poured $1.1 billion into high-grade bond funds in the week ending April 24 and $970 million into high-yield securities while pulling $78 million from equity funds, according to a Bank of America Corp. April 26 report.
“There is a window for U.S. issuers to come to the European market now as we can’t assume that this low level of volatility will last forever,” said Veysey. “It’s a case of taking advantage of the market place as much as you can to issue at the best rates available.”

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IBM’s Record

Elsewhere in credit markets, International Business Machines Corp. obtained a record-low 1.625 percent coupon on seven-year dollar-denominated debt and tied an all-time low for three-year securities. The market for corporate borrowing through commercial paper contracted for a third week. Supervalu Inc. is seeking to lower the rate on a $1.5 billion loan it obtained earlier this year to support the sale of five supermarket chains to an investment group led by Cerberus Capital Management LP.
The cost of protecting corporate debt from default in the U.S. fell to a five-year low. The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, dropped 3.5 basis point to a mid-price of 74.3 basis points, according to prices compiled by Bloomberg.

The Markit iTraxx Europe Index, tied to 125 companies with investment-grade ratings, decreased 3.3 basis points to 91.5 at 5:12 p.m. in London. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan fell 0.8 to 106.

The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Rate Swaps

The U.S. two-year interest-rate swap spread, a measure of debt market stress, fell 0.03 basis point to 14.01 basis points. The gauge narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.

Bonds of Cupertino, California-based Apple Inc. were the most actively traded dollar-denominated corporate securities by dealers, accounting for 4.6 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The iPhone maker sold $17 billion of bonds on April 30 in the biggest corporate offering on record.

IBM’s $1.25 billion of notes due May 2020 beat a 1.65 percent rate on $750 million of debt sold last July by semiconductor maker Texas Instruments Inc., Bloomberg data show.

Commercial Paper

The largest computer-services provider also sold $1 billion of three-year debt at a 0.45 percent coupon, matching a record- low for that maturity obtained by Apple, Texas Instruments, Unilever Plc and Walt Disney Co., Bloomberg data show.

The seasonally adjusted amount of U.S. commercial paper dropped $12.4 billion to $997.4 billion outstanding in the week ended May 1, the Fed said yesterday on its website. That’s the lowest level since the market touched $968.6 billion in the period ended Nov. 14.
Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as payroll and rent.

The S&P/LSTA U.S. Leveraged Loan 100 Index rose 0.02 cent to 98.59 cents on the dollar, the highest since July 2007. The measure, which tracks the 100 largest dollar-denominated first- lien leveraged loans, has gained 2.79 percent this year.

Speculative-grade loans and high-yield bonds are rated below Baa3 by Moody’s and lower than BBB- at S&P.

Supervalu, the third-largest U.S. grocery chain, is proposing to pay interest on the covenant-light loan due in March 2019 at 3.5 percentage points more than the London interbank offered rate with a 1 percent minimum on the lending benchmark, down from 5 percentage points more than Libor with a 1.25 percent floor, according to a person with knowledge of the transaction. Credit Suisse Group AG is arranging the financing.

In emerging markets, relative yields declined 4 basis points to 288 basis points, or 2.88 percentage points, according to JPMorgan Chase & Co.’s EMBI Global index, which had averaged 281.2 this year.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

(VIA. Bloomberg)