– By Fred Dunlap –
What would we do without Twitter? How would we navigate our lives without access to the 280 characters of wisdom that come from its users?
If we didn’t have Twitter, we wouldn’t know that our President is a Stable Genius. We wouldn’t know that Foghorn Leghorn’s button is bigger than the button on the desk of the Pillsbury Dough Boy. We wouldn’t know that the Rocket Man is little. Heck, he looks pretty big on TV, but alas I have heard that cameras can give that impression…
If we didn’t have Twitter, we wouldn’t hear from Foggy that his upcoming physical exam “better go well or it will hurt the stock market.” Really? Is it all about him? Or might others have a hand in it too?
Imagine a world (without Twitter) where we would be forced to conduct our daily activities without access to these sage points of view.
What would we do without Twitter?…
It’s been nine days since my last missive. Nine days since the markets jumped in tribute to Santa.
In the first nine trading days of 2018, the market indexes have been up (8 out of 9), setting new records each day.
And yes, it’s now “Earnings Season” with several big companies already reporting this morning. Blackrock, JP Morgan and Wells Fargo each unveiled their fourth quarter (2017) earnings and gave some insight into their 2018 forecasts.
How did that go? Pretty good! After all, how bad could those conference calls be, given the bolstering effects of the new Tax Law?
An abnormal Earnings Season
Public companies have been reporting earnings for years. And they have become pretty good at it, carefully managing the expectations of their investors. Sandbagging has become an art form, where it’s better to under-promise and then over-deliver.
But this season is different. Comparables are no longer comparable. Why? Because the goalposts have been moved as a result of Tax Reform.
Prior quarter and prior year comparisons aren’t nearly as relevant this year, as Wall Street analysts scramble to convert historical performance into the post-Tax Reform world.
In late December, market pundits declared that stock prices already had “baked in” the value of Tax Reform. They asserted that stock prices had risen already in anticipation of the benefits of lower corporate taxes. They warned then that the risk of pullbacks/corrections now exceeded the potential for upside gains.
Now eleven days later, it would appear that their prognostications were…a bit faulty. Clearly, prices two weeks ago did NOT factor in the effects of Tax Reform. After nine trading days, the S&P has vaulted 4.2%, and the real question is: “Do stocks now have Tax Reform fully baked in, or is there still more upside ahead?”
Peeling back the Onion
The reality is that nobody knew the actual impact of Tax Reform on each public company. That’s because each company is different, where the benefits of Tax Reform vary, depending on: 1. the amount of business they conduct within the US, 2. the extent of their capital investment (where they could capitalize on the new rules on immediate expensing), and 3. the potential for Repatriation of dollars currently captive overseas. Because each company has a unique answer to these three questions, it would follow that their degree of benefiting from Tax Reform would be unique too.
For these reasons, the Earnings Reporting Season will be more complicated this time. Questions from investors will be more extensive. Investors will expect management to identify a more accurate “effective tax rate” for each company. They will also demand to know the companies’ intentions for investing the windfall profits coming from a lower tax rate. Further, they will want to understand each company’s plans for bringing captive dollars back to the US, including the timing of the retrieval AND the plans for deployment.
Yes, these Earnings Report discussions will be more extensive and involved. And coming out of each earnings report conference call, it is possible that we will see spikes in valuation, either up or down, as investors gain a more accurate understanding of each company’s performance potential in the post-Tax Reform world.
Is it possible that some stocks may now be over-valued relative to what their real post-Tax Reform potential may be? Yes, and when this gets discovered during the company’s Earnings Report conference call, those stock prices will probably drop.
While this is possible, it is more likely that surprises will be positive, driving stock valuations higher. Why? Because investors typically hedge their bets, in the absence of having better data by which to base their buying decisions. And though investors have known the details of the new Tax Law for a few weeks, they haven’t been able to discern how those details will apply to each company. So we can assume that they have exercised prudent caution in advance of the earnings call.
Therefore, with the clarity coming from each earnings call (week-by-week, company-by-company, as they report their results), stock market valuations should continue to climb. It will be only after Q417 earnings have been fully reported, that we will know the full impact of Tax Reform on equity prices.
Tax Reform – The Gift that keeps on Giving!
Depending on partisan bias, Tax Reform has either been applauded or denigrated, with carefully orchestrated talking points to serve each party. But what are the facts? To clear the smoke of bias, here’s what’s really happening (the high points):
- Corporate changes
- Tax rates cut to 21%
- Full and Immediate expensing for Capital Expenditures
- Preferential terms for Repatriation of dollars held captive overseas
- Individual changes
- all tax rates reduced substantially
- Standard deductions doubled
- Personal exemption has been eliminated
- Elimination of the State and Local Tax (SALT) deduction (if more than $10,000)
Given the complexity of the previous tax code, it’s virtually impossible to institute a new Tax Law which impacts everyone positively. There is no perfect tax plan. But setting aside political rhetoric, this new Tax Law lowers taxes for corporations, and it lowers taxes for 85-90% of individual taxpayers. Period.
What about the other 10-15% of individual taxpayers? Generally, these would be wealthier folks living in states which have very high state and local taxes. The removal of the SALT deduction is the reason their taxes may be higher. Keep in mind that the new tax plan DOES allow for SALT deductions, but only up to $10,000. In other words, for the vast majority of people living in SALT states (lower and middle class), they won’t be negatively affected by the removal of SALT deductions, because their state and local taxes paid are below the $10,000 threshold. The people negatively impacted would mostly be those SALT residents with higher income levels.
Politicians from the SALT states have complained vehemently, even proposing lawsuits to oppose the new Tax Law. The realistic viability of these protests…is ZERO. But guys like NY Governor Andrew Cuomo will pursue them nonetheless, if only to present himself as someone fighting for his constituents (oh, and preparing for his Presidential run in 2020).
Though it would be less politically palatable, these political leaders should be looking inwardly, focusing on lowering their costs of government. After all, if their taxes weren’t so high, the new Tax Law (and the removal of SALT deductions) wouldn’t be an issue.
(Note: Look for SALT residents to put increasing pressure on their political leaders to do just that (reduce costs and taxes). The other option these residents might have is to migrate to a lower tax region, some of which is already occurring.)
The bottom line on Tax Reform is that it will provide an economic catalyst. As investors (you and me), that’s a good thing. And for the 10-15% above, it’s probably a good thing too… I talked to a buddy the other day who is part of that 10-15% cohort. He was complaining about the unfairness of the new Tax Law. I reminded him that he was getting a reduction on his individual tax rate, just like everyone else. I also reminded him that he would be getting a “pay increase” from a stronger economy–from better investment income. I told him “you may end up paying a slightly higher effective tax rate, but it will be on a BIGGER amount of income.” He hadn’t considered that…
The Gift that keeps on Giving
The other “nice surprise” emanating from Tax Reform has been the immediate actions on the part of corporations after the Law was passed. In our January 3rd Newsletter, we discussed that more than four dozen major corporations had already initiated bonuses and/or wage increases for employees. I wagered that more companies would soon follow, either out of pressure from their employees or to keep the early mover companies from stealing them.
Now, nine days after my 1/3/18 Newsletter, the number of companies who have announced similar programs for their employees stands at 140. The latest to do so are WalMart and Wells Fargo Bank. To date, it is estimated that more than 2,000,000 workers have been positively impacted by these bonuses and/or wage increases.
This is economically positive, as it puts more money in the hands of consumers, who likely will spend it, putting those funds back into the economy. This extra money is in ADDITION TO the additional take home pay they will receive as a result of lower tax rates under Tax Reform.
This is also politically positive for the Republicans, as it provides evidence that the new Tax Law is helping the little guy. Votes historically go to the party perceived to provide job security and a better way of life.
As I said in the last Newsletter, this presents a problem for the Democrats. Yes, this could work out well for the Republicans…if…they don’t do anything…to screw it up…
But…
Aberrant Musings Hitting the Wild and Extraneous Meter
Coping with the Stable Genius
It occurred to me that this is the most prolific bull market in my adult lifetime. Better than the late 90s? Yep. Better than the period before the Real Estate debacle? Undoubtedly. But why?
Both of those bull markets were achieved in the absence of strong fundamentals. Those market rallies were the outgrowth of excesses…things which are unsustainable. Things which create bubbles and things which result (inevitably) in recessions.
But what makes this economic cycle and stock run even more impressive is that it has been impervious to the quirks and abnormalities of the current Administration. Moreover, the markets have been virtually unobservant to the antics of the Stable Genius.
What kind of person would ever tell people that he is a Genius? In private or in public?
In the days of Google, who gives a speech to inform the public about the elite schools he attended? Particularly when that detail can be easily researched online? That is, if anyone would be interested.
Who calls everyone “his good friend,” only to berate a person later, calling them a liar or a fool?
And yet, in spite of these abnormalities, the financial markets continue their climb unabated…
Goading the Dough Boy
Who taunts a guy who has a warehouse full of nukes?
And yet the financial markets continue their climb unabated…
“My Button is bigger than your Button”
There’s a theme developing here… I recall, during the election process, there was a certain amount of speculation around a portion of the male anatomy. Defenses to the “size question” were immediately launched. Hand-sizes were evaluated. Shoe-sizes were scrutinized.
And now for the most indisputable proof of virility and manhood? The size…of your button…?
And yet, through all of this, the financial markets continue their climb unabated…
Stepping on your Richard
The Republicans generated incredible political sway with the passing of Tax Reform, along with the associated prosperity bestowed on more than 2,000,000 workers by their corporations. The Repubs will get much of the credit for that, as a byproduct of Tax Reform.
Looking ahead, it’s likely that an Immigration Bill could be passed, one which could resolve DACA appropriately, but also impose prudent immigration reforms which will help keep our country and our citizens safe.
If that weren’t enough, an Infrastructure Bill could likely get passed, where bipartisan support would be assured. Assured? Yes, because which politician (either party) wants to go home to tell their constituents that they voted against fixing local roads and bridges?
This could all get done in 2018. Yep, that’s practical. It would help the economy, and it would be an impressive set of accomplishments going into the 2018 mid-term elections. Heck, if you had to bet, you would think the Republicans “have the mid-term elections in the bag.”
That is, unless someone were to characterize Haiti and a basket of African nations as being a “Shit Hole…”
Now that might change things…
Boy, if you factor Shit Hole-Gate into the equation, then all bets may be off on those mid-term elections. You might be accused (again) of being racist. You might have immigrant citizens pissed off, instead of excited about Immigration Reform. You might cause Congressional leaders to be so offended that they become unwilling to support an Immigration or Infrastructure Bill…not because they weren’t viable ideas, but more because you have lost their good will.
With racism accusations now again in full swing, the irony of all ironies is that this gaffe went down on the Martin Luther King holiday weekend. You can’t make this stuff up… And you wouldn’t want to.
This was a fine example of Stepping on your Richard. And it has many people tonight thinking he is a real Richard…
But more than anything else, the Shit Hole reference gave the Democrats an angle. They appeared to be rudderless. But this may have given them new life. And it may have suddenly made the chances for Immigration and Infrastructure Bills a much more remote possibility.
Amazingly, amid the fervor today over this unfortunate reference, the financial markets continued their climb unabated…
Stealing Defeat from the Jaws of Victory
Though 2017 was fraught with some awkward Republican moments, the Republican Party’s progress in recent months has them well-positioned to maintain control in 2018. That is, if they can avoid self-inflicted wounds.
If they don’t avoid self-inflicted wounds, they might find themselves…in a Shit Hole.
How do they avoid that?
- Install a mute button in the Oval Office
- Deactivate Foggy’s Twitter account (he might be annoyed at first, but he will thank them later), OR
- Do nothing at all.
Why #3? Because the financial markets continue their climb unabated.
Why are the markets so unaffected? For the same reasons the American public has become increasingly numb to the antics of the Oval Office. When the Boy cries “Wolf,” he gets taken less seriously.
Across an increasing number of US citizens, might the mute button be on already? And might the interest level in his Twitter account be already somewhat deactivated?
I heard this evening that President Trump’s physical exam was “extremely successful.” That’s good news. For him…and for the stock market, I guess. But wait a minute… The stock market futures this evening were already climbing unabated…
Stay thirsty my friends.
Freddie Deeeeeeeeeee