Financial Review

Aggressive Spacing and Large Fonts

…..Russell 2000 record. Tax plan unveiled, minus details. Treasuries slammed. Durable goods orders jump. Commerce slaps duties on Bombardier. Fewer contracts on homes. Sonic hack. Amazon has new stuff. Google turns 19.

Financial Review by Sinclair Noe for 09-27-2017

 

DOW + 56 = 22,340
SPX + 10 = 2507
NAS + 73 = 6453
RUT + 28 = 1485 (record)
10 Y + .08 = 2.31%
OIL + .18 = 52.06
GOLD – 11.20 = 1283.40

 

The Russell 2000 Index hit a new record high. The S&P 500 index hit an intraday record high but could not take out last week’s closing high.

 

The Trump Administration finally unveiled their tax cut plan, 9 pages of it (click here for full text). Trump spoke in Indiana today. The framework shrinks the number of tax rates to just three from seven today. The proposed rates are 12%, 25% and 35%. But it will be up to the tax committees to assign income ranges to each rate. The 12% bottom rate is actually higher than today’s lowest rate of 10%.

 

The plan doubles the standard deduction, to $24,000 for married couples and $12,000 for single filers. The framework proposes the elimination of most itemized deductions, including the state and local tax deduction. It also eliminates personal exemptions, worth $4,050 per person. So, a family of four could no longer reduce their taxable income by more than $16,000. Now this bears a closer look. Here’s the important fine print, the plan states: “To simplify the tax rules, the additional standard deduction and the personal exemptions for taxpayer and spouse are consolidated into this larger standard deduction.” Here’s how that math works. Let’s say you are single with no dependents, and you have a moderate income. Currently, you get to take the standard deduction ($6,350) and one personal exemption ($4,050). If you are 65 or older, you also get to take an additional standard deduction ($1,250). That adds to $10,400, or $11,650 if you’re a senior citizen. The Republican plan would replace all these provisions with a single deduction of $12,000 ($24,000 for married couples.) That’s a 15% increase — except for seniors, who get a 3% increase. Not a doubling, not even close. And then your first dollar of taxable income would be subjected to a 12% tax rate, instead of the current 10%.

 

Currently, you get to take the personal exemption even if you also itemize deductions, but you only get to take the standard deduction if you forego itemized deductions. Combining these provisions into a single, standard deduction would mean itemizers lose their personal exemption and get nothing back — meaning they’ll typically pay tax on an extra $4,050 of income if they’re single, or $8,100 if they’re married.

 

The plan does not address the prospects for repeal of popular deductions – the tax breaks for mortgage interest, charitable donations. What happens to other popular deductions is less clear.  The plan would eliminate deductions for state and local tax expenses. States are going to go crazy over that loss. The National Conference of State Legislatures says the deduction has existed in the federal tax code since its inception. The group says “tens of millions of middle-class taxpayers of every political affiliation” would experience a greater tax burden if the deduction were eliminated. The group says the deduction’s elimination will also impede states in their efforts to invest in education and other public services.

 

The plan called for a repeal of the alternative minimum tax, a provision originally intended to tax wealthy households that now reaches well into the middle class. And the plan also calls for eliminating the estate tax.

 

The document also outlined various provisions for businesses, including a cut in the corporate tax rate to 20 percent, or 25% for small and family-owned businesses conducted as sole proprietorships, partnerships and S corps. But while promising to “modernize” the dozens of tax breaks that favor specific companies and industries, those details remain to be spelled out. I talks about repatriating corporate capital held offshore, but it doesn’t provide any guidance or detail on what rate of tax or any conditions for repatriation.

 

How to pay for all this without an explosion in the debt and deficit? Animal spirits will lift the economy to tremendous growth – at least that is the argument we are going to here. Cut taxes for corporations and the wealthy, which will shower great jobs on the rabble, which will not only not increase the deficit, it will cut it because so much new revenue will pour in. More likely, if you get a fiscal boost and tax reform this late in the cycle where most of the slack in the market is eroded, you’re not going to get a lot of bang for your buck. While the rhetoric of cutting taxes sounds good, don’t expect much popular support for specifics. Expect a whole bunch of opposition from various groups who are going to have their specific oxen gored. The big disappointment is that this whole tax cut plan really doesn’t look serious. It’s 9 pages, and most of those pages have a whole lot of white space and large fonts; the plan has some flowery promises and almost no math. More generally, the plan has so many holes — left for Congress to fill in — that a full picture of who gains the most cannot be drawn at the outset. The plan could well benefit both the rich and the middle class, at the cost of national debt, but that remains to be seen. If the proposal follows any kind of order, as Senator John McCain has called for, don’t expect anything of substance any time soon. If Republicans thought health care was tough, just wait until they try to tackle tax reform. In that sense, today’s gains on Wall Street can be called a relief rally – a relief that any type of plan was presented, albeit without many details.

 

The market for Treasury securities experienced one of its worst days of the year, as yields soared. It’s bad enough that the federal budget deficit has already widened, but what’s concerning now is that the government is likely to ramp up bond sales to pay for tax cuts at a time when the Federal Reserve is planning to reinvest less of the maturing proceeds from its bond holdings back into the market. The amount of marketable US debt outstanding has already increased to $14 trillion from less than $5 trillion the past decade. And don’t forget the repatriated corporate cash isn’t really cash, it is equivalents, meaning a whole bunch is held in US Treasuries.

 

The pollsters at Gallup periodically ask people what they think is the most important problem in America. Taxes don’t make the top 10 list. Why? Because most Americans don’t pay much of anything in federal taxes.  In an NBC/ Wall Street Journal poll, 62% of those polled said taxes should go up on the wealthy, and 55% said taxes should rise for corporations.

 

The biggest threat to the U.S. economy over the next 6 months: North Korea? Rising interest rates? Terrorism? A stock market drop? Nope.  Thirty-six percent of Americans chose “the political environment in Washington” as the biggest threat to the economy, according to a new survey by personal finance website Bankrate.com.  That easily beat out the next four choices: the threat posed by North Korea (24%), rising interest rates (10%), terrorism (10%) and a decline in the stock market (8%).

 

Orders for durable or long-lasting goods such as passenger planes rose 1.7% last month. The increase stemmed mainly from a big batch of orders for commercial aircraft. Bookings surged 45%. Demand was higher for most other manufactured goods, but bookings grew at a slower pace. Orders minus transportation edged up 0.2%. The government said Hurricane Harvey appeared to have little effect. The storm slammed the Houston area hard late in the month, but probably too late to reduce orders.

 

The Commerce Department on Tuesday slapped preliminary anti-subsidy duties of 220 percent on Bombardier jets, which could effectively shut Bombardier out of the US market if upheld, after rival Boeing  launched a trade challenge accusing Canada of unfairly subsidizing the aircraft. The dispute could spill into talks between Canada, the United States and Mexico to update the North American Free Trade Agreement. Negotiators are meeting in Ottawa.

 

Americans signed fewer contracts to buy homes in August, the fifth month of declines in the last six. The National Association of Realtors’ pending home sales index fell 2.6% to 106.3. That was the lowest reading since January 2016 and put the index 2.6% lower than its level a year ago. There is a supply-demand imbalance with very tight inventories.

 

Here we go again: Sonic may be the latest company to face a cybersecurity breach. The drive-in restaurant chain — which has 3,500 locations across the United States — said that a credit card processing company noticed peculiar activity on some Sonic customers’ cards. That’s a telltale sign that hackers targeted Sonic. The company said it’s not yet clear how many restaurants or customers may be impacted.

 

Amazon announced a bunch of new hardware today. Amazon introduced 5 new Echo hardware products. The big difference seems to be better speakers. Also, they announced their voice assistant, Alexa, will be available in BMW cars. Amazon also unveiled tiny “Echo Button” devices that can be configured to work and control an Amazon Echo. In one instance, Amazon showed how a family might play a game like “Trivial Pursuit” using the buttons to chime in for answers. The Echo Connect is a $35 box that will allow you to place phone calls to landlines using your existing Amazon Echo units. The Echo already supports calling between Echos, but that acts more like an intercom system. Amazon also unveiled a new Fire TV dongle that plugs into the back of a TV (it uses HDMI). It will support 4K content.  Resistance is futile.

 

Meanwhile, Google celebrates its 19th anniversary today. I have no idea how we found anything 20 years ago.

 

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