Financial Review

Happy Time Vibe

….Dow record but off intraday highs. Broader market slides. Tax plan moves to reconciliation. Shutdown pushed back. CVS Aetna deal biggest of the year.

Financial Review by Sinclair Noe for 12-04-2017

 

DOW + 58 = 24,290
SPX – 2 = 2639
NAS – 72 = 6775
RUT – 11 = 1532
10 Y + .02 = 2.38%
OIL – .91 = 57.45
GOLD – 4.00 = 1276.70

 

This morning, the markets surged – largely, a happy-time vibe from the tax cut plan – but as the day wore on, the euphoria faded. The Nasdaq turned south after about one hour of trading. The entire tech sector came under serious pressure. Microsoft dropped 4%, its biggest single-day decline since June 2016.  Facebook lost 3.6%. Amazon down almost 2.5%. Alphabet down 1%. Apple slipped about 0.7%. The S&P 500 managed to hang on until the final minutes of trading before the numbers turned red. The Dow Industrials managed to hold on to a positive session and a record high close, but that close was 245 points down from the intraday high. Treasuries continued to slip. Even though yields rose today, they remain relatively subdued, with 10-year Treasury yields struggling to push much above 2.40 percent. If the economic outlook is so strong, then how does one explain long-term bond yields? Bond traders are naturally more cautious, and appear to be taking their cue from forecasts that fiscal stimulus, including Republican-backed tax cuts, will deliver only a modest boost to the economy in the next two years. Municipal bond investors are bracing for what promises to be the biggest week not only of 2017, but possibly of years to come. Estimates are that borrowers may sell $19 billion to $21 billion of tax-exempt bonds this week, almost triple the average this year. The reason why issuance will boom is that the Senate this weekend passed its version of tax reform, which includes prohibiting tax-exempt advance refunding.

 

Senate Republicans narrowly passed their tax bill over the weekend, and now must reconcile it with the House version before they can send it to the White House. Easier said than done. There are significant differences between the House and Senate versions. The Senate calls for all individual tax breaks to expire after 2025 to comply with budget rules, while the House would keep most of the individual changes in place, except for a $300 per person family credit. So-called pass-through businesses, such as partnerships and limited liability companies, are also treated differently under the bills. And the Senate bill would postpone a corporate tax rate cut — to 20 percent from 35 percent — for one year, until 2019; that means tax overhaul’s potential direct impact to 2018 corporate earnings is likely to be zero. The House bill would consolidate the current seven individual tax brackets to four, leaving the top tax rate at 39.6 percent. The Senate bill would have seven brackets — with lower rates, and a top rate of 38.5 percent.

 

In a last minute change, the Senate GOP decided to keep the alternative minimum tax for individuals, while raising the exemptions until 2026, and preserve the corporate AMT. The House would repeal both levies. The Senate bill also keeps the estate tax (while doubling the exemption amount until 2026). The House plan doubles the threshold, but eventually fully repeals the levy. The Senate legislation also calls for repealing the Obamacare individual mandate — and while House Republicans mostly support that, it could get tricky if moderates’ votes are needed. A key part of trying to make health insurance coverage universal is to require that everyone gets it; this helps spread the costs of health care among as broad a pool of people as possible. Repealing the requirement will save the government money because fewer people will enroll in publicly-subsidized health plans. However, a good chunk of those subsidies underpinned the individual insurance market, so even people who don’t receive the payments are expected to see higher premiums.

 

The U.S. faces a partial government shutdown after money runs out on Dec. 8 if Congress can’t agree on a spending bill by then. House Republicans introduced a temporary stop-gap spending bill to fund the government until Dec. 22. The bill maintains the current federal spending levels but includes a provision to ensure that states are not forced to suspend the popular Children’s Health Insurance Program, which annually provides health insurance for nearly 9 million children in low-income families.

 

In the largest deal of 2017 CVS Health is buying Aetna, the third-largest US insurer, for $69 billion. Aetna stockholders will be paid $145 a share in cash and 0.8378 CVS shares per Aetna share. The acquisition is subject to regulatory approval, but if approved it will change the nature of retail and healthcare. First, if CVS does buy Aetna, it might be able to win over more business—both from individual consumers and from employers buying plans on behalf of their workers. In theory, that’s because CVS could gain a competitive edge by reducing the cost of providing care to Aetna’s customers.

 

How could it do this? CVS is not just drugstores. In 2006, it acquired a company called MinuteClinic, which operates walk-in clinics. CVS now has more than 1,000 of them, including in its stores and also in some Target locations. This is one of the main reasons CVS and Aetna could, together, save money: A company that sells insurance could start providing care directly, and steer customers not immediately to doctors but rather first to its own nurses and pharmacists working at CVS locations. For example, if an Aetna customer has diabetes, it can be extremely costly (for both Aetna and the customer) for them to frequently see doctors for help managing their condition. Instead, a merged CVS-Aetna could encourage this customer to go to its walk-in clinics regularly for check-ins, potentially limiting those higher-cost doctor visits. The merger is intended to shift the way consumers interact with their healthcare. The plan is to make pharmacies the “new front doors of healthcare” — as opposed to a traditional doctor’s office or a hospital; and once a customer is in the front door, the sale continues in the pharmacy.

 

The other reason for the CVS-Aetna deal is Amazon, which has been plotting to move into the pharmacy business. Amazon has already secured the necessary licenses in 12 states and there is a possibility they will try to start up an online pharmacy that could ship medications. How does a brick and mortar retailer respond to Amazon? History shows that Amazon can crush competitors. Whether the CVS-Aetna deal could withstand the onslaught remains to be seen, but they are going to respond with some fresh new ideas. The actual amount of money prescriptions bring into pharmacies isn’t all that much, it’s what else you buy while you’re at the pharmacy — snacks, drinks, beauty products — that makes pharmacies a booming business. Say that prescription portion went online, it would be much harder for retail pharmacies to compete with convenience stores, grocery stores and anyone else selling candy bars and deodorant. But say you’re an Aetna member, the preferred way to get your prescription might be by going to a CVS pharmacy, bringing foot traffic that might not come organically.  And it is possible CVS-Aetna customers could see benefits if the new company can provide some innovative new services or pass through cost benefits to them. On the other hand, the merger could give CVS control over drug wholesalers, pharmacies, insurers, and pharmacy benefit managers – in other words, a way to crush competition from other companies. One thing the two companies are hoping for is synergy – that’s corporate-speak for cost savings, and the big place to cut expenses is by firing workers.

 

For the first time in 40 years, power plants are no longer the biggest source of U.S. greenhouse gas pollution. That dubious distinction now belongs to the transport sector: cars, trucks, planes, trains and boats.  The big reversal didn’t happen because transportation emissions have been increasing. In fact, since 2000 the U.S. has experienced the flattest stretch of transportation-related pollution in modern record keeping, according to data compiled by the U.S. Energy Information Administration. The big change has come from the cleanup of America’s electric grid. Electricity use in the U.S. hasn’t declined much in the last decade, but it’s being generated from cleaner sources. A dramatic switch away from coal, the dirtiest fuel, is mostly responsible for the drop in emissions. Coal power has declined by more than a third in the last decade. Meanwhile, the transportation sector is getting cleaner. Cars are becoming more efficient under aggressive pollution rules, or CAFÉ standards, but that’s so far been offset by an ever-rising American appetite for SUVs, crossovers and pickup trucks. Investments in electric cars may soon begin to do to the transportation sector what wind and solar have done to the power sector: turn the pollution curve upside down. The price of battery packs has been plummeting by about 8 percent a year and electric cars are now projected to become cheaper, more reliable, and more convenient than their gasoline-powered equivalents around the world by the mid-2020s.

 

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