Financial Review

A New Record for Record Highs

….Dow and S&P hit record highs, again. Copper 4-year high. Oil up. North Korea caught red handed. South Korea clamps down on bitcoin. A shift in the Senate. A very bad weather year. Looking for loopholes in the tax plan….

Financial Review by Sinclair Noe for 12-28-2017

DOW + 63 = 24,837
SPX + 4 = 2687
NAS + 10 = 6950
RUT + 4 = 1548
10 Y + .02 = 2.43%
OIL + .25 = 29.89
GOLD + 7.90 = 1295.70

 

Stocks closed higher; not a big move, but enough for another record high. The Dow Industrial Average posted its 71st record closing high of the year. That extends the Dow’s record-setting streak; prior to 2017, the most closing records it had ever posted in a year was 69. Also, another record high for the S&P 500.

 

Global stocks edged higher. Copper posted another gain, pushing prices to 4-year highs. Stronger demand for copper portends a strong year for the global economy in 2018. The metal, used in construction and machinery, and is seen as a proxy for global growth. Freeport-McMoRan shares gained 2.5%.

 

Oil prices hit 2-1/2 year highs this week, topping $60 a barrel. There was a small sell-off yesterday, but prices bounced today. Reuters released a poll of oil analysts, calling for strong global demand for oil in 2018 and OPEC and non-OPEC oil producers to remain committed to keeping supplies tight. The consensus estimate among analysts is that oil prices will be slightly above $60 a barrel in the new year. U.S. oil production has risen more than 16 percent since mid-2016, and is expected to surpass 10 million bpd next year; although, today the Federal Reserve Bank of Dallas issued a survey saying that oil prices will need to rise further for energy companies to significantly expand drilling activities. Baker Hughes reports higher oil prices pushed the U.S. rig count to 931, up about 43 percent from last year. The Dallas Fed survey’s respondents expect the rig count to continue to climb six months from now but nearly all said oil prices need to be above $60 a barrel for a substantial increase.

 

The United States announced sanctions on two North Korean officials behind their country’s ballistic missile program after the U.N. Security Council unanimously imposed new sanctions on North Korea last week. The U.N. resolution seeks to ban nearly 90 percent of refined petroleum exports to North Korea by capping them at 500,000 barrels a year. The U.S.-drafted resolution also caps crude oil supplies to North Korea at 4 million barrels a year. The North Korean statement that U.N. sanctions are an act of war is, as tends to be the case, an exaggeration, but nevertheless, the market has no choice but to price it. Some safe-haven positioning is a natural reaction.

 

Caught RED HANDED – very disappointed that China is allowing oil to go into North Korea. There will never be a friendly solution to the North Korea problem if this continues to happen!” – that’s the latest Trump tweet. Earlier today, China earlier said there had been no U.N. sanction-breaking oil sales by Chinese ships to North Korea after a South Korean newspaper said Chinese and North Korean vessels had been illicitly linking up at sea to get oil to North Korea.

 

The rush to get in on the cryptocurrency boom has spread around the globe, but nowhere more than in South Korea. That fact hasn’t slipped by the South Korean government’s attention. New regulatory measures, including a real name policy, were announced, effectively ending anonymous accounts and requiring banks to keep records of the identities of customers when it handles settlement services for cryptocurrency trades.  The government warned that it could move forward with a shutdown of cryptocurrency exchanges altogether. Bitcoin fell as much as 11 percent to as low as $13,500. It’s now down 30 percent from the record $19,511 it reached on Dec. 18. Overstock.com, On Track Innovations, and Riot Blockchain also traded lower. Such volatility isn’t new for bitcoin or its proxies.

 

The number of Americans filing for unemployment benefits was unchanged last week at 245,000, slightly above the 240,000 forecast; that might be an indicator that the monthly jobs report won’t be really strong, but the underlying trend remained consistent with a tightening labor market.

 

Alabama officials certified Democrat Doug Jones the winner of the state’s U.S. Senate race, after a state judge denied a legal challenge by Republican Roy Moore, whose campaign was derailed by accusations of sexual misconduct with teenage girls. Jones won the vacant seat by about 22,000 votes, or 1.6 percentage points. That made him the first Democrat in a quarter of a century to win a Senate seat in Alabama. Seating Jones will narrow the Republican majority in the Senate to 51 of 100 seats.

 

2017 was a very bad year weather-wise in the US.  There were 15 weather events costing $1 billion or more each through early October, one short of the record 16 in 2011, according to the federal government’s National Centers for Environmental Information. And the tally doesn’t include the recent wildfires in southern California. Among the most devastating events were hurricanes Harvey, Irma and Maria and wildfires in northern California. The killer storms caused economic losses of more than $210 billion in the U.S. and across the Caribbean, and about $100 billion in insured damages. The list goes on – hail in Colorado and Minnesota, tornado outbreaks across the Midwest and South, flooding that damaged a massive dam in California.

 

The new tax bill signed into law on Friday caps the amount that tax filers can deduct in state and local income, sales and property taxes at $10,000, beginning next year. Many homeowners in high tax states like Massachusetts, New York, New Jersey and California have been lining up to prepay their 2018 property taxes before year-end in order to claim a full deduction on their 2017 tax return. The IRS said property taxes that haven’t been assessed before 2018 won’t be deductible on 2017 tax returns.

 

New York Governor Andrew Cuomo says the new tax code targets high-tax states and may be unconstitutional, adding that the state is considering overhauling its own tax system in response. Cuomo says the new tax caps amount to double taxation, and places an unjust tax burden on blue states. Under current law, taxpayers not claiming the standard deduction can deduct both their state and local property taxes, and either their state and local income taxes or their state and local sales taxes, whichever is higher. The Republican bill added a new $10,000 maximum for all state and local tax deductions, effectively raising taxes on wealthy people in those states and reducing a key federal subsidy that makes it easier for states to charge high taxes on rich residents.

 

A few possible options have emerged to evade the new limit: one idea is pre-paying property taxes but that idea will pass in a couple more days. Another route would be for states to create dollar-for-dollar tax credits for all charitable contributions made to the state government. Charitable donations are still deductible under the GOP, so reclassifying state taxes as charity would enable residents to still deduct them at the federal level. But perhaps the most promising option is for states to repeal their income taxes and replace them with employer-side payroll taxes. This might appear like a minor technical change. But it would not only totally offset the new limit on deducting state taxes — it would amount to a sizable tax cut for many middle-class families and would vastly simplify tax preparation by freeing people up from filing their own state taxes.

 

You can levy payroll taxes in one of two ways: on the employer side or the employee side. In the US, we do both: Social Security and Medicare taxes amount to 7.65 percent on each. So for a hypothetical employee earning $100,000 a year, the employer first pays $7,650 to the government, and then deducts another $7,650 from the employee’s paychecks and sends it to the government, leaving the employee’s post-payroll tax take-home pay at $92,350. You could in theory eliminate the employer-side payroll tax, just tax the employee’s wages, and get the same ultimate effect. Suppose instead of a 7.65 percent payroll tax on each side, there was a 14.2 percent tax just for employees. The employer would pay the $107,650 they already determined the employee’s labor was worth, the employee would pay $15,286.30 in payroll taxes, and have $92,363.70 in take-home pay— almost exactly the same as under the old system. Or you could, equivalently, put everything on the employer’s side. They budget $107,650 for the job, pay a 14.2 percent employer-side payroll tax, and set the employee’s salary at $92,363.70, for the same ultimate effect.

 

Taking advantage of tax loopholes has always been a part of the way the world works, but 2018 could be the year when we take it to new levels.

 

 

 

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