Financial Review

The Pause Before the Shutdown

….Stocks slip. Shutdown looms. Amazon HQ2 – and then there were 20. Jobless claims fall. Morgan Stanley beats. AmEx loss. IBM has revenue. Why all the tax charges? Construction slips. Remodeling booms.

Financial Review by Sinclair Noe for 01-18-2018


DOW – 97 = 26,017
SPX – 4 = 2798
NAS – 2 = 7296
RUT – 9 = 1576
10 Y + .03 = 2.61%
OIL – .19 = 63.78
GOLD – .20 = 1327.40


Wall Street paused to catch a breath. Yields on the 10-year Treasury hit a 10-month high.


The threat of a government shutdown is looming this week even as lawmakers prepare to vote on a stopgap bill to keep operations going for roughly another month. Funding is due to expire early Saturday morning. House lawmakers plan to vote later this evening on a bill keeping the government open through Feb. 16. Although at this moment it looks like conservatives in the House Freedom Caucus are withholding their support from the House GOP bill.  That continuing resolution doesn’t address the Deferred Action for Childhood Arrivals program, something that Democrats want to extend. It includes other elements, such as a six-year extension of the Children’s Health Insurance Program. So, children’s health insurance is now a bargaining chip in the budget, or perhaps a political hostage.  It would need 60 votes to advance in the Senate and Republicans have 51 seats.


The appropriations bill that the Senate and House must pass by Friday to avoid a government shutdown forbids the Securities and Exchange Commission from making publicly traded companies disclose their political spending to shareholders – funny how they slipped that in.


Without an agreement, the government would partially shut down — and the key word here is “partial.”  In a government shutdown, federal employees could be furloughed, — although the U.S. mail would continue to be delivered and military personnel would still be on duty. Federal Bureau of Investigation agents, and air-traffic controllers would stay on the job and of course, Congress would continue to work and be paid. National parks might shut down, which could have  a big impact on Arizona. Separately, Nearly all of the seats on the U.S. National Park Service advisory board are vacant following a mass resignation, with ex-members citing Interior Secretary Ryan Zinke’s unwillingness to meet with them. The resignation of 10 out of 12 National Park System Advisory Board members leaves the federal government without a functioning body to designate national historic or natural landmarks. The last time the government shut down, from Oct. 1-16, 2013, about 850,000 federal employees were furloughed.


Last year Amazon announced it wanted to build a second corporate headquarters – HQ2. In Amazon’s request for proposals, it dangled the promise of hiring up to 50,000 full-time employees (at an average salary of more than $100,000 a year) over the next 10 or 15 years, and spending $5 billion in the process of executing the project. Amazon has said its preferences for the site include a metropolitan location with a population of more than 1 million, mass transit, proximity to an international flight hub and the potential to retain and attract technical talent. And 238 municipalities scrambled to propose the most generous package of financial incentives they could muster, in hopes of luring the online-retailing and cloud-computing giant. Today, Amazon announced that they have narrowed the field to 20. The potential sites range from coast to coast, and even north to Toronto. Here are the cities that made the initial cut: Los Angeles, Denver, Austin, Dallas, Miami, Atlanta, Nashville, Indianapolis, Chicago, Columbus, Raleigh, Northern Virginia, Washington, Pittsburgh, Philadelphia, Montgomery County Maryland, Newark, New York, Boston, and Toronto.


Among the perks offered by Washington DC, Amazon could qualify for relocation reimbursements of up to $7,500 per worker that moves to D.C. and wage reimbursements of up to $30,000 per new job it fills locally with military veterans; a five-year corporate franchise tax exemption capped at $15 million; a five-year freeze on property taxes on every building the e-commerce and cloud computing firm occupies in D.C. as long as Amazon occupies at least half of that building; a 10-year exemption on personal property taxes on qualified property and equipment; and a sales tax exemption in perpetuity on its investment in qualified new purchases. In the suburbs of Atlanta, the town of Stonecrest offered to rename the town Amazonia, and make Jeff Bezos the mayor for life. Newark is floating $7 billion in tax breaks.


States, counties, and cities provide companies more than $80 billion per year in tax breaks and other sweetheart deals. The practice of luring businesses with incentives such as tax breaks, grants, free land, and low-interest loans has become so ingrained it’s now a rote drill, complete with specialty consulting firms that help companies negotiate such giveaways. Local officials want to be seen as doing something to create jobs, and to project a pro-business image. Spreading taxpayers’ dollars to prospective businesses is one easy way to do it. There is a price to pay for these deals, but that’s a longer-term proposition.


Arizona’s seasonally adjusted unemployment rate ticked up from 4.3% in November to 4.5% in December. The national unemployment rate remained unchanged at 4.1%. A year ago, the Arizona seasonally adjusted rate was 5.0% and the US rate was 4.7%. Arizona gained 5,700 Nonfarm jobs (0.2%) in December. The private sector added 9,500 jobs, but government lost 3,800. Over the past 12 months through December, Arizona Nonfarm employment grew by 42,500 jobs.


Jobless claims decreased by 41,000 to 220,000; lowest level since Feb. 1973, biggest drop since April 2009. Continuing claims rose by 76,000 to 1.95 million in week ended Jan. 6. Four-week average of initial claims, a less-volatile measure than the weekly figure, fell to 244,500 from the prior week’s 250,750. The drop in claims may be indicative of a tight labor market, one where employers are holding on to existing workers. This measure of the labor market is also a bit distorted because fewer workers are eligible for unemployment benefits than in the past. Also, this report may have some statistical noise because it fell between 2 holidays.


Morgan Stanley released fourth-quarter earnings, and, like the rest of the big Wall Street banks, they beat analysts’ estimates, on an adjusted basis. The bank reported adjusted earnings of $0.84 a share; analysts had been expecting Morgan Stanley to produce adjusted earnings of $0.77 a share. Morgan Stanley is the last of the big US banks to report, and, like the others, its non-adjusted earnings took a one-time hit from the new tax law. The tax bill signed into law in December slashes corporate tax rates, so why are some companies announcing charges instead of benefits from the change? Many big banks suffered multibillion dollar losses during the financial crisis that created tax loss carryforwards that can help reduce their future tax bill. Basically, if you lose enough money one year, you can spread out the deduction of those losses over multiple years. The banks have deferred tax assets on their balance sheets, offsets that can be used to reduce future tax liabilities or to defer them. It’s like a coupon to cut your future tax bill, and that coupon has value, so it is considered an asset. Deferred tax assets are worth less when the tax rate is changed, in this case lowered from 35% to 21%, a 40% cut.


American Express posted its first quarterly loss in 26 years, due a $2.6 billion charge related to the U.S. tax law overhaul and the credit card issuer also said it would suspend its share buyback program for the first half of 2018, but continue paying dividends. Excluding one-time items, AmEx earned $1.58 per share.


IBM’s revenue rose for the first time in 23 quarters and beat analysts’ estimates as the company’s shift into its focus areas such as cloud computing and security services gains traction. IBM’s cloud business grew 30 percent in the quarter to $5.5 billion. IBM’s total revenue increased 3.6 percent to $22.5 billion. Earnings were in-line with estimates.


Earnings growth for the quarter is forecast at 12.3 percent, according to Thomson Reuters data through Thursday morning.


Wyndham Worldwide says it will buy La Quinta Holdings hotel operations for $1.95 billion, adding another well-known U.S. brand and nearly 900 mid-scale, upper mid-scale and economy locations to its portfolio. Wyndham Hotel Group, known for its own-brand hotels as well as Ramada, Days Inn and Super 8 budget lodgings, will have a total of 21 brands when the La Quinta deal closes as expected in the second quarter of 2018.


Construction on new houses fell 8.2% in December to a 1.19 million annual rate. Single-family starts dropped 11.8% (as cold weather likely delayed some projects), but construction on buildings with five or more units rose 2.6%. Permits for future construction were basically flat at 1.30 million. Still, 2017 was a very good year for home builders. Permits, housing starts and the number of new homes completed all hit the highest levels since 2007, but not enough to alleviate tight inventories.


Home remodeling is projected to grow at the fastest pace in more than a decade this year. The leading indicator of remodeling activity, produced by the Joint Center on Housing Studies at Harvard University, suggests homeowner spending on improvements and repairs will be close to $340 billion in 2018, 7.5% higher than spending in 2017. That would be the biggest annual increase since the final quarter of 2007, when the Great Recession began, and it could boost not only the industries that service such activity, but also the broader economy. 2018 spending will get a boost in restoration from the string of natural disasters in 2017, but the bigger picture is that lean inventory in the housing market means there’s fewer options for owners who want to trade up — and higher levels of home equity are helping enable them to expand or upgrade instead.



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