Financial Review

Watching Paint Dry

…..The most boring market ever. 401Ks are safe from tax reform. The fight over arbitration clauses. Abe wins snap election. Amazon ponders HQ2. The rent is too damn high.

Financial Review by Sinclair Noe for 10-23-2017

 

DOW – 54 = 23,273
SPX – 10 = 2564
NAS – 42 = 6586
RUT – 11 = 1497
10 Y – .01 = 2.38%
OIL + .02 = 51.86
GOLD + 2.00 = 1283.00
Wall Street had opened at record highs following Japanese Prime Minister Shinzo Abe’s emphatic win in weekend polls. The victory also sent the dollar to a three-month high against the yen, as investors bet the win would mean a continuation of “Abenomics,” the ultra-loose policies that have kept downward pressure on the yen. But the early morning gains faded. General Electric posted its worst single day loss in more than 6 years, dropping more than 6%. Oilfield services company Halliburton warned of slower growth at its oil well drilling and evaluation business, reflecting a steady drop in rig counts in the United States. The outlook suggests Halliburton’s current-quarter might not be as strong as its latest quarter, even as they posted a 15% increase in third quarter revenue. Halliburton’s shares fell about 1.5 percent. Schlumberger was down 1.5 percent, while Baker Hughes fell 4 percent. Meanwhile, T-Mobile’s quarterly profit topped Wall Street analyst estimates and the No. 3 U.S. wireless carrier raised the lower end of its expected range of customer additions for the year but didn’t elaborate on a potential deal with rival Sprint.

 

Still, the S&P 500 index set a record today, completing its longest streak ever without a 3% intraday drawdown. At the close, it overtook the previous record of 241 days set in 1996. The S&P 500 has gone 34 straight days without a 0.5% drop, the longest streak since 1995. The S&P 500 has fallen by 1% or more in a single day only four times this year, the fewest for a full year since 1964. Its average daily close on an absolute basis has been 0.3% this year, the lowest since 1965. So, that’s it; it’s official – this is the most boring stock market of all time.

 

As earnings season rolls on we see companies in the S&P 500 are posting earnings growth of just 2.4% through last week, below the already lame 3.7% that was forecast. The first two quarters of the year looked like earnings were great and headed for the moon, but part of that was just he comparison with the first half of 2016 when earnings were declining. This week brings a heavy slate of reports, as 185 of the benchmark’s constituents post results. At 21.85 times earnings, the S&P 500 is on the pricier side of historical averages.

 

It’s not theory anymore. U.S. markets are clearly pricing in some version of a tax plan. The tenor of the markets changed in early September when tax reform made its way back into the news cycle. As we get closer and closer, the details become more and more important. Today, Trump tweeted that there will be no changes to Americans’ tax-deferred retirement plans (such as 401Ks and IRAs), pushing back against reports that the Republicans are weighing a proposal that would significantly reduce the income workers can save in these popular programs. Now that’s good news if you are trying to save for retirement but it might be bad news for a tax plan. Republicans’ ability to win passage of a tax package hinges on its ability to survive a complex set of legislative restrictions in the Senate. Republicans are attempting to cut business tax rates deeply, and also to cut individual tax rates, using a legislative route that allows them to bypass a Democratic filibuster and pass a bill with a simple Senate majority. To do that, they will need to make some tough political choices, eliminating some popular tax breaks, or employing some budgetary accounting tricks, in order to offset lost revenues from rate cuts. Trump’s tweet concerned one of those accounting maneuvers, which would have allowed Republicans to effectively borrow tax revenues from the future to offset some rate cuts today. Reducing 401K contribution limits would force retirement savers to pay more in taxes today, as they sock away money, but less in the future, when they began withdrawing retirement funds tax-free. This move also opens the door for other possible concessions, or maybe we should say – inevitable concessions. Clearly, nothing like the plan Republicans recently put forward will become law. The plan does not just fail to lift economic growth meaningfully, it adds significantly to the nation’s fiscal problems. It also is politically unpalatable. The brouhaha over eliminating the state and local income tax deduction, the principal source of additional tax revenue in the plan, has even forced some of the authors of the legislation to step back from it. If a tax bill makes it into law, and odds appear no better than even that one will, then it will be significantly scaled back.

 

Whenever you open a bank account or apply for a credit card, there is a ton of fine print, which includes a clause that says that if there is a problem, it must be resolved through arbitration – not by going through the courts or joining in a class action lawsuit. The Consumer Financial Protection Bureau, a watchdog agency, has approved a rule that would block mandatory arbitration clauses, allowing more people to file or join a lawsuit to press their complaints. So, if a bank were to open bogus accounts in your name, or start racking up unwarranted fees, you could still try to resolve the matter through arbitration but you could also keep the option of taking it to the courts. One of the big problems with arbitration is that it is difficult for most people to take time out of their schedule to attend arbitration over smaller disputes. Would you take a day off work to attend arbitration over a $100 dispute you may or may not win? Many people just give up. Another problem is that if a consumer reaches a settlement through arbitration, it generally requires non-disclosure – meaning that other potential plaintiffs do not have the benefit of knowing that other consumers have been wronged, how they settled, or what evidence might have been uncovered in the process – meaning there is no precedent established through the process of arbitration. And that means there is no record of repeat offenses. Every misdeed by the bank or financial institution is viewed as “one-off” rather than a pattern of improper or even illegal behavior.

 

Wall Street had hoped Congress would kill the rule before it went into effect later this year. Today, the Treasury Department issued an 18-page report that tries to argue against the protections. With tax reform now taking up much of lawmakers’ attention, opportunities to push through the measure in time are dwindling. Also slowing their efforts has been backlash against two big financial firms, Wells Fargo and Equifax. Wells Fargo has been under pressure since admitting last year that employees had opened millions of sham accounts customers didn’t ask for, and Equifax is struggling to recover from a massive hack that affected more than 145 million people. Consumers groups have used both cases as a rallying cry against arbitration clauses, which Wells Fargo and Equifax both use. But the Treasury Department’s report could provide a boost to efforts to derail the rule.

 

Prime Minister Shinzo Abe made a huge gamble when he called for a snap election to demonstrate confidence in his government. Lucky for him, he won in a landslide. Also lucky are stock investors, and not just those in Japan. The victory likely means the continuation of the Bank of Japan’s huge economic stimulus. Abe’s policies have allowed gross domestic product to expand for six straight quarters, a rarity for an economy that has been in and out of recession fairly regularly since the 1990s. At less than 3 percent, the unemployment rate is the lowest in 23 years. Japanese shares rose, with the Nikkei 225 Stock Average gaining for a 15th straight day, its longest winning streak on record. Globally, the BOJ’s continued policy accommodation should help cushion the blow from the Fed’s balance sheet normalization and the ECB’s expected tapering next year. The ECB meets on Thursday and they are widely expected to cut their monthly bond purchase program in half.

 

The tally is in: Amazon received 238 proposals from cities, states, districts and territories interested in becoming home to the company’s second headquarters. Last month, Amazon announced that it wanted to open a second North American headquarters, setting off a scramble among economic development officials from the United States, Canada and Mexico eager for as many as 50,000 jobs and $5 billion in investment. The next step is for Amazon’s real estate team to sort through the bids and decide which proposals to consider more closely. It plans to make a decision early next year. Affordable-housing advocates point to spikes in rents in Seattle as evidence that bidding cities ought to prepare for rising housing costs if Amazon decides to locate thousands of highly paid employees there.

 

The number of apartments deemed affordable for very low-income families across the United States fell by more than 60 percent between 2010 and 2016. According to a new report by Freddie Mac, rent growth is outstripping income growth in most major metro areas. The apartment vacancy rate was 8 percent in 2009, compared to 4 percent in 2017. More renters flooded the market after people lost their homes in the housing crisis. That trend, coupled with a stagnant supply of apartments, resulted in increased rents. The report found a significant drop in the percentage of affordable units in seven of the nine states where Freddie Mac financed the most rental units, including Arizona.

 

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