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One tax to rule them all


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The Days Ahead: The quietest week of the year. No major announcements  

Taxes, last of the data points and we made it to the tax bill. Also:

1. Those tax cuts:

The tax bill passed, in case you missed it. It’s a decidedly mixed bag but the way we look at it, is that it’s a major tax cut for corporations, a simplification of personal tax rates and deductions and a clean-up of international tax policies which will end things like tax inversions. Here’s the full line item paper and here's the full bill. By now, the limit on state, local and mortgage interest relief are well known as a feature, not a bug, of the hit to residents of high tax states. The corporate tax rate change will certainly improve the bottom line of energy, industrial and consumer discretionary companies, which tend to pay the highest rates. But 200 companies in the S&P 500 pay less than 20% in tax already and in the all cap universe of 3,300 stocks, 950 companies make no money, so no amount of tax reform will make a difference.

There were a couple of publicized announcements that tax reform will trickle down to wages. AT&T said it would give 200,000 of its 268,000 a $1,000 bonus (so not a wage increase) which would cost them $200m. AT&T will receive an annual tax cut of $2.5bn so, yeah, less than 10% of its savings. Meanwhile, they're in a tussle with the DOJ about whether they can keep CNN in the Time Warner merger. So paying $200m to avoid a $500m breakup fee seems like a good move. Wells Fargo said it would give 25,000 of its 269,100 employees a raise from $13.50 an hour to $15.00, which costs $80m out of the $4bn in tax savings they will now receive every year. Not to be left behind, Fifth Third said the same thing, presumably so that its employees don't walk across the street to Wells. That will cost them $2m and the tax cuts save them $130m. These are also $30,000 a year jobs or two-thirds the national average, so let’s put it all in perspective.

Why pick on them? Because survey after survey said companies are likely to spend the tax breaks on dividends, share buybacks and M&A. It’s unlikely to lead to lasting wage and capex increases.

Anyway, here's our quick summary on the tax bill in one chart. We go into a bit more detail here.

As for market reactions:

  • U.S. dollar: marginally weaker
  • Stocks sideways: probably a typical “buy the rumor, sell the fact” tale
  • No inflationary fears: TIPS barely moved
  • No high growth concerns: 10-Year Treasuries, same as this time last year.
  • Deficit increase is a given: barring some spectacular growth not achieved in two decades.
  • Growth: The Joint Committee on Taxation says it will grow GDP by 0.8% 10 years over (i.e. not annual), which works out to $101 per household per year.

And do tax cuts pay for themselves? Well, this is in one of those “Big Endian” arguments but history suggests that no, if you cut something, it tends to go down.

2. Income and Growth:

Third quarter GDP was revised down but is still above 3% for the second consecutive quarter. Personal income spending was up around 5% on an annualized basis but actual income growth was much lower. Here it is:

Blog 3 12-22-17US - Personal Income per capita 2_FITB-USA.jpg

The increase in spending was clearly because of a draw down in savings. The savings rate is at its  lowest since 2007. This is fine while confidence is high but is not sustainable unless inflation falls or wages start to increase.

 

3. Last Look at the S&P 500:

It’s been a blowout year for stocks. As we mentioned a few weeks ago, average up years for the S&P 500 are around 17% and today we’re at 19% (21% with dividends) while the NASDAQ has outperformed the broad index by 8% and is up 29%. The chart has gone one way:

Blog 4 12-22-17 Nasdaq technichals_.jpg

We throw in the technicals for good measure but this is a market long given up on corrections and has been a straight shot since June 2016. The big movers (the FANGs) now account for 13% of the S&P 500 and 44% of the NASDAQ. We think it's a scary chart but admit they have delivered on earnings.

 

4. Five things we hope not to have to talk about in 2018, but probably will:

  1. Tax Cuts
  2. Bitcoin
  3. FANGS, FAANGs
  4. Uber
  5. Amazon

Bottom Line: Not much to expect in the final few days. We wish all our readers a very Happy Holidays and New Year and we’ll be back in January.

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Other:

Cost of a partridge in a pear tree.

Best wildlife pix of 2017

  

--Christian Thwaites, Brouwer & Janachowski, LLC


Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.

All charts from Factset unless otherwise noted.