Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

Month: April 2017

THE DAILY EDGE (28 April 2017)

U.S. Durable Orders Edged Up In March Demand for long-lasting factory goods improved modestly in March, a sign that the manufacturing sector is healing only slowly as business investment remains restrained.

Orders for durable goods—products designed to last at least three years, such as trucks and computers—increased 0.7% from the prior month, the U.S. Commerce Department said Thursday. It was the third straight month orders increased, but March’s gain was the weakest and below economists’ expectation for a 1.3% rise. (…)

Thursday’s report showed a closely watched proxy for business spending on new equipment, orders for nondefense capital goods excluding aircraft, rose 0.2% in March, continuing a trend of small increases in the category.

Orders for nondefense capital goods excluding aircraft rose 2.1% over the past three months compared with the first quarter of 2016. Total durable-goods orders were up 3.4% in the first three months of 2017 compared with the same period a year earlier. (…) (Table from Have Analytics)

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U.S. Pending Home Sales Ease

The National Association of Realtors (NAR) reported that pending home sales slipped 0.8% ((+0.8% y/y) during March to an index level of 111.4 following a 5.5% rise. The decline followed a 5.5% February increase that was strengthened by warm weather. The index is reported on a 2001=100 basis.

The pending sales figures exhibited mixed performance across regions. The index in the Northeast declined 2.9% after a 3.4% February gain. In the West the index also fell 2.9%, reversing all of the prior month’s rise. The index in the Midwest eased 1.2% following an 11.5% rise to the highest level since last March. To the upside, the index for the South increased 1.2% to the highest level since March 2006.

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 U.S. first-quarter growth weakest in three years as consumer spending falters The U.S. economy grew at its weakest pace in three years in the first quarter as consumer spending barely increased and businesses invested less on inventories, in a potential setback to President Donald Trump’s promise to boost growth.

Gross domestic product increased at a 0.7 percent annual rate also as the government cut back on defense spending, the Commerce Department said on Friday. That was the weakest performance since the first quarter of 2014.

The economy grew at a 2.1 percent pace in the fourth quarter. (…)

A measure of private domestic demand increased at a 2.2 percent rate last quarter. First-quarter GDP tends to underperform because of difficulties with the calculation of data that the government has acknowledged and is working to rectify. (…)

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, braked to a 0.3 percent rate in the first quarter. That was the slowest pace since the fourth quarter of 2009 and followed the fourth quarter’s robust 3.5 percent growth rate. (…)

U.S. labor costs accelerate in first quarter

The Employment Cost Index, the broadest measure of labor costs, increased 0.8 percent, the largest increase since the fourth quarter of 2007, after rising 0.5 percent in the fourth quarter, the Labor Department said on Friday.

Economic Growth Likely Stalled in First Quarter The government’s initial tally of first-quarter GDP is expected to show growth slowed to a crawl, suggesting investors’ hopes following Donald Trump’s election victory haven’t yet translated into real gains.

The U.S. economy has a habit of starting the year out sluggishly only to rebound in the spring and summer, and this year appears no different. Many economists believe there are flaws in how the government adjusts data for seasonal factors that might be understating growth, and the Labor Department has worked to improve its methods. Whatever the case, the underlying trend likely remains intact: 2% growth—not bad, but weaker than the more robust expansions of past decades.

The main factor behind the economy’s sluggish performance this winter is likely weaker spending by consumers. Some reasons are temporary: delayed tax refunds by the IRS, and lower utility bills due to warm weather. Others are less encouraging: Auto sales have also fallen, and higher inflation is offsetting much of Americans’ wage gains. (…)

This will help:

  • Ready for lower retail gasoline prices in the US? They are coming. (The Daily Shot)

Even more so if food prices remain weak:

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 Euro, Bond Yields Lifted by Strong Inflation Data The euro and government bond yields in Europe jumped on surprisingly strong inflation figures, while stocks fell.

(…) Official figures released midmorning showed the eurozone’s core inflation rate—which excludes volatile food and energy prices—at 1.2%, the highest level since 2013. Analysts were expecting a rise of 1%. Headline inflation reached 1.9%, touching the European Central Bank’s target of slightly below 2%. (…)

What surprise? Here’s what I wrote in The Daily Edge of April 19:

Core prices have been very volatile in recent months in Europe: they declined at a 4.4% annualized rate between November and January but jumped at a 9.0% annualized rate in February-March. Check this out (MoM): Nov. to March: -0.1%, +0.4%, –1.4%, +0.3% +1.2%.

Here’s the data through April with revisions to prior months:

(MoM): Nov. to March: -0.2%, +0.4%, –1.7%, +0.4% +1.4%, +0.5%.

  • Last 3 months annualized: +9.5%
  • Last 2 month annualized: +12.0%

So:

“There is clearly a risk that we could stand at the June meeting with an ECB that changes its forward guidance in a more hawkish direction provided the cyclical situation looks good,” said Pernille Bomholdt Henneberg, chief analyst at Danske Bank .

Sarcastic smile Better not be short the euro if that happens.

Here’s Germany’s inflation (The Daily Shot):

Why Trump Decided to Back Off Nafta Threat Conversations with the Mexican and Canadian heads of state, along with a flood of calls from business executives, helped steer President Trump away from an idea that some of his advisers feared was an unnecessary threat.
  • From the WSJ editorial:

(…) On Thursday morning President Trump tweeted out his account of the goings-on. The two trading partners had asked for a negotiation instead of U.S. withdrawal. Mr. Trump said: “I agreed subject to the fact that if we do not reach a fair deal for all, we will then terminate Nafta. Relationships are good-deal very possible!” (…)

Mr. Trump may think this is all part of a negotiation to get a better “deal,” but it isn’t clear there’s much better to get. Mexican tariffs on imports of U.S. agricultural products, and most other goods, are nearly zero. U.S. agriculture’s three biggest export markets are China, Canada and Mexico.

Other U.S. exporters to our Nafta partners similarly benefit from nominal tariffs on their products. That is why an official of the National Cattlemen’s Beef Association said Wednesday that terminating Nafta “is one of the most dangerous moves we can make at this time.”

Mr. Trump has his reasons for disliking Nafta, none of which are good. And if he isn’t careful, he could do great damage to much of the U.S. economy.

Next Tax Battle: Trump’s Bid to Ax a Favorite Blue State Deduction

The tax policy outline Mr. Trump unveiled Wednesday proposes repealing the deduction for state and local taxes, which lets individuals subtract their home-state levies from their federal taxable income. That move was a major shift for Mr. Trump, who previously had called for capping deductions but not killing the break.

What makes the latest proposal politically divisive—and could lead to a split inside the Republican Party—is that it would shift the tax burden from low-tax states such as Texas and Florida to high-tax states such as New York and New Jersey. Blue-state Democrats criticized the proposal, as expected, but Republicans from those states don’t like it either. (…)

Removing the deduction could raise more than $1 trillion over a decade, according to independent estimates, which would help offset the cost of GOP rate cuts.

The deduction, one of the largest breaks for individuals, saves taxpayers about $103 billion this year, according to the congressional Joint Committee on Taxation. That is $38 billion more than the mortgage-interest deduction and $46 billion more than the deduction for charitable contributions. (…)

Source: @NickTimiraos, @RichardRubinDC, @josephncohen; Read full article

Donald Trump is undermining his Treasury secretary 

Larry Summers:

(…) President Donald Trump’s tax proposals were rolled out on Wednesday by the Treasury secretary Steven Mnuchin and National Economic Council director Gary Cohn. For reasons of long-run budget health, fairness, and economic impact I think they are extraordinarly ill-advised. (…)

Whatever its other virtues, distributional neutrality is not a feature of the plan announced on Wednesday. Indeed, between massive corporate rate cutting, big tax cuts for the highest income individual taxpayers, elimination of the estate tax and other incentives it is a certainty that the vast majority of the benefits of the plan will go to a very small fraction of tax payers. (…)

Republicans Put Off Obamacare Repeal Vote Again

Republicans vote-counters had been weighing whether to hold a vote this week, after conservative holdouts endorsed the bill following recent revisions. But a number of moderate Republicans remained opposed to the measure, and leaders were also distracted by the need to assemble votes for a stopgap measure to fund the government. The current spending bill runs out Friday.

When it comes to the health bill, conservative and moderate holdouts are still “struggling to get to yes,” Representative Tom MacArthur of New Jersey, the chief author of an amendment that is reviving hopes for the GOP’s health-care bill, said earlier Thursday.

“I think it’s close,” said MacArthur on whether enough votes to pass the bill will be found. “But I think there is a real chance of a vote.” (…)

Markets Think Trump Speaks Loudly But Carries No Stick The market reaction—or lack of it—to Donald Trump’s sketchy plan for tax cuts is part of a recognition that Washington remains stuck with politics as usual.
Trump’s Tariffs Won’t Work
Trump says he thought being president would be easier than his old life

“I loved my previous life. I had so many things going,” Trump told Reuters in an interview. “This is more work than in my previous life. I thought it would be easier.”

EARNINGS WATCH
  • 271 companies (60.2% of the S&P 500’s market cap) have reported. Earnings are beating by 5.7%, with 77% of companies surpassing bottom-line estimates. Revenues are surprising by 1.1%.
  • Expectations are for revenue, earnings, and EPS growth of 7.1%, 11.4%, and 13.3%, respectively.
  • EPS is on pace for 15.1%, assuming a typical beat rate for the remainder of the season. (RBC)
Bankers Use Trump Rally to Cash Out Investors rushed into regional and community bank stocks after the U.S. election, encouraged by higher interest rates and potential regulatory relief. Top executives at banks used the rally to cash out.

Insiders at publicly traded commercial banks with a market value greater than $1 billion, but excluding the largest national banks, sold about $1.4 billion in their company stock between the election and the end of March, up 65% from the 10-plus months in 2016 before the election, according to an analysis by The Wall Street Journal.

The moves are in line with the behavior of insiders at the biggest U.S. banks, which was the subject of a Wall Street Journal article in January.

Executives at some of the country’s largest banks sold about $163.5 million worth of stock since the presidential election, more than in that same period in any year since before the financial crisis, according to an updated Wall Street Journal review of securities filings. (…)

Private-equity investors with board seats also sold. Four of them accounted for more than $310 million of the sales, or about 22% of the total, since the election. These same investors sold $46 million in 2016 before the election.

While it is relatively unusual for private-equity investors to have stakes in banks due to regulatory restrictions, some got involved during or shortly after the crisis. (…)

No Buyback, No Problem: Companies Trim Share Purchases in First Quarter

First quarter share repurchases among S&P 500 firms that have released data are tracking 24% lower than those companies reported a year earlier, according to S&P Dow Jones Indices. (…)

In a separate analysis, Bank of America Merrill Lynch equity strategists said this week that although buybacks among their corporate clients picked up in April, year-to-date activity is tracking at the lowest pace for any comparable period since 2013, and is down almost 30% from the same period a year earlier. (…)

Companies authorized $150.3 billion of share buybacks in the first three months of the year, down from $197.5 billion a year earlier, according to data from Birinyi Associates Inc. (…)

Exclusive: Trump says ‘major, major’ conflict with North Korea possible, but seeks diplomacy

(…) “There is a chance that we could end up having a major, major conflict with North Korea. Absolutely,” Trump told Reuters in an Oval Office interview ahead of his 100th day in office on Saturday.

“We’d love to solve things diplomatically but it’s very difficult,” he said. (…)

THE DAILY EDGE (27 April 2017): Tax Cuts!?

Trump’s Tax Cuts Face Narrow Path Through Congress President Trump’s tax proposal calls for deep reductions in business tax rates and major changes to the individual tax system. But the plan faces a narrow path to victory through Congress.

(…) What the administration delivered Wednesday largely hews to tax-cut proposals Mr. Trump made during his campaign last year, but includes some crucial changes. Most notably, he is proposing to repeal a provision of the tax code that allows individuals to deduct the state and local taxes they pay from their reportable income. That will hurt residents of high-tax states such as Mr. Trump’s home state of New York, New Jersey and California, and is already spurring objections from Republican lawmakers in those largely Democratic states.

Such a repeal has the potential to raise more than $1 trillion over a decade, which would help fund the reduction in rates and get the tax plan through Congress, which is focused on deficits in part because of budget rules. (…)

Unless Mr. Trump can attract votes from Democrats—which appears unlikely—the plan must comply with legislative procedures that allow for a party-line vote in the Senate, where Republicans have 52 seats out of 100.

The key to those procedures: Any tax plan can’t increase budget deficits beyond a 10-year period. The Committee for a Responsible Federal Budget said Wednesday that the plan would cost about $5.5 trillion in lost revenue over a decade. Those limitations could lead Republicans to make some or all of the tax cuts temporary to limit the long-run fiscal effect.

Mr. Trump’s team intends to argue that his tax cuts will spur economic growth and increase revenue, which would help avert increased deficits. Lawmakers and Congress’s nonpartisan tax policy scorekeepers—the Joint Committee on Taxation—need to agree for the plan to proceed. Independent experts cautioned that the administration’s growth assumptions appear optimistic. (…)

Mr. Trump’s plan leaves several crucial issues unresolved. They include how to treat business deductions for capital expenses; what happens to personal exemptions; how to tax the earnings of U.S. companies stockpiled overseas; how a break for child care would be structured; and where the tax brackets for individuals would be set.

Because of those omissions, it is difficult, if not impossible, to calculate the exact fiscal impact of the plan and how it would affect individual households. (…)

Cutting the pass-through tax rate to 15% while keeping top tax rates above 30% could put firms in the unusual position of having firm owners, such as law-firm partners and hedge-fund owners, paying much lower tax rates than their own employees. Averting such distortions would require complex new rules in the tax code. (…)

Mr. Mnuchin said key pieces of the business tax plan were still being worked out. The House GOP plan repeals the deductibility of interest and allows business to write off capital expenses immediately. Mr. Mnuchin said the administration favored some form of immediate write-off but didn’t commit to any details. He also said the administration knew that some industries, including real estate and utilities, were concerned about losing the interest deduction.

“We do think some level of expensing is important,” he said. “We’re sensitive to that certain industries are very sensitive to interest deductibility, and we want to make sure that we don’t do anything that creates uncertainty in the economy.”

(…) More than half of all business income is now earned by pass-through entities, which have surged in popularity in recent decades.

Of all pass-through income, more than half is earned by top-bracket taxpayers, according to estimates by the Tax Policy Center in Washington. The top brackets begin at $470,700 for married couples filing jointly and $418,400 for singles.

Under current law, pass-through owners have little income-tax incentive to distinguish between business income and compensation, although some have tried to minimize compensation in order to lower Medicare and Social Security taxes.

If this proposal becomes law, owners will likely try to reduce their compensation in order to save income taxes as well, says Troy Lewis, a certified public accountant in Draper, Utah, who advises wealthy clients. “People try to structure their affairs to achieve lower rates.”

For example, say a pass-through owner has $200,000 of net income currently taxed at the top 39.6% marginal rate. Under the proposal, the part that is compensation would be taxed at a 35% rate, and the portion that is business income would be taxed at a 15% rate.

So taking wages of $50,000 instead of $150,000 could save $20,000 in income taxes, plus any additional payroll-tax savings. While there are laws defining “reasonable” compensation, they are cumbersome for the IRS to enforce because each case is different.

It is still unclear whether the proposal would apply to self-employed workers and how much wealthy owners of hedge funds and private-equity firms would benefit, if at all.

Gregg Polsky, a tax-law professor at the University of Georgia, said the proposal wouldn’t immediately affect private-equity partners because much of their income is taxed already at lower capital-gains rates. On the other hand, he said, they could restructure arrangements to benefit from the lower 15% rate.

One adviser to hedge funds, Michael Laveman of accounting firm EisnerAmper LLP, said the proposal would act as a tax cut for hedge-fund owners who share management fee income. Management fees, he said, are typically taxed at the current top 39.6% rate.

Mr. Laveman’s own firm, also a partnership, would be among the beneficiaries. “I’m trying not to tell my wife about the huge tax break we are about to get,” he said.

Trump’s Tax Principles A pro-growth outline that focuses on weak capital investment.

From the WSJ editorial:

(…) Slashing the headline rate to 15% would instantly lead to a surge in capital investment. Mr. Trump would make small businesses like S corporations and other pass-throughs that now pay through the individual tax code eligible for the 15% rate. Tax parity among all companies is a useful goal, not least because owner-operated companies are an engine of hiring and growth.

Increasing the capital stock will raise productivity. The economic literature conservatively suggests that about half of the corporate tax burden is carried by workers in the form of lower wages. In other words, moving to 15% is a national pay raise. (…)

This 20-year chart from Ed Yardeni shows how tightly knit normally are capex and profits. What happened in 2014-16? The 75% collapse in oil prices which forced energy companies to severely cut expenditures.

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  • People Appear More in Need of Tax Break Than Corporations (BloombergBriefs)

From the NYT editorial:

President Trump’s Laughable Plan to Cut His Own Taxes

(…) As to the rationale offered up by Mr. Mnuchin and Mr. Cohn, even many conservative economists believe that the argument that tax cuts will pay for themselves, by increasing investment and creating jobs, is the same supply-side fantasy that has repeatedly been proved wrong. This durable nonsense would instead add mightily to a federal debt that Americans will be paying off for generations to come. (…)

In addition to lowering the top individual income tax rate to 35 percent, Mr. Trump would do away with the alternative minimum tax, which accounted for a vast majority of the taxes he paid in 2005, according to his leaked tax return from that year, and is one way of making sure that most well-off Americans pay a significant tax on ordinary income. He would also get rid of the estate tax, benefiting mainly wealthy families like his. (…)

From Bloomberg:

From the FT:

(…) The Committee for a Responsible Federal Budget estimated that over a 10-year period the proposals would lead to a loss of anywhere from $3tn to $7tn depending on how the details pan out. Among the most costly proposals is the corporate tax cut, which loses $2.2tn, the reduction in the tax rate on pass-through entities (that is, businesses that pass earnings to their owners as individuals), the doubling of the standard deduction, and the changes to the rates of individual income tax.

The plan’s defenders would argue this ignores the so-called dynamic effect of easing taxes — namely higher growth, which generates revenue. This is something Mr Mnuchin has repeatedly stressed, as he claims that his tax cuts would pay for themselves. However, the dynamic revenue score that matters most is the one produced by the Joint Committee on Taxation, a congressional watchdog that will run the numbers on whatever emerges from Congress. This uses highly conservative assumptions that will not show a big revenue fillip from higher growth.  

The administration’s brief tax document was cooked up in short order after Mr Trump ordered his team to energise tax reform by putting forward a road map. One of the key questions now is how the proposals mesh with an existing plan from Mr Ryan, which aims to be revenue-neutral.  Mr Ryan put a positive gloss on the proposals on Wednesday, saying the package was “along exactly the same lines that we want to go”, while Mr Mnuchin said the administration was on the same page as Republican leaders. (…)

Presidential leadership is seen as essential for tax reform to happen. It heralds an intensifying round of meetings between the administration and tax writers in Congress. If there is progress on healthcare reform — as appeared to be the case on Wednesday — it could further enhance the prospects of a tax bill eventually materialising.

(…) This fits Trump’s America first agenda. Many beneficiaries are wealthy individuals with US-based employees, not the multinationals that benefit from a pure corporate tax cut. It is also sweet for lawyers, who can set up more such structures. Steven Mnuchin, Treasury secretary, argues that increased economic growth arising from the changes will bolster tax receipts. That is generous. (…) The message is clear from the administration: fiscal responsibility is taking a back seat. And it thinks plenty will still want to come along for the ride.

David Rosenberg:

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Trump Drops Nafta Pullout Threat The Trump administration said it was no longer considering pulling out of Nafta, following a day of intense lobbying from business leaders and lawmakers who rallied to quash internal White House discussion of the possibility.
Trump Administration Launches Probe of Aluminum Imports The Trump administration has launched a wide-ranging probe of aluminum imports and producers in Canada and China—by far the biggest aluminum exporters to the U.S.—could face the biggest impact from any tariffs coming out of the case.
EARNINGS WATCH
  • 205 companies (43.4% of the S&P 500’s market cap) have reported. Earnings are beating by 5.6%, with 75% of companies surpassing bottom-line estimates. Revenues are surprising by 0.8%.
  • Expectations are for revenue, earnings, and EPS growth of 6.9%, 10.4%, and 12.3%, respectively.
  • EPS is on pace for 15.5%, assuming a typical beat rate for the remainder of the season.

Impressive, and really needed given this from Frank Holmes

OMINOUS SIGNS

My on going tab on signs we have finally gone full circle:

(…) New retail brokerage accounts tallied 235,000 during the quarter, up 44%. (…)

  • Personal anecdote: a 53 year old door installer was watching his stock ptf. on his cell phone while doing work at my house this week…In fact, he asked us for access to our wi-fi network, not being able to get his own unlimited cell phone plan…
  • Heard on NPR, a one hour “show” (between 4 and 5 pm) on on-line trading and how day-trading and/or “swing-trading” can “easily” take you to financial independence, whether markets go up, down or sideways. That “show” is really a one-hour advertising for OnlineTrading Academy which claims that “You don’t have to work on
    Wall Street to make money like Wall Street.”

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