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• THE TAAL EQUITY MARKETS
• THE ‘INFLATION MYSTERY” EXPLAINED

Robust Job Growth Puts U.S. on Firmest Footing in a Decade The U.S. economy is hitting milestones not seen in more than a decade, marked by robust hiring that has led to low unemployment and a sustained pickup in output.

Labor Department data Friday showed nonfarm payrolls rose a seasonally adjusted 228,000 in November—the record 86th straight month of expansion—after a 244,000 gain in October [revised from 261k]. Steady hiring has in turn driven the unemployment rate down to 4.1% for two straight months, holding at a 17-year low.

That would put economic output on track for a third straight quarter of near 3% growth, a breakout, for now at least, from a long period of 2% growth. The economy hasn’t delivered three straight quarters of growth at or above 3% since a period from mid-2004 to early 2005. (…)

Average hourly earnings for private-sector workers increased five cents last month after declining in October. Wages were up 2.5% from a year earlier in November—near the same lackluster pace maintained since late 2015. (…)

A broad measure of unemployment and underemployment that includes Americans stuck in part-time jobs or too discouraged to look for work ticked up to 8% in November, but remained near the lowest level since 2006. Meanwhile, the share of the population between 25 and 54 years old that has a job, 79%, touched the highest level since the recession ended in 2009.

Those figures suggest there are relatively few Americans left to be drawn off the sidelines of the labor market. (…)

Overall, a pretty solid employment report that does not change the basic trends:

• Fairly steady monthly job creation numbers (last 3 months: +170k on average vs YtD +174k) but the YoY trend remains downward.
• No acceleration in wages, rather a small deceleration which does not threaten profit margins just yet.

• The aggregate payroll index (wages x hours) keeps rising in the 4-5% range (+4.8% in November) while inflation is slowly creeping up…

• …squeezing real labor income growth back below +2.0% (+1.9% in November) while real expenditures keep rising 2.5-3.0%. Given current historically low savings, something needs to change in order for consumption to stay firm: wages need to accelerate or inflation to decelerate.

• Trends in wages are worrisome. October was revised downward from flat to -0.1% (the first negative reading in 3 years). So Oct-Nov: +0.5% annualized after +2.8% during the previous 9 months. Last 3 months: +2.0% a.r.. FYI, last 3 months CPI: +4.2% a.r. (core +2.4%); PCE deflator: +3.0% (core +1.9%).

• The deleveraging of the American consumer lasted a grand total of 4 years. Debt/income is now 26%. The Fed’s “lower for longer” policy is hiding this time bomb…

• …for how long. How much do interest rates need to rise to begin the pinching process. Not by much given how low rates are.

BTW:

• 1 in 3 Americans with a Credit File Has Debt Reported in Collections

Thirty-five percent of adults have a debt in collections reported in their credit files, an Urban Institute study shows. The study, conducted with Encore Capital Group’s Consumer Credit Research Institute, found these 77 million Americans owed an average of $5,200 in September 2013.

That was in 2013, when total debt was 23% of DPI. It is now 26%, 13% higher…

• Forty-three million Americans have unpaid medical debt on their credit files, according to a 2014 study by the Consumer Financial Protection Bureau. The study also found that 52% of all debt on credit reports was related to medical expenses. (…) In fact, there is more than $127 billion in debt listed as medical type in the collection stages as of June 2017. (Experian)

Now this:

• HOW DONALD TRUMP SHOT DOWN OBAMACARE WITH THE SENATE TAX REFORM BILL

With one simple move, the tax reform bill passed by Senate Republicans Saturday could herald the beginning of the end of former President Barack Obama’s Affordable Care Act, better known as Obamacare.

The new bill repeals Obamacare’s key requirement that all Americans obtain health insurance. Policy experts say that removing the mandate will force insurance premiums to rise, as young and healthy Americans opt out, leaving millions of Americans without healthcare.

“It’s going to take a bunch of healthy people out of the insurance market,” Craig Garthwaite , director of the healthcare program at Northwestern University’s Kellogg School of Management, told Reuters.

Obamacare “is going to collapse even more now,” he said.

Without the mandate, health insurance premiums would rise 10 percent in most years over the next decade on the individual market and 13 million people would lose coverage by 2027, the nonpartisan Congressional Budget Office said in a report last month. (…)

• The Middle Class Might Not Even Notice If the GOP Cuts Their Taxes

• Trump’s Middle-Class Tax Pledges Go Unfulfilled in Senate Bill

•  As tax plan gained steam, GOP lost focus on the middle class

Larry Summers:

• US economy faces a painful comedown from its ‘sugar high’

(…) There will be no meaningful and sustained growth in workers take-home pay without successful measures both to raise productivity and to achieve greater equality. Only in this way can we achieve healthy growth. The tax-cut legislation now in committee on Capitol Hill exacerbates every important problem it claims to address, most importantly by leaving the federal government with an entirely inadequate revenue base.

The bipartisan Simpson-Bowles budget commission concluded that the federal government needed a revenue base equal to 21 per cent of gross domestic product. In contrast, the tax cut legislation now under consideration would leave the federal government with a revenue basis of 17 per cent of GDP — a difference that works out to $1tn a year within the budget window.

This will further starve already inadequate levels of public investment in infrastructure, human capital and science. It will probably mean further cuts in safety net programmes, causing more people to fall behind. And because it will also mean higher deficits and capital costs, it will probably crowd out as much private investment as it stimulates. The proposed tax cuts may prolong the sugar high. But they are no substitute for the new economic foundation we so desperately need. (…)

EARNINGS WATCH

Three weeks to the important fourth quarter end. So far, so good.

Factset:

In terms of estimate revisions, analysts have made smaller cuts than average to earnings estimates for companies in the S&P 500 for Q4 2017 to date. On a per-share basis, estimated earnings for the fourth quarter have fallen by 0.5% since September 30. This percentage decline is smaller than the trailing 5-year average (-3.3%) and the trailing 10-year average (-4.3%) for the first two months of a quarter.

In addition, a smaller percentage of S&P 500 companies have lowered the bar for earnings for Q4 2017 relative to recent averages. Of the 107 companies that have issued EPS guidance for the fourth quarter, 71 have issued negative EPS guidance and 36 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 66%, which is below the 5-year average of 74%.

Because of the downward revisions to earnings estimates, the estimated year-over-year earnings growth rate for Q4 2017 has fallen from 11.3% on September 30 to 10.6% today. All eleven sectors are predicted to report year-over-year earnings growth.

If the Energy sector were excluded, the estimated earnings growth rate for the remaining ten sectors would fall to 8.4% from 10.6%.

The Industrials sector has recorded the largest decrease in expected earnings growth since the start of the quarter (to 1.6% from 10.2%). Despite the drop in expected earnings, this sector has witnessed an increase in price of 3.5% during this same period. Overall, 43 of the 68 companies (63%) in the Industrials sector have seen a decline in their mean EPS estimate during this time. Of these 43 companies, 6 have recorded a decrease in their mean EPS estimate of more than 10%, led by General Electric (to $0.30 from $0.57), Nielsen Holdings (to $0.46 from $0.81), and Alaska Air Group (to $0.99 from $1.56). General Electric has also been the largest contributor to the decrease in expected earnings for this sector since September 30. The stock price of General Electric has fallen by 26.4% (to $17.80 from $24.18) during this same period.

If General Electric were excluded, the estimated earnings growth rate for the Industrials sector would improve to 8.0% from 1.6%.

The estimated (year-over-year) revenue growth rate for Q4 2017 is 6.3%.

Thomson Reuters/IBES:

The estimated earnings growth rate for the S&P 500 for Q4 2017 is 11.6%. If the Energy sector is excluded, the growth rate declines to 9.3%.

Small Investors Face Higher Taxes Under Senate Proposal A little-discussed provision in the Senate tax bill could lead to a higher tax bill for millions of small investors and may cause many to unload stocks before year-end to avoid those costs.

A little-discussed provision in the Senate tax bill could lead to a higher tax bill for millions of small investors and cause many to unload stocks before year-end to avoid those costs.

Under the Senate’s $1.4 trillion tax overhaul, investors would lose the ability to choose which shares they can sell to reduce a position. Instead, investors selling partial stakes in a company would have to unload their oldest shares first, a process known as selling on a “first-in, first-out” basis.

Selling those shares usually brings a higher tax bill if the stock’s price has been rising. (…)

The House’s tax proposal doesn’t include the first-in, first-out provision, and some lawmakers are trying to kill it. In a letter to Senate leaders on Thursday, 41 House Republicans urged their colleagues to drop the provision, saying it would amount to “massive, fundamental change that inhibits investor autonomy.”

Proponents point to a Joint Committee on Taxation estimate that the rule would raise as much as $2.4 billion over the next 10 years, starting in 2018. (…)

Under the current U.S. law, investors can choose which shares they sell, typically the last ones in which deprives Uncle Sam from taxing the earlier, lower cost, shares. Anybody heard about cost averaging?

Outlook 2018: The Bull Market’s Next Act

(…) Given synchronized global growth and rising corporate profits, 2018 could be another good year for stocks, notwithstanding the bull’s advancing age. The S&P 500 could gain about 7%, mirroring similar gains in corporate profits, according to the consensus forecast of 10 investment strategists at major U.S. investment banks and money-management firms surveyed by Barron’s each December. The group’s predictions range from 2675 to 3100, with a mean estimate of about 2840.

The outlook isn’t entirely rosy: Interest rates are headed higher, stocks are expensive, and a tax overhaul could still stall or fail. But so long as corporate earnings keep climbing and the Federal Reserve raises rates in a measured way, the strategists see more room for gains. (…)

OUR PROGNOSTICATORS EXPECT S&P 500 earnings to climb to $145 in 2018 from an expected $131.45 this year. Most estimates assume that global growth will spur earnings gains, with an additional boost coming from U.S. tax cuts. Depending on the final tax bill, they figure that lower corporate taxes could be worth 5% to 10% of earnings growth, or anywhere from $7 to $14 a share. But in the unlikely event that no tax cuts are passed, the market could drop sharply.

Industry analysts forecast S&P earnings of $146.20 for next year, not including tax cuts. If analysts revise their estimates higher in coming months to account for the positive impact of lower taxes, stocks could get a further boost. (…)

BITCOIN

• Chipmakers and investment vehicles linked to cryptocurrency rocket in value

• The Greatest Investment Bubble

(…) “There is here a basic and recurrent process. It comes with rising prices, whether of stocks, real estate, works of art, or anything else. This increase attracts attention and buyers, which produces the further effect of even higher prices. Expectations are thus justified by the very action that sends prices up. The process continues; optimism with its market effect is the order of the day. Prices go up even more.”

The description written two decades ago by Galbraith seems as fresh as ever, with the incomparable and incomprehensible price action of Bitcoin—which soared 40% in a matter of 40 hours last week, according to The Wall Street Journal. While Coinbase, which allows individuals to participate in the frenzy, has become the most downloaded app on Apple’s iTunes, according to Recode, Bitcoin also was giving erstwhile Wall Street types the kind of volatility squeezed out of the modern stock, bond, commodity, and currency markets, as Barron’s cover story last week reported (“,” Dec. 2). The real fun should begin when Bitcoin futures trading begins Sunday evening.

That it ends is inevitable, and inevitably violent. “The descent is always more sudden than the increase; a balloon that has been punctured does not deflate in an orderly way,” Galbraith further wrote. “The phenomenon has manifested itself many times since 1637, when Dutch speculators saw tulip bulbs as their magic road to wealth,” he noted, adding that he wasn’t making a prediction. Neither is one offered here. (…)

But the size of Bitcoin pales against what really is the biggest bubble in the world. That would be the trillions of dollars worth of bonds with negative yields, contends David Rolley, co-team leader of the global fixed-income and emerging-debt group at Loomis Sayles.

According to JPMorgan’s latest tally, there is some $10.1 trillion in global government bonds with yields below zero—or 40 times as much as Bitcoin. That is down from the peak of $12.7 trillion reached in July 2016 in the wake of the market panic following the Brexit vote.

Of course, this isn’t the product of wild-eyed speculators’ relentless chase of a market’s accelerating ascent, but the result of sober central bankers’ monetary policies. The European Central Bank has been buying 60 billion euros’ ($70.6 billion) of bonds per month. The Bank of Japan, meanwhile, is acquiring Japanese government bonds in sufficient quantity to keep its 10-year yield pegged near zero percent. (…)

Tap and Trade: Apps Target Young Investors

Morgan Stanley Launches Robo-Advisor for Young Investors