- The 5 digs out a few less-publicized items from the tax bill
- Small-business tax cuts sacrificed so the GOP can hate on Steph Curry
- The best way you can piggyback on the bill’s corporate tax cuts
- The new Fed chief: He’ll keep rates low and the Fed’s books opaque
- Venezuela defaults (but don’t call it a default)
- It’s slightly easier to start a business in the U.S. again
- Unemployment rate milestones… Apple comes closer to being the first $1 trillion company… the news Fox and CNN won’t report… and more!
OK, so the House Republican tax plan doesn’t mess with your 401(k).
The tax bill that Treasury Secretary Steve Mnuchin once promised us would be law by August is now… well, not law. Nowhere near law, in fact… but at least it’s a matter of public record. All 429 pages of it.
We won’t dwell on the highlights of the plan. You can read about that anywhere. In terms of the themes we’ve been following this month here in The 5, the following things stand out…
- The uncertainty about the 401(k) thing is resolved. (At least until the Senate Republicans release their plan!)
- Folks in high-tax states like California and New Jersey would indeed get hosed with the end of the state and local tax deduction
- Families with lots of kids would indeed get hosed with the end of the personal exemption. (The expanded child tax credits won’t nearly make up for it.)
Oh, but wait — the homebuilder and real estate brokerage stocks got clobbered yesterday. What’s up?
There were two genuine surprises in the bill. While the deduction for property taxes is spared the ax, it’s capped at $10,000. Meanwhile, the threshold for the mortgage interest deduction gets slashed in half: Only the value of a loan up to $500,000 would be deductible. (Existing mortgages would be grandfathered.)
Way we understand it, the homebuilder lobby and the realtor lobby haven’t been able to get on the same page this year in their talks with the House GOP leadership. And now we see the results in the legislation.
Being a specialist in the high-end homebuilder market, Toll Brothers (TOL) took the biggest hit yesterday — down about 6%. It’s stabilizing as we write this morning.
Here’s something we haven’t seen the mainstream point out: Under this proposal, many of the tax increases that came into effect under Obama remain in place, including…
- The 20% top tax rate on dividends and long-term capital gains (until 2013, it was 15%)
- The 3.8% Medicare surtax on dividends and long-term capital gains for couples earning more than $250,000 (an Obamacare thing, not indexed for inflation)
- The 0.9% Medicare surtax, applied to all income over $250,000 for couples (another Obamacare thing, also not indexed for inflation).
Near as we can tell, the phaseout of itemized deductions for higher-income earners also remains. (In 2018, it starts at $320,000 for couples; this is indexed for inflation.)
If Trump is so dead-set on undoing everything Obama did, what gives?
Meanwhile, the small-business lobby thinks the bill sucks.
“This bill leaves too many small businesses behind,” says Juanita Duggan, president of the National Federation of Independent Business. “We are concerned that the pass-through provision does not help most small businesses.”
What she’s talking about is that many small businesses currently get taxed at the top individual rate of 39.6%. The bill reduces that to 25%… but many “pass through” businesses would not qualify for this lower rate.
There’s a crazy-quilt patchwork of rules in the bill to sort it out, and Duggan is not impressed. But the GOP is so pleased with its handiwork in defining who qualifies that it put out the following in a press release: “Our legislation will ensure this much-needed tax relief goes to the local job creators it’s designed to help by distinguishing between the individual wage income of NBA All-Star Stephen Curry and the pass-through business income of Steve’s Bike Shop.”
Since when did the GOP have it in for pro athletes? Oh, forgot — Steph isn’t a Trump fan.
We could look past the GOP’s pettiness if their bill really did help “local job creators”… but per Ms. Duggan it does not.
At least the bill repeals the rotten estate tax — eventually. Successful family-owned businesses can stay in the family instead of being sold off to corporate behemoths because the heirs don’t have ready cash to pay a steep tax bill.
Speaking of corporate behemoths… they make out best in the legislation. The top corporate income tax rate is cut from 35% — highest in the world — to 20%.
No more would profits earned by American companies’ overseas divisions be taxed twice — they’d be taxed only in that division’s home country.
And there’s incentive for that $3.1 trillion in corporate cash stranded overseas to “come home”: Under the bill, this repatriated cash would be taxed at a one-time rate of 12%.
That’s great news for the three biggest publicly held companies out there — Apple, Alphabet (Google) and Microsoft.
Together with Cisco and Oracle, those tech giants have well over $500 billion in cash and “cash equivalents” held overseas.
As we pointed out earlier this month, it’s shareholders in these companies who stand to benefit most: The companies will likely use the bulk of this cash to raise dividends and buy back shares — making the remaining shares held by investors more valuable.
Now, it’s certainly true you could buy shares of those five companies to profit from this bill. But our researchers have identified a strategy that could prove far more lucrative. And the gains could flow into your brokerage account in a matter of mere weeks. Learn more about it at this link.
The market’s reaction to the tax plan, both yesterday and today, has been underwhelming.
There’s a saying: “Buy the rumor, sell the news.” Traders have been buying the rumor of tax reform all year, bidding the Dow up 18% since Jan. 1. It’s understandable there’s been no major reaction now that a bill has been written. The Dow inched its way toward a record close yesterday, and it’s inching higher today — 23,541 at last check.
The biggest company in the world, Apple, delivered stellar earnings numbers after the closing bell yesterday. This morning AAPL’s share price is at a record high and its market cap is approaching $900 billion.
The October job numbers came out this morning. The wonks at the Bureau of Labor Statistics conjured 261,000 new jobs for the month. Perhaps more important, the punk number for September was revised upward. The official unemployment rate is now 4.1%, the lowest since December 2000. The real-world unemployment rate from Shadow Government Statistics is 21.6%, the lowest since July 2010.
Traders are still chattering about the nomination of Jerome “Jay” Powell as the new chairman of the Federal Reserve. The mainstream approves heartily: “Shocking: Trump Makes the Right Choice” says the headline on a New York Times Op-Ed by crony capitalist Steven Rattner.
Sometime late yesterday a CNN alert appeared on my iPad informing me that Powell “would be the first former investment banker to hold the position.”
At first, I thought that was a pointless bit of trivia, the kind the mainstream loves to engage in.
Then it dawned on me how profound that really is — far more than some flunky at CNN realized.
What does an investment banker do, really, in our present day and age? He buys a perfectly productive and profitable business. He finances the purchase price with loads and loads of debt. The debt is so onerous, the profits aren’t enough to cover his debt service.
So he cuts costs — firing totally qualified and productive people, telling the survivors to “do more with less.” (I watched this happen over and over again when I worked in broadcasting — despite profit margins running 35-40%!) But in the end, it’s all good for the investment banker because a couple of years later he can go back and refinance the debt at a lower interest rate. Rinse and repeat.
The only thing that made this travesty possible is that under four successive Fed chairmen, interest rates have been falling relentlessly since 1981. As soon as the principal and interest payments started to really bite, the Fed would step in and ratchet rates down and it was time to refinance.
So Powell belongs to an enormous class of grifters and charlatans who haven’t built one new factory or created one new job… but who’ve nonetheless succeeded in business fabulously because we’ve been in a falling-interest-rate cycle for the last 35 years.
Powell is the perfect man for the job at the perfect time. History has groomed him for this moment. It’s freakin’ destiny, man. He got the job because he knows better than anyone else how important it is to keep the scam going, even after nine years of ultralow rates punishing savers.
Just watch — sometime under the Powell regime, the Fed will take us into negative interest rates, like they had in Europe for a while last year. You’ll have to pay the bank to hold your money. Count on it.
Oh, and forget about the Fed getting audited. Not if Powell can help it.
In the years since Rep. Ron Paul’s retirement, other members of Congress have introduced various audit-the-Fed bills. In 2015, Powell denounced the idea in no uncertain terms.
“These proposals,” he said during a speech at Catholic University, “are based on the assertion that the Federal Reserve operates in secrecy and was not accountable for its actions during the [2008 financial] crisis, a perspective that is in violent conflict with the facts. The Fed has been transparent, accountable and subject to extensive oversight, especially during and since the crisis. We have also taken appropriate steps since the crisis to further enhance that transparency.”
So there.
To paraphrase Sarah Palin — and the risk of repeating ourselves — how’s that swampy-drainy thing workin’ out fer ya?
Don’t call it a default: Venezuela’s president Nicolás Maduro has decreed “a refinancing and a restructuring” of his government’s debt.
When last we left the Venezuelan saga a week ago, the state oil company PDVSA had more than $2 billion in bond payments coming due over the coming days. In the end, the payments came through… but that’s it, says Maduro.
Now begins the process of renegotiating with the government’s biggest bondholders. Maduro will try to tell you it’s not a default as long as the government and the bondholders can come to terms — i.e., the bondholders agree to the government paying them less money.
If they can’t come to terms, even Maduro will have to call it a default. That could have some ugly and unpredictable reverberations through global markets. We’re monitoring events closely…
Hey, whaddya know? The United States has broken back into the top 50 countries when it comes to the ease of starting a business. USA! USA!
The World Bank comes out every year with its Ease of Doing Business survey. In the overall numbers the United States usually fares well, and this year is no exception: America ranks No. 6 behind Hong Kong, South Korea, Denmark, Singapore and No. 1 New Zealand.
But we pay closer attention to the internals of the report — especially the ease of starting a business. As we’ve been saying for years, research from the Kauffman Foundation finds startups are responsible for nearly all net job creation in the United States since 1980.
In 2015, the United States ranked No. 49. That was bad enough, but it fell out of the top 50 in 2016. The 2017 rankings, out this week, put the land of the free back at No. 49.
New Zealand remains No. 1, followed by Canada and Hong Kong. “In New Zealand,” said the 2015 edition of the report, “an entrepreneur can complete the entire process of company formation in just a few hours through a single online procedure.”
“Comrade Dave,” a reader writes tongue in cheek, as we get more reaction to our extensive Russian ramblings this week…
“I was at a dinner meeting a few years back with several CEOs and other officers from several companies.
“The conversation touched on numerous topics including the Ebola outbreak in Africa then, which, stunningly, none of them was aware of at the time.
“After I shared with them what little facts I had on the newly developing outbreak, one of the CEOs asked me if I watched Fox or CNN to get my news.
“I said I couldn’t stand Fox or CNN, as neither of them is a news organization anymore. Instead they are propaganda machines for the various interests that own/support them and mouthpieces for how wonderful the Dems or Republicans are.
“That caused some forks to be lowered and those seated to nervously glance around the table, similar to what happens when someone has bad gas and everyone is trying to figure out who was responsible for the mal-air.
“But what I said next really stunned them.
“I said if I really wanted to get TV highlights of what was going on in the world, I would rather watch RT or Al-Jazeera, keeping in mind their biases.
“While a few of the folks were disgusted, they were also interested in what I had said and probed more. The rest wanted to go back to talking about golf or other polite conversation.
“So in summary, Obama spends $350 million to prevent Netanyahu’s re-election in Israel, the Democrats orchestrate a behind-the-scenes ‘coup’ to take the nomination away from Bernie and hand it to Hillary and then CNN is caught sending advance debate questions to Hillary as well as sending news stories for approval before publication.
“And now, with the help of a propaganda machine (CNN) that makes Goebbels look like an amateur, along with a poorly educated, gullible public, we are now talking nonstop about how Trump is colluding with the Russians. WTF!
“If you would have read about this in Orwell’s 1984, you wouldn’t have believed it possible.
“One positive that Trump has brought to the public consciousness is the imagery of Washington as a swamp filled with swamp creatures. Both parties.”
The 5: The House Intelligence Committee tried to wow us on Wednesday with some Facebook and Instagram ads purchased by “Russian-linked accounts,” whatever the hell that’s supposed to mean. Politico lapped up the story like a hungry kitten presented with Grade A cream.
Jeff Stein, the congressional reporter at Vox, pointed out an inconvenient fact…
Stein further reminds us Clinton spent $1 billion trying to get elected — $72 million of that on TV ads during the stretch run of the campaign.
And chew on this, courtesy of our favorite political reporter Michael Tracey: “Maybe the most insulting part of this farce of a congressional crusade is that it takes the American people to be absolute idiots.”
Hmmm…
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. We don’t mean to scare the bejeezus out of you with this warning… but when you see it you’ll understand why we’ve included it along with an introduction to one of our most lucrative trading strategies ever. Check it out.
