Paper Chase: Give and Take
The market has been on a roller coaster ride over the past couple of weeks with momentum stocks and earnings driving volatility. Retail sales rose by 1.13%, the biggest increase since September 2012 and was ahead of analysts’ expectations. This is important because consumers are 2/3 of the American economy. Single family home sales have also increased due to improved weather. These numbers are the best of year but still weaker than analyst’s expectations.
The Dow has seen swings of hundreds of points, and the NASDAQ has seen swings of multiple percentage points. We are at an inflection point for monetary policy meaning market participants think that policy will change. They bring the market forward in time and expect it to be sharper than is consistent with sustaining economic expansion. We should get used to this volatility.
Interest rates will stay low for a long time. Her remarks seemed to be more reassurance aimed at the American people more than investment community. Yellen is very concerned about unemployment, and indicated there would be no imminent further tightening of monetary policy. The fed will carry on with taper, but Yellen is not as concerned with inflation as much as she is with general support to the economy.
She also believes that the fall in unemployment will not put upward pressure on prices anytime soon.
Yellen’s remarks were painfully evenhanded. The overall message was that rates would be lower for longer. in spite of perceived turmoil, Yellen has had an easy entry into the Fed chair job. Payroll data hasn’t been strong enough where the fed is behind the curve nor has it been weak enough to instill a feeling the economy is stalling out. Yellen has been essentially untested. Last quarter, the economy tracked at a 1 percent annual rate. The 2nd quarter looks as if growth is at 3.5%. When monthly numbers are consistent with 3.5% expansion in the economy and non-farm payrolls start with 2 or 3, Yellen will be tested.
With 17% of companies reporting, 63% came in above their estimates, 14% met estimates and 26% are below estimates. The question of how much can be blamed on the weather has been covered on the Paper Chase extensively. There were many cautious forecasts anticipated declines in earnings. Stocks trading at record highs was thought to be out of sync with what was likely to happen inside the companies. There have been some earnings disappointments, particularly Google, which underlies some of the risk that stalks the tech sector where investors have gotten ahead of themselves. Still, earnings have not been as bad as people have feared.
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The S&P 500 is not just the domestic economy but the world at large. the numbers we are seeing are consistent with tepid, cyclical expansion in the U.S. economy while world hangs on.
10 year note
The 10 year note has remained at or below 2.65 for some time now. This is purely a case of being the Best house on a bad block. The U.S. treasury is a safe haven asset and the world is a risky place.
We have previously reported on the Ukraine. This is now spilling into the market. Over the previous years, emerging markets were where growth and opportunity existed. This has changed dramatically over the past year for the fed is tightening policy and there has been a pull back. Ukraine reminds everyone there is political risk in emerging markets, which is why people are going to the safe haven that are U.S. treasuries.
Bull or Bear?
Earnings are solid, growth is coming back and the fed will be accommodating in the near future. All of these indicate the continuation of this bull market. I suggest putting your money back into equities.
S&P 100 companies pay roughly 30% lower rates on international taxes than U.S. taxes. Tech companies – including Apple, eBay and Google – seem to specialize in paying up to 80% lower rates abroad. Six S&P 100 companies are actually paying a negative overall tax rate and are therefore due a tax refund: Abbott Laboratories, Morgan Stanley, Bank of America, AIG, Bristol-Myers and Verizon. Among the remaining companies that owe taxes, Citi, VISA, AbbVie, and MetLife pay the lowest rates. The average S&P 100 company pays a 14% higher tax rate than the top 3% of consumers.
While job creation has not been great, we have seen soaring corporate profitability driven by multinationals. Production is incentivized overseas at the competitive disadvantage of domestic firms here. One suggestion is to end the deferral of foreign based earnings, as earnings should not be kept out side of the U.S. tax base essentially forever, and put them on an equal footing with companies here. Lowering the rate and broadening the base is also good, but ending the ability of multinationals to get tax breaks that don’t benefit domestic firms particularly deferral has gained some traction.
On the other hand, the U.S. only taxes overseas earnings of U.S. chartered companies. Beefing up taxation on U.S. chartered companies on foreign earnings in hope they invest here instead of abroad is a start, but many companies investment through foreign chartered companies which remain tax-free.
Another suggestion is a minimum tax on foreign earnings of U.S. companies in addition to closing loopholes. Another more radical idea is to stop collecting this tax at the corporate level and do it at the shareholder level. In other words, tax American shareholders of publicly traded companies on dividends and capital gains at ordinary income rates. Capital gains would be taxed as they accrue which is controversial as you would be taxing unrealized gains though they are real parts of your wealth. If the stock market drops, you claim a loss but you would need to have enough income to deduct that loss. While I believe this is out of the realm of possibility, it is not enough to tinker with a system that is fundamentally flawed and will never really be able to make work effectively.
Give and Take
What works for teaching good values? How do you raise a moral child? It is not enough to praise good behavior. Parents must praise the overall personality that encompasses that good behavior. When bad behavior occurs, criticism should focus on the action and not the person. Children who develop strong values helping others attain the most extreme career outcomes meaning they either become the worst performers or the best performers. People who help others end up sacrificing themselves to help all the people, all of the time with all of their requests which can be a recipe for disaster.
People are either givers, takers or matchers. Takers get as much as possible from others. They never give anything back, and hog interesting work for which they get all of the credit at the end of the day. Givers enjoy helping others with no strings attached. Most people are matchers. I’ll do it for you if you do it for me. Matching has become a risk averse mentality and creates a transactional impression of not caring about people as opposed to what they can do for you.
Data suggests the most productive engineers, best medical students, and highest performing sales people are those who give freely without strings attached, but are able to match when they encounter a taker. An example of this is the President of Cinnabon, Kat Cole, a former Hooters waitress who had to drop out of college to help her family. Givers learn more and have more expertise and knowledge thank takers for they often assume other people’s tasks and learn more.
Detroit will auction off 16,000 abandoned houses the city has acquired. The opening bids start at $1000, but this is not speculative. Owners are expected to rehab the houses, and live on site within 6 months of closing. The deal is available to Michigan residents only.
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