Morning in Arizona

Morning in Arizona

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Tuesday, May 23, 2017

Trump Budget

Financial Review

Trump Budget

DOW + 43 = 20,937
SPX + 4 = 2398
NAS + 5 = 6138
RUT + 3 = 1380
10 Y + .03 = 2.28%
OIL + .36 = 51.49
GOLD – 9.70 = 1251.70

In the morning, U.S. economic data showed new single-family home sales in April tumbled from near a nine-and-a-half-year high, while manufacturing activity for May fell to the lowest level since September.

While the President is on an overseas trip, stocks were helped by a lack of major news updates related to the government probe on possible ties between his election campaign and Russia. While today’s economic data was weak, investors were relieved Trump’s first full budget plan was largely as expected, even if it is not expected to be approved in Congress.

The Trump Budget was published today. Its official title is “A New Foundation for American Greatness” and it includes big changes to the role of the federal government. It would cut or eliminate numerous programs that the White House says are a waste of money or create too much dependency.

Some of these programs — including Medicaid and food stamps — provide benefits to up to a fifth of all Americans. The $4.09 trillion budget proposal for the fiscal year that begins in October, is the first detailed blueprint for how Trump wants the government to change.

White House Office of Management and Budget Director Mick Mulvaney called the plan a “Taxpayer First Budget,” and he said they worked to jettison any spending that they felt they could not defend. In total, this meant roughly $3.6 trillion in cuts over the next 10 years.

The Trump budget team made rosy assumptions about economic growth that many economists — both conservative and liberal — said went too far. Trump has proposed cutting the corporate tax rate from 35 percent to 15 percent, but his budget assumes that corporate tax receipts will increase almost every year.

The budget says the U.S. government will collect $328 billion in estate and gift taxes over the next decade, but it also says Trump will eliminate the estate tax. The budget assumes its policies will kickstart an era of 3% GDP growth by 2021.

The Congressional Budget Office assumes the U.S. can grow at 1.9%, and professional forecasters see, as measured by the Blue-Chip survey, see just 2.1% GDP growth. Per analysis from a Committee for a Responsible Federal Budget, there is no plausible path to 4% growth, and 3% growth is “unlikely.”

It would require exceeding the record levels of productivity set between 1959 and 1968 or restoring capital growth, productivity growth, and labor-force participation to the levels achieved in the booming 1990s. The independent Tax Policy Center estimated that Trump’s campaign tax plan would add $7.2 trillion to the deficit.

Whether realistic or not, higher growth estimates allow the Trump administration to project that the government will collect more revenues from taxpayers and spend less on safety-net programs, offsetting the costs of the president’s wish list to hold deficits down.

The budget would provide $574 billion for the Pentagon, a 10 percent increase from the last full-year budget in fiscal 2016 and about 9.5 percent more than the budget Congress approved for the current fiscal year. Trump’s proposal would exceed the military spending caps under the 2011 Budget Control Act by $52 billion.

The president would reduce nearly a third of funding for diplomacy and foreign aid including global health and food aid, peacekeeping and other forms of non-military foreign involvement. Also, spending more than $2.6 billion for border security, including $1.6 billion to begin work on a wall on the border between Mexico and the US, or at least between Naco and Agua Prieta.

While the Pentagon’s budget would see a $6 billion increase, the push for more high-priced weapons — including fulfilling Trump’s pledge to increase the Navy fleet to 350 ships from 275 that can be deployed today — will wait another year.

He’s also proposing cutting funding for the State Department by more than 28 percent. The budget also makes use of several other classic accounting gimmicks. It assumes that the wars in Afghanistan and the Middle East will cause future Congresses to allocate $593 billion in extra war funding that won’t be needed and then claims to save that amount by not spending it.

On the campaign trail, Trump said, “I’m not going to cut Social Security like every other Republican, and I’m not going to cut Medicare or Medicaid.”  In his fiscal 2018 budget proposal, Trump asked Congress for $3.6 trillion in spending cuts that would mean steep reductions in Medicaid health insurance payments, Social Security disability benefits, food stamps, low-income housing assistance and block grants that fund meals-on-wheels for the elderly.

Funding for Medicaid, the health-care program for low-income Americans and many people in nursing homes, and CHIP, the Children’s Health Insurance Program, would be cut by $880 billion over 10 years.

Funding for SNAP, the Supplemental Nutrition Assistance Program, a modern version of food stamps that provided benefits to 44 million people in 2016, would be cut 29 percent. In many cases, a higher burden of paying for anti-poverty programs would be shifted away from the federal government and onto the states.

The budget would cut payments to disabled workers by $72 billion over the next 10 years, or about $7.2 billion a year. That represents 5% of the disability benefits the government doled out in 2016. The disability insurance fund was created in 1956 in a series of amendments to beef up Social Security.

Social Security retirement benefits and Social Security Disability are all part of a single Social Security safety net designed to ensure that American workers can live with dignity when they retire or if they become too disabled to get gainful employment.

Far from a separate program, Social Security Disability Insurance is a protection available to all Americans, and is paid for through the same Social Security payroll taxes that pay for retirement benefits.

The budget also calls for cuts to the National Institute for Health, the Centers for Disease Control and Prevention, the Food and Drug Administration, and Planned Parenthood.

The Environmental Protection Agencyas expected based on prior budget proposal drafts, is set to lose 31% of its current budget, which amounts to a $2.7 billion cut. That will likely hinder the agency’s ability to enforce environmental laws, impede its tap water safety programs, and eliminate its Climate Protection Program, among other changes.

State and tribal assistance grants would be slashed from $1.08 billion to $597 million, or 45%. Those grants pay for states to carry out several federal directives such as toxic substance compliance, pesticides enforcement and brownfield inspections. Some of those categories have been zeroed out entirely, including beach protection, radon monitoring and lead testing.

The White House plan to trim the national debt includes selling off half of the nation’s emergency oil stockpile and the entire backup gasoline supply; a move that would raise $500 million in fiscal year 2018 — and as much $16.6 billion over the next decade — by drawing down the Strategic Petroleum Reserve.

The budget projects raising $1.8 billion over the next decade by opening the 19-million-acre Arctic National Wildlife Refuge to oil and gas development. The idea of allowing drilling in the refuge for its estimated 12 billion barrels of crude has long been championed by Alaska Republicans. But it’s anathema to environmentalists, who have successfully blocked ANWR drilling plans from advancing.

The plan includes changes to a few popular student loan programs – cutting back on the number of loan repayment options; eliminating the program that allows some workers in public service jobs to have their debts waived; and changes to Pell Grants, federal grant issued based on financial need.

These proposals would apply to loans that were issued on or after July 1, 2018. They would not apply to loans issued after July 1, 2018, if those loans are used to finish the borrowers’ current course of study. In other words, a college junior in seeking a loan on July 1, 2018, to finish her bachelor’s would not be subject to these proposals.

The proposed budget estimates that the federal government could save $35 billion over the next decade by rolling back regulations governing Wall Street. The White House does not detail how those savings would be realized. But the administration said an ongoing review of existing financial rules “will likely result in proposals that will provide significant savings to the federal government.”

Treasury Secretary Steven Mnuchin is currently conducting a comprehensive review of the impact of the 2010 Dodd-Frank financial reform legislation. An initial report recommending policy changes is expected to come at the beginning of June.

Fiscally and socially, the Trump proposal is a reverse Robin Hood.

Cuts in domestic programs to fund big military-spending hikes would disproportionately hit the poor. Tax cuts would primarily benefit the affluent. The Library of Congress is filled with budget proposals that presidents sent to Capitol Hill and never saw again in the form of legislation.

Even with a House and Senate controlled by fellow Republicans, Trump’s plans could face the same fate. Congress usually starts its drafting process each year with the existing budget and makes additions or subtractions from that.

If it keeps to that practice, it will be starting with a plan that passed with bipartisan support earlier this month, one Democrats believe many Republicans would not mind sticking to for another year. Remember that Congress has a difficult time passing any budget. Today’s White House proposal likely deepens the divide.

Stocks Looking to Extend Winning Streak

Charles Schwab: On the Market
Posted: 5/22/2017 9:00 AM ET

Stocks Looking to Extend Winning Streak

U.S. stocks are higher in early action for a third-session, continuing to rebound from last Wednesday's selloff that came amid a spike in volatility as domestic political uncertainty flared up. Treasury yields are ticking higher and the U.S. dollar remains under pressure, while gold is gaining ground. Crude oil prices are adding to a recent run on optimism of extended production cuts. Ford announced that it replaced its CEO, while Huntsman and Clariant agreed to merge. Asia finished mostly higher, though Europe is mixed.

As of 8:49 a.m. ET, the June S&P 500 Index future is 4 points above fair value, the DJIA future is 37 points above fair value, and the Nasdaq 100 Index future is 6 points north of fair value. WTI crude oil is increasing $0.59 to $51.26 per barrel and Brent crude oil is gaining $0.53 to $54.14 per barrel. The Bloomberg gold spot price is trading $2.49 higher at $1,258.41 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is down 0.2% at 96.90.

Ford Motor Co. (F $11) announced that President and Chief Executive Officer (CEO) Mark Fields will retire and be replaced by Jim Hackett, who has led Ford Smart Mobility LLC since March 2016. The company is set to hold a press conference after the opening bell.

Huntsman Corp. (HUN $27) and Clariant AG (CLZNY $21) announced an agreement to combine in a merger of equals through an all-stock transaction, creating a global specialty chemical company with approximate annual sales of $13.2 billion. The merged company will be named HuntsmanClariant. Under the terms of the deal, Huntsman shareholders will receive 1.2196 shares of the new company for each share owned and each share of Clariant will remain outstanding as a share of the new company. Clariant shareholders will own about 52% of the company and Huntsman shareholders will own approximately 48%.

Fed, housing and business activity reports set to join political focus this week

Treasuries are dipping as the U.S. economic calendar is void of any major releases today. The yields on the 2-year and 10-year notes, along with the 30-year bond, are ticking 1 basis point higher to 1.28%, 2.25% and 2.90%, respectively. For analysis of the bond markets, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at and follow Schwab on Twitter: @schwabresearch.

Along with likely continued focus on the political front, this week's economic docket will bring looks at the housing sector with the releases of new and existing home sales. Moreover, manufacturing and business activity will likely be scrutinized, with Markit's preliminary Manufacturing and Services PMIs, along with the second read on Q1 GDP and preliminary durable goods orders. Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her article, ½ Full: Seeing Through a Weak Q1 leading indicators say a lot more about the economy prospectively than backward-looking measures like GDP, and they remain quite healthy. Liz Ann concludes that we are likely just experiencing yet another "soft patch" in an ongoing expansion; so for now, "I am seeing the glass as half full." Read more on the Markets & Economy page at and follow Liz Ann on Twitter: @lizannsonders.

Finally, the release of the Fed's May meeting minutes could command attention as the markets grapple with the path of future rate hikes and the expected beginning of the paring of the Central Bank's bloated balance sheet. For analysis, see Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Chief Fixed Income Strategist, Kathy Jones' video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? on the Insights & Ideas page at, where Randy and Liz Ann Sonders also offer the video, June Rate-Hike Highly Likely? Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Finally, following last week's brief spike in volatility, see the latest articles, Is The Stock Market Just Quiet Or Is It Too Quiet? from Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Liz Ann Sonders', Strange Brew: Heightened Uncertainties, Yet Plunging Volatility…What Gives? on the Markets & Economy page at Follow Jeff on Twitter: @jeffreykleintop.

Europe mixed on M&A, politics and euro strength

European equities are mixed in afternoon action, with the markets continuing the grapple with political uncertainty on both sides of the pond, while shares Switzerland's chemical company Clariant is rallying on today's announced merger agreement with the U.S.-based Huntsman. The euro is extending a recent rally versus the U.S. dollar, which has been pressured by ramped-up U.S. political uneasiness. The euro is getting a further boost from comments from German Chancellor Angela Merkel regarding the currency being "too weak," leading to Germany's trade surplus, per Bloomberg. However, the British pound is dipping versus the greenback, as ongoing U.K. Brexit negotiations are fostering uncertainty. Adding to the political risk, Germany, Italy and the U.K. face elections later this year. For analysis of the political uncertainty see Schwab's Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at, where you can also find our article, Brexit Begins: What's Next for the U.K?. Bond yields in the region are mixed. Oil & gas issues are moving to the upside as crude oil prices are extending a recent rally on optimism the extension of production cuts will be announced.

The U.K. FTSE 100 Index and Switzerland's Swiss Market Index are up 0.5%, Germany's DAX Index and Spain's IBEX 35 Index are declining 0.3%, France's CAC-40 Index is ticking 0.1% higher, and Italy's FTSE MIB Index is falling 1.2%.

Asia mostly higher to begin the week

Stocks in Asia finished mostly to the upside as the U.S. markets continued to recover on Friday from a midweek selloff that came as volatility spiked amid flared-up U.S. political uncertainty, which appeared to call President Trump's ability to pass pro-growth policies into question. The global markets are shrugging off lingering geopolitical uncertainty as North Korea conducted another missile test over the weekend, while paying attention to U.S. President Trump's first foreign trip. Japan's Nikkei 225 Index gained 0.5%, with the yen stabilizing after last week's rally, while the nation's trade report showed exports grew at a smaller pace than expected and imports topped forecasts. Australia's S&P/ASX 200 Index rose 0.8%, with basic materials recovering and oil & gas issues gaining ground as crude oil prices extend a recent run on optimism of extended production cuts. South Korea's Kospi Index showed some resiliency in the face of the North Korean missile tests and a deceleration in that nation's export growth, advancing 0.7%. India's S&P BSE Sensex 30 Index moved 0.4% higher, back to near record territory as the markets cheered the finalization of rates for the national sales tax, per Bloomberg.

Chinese stocks finished mixed, with the Shanghai Composite Index declining 0.5%, amid festering regulatory crackdown concerns and economic uncertainty in the wake of recent soft data. However, the Hong Kong Hang Seng Index increased 0.9%, with insurers getting a boost from some analyst optimism toward the group. For analysis of the global front amid the backdrop of trade and geopolitical uncertainty, see Schwab's Jeffrey Kleintop's, CFA, articles, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at, as well as, Top Five Trade Issues Investors Should Be Watching on the International Investing page at