Financial Review

Passable?

Sinclair Noe — November 9, 2017

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DOW – 101 = 23,462
SPX – 9 = 2584
NAS – 39 = 6750
RUT – 7 = 1473
10 Y + .01 = 2.33%
OIL + .28 = 57.09
GOLD + 3.60 = 1285.40

Cryptocurrency

Number of Currencies: 896

• Total Market Cap: $207,584,766,926
• 24H Volume: $7,033,013,883

Top Cryptocurrencies

	Name	Symbol	Price USD	Market Cap	Vol.	Total Vol. %	Price BTC	Chg. % 1D	Chg. % 7D
	Bitcoin	BTC	7,284.4	$120.72B	$3.25B	46.27%	1	+2.26%	+1.71%
	Ethereum	ETH	319.08	$30.61B	$890.04M	12.66%	0.0444694	-0.14%	+10.62%
	Bitcoin Cash	BCH	654.88	$11.03B	$700.58M	9.96%	0.0913918	+0.90%	+9.01%
	Ripple	XRP	0.21539	$8.39B	$144.05M	2.05%	0.00003023	+1.55%	+7.10%
	Litecoin	LTC	65.100	$3.52B	$289.23M	4.11%	0.00910873	+0.76%	+19.87%
	Dash	DASH	324.80	$2.51B	$109.99M	1.56%	0.045418	+1.58%	+22.79%
	NEO	NEO	31.615	$2.06B	$78.55M	1.12%	0.00441338	-0.44%	+26.09%
	NEM	XEM	0.23474	$2.04B	$7.66M	0.11%	0.00003145	+4.24%	+32.08%
	Monero	XMR	117.79	$1.84B	$86.31M	1.23%	0.0166556	-0.18%	+41.71%
	IOTA	MIOTA	0.53201	$1.50B	$71.30M	1.01%	0.00007488	-0.47%	+46.60%

The Senate version of the Republican tax plan was supposed to be unveiled today. Morning came and went. No plan. Lunch passed without a plan. This afternoon, the Senate released an outline of their tax plan. It looks like the Senate tax cut plan would delay until 2019 a reduction in the corporate tax rate and fully repeal the federal income tax deduction for state and local taxes, two key differences with a House tax plan.

The Senate plan, like the House version, would cut the corporate tax rate to 20 percent from 35 percent, but would delay this by one year until 2019; it also grants a more generous system of deductions for smaller businesses.

The House bill would repeal a deduction on federal income tax that Americans can now take for state and local income and sales taxes, but keep the deduction for business owners. It would cap the deduction for state and local property tax paid at $10,000.

The Senate plan would repeal the state and local tax (SALT) deduction entirely – that one issue could be a big problem, especially for Republicans in high tax states. The Senate bill maintains the current seven tax brackets but adjusts the qualifying income levels and doubles the standard deduction for individuals, married couples and single parents. Senate rules dictate the tax bill can only increase the deficit by $1.5 trillion in the first 10 years and cannot affect it after that.

That rule has already posed a major math problem for Republicans in the House, who are unified in their goal to cut taxes across the board but have faced deep internal disagreement on how to offset those cuts with changes to deductions, loopholes, and credits elsewhere. It’s not clear how that debate will unfold in the Senate. What is clear – is that the tax cut plan has a math problem.

In addition to delaying the corporate tax cut and eliminating deductions for state and local taxes, the working Senate draft would: Keep the cap for home mortgage deductions at $1 million. The House bill lowered the cap to $500,000. Keep the adoption tax credit, which the House bill eliminated. Keep the medical expense deduction, which the House bill eliminated. Expand the child tax credit and creates a more refundable tax credit than the House bill did.

Both the Senate and House versions would eliminate the alternative minimum tax. The proposal does not touch current tax protections for 401(k) retirement investments. A repeal of the requirement under the Affordable Care Act, or Obamacare, that individual Americans obtain health insurance or pay a fine does not look like it will be included in the Senate plan. Again, it is still too early to give you many details, but again, the math doesn’t seem to work.

If the politicians cut in one place, they need to find the money from somewhere else. Where? Well, a 2018 budget blueprint approved by Congress late last month would reduce Medicare spending by $473 billion over 10 years compared with the current baseline projection, and proposes $1.3 trillion in cuts to Medicaid, various Affordable Care Act (ACA) tax credits and cost sharing subsidies and other health spending.

Republicans need the spending reductions to make room for $1.5 trillion in tax cuts, mostly for corporations and wealthy households. The budget plan does not include the specifics on how these cuts will be achieved. But previous Republican plans for Medicaid – the joint federal and state health insurance program for lower-income people and children – would have been disastrous for millions of older Americans.

The centerpiece of the House bill is to nearly halve the corporate tax rate, from 35 percent to 20 percent, at a 10-year cost of about $2 trillion. I’m not sure that qualifies as a middle-class tax cut. Gary Cohn, the White House Chief Economic Adviser said in late September that the wealthy are not getting a tax cut under the proposed GOP plan. In an interview with CNBC on Thursday, Cohn softened his position, saying that if the wealthy do get a tax break under the new plan, that’s totally fine with him.

The emphasis on corporate tax cuts is a political consideration that risks making the rest of the plan a political embarrassment. There may be some benefits for the middle-class, but any potential benefits are based on trickle-down theory. This summer, the GOP fumbled “repeal and replace” as a procession of reports from the Congressional Budget Office dramatized the effect of kicking 20 million people off health care, contributing to the bill’s ultimate failure.

With “tax cuts,” another procession of analyses from the University of Pennsylvania, the Tax Policy Center, and the Joint Committee on Taxation strongly suggest that the House plan would ultimately raise taxes on middle-class families with children, while cutting taxes dramatically for rich, lay about heirs.

In short – there is still a ton of work to make this tax cut mess passable, and the clock is ticking. If progress is not made, the equity market should either pause or correct until meaningful progress is made, or not. Earnings, growth, Fed policy and a few other issues are all important to Wall Street, but tax cuts are foremost. The Senate Finance Committee will hold its hearing on the bill next week. Senators are aiming to pass it out of committee before the Thanksgiving holiday.

The Dow Industrial Average was down as much as 250 points this morning before recovering to close down 101. That should serve as a reminder that equities aren’t a one-way trade higher. Investors are unusually jittery these days, in part because it seems that everyone is betting the same way. Just to clarify – jittery, not panicky.

Another market getting hit hard is corporate debt rated below investment grade, or junk bonds. BlackRock’s $18 billion iShares iBoxx High Yield Corporate Bond ETF fell to its lowest level since March as the number of shares traded rose to more than five times the daily average.

More broadly, investors are demanding an extra 3.9 percentage points in yields to own junk bonds rather than Treasuries, up from 3.56 percentage points just two weeks ago. The selloff came on the same day that Goldman Sachs analysts released a report noting that while U.S. aggregate credit quality has reversed deteriorating trends, “the picture under the hood remains challenging.”

Due to rising leverage in recent years, the say the “ability of U.S. non-financial corporations to withstand any potential negative shock remains greatly diminished.” Three of the biggest junk-rated borrowers, IHeartMedia, CenturyLink and Community Health Systems, posted disappointing earnings that sent their bonds plunging.

Morgan Stanley analysts note that the House GOP tax plan would limit interest deductibility, which means that high-yield borrowers could face a higher after-tax cost of interest.

Disney reported a 2.8 percent drop in quarterly revenue after the closing bell, weighed down by the lack of any major box office releases, sending the company’s shares down about 3 percent in extended trading. Disney is banking on a new Star Wars movie, “The Last Jedi” in December and a Han Solo movie in May, to drive people to theaters. But that’s far from the end of the money-making opportunities.

Disney has drawn big profits from the strengths of its TV channels, but that growth is challenged as more people dump cable subscriptions. As people turn to online replacements, Disney is hoping to lure them with a streaming service planned for 2019. “Star Wars” movies will be a big part of that.

Also after the closing bell, Nvidia reported third-quarter net income of $838 million, or $1.33 a share, up from 83 cents a share, in the year-ago period and beating estimates of 95 cents. Revenue was also up. In after-hours trade, shares were up, down, up again.

Roku soared 53 percent after the video streaming device maker’s quarterly results and guidance beat expectations.

Macy’s jumped 10 percent after the department store operator’s profit came in above expectations, even though same store sales continued to slide. Macy’s raised their guidance and saw better gross margin performance primarily due to tighter control of their inventory.

Nordstrom reported quarterly earnings that beat analysts’ expectations on Thursday, but revenue missed and same-store sales disappointed. Nordstrom family members recently put off efforts to take the retailer private until after the holiday season. Its performance over the next several months will be key to determining whether it can raise financing.  Nordstrom shares were up 4.5 percent.

Kohl’s surprised investors by reporting that comp sales increased 0.1% last quarter. That marked a solid improvement from the 1.5% decline it posted for the first half of fiscal 2017. Kohl’s also had lower margins and missed on earnings, but offered up rosy guidance. Shares inched higher.

This was a tough day for traders short the retail sector.

Dish Network rose 3.6 percent after the satellite and internet TV provider added subscribers in the United States in the third quarter and reduced the rate at which it lost existing customers.

This week Waymo announced driverless cars will soon be coming to Phoenix for testing on the streets. Turns out Las Vegas rolled out a driverless shuttle bus today. It is slow – top speed 15 miles per hour – first day on the road – an accident. The autonomous shuttle was clipped by a human-driven truck pulling out into the road.

The driverless vehicle detected the truck and stopped, but didn’t back up to avoid the collision. None of the shuttle passengers were reported to be injured. One of the passengers on the bus described the accident, saying: “The shuttle just stayed still. And we were like, it’s going to hit us, it’s going to hit us. And then it hit us.”