Financial Review

Cookies in Bulk

Sinclair Noe — July 13, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW + 20 = 21,553
SPX + 4 = 2447
NAS + 13 = 6274
RUT + 1 = 1425
10 Y + .02 = 2.35%
OIL + .69 = 46.08
GOLD – 2.70 = 1218.30
BITCOIN – 0.21% = 2359.62 USD
ETHEREUM + 2.83% = 208.81

Wall Street posted modest gains, but good enough for another record high on the Dow. The S&P 500 Index closed within five points of its record. Analysts estimate second-quarter earnings for S&P 500 companies rose 7.8 percent from a year ago, with financials projected to have had the third-best profit growth among sectors. Tomorrow, we will start seeing the major banks report earnings for the quarter.

Senate Republican leadership released the updated version of its healthcare bill today. Let’s cover the major changes.

The new version could preserve the 3.8% investment-income tax and an 0.9 percent surtax for the Medicare insurance program on people making over $200,000 a year, a huge source of revenue introduced by the Affordable Care Act and one of the biggest reasons Republicans wanted to repeal Obamacare.

Other taxes including one on health-insurance executives and a Medicare health-insurance tax would no longer be repealed in this version. Numerous smaller taxes, like one on tanning salons, would still be repealed. The original bill had $2 billion in funding to combat the opioid crisis. The new version would increase that number to about $45 billion.

The revised plan included conservative Senator Ted Cruz’s proposal to let insurers offer stripped-down, low-cost healthcare plans that do not comply with Obamacare regulations to cover certain health benefits.

The amendment would allow plans to exist that don’t comply with two regulations set up under the Affordable Care Act: community rating and essential health benefits. Those benefits include maternity and newborn care, mental health services and addiction treatment, outpatient care, hospitalization, emergency room visits and prescription drugs.

Insurer groups, including the national Blue Cross Blue Shield Association, have derided these “skinny plans,” saying they would raise insurance premiums, destabilize the individual insurance market and undermine protections for pre-existing medical conditions, by making policies that cover existing conditions very expensive.

Like the earlier version, it would end a penalty on individuals who do not obtain insurance and overhaul Obamacare subsidies to help people buy insurance with tax credits. While ending a fine on people who decline to obtain insurance, the Senate bill would force people who let their coverage lapse to wait six months before coverage could resume.

The bill retained the previous draft bill’s phaseout of the Obamacare expansion of the Medicaid government health insurance program for the poor and disabled and sharp cuts to federal Medicaid spending beginning in 2025. The BCRA also would change federal funding to Medicaid to a per-capita structure — meaning the federal government would send states a fixed amount of money per Medicaid enrollee in the state.

That’s different from how it is now, where the federal government helps cover enrollees based on how much their care costs, which can vary by person. In all, the per-capita structure would leave states with less funding than under the current law. As a result, Arizona would see a 17% reduction in Medicaid funding by 2026.

The bill would allow people to use health savings accounts to help pay for insurance premiums and contains an additional $70 billion to help low-income insurance holders cover out-of-pocket medical expenses. No word on how to pay for those expenses after the $70 billion is exhausted.

The health-care industry is aligned against the proposal, which would essentially create separate insurance markets for sick and healthy people. Even the insurance industry’s top lobbying group, America’s Health Insurance Plans, came out in public opposition to the amendment after staying quiet through much of the Senate debate. Whether the Cruz amendment stays in the bill is in doubt.

The American Academy of Pediatrics, the American College of Physicians, the American Lung Association, and American Hospital Association all expressed opposition to the bill.

The American Heart Association, along with American Cancer Society Cancer Action Network, American Diabetes Association, American Lung Association, Cystic Fibrosis Foundation, March of Dimes, Muscular Dystrophy Association, National Health Council, National Organization for Rare Disorders, WomenHeart: The National Coalition for Women with Heart Disease came out with a joint statement against the revisions, specifically the Cruz amendment.

The score from the nonpartisan Congressional Budget Office estimated that the first version of the BCRA would result in 22 million more uninsured Americans by 2026 than the current system. The CBO is expected to score the new version by Monday. We’re still likely to see many millions of people losing or going without coverage because of this bill. Although some of the taxes on wealthy people are retained, the bill doesn’t appear to use much of that to cover low-income people.

McConnell has little room for error, as even three “no” votes among Republican senators would sink the legislation. As of now, none of the 10 senators who came out publicly against the original version of the bill have said they moved into the “yes” column.

Complicating matters further, two Republican senators, Lindsey Graham and Bill Cassidy, offered an alternative healthcare proposal minutes before McConnell unveiled his new plan. It would redirect much of Obamacare’s federal funding for health insurance to states.

Meanwhile, President Trump is in Paris. On the flight from the US to France, Trump told reporters on Air Force One he is considering quotas and tariffs to deal with the “big problem” of steel dumping from China and others. The administration’s decision on steel could be unveiled in the coming weeks.

In Paris, Trump held the door open to a reversal of his decision to pull the United States out of the Paris climate accord on Thursday, but did not say what he would need in return to persuade him to do so.

Fed Chair Janet Yellen returned to Capitol Hill today for the second session of her semi-annual Humphrey-Hawkins testimony. Today, Yellen testified before the Senate Banking Committee. The Fed raised its benchmark interest rate in June for the third consecutive quarter, and it plans to begin reducing its bond holdings this year. Yesterday, she laid out a dovish approach to monetary policy.

Yellen said it would be “quite challenging” for U.S. growth to reach a 3-percent target set by President Trump. Still, Yellen said the economy remained in good health, stating: “I don’t see anything inherent in the nature of the expansion that suggests it will come to an end anytime soon.”

So, today the focus was on the Fed’s third mandate – as a regulator. Republicans sought Yellen’s support for proposals to loosen or eliminate some strictures imposed on financial institutions after the 2008 financial crisis. Democrats pressed her to affirm the importance of those regulations. Yellen agreed that some rules might be too strict, and expressed a general willingness to consider changes.

She also reiterated her support for reducing the regulation of community banks, a popular idea among members of both parties, though specifics are hard to come by. Senator Elizabeth Warren asked Yellen why the Fed had not removed members of Wells Fargo’s board after a scandal involving the opening of fake customer accounts. Yellen said the matter remained under investigation, adding, “The behavior that we saw was egregious and unacceptable.”

Dallas Fed President Rob Kaplan said he wants to see more evidence of a recovery in inflation before committing to another rate hike. Kaplan, a Federal Open Market Committee member this year, said “at present, with a federal funds rate at a range of 100 to 125 basis points, I would like to see some greater evidence that we are making progress toward meeting our 2% inflation objective in the medium term.”

He joins Fed. Gov. Lael Brainard in expressing reservation toward more rate hikes. (Minneapolis Fed President Neel Kashkari opposed the June increase.) However, Kaplan does say the plan to reduce the balance sheet “will likely be appropriate” later this year.

Financial Review

Take 65

Sinclair Noe — June 22, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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DOW – 12 = 21,397
SPX – 1 = 2434
NAS + 2 = 6236
RUT + 5 = 1404
10 Y – .01 = 2.15%
OIL + .21 = 42.74
GOLD + 3.70 = 1251.00

BITCOIN – 0.11% = 2709.21 USD
ETHEREUM – 2.77% = 328.37

BITCOIN + 1.13% = 2771.78 USD
ETHEREUM – 1.81 % = 330.40

BITCOIN – 0.11% = 2709.21 USD
ETHEREUM – 2.77% = 328.37

The Senate health care bill was unveiled today. The 142-page bill was written entirely behind closed doors and today is the first time the public and most senators have seen the bill. The latest version of Trumpcare is officially titled as the Better Care Reconciliation Act of 2017, which is a rewrite of the House of Representatives American Health Care Act, which is a rewrite of the Affordable Care Act.

The bill would repeal Obamacare’s individual mandate, drastically cut back federal support of Medicaid, and eliminate Obamacare’s taxes on the wealthy, insurers and others.

The bill will have to undergo scrutiny to ensure that it meets the strict requirements on what can or can’t be included in a bill under the budget reconciliation process. The non-partisan Congressional Budget Office, will analyze and score the bill and present its findings early next week.

The CBO analysis will shed light on how much money the bill would cost and how many people would be covered. Senate Republicans hope to see better headlines from this CBO report than the one that the House GOP legislation received. CBO said the House bill would result in 23 million fewer people insured in 2026 than under Obamacare.

Here are some of the key points that we know. The Senate bill would require insurers to cover those with pre-existing conditions and charge everyone the same regardless of health history. But it would allow states to waive the federal mandate on what insurers must cover, known as the essential health benefits.

This would allow insurers to offer less comprehensive policies, so those with pre-existing conditions may not have all their treatments covered.

The bill would continue the enhanced Medicaid expansion funding from Obamacare until 2021 and then phase it out over three years. The Senate bill would keep the House plan to send a fixed amount of money to states each year based on enrollment or as a lump sum block grant.

But it would shrink the program even more over time by pegging the annual growth rate of those funds to standard inflation, rather than the more generous medical inflation, starting in 2025.

This would likely force states to cut enrollment, benefits or provider payments. Several independent analyses have concluded that this funding structure would lead to large-scale shortfalls in every state, which would need to be closed by reducing enrollment or benefits, and cutting capacity to respond to disasters and public-health crises.

Those affected most would be poor children, people with mental-health issues, and disabled people.

The Senate bill would also largely maintain Obamacare’s premium subsidies structure, but tighten the eligibility criteria starting in 2020. Fewer middle class folks would get help because only those earning up to 350% of the poverty level would qualify, rather than the 400% threshold contained in Obamacare.

It also allows even less generous plans to stand as benchmarks for exchange and employer coverage, which could likewise contribute to disruptions and deductible increases. In recognition of the disruptions to the state-level exchanges through which individuals purchase coverage, the House bill set up a “Patient and State Stability Fund,” which would inject over $100 billion into state high-risk pools and reinsurance funds.

The Senate largely replicates this approach with slightly less funding, although it does add an additional $2 billion fund for fighting the opioid crisis in 2018.

The bill would also aim to shore up the existing Obamacare market by allocating funds for the cost-sharing subsidies until 2019. This might placate insurers, who were upset by Trump’s refusal to commit to continue making these payments, leading many carriers to hike rates or drop out of the exchanges for 2018.

The draft bill proposes repealing the 3.8 percent net investment income tax on high earners retroactively to the start of 2017, not at some point in the future. The tax cut will be offset by reducing aid to the poor to cut costs. We’ll have to wait for the CBO score to see if the math works, and how many people would see higher premiums or see coverage eliminated. That could be followed by a vote on the bill as soon as next week.

Democrats appear to have a solid bloc of opposition; if 3 Republicans oppose the bill, it will not pass. The bill could be changed over the next few days. Sens. Rand Paul of Kentucky, Ron Johnson of Wisconsin, Ted Cruz of Texas and Mike Lee of Utah said in a joint statement they’re “not ready to vote for this bill.”

Many other GOP senators are avoiding outright supporting the new health care bill, saying they need more time to read the fine print before taking a stand. The CBO score will be key – if it is not significantly better than the score of the House version, this bill could be DOA.

Hospital stocks traded sharply higher after the bill was released, adding to gains from earlier in the session. HCA Healthcare Inc rose 3.8 percent, while Tenet Healthcare Corp surged 8.4 percent. Health insurers also traded broadly higher, with large players Aetna and UnitedHealth Group each up more than 1 percent. Insurers that specialize in Medicaid also gained, with Centene up 3.4 percent and Molina Healthcare rising 2.6 percent.

About those tapes President Donald Trump suggested (or warned) that he (or someone) may have had of his one-on-one conversations with then–FBI Director James Comey: They don’t exist. Or, if they did, he didn’t make them. Trump took to Twitter today to say: “I have no idea… …whether there are “tapes” or recordings of my conversations with James Comey, but I did not make, and do not have, any such recordings.”

Thirty-four of the largest banks operating in the U.S. cleared a Federal Reserve stress test of their ability to withstand economic shocks. Every bank subject to the annual tests’ first phase exceeded minimum thresholds, though Morgan Stanley trailed the rest of Wall Street on a key measure of leverage — the second year it performed worse than peers on one of the test’s main metrics.

The Conference Board’s leading economic index climbed 0.3% in May and offered further proof the U.S. continues to grow at a steady clip, suggesting the economy is likely to remain on, or perhaps even moderately above, its long-term trend of about 2% growth for the remainder of the year.

Mortgage rates are keeping close pace with U.S. Treasury yields, and the yield on the 10-year Treasury note is hovering around the lowest levels of the year, and the lowest since the November election. Mortgage rates fell to one of the lowest levels of the year in the most recent week, following a short-lived rebound. Freddie Mac said  the 30-year fixed-rate mortgage averaged 3.90% in the June 22 week. The 15-year fixed-rate mortgage averaged 3.17%

The number of Americans filing for unemployment benefits increased 3,000 to a seasonally adjusted 241,000 last week.

Qatar Airways, the Gulf country’s state-owned airline, has expressed interest in buying as much as a 10 percent stake worth at least $808 million in American Airlines Group. The potential investment comes against the background of diplomatic and competitive turbulence for Qatar Airways, its home country and U.S. airlines.

Operations at Qatar Airways were disrupted after four Arab nations cut diplomatic and economic ties with Qatar this month in the worst diplomatic crisis in the region in years. Separately, American, United Continental, and Delta have pressed the U.S. government to act to curb U.S. flights by Qatar Airways and rival Gulf carriers Emirates Airline and Etihad Airways. The U.S. carriers charge that their Gulf rivals have received billions of dollars in unfair state subsidies.

Qatar Airways said in a statement that it sees a “strong investment opportunity” in American and that it “intends to build a passive position in the company with no involvement in management, operations or governance.” American said its rules prohibit “anyone from acquiring 4.75 percent or more of the company’s outstanding stock without advance approval from the board.”

As expected, Sears Canada has filed for bankruptcy protection and 2,900 employees countrywide are losing their jobs.

Warren Buffett’s Berkshire Hathaway is extending a 1.5 billion credit facility to Home Capital Group, Canada’s largest non-bank lender. Berkshire also agreed through its Columbia Insurance unit to buy up to $300 million of Home Capital shares for a 38.4 percent stake, pending shareholder and regulatory approvals. The credit line carries an interest rate of at least 9 percent.

Reuters reports Staples is in advanced talks to be acquired by Sycamore Partners in a $6 billion deal.

After leading the stock market for months, the big name tech stocks hit pause to catch a breath. And that allowed an old name to sneak into rally mode. Oracle was late to the cloud revolution, allowing upstarts like Salesforce.com Inc. to find significant market share with software delivered over the internet, and has suffered while making an acquisition-fueled push into the space.

But it looks like Oracle is figuring out the cloud. Late yesterday, they reported fiscal fourth quarter earnings, and today, shares topped $50, sending the market cap over $200 billion. Oracle posted full-year revenue growth of 1.8% and profit growth of 4.9%, and raised guidance.

Facebook CEO Mark Zuckerberg revised the world’s largest online social network’s mission statement. The previous mission was “to give people the power to share and make the world more open and connected.” Facebook’s new mission is to “give people the power to build community and bring the world closer together.”

Financial Review

Trump Budget

Sinclair Noe — May 23, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

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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 Agency, as 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.