Day 347: Ready For Lift Off?
Mother's Little Helper portfolio was UP today +6,585.06 (+0.79%).
Overall GAIN YTD: +$252,206.68 (+43.19%).
Our benchmark index, the S&P 500 is up +18.94% Year To Date.
This Friday morning I will be interviewed on The Bigger Picture, a New York based Facebook Live talk show. The show is hosted by actress Jordan Baker and entrepreneur Risa Hoag. The show airs this Friday December 15th 8:00am EST (5:00am PST), I think I come on about 8:30am (5:30am PST). Go to this link to tune in or check in at a more reasonable hour, all the past shows are available The Bigger Picture
Ready For Lift Off?
Interest Rates: Federal Reserve Chair Janet Yellen announced a 0.25% rate hike to the target
range of 1.25% to 1.5%. This gradual easing of interest rates I think was expected by investors and the markets showed this today by not rallying on this news but on the news of earnings, catalysts, mergers and acquisitions. What wasn’t expected was Chair Yellen’s optimistic outlook and prediction that rates would be kept low and that job hiring rates were not going to ignite rate hikes. So what? I think we’ll see target interest rates attracting more foreign investment. So regardless of what happens with the tax bill expect more capital to flow to the U.S and get invested in businesses, stocks, bonds and real estate.
Taxes: While Yellen was speaking, so was Trump and members of the Senate about the tax bill. Though the election of Doug Jones in Alabama should delay the vote on the tax bill, it looks more likely that Republican’s will move forward and get the bill done before Christmas. Jones’ swearing in ceremony is probably weeks away at best and could be longer if Roy Moore drags out a recount. If Moore chooses to pay for the recount himself, expect a long delay.
The United States' corporate tax ranks relatively high on all three measures. The U.S. has the highest statutory rate (39.1 percent), the third highest average effective tax rate (29 percent), and the fourth highest marginal effective tax rate (18.6 percent). The new tax bill appears ready to deliver a 21% corporate rate. It’s important to follow and quote all three measures of taxation and to keep taxes in context with foreign competitors. By comparison the standard corporate tax rate for Chinese companies is 25%, but key industries that are the growth engine for China can receive a 15% rate, incentivizes investment in those key sectors. Averaging the two rates delivers a 20% average rate for corporations in China. The United Kingdom reduced their corporate rate to 19% in April of 2017. The EU average rate is 21.51% and the European average rate is 19.54%. Currently there is a corporate alternative minimum tax rate (AMT) of 20%. The corporate AMT appears to be on the chopping block.
The Fed is Optimistic: The Fed increased its median prediction of 2018 real GDP growth to 2.5%
from the 2.1% estimate released in September. The Fed is also projecting real GDP to grow 2.1% in 2019 and 2% in 2020. The Fed also decreased its 2018 unemployment rate projection to 3.9% from 4.1% estimate and expects this level to persist through 2019. Meanwhile, the Fed kept its inflation projections for 2018, 2019, and 2020 unchanged.
Nudge, nudge. Wink, wink. Say no more: Like a Monty Python sketch, I had to go back and listen again, because after raising interest rates by the expected 0.25%, Yellen actually signaled (nudge, nudge) that the economy is doing well, nothing flashing red or even orange. Ummmmm the only color left is GREEN. She likes the banking system and doesn’t see excessive credit growth. Job hiring is solid and rising but is not a major factor that would cause the FOMC to raise rates faster. Even more interesting is that there were two dissenters at the FOMC meeting. Two fed governors voted to leave rates unchanged.
What all this means for investors is stock prices should, in general be going up and there doesn’t appear to be and signs of recession anywhere in sight. Our national economy should continue to grow without getting overheated and the global economy is also expected to follow the same path.
The analysts are going to be busy. With a 21% corporate tax rate we should see price to earnings ratios (P/E) get repriced, reducing P/E ratios by as much as 20%. Stocks that look expensive are about to get cheap and that will flood even more capital into U.S companies. If we also get a repatriation of overseas cash in a way that incentivizes companies to bring that cash home I suspect that we’ll see increased stock buy backs, increased dividends, more job growth, more R&D spending and more mergers and acquisitions. Stock buy backs are an investment in ourselves. When a company looks at all the ways it can put cash to work and comes to the conclusion that they believe in themselves so much that they want to invest in their own stock, that’s good news, especially for the owners who are predominately 401K plans and other retirement and pension funds. Increased dividends is also a very owner friendly action putting more cash in the pockets of individuals, pensioners and retirement accounts. Research and Development (R&D) spending is my favorite use of corporate cash. This is the investment in our future, the investments that deliver new technology, new medicines, new breakthrough medical devices and exploration into areas we only dreamed of previously. Finally mergers and acquisitions, when done right, consolidate markets, focus resources and add value to the acquiring company. In the 1980’s mergers and acquisitions usually meant that a company was broken up into tiny parts, lots of people fired and everything sold off to release value; sort of like parting out a used car. That kind of M&A created wealth but also was highly destructive to whole industries. The M&A activity we’re seeing now is about growing, about adding the value of one company to that of another making the new organization stronger and better able to compete in the global market.
Prepare for lift off.
Disclosure: I am personally invested long in these stocks that appear in the MLH portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks that do not appear in the MLH portfolio: BA, BRK.B, CELG, CSCO, CTXS, CVX, DOW, DVAX, FB, IBM, NTES, NVDA, OMER, PFE, PG, RDHL, SCHW, TBT, THO, TWX, VEEV, VZ, XLNX, XOM, Bitcoin, LiteCoin
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.