4/19/19 – Mixed Markets in Holiday Week

Markets were closed today in observance of Good Friday. On the week, the Dow gained 0.6% while the S&P 500 declined 0.1%. Earnings season started off in a better-than-expected fashion. So far, 74% of companies that have reported earnings exceeded analyst estimates. Next week is a big week for earnings with almost a third of the S&P 500 companies reporting. We’re also expecting the initial reading on 1st quarter economic growth. It is expected to show the economy slowed down from prior quarters, but still grew at an annualized rate in excess of 2%.  

A good weekend for Tiger Woods turned into a great week for Nike. Sunday afternoon, Tiger Woods won The Masters for the 5th time, but his first since 2005. He hadn’t won any major tournament since 2008. With Woods in the hunt, TV ratings were up over last year and marketing experts estimated Nike received over $20 million in advertising value based on how often its iconic swoosh was seen on Tiger’s shirt and hat. Nike’s market value increased by $2 billion following the win when markets opened Monday morning. It’s not uncommon to see Nike stock move up/down based on the performance of its athletes. Earlier this year when Duke basketball star Zion Williamson blew out his Nike shoe on national television, the stock lost over $1 billion in value. Other company’s connected to Woods such Monster Energy Drinks, Callaway and Bridgestone all saw their value increase 1% or more following Woods’ victory. Read More

Oil decreased 0.2% this week to close at $64.00/barrel. The yield on the 10-yr Treasury moved higher, closing at 2.56% from 2.55% last week. The average rate on a 30-yr fixed rate mortgage moved higher, to 4.17% from 4.12% a week ago.

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4/12/19 – Friday Rally Pulls S&P 500 Positive

I’m heading out of town this afternoon, so the weekly report is coming out a few hours early today. Stocks rallied today on strong earnings from JP Morgan and positive comments on the economy from JP Morgan CEO Jamie Dimon. During the earnings call, Dimon told investors that consumers were strong, balance sheets were strong, companies have plenty of capital and said that the current expansion, “could go on for years. There’s no law that says it has to stop. We do make lists and look at all the other things: geopolitical issues, lower liquidity. There may be a confluence of events that somehow causes a recession, but it may not be in 2019, 2020, 2021.” While the economy has slowed from 2018, it appears to still be going strong. As of the time of writing, the Dow is down 0.2% for the week while the S&P 500 is up 0.4%. Read More

Disney announced its own streaming service for kids will launch in November. Disney+ is priced well below Netflix, at $6.99/mo, but primarily includes kids programming. Disney hopes to have 60-90 million subscribers in five years. This will be Disney’s third streaming package, supplementing ESPN+ and Hulu. About a year ago Disney announced it was pulling all its content from Netflix and was creating its own direct-to-consumer streaming option. It’s fascinating to see how the media market is changing. It seems every media content company has its own streaming plan now. Showtime, HBO, Disney+, Netflix, Amazon Video, Hulu, ESPN+, CBS All-Access, etc, etc. Consumers, myself included, have long wanted to be able to pick channels a la carte instead of being stuck with cable bundle. While we’re not fully there yet, we’re rapidly approaching that point, which is raising new issues. Consumers end up paying 4-7 different companies every month for shows/movies. It’s easy to end up spending just as much as you were before with cable by the time you add in all the various streaming services you need to get the shows you want to watch. Read More 

Oil increased 1.3% this week to close at $64.13/barrel. The yield on the 10-yr Treasury moved higher, closing at 2.55% from 2.49% last week. The average rate on a 30-yr fixed rate mortgage moved higher, to 4.12% from 4.08% a week ago.

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4/5/19 – Strong Jobs Reports Pushes Stocks Higher

  • US economy adds 196k jobs in March
  • Oregon Senator proposes taxing unrealized capital gains

Stocks responded positively to today’s jobs report. The US economy added 196k net new jobs in March, a strong bounce back after February saw an increase of only 20k new jobs. The unemployment rate held steady at 3.8%. Wage growth slowed slighly, but remained above 3% year-over-year. In an economy with low inflation, 3%+ wage growth feels pretty good to me. This report shouldn’t change anything with the Fed’s plan to keep interest rates unchanged through the rest of 2019. For the week, the Dow increased 1.9% while the S&P 500 gained 2.1%.  

Oregon Senator Ron Wyden revived an idea this week to tax unrealized capital gains on an annual basis. Long-term capital gains have long been taxed at a lower rate than regular income. Wealthy individuals often generate a large portion of their income from capital gains versus W-2 income, leading to a lower overall tax rate than many ordinary Americans pay. The current capital gains rate for wealthy Americans is 20%. This is below the 22% tax bracket for income between $39k and $77k. On the surface, this is an unfair system that flies in the face of an otherwise progressive income tax structure.

Capital gains have always been taxed when an asset was sold. There are many reasons for this. When investing in a business, buying a house or other capital intensive investments, all the cash might be tied up and not available to pay taxes on an annual basis. Additionally, as long as an investment is still owned, the ultimate gain or loss isn’t known. Many investments collapse in value in any given year. Only when sold is the true gain/loss known. On that basis, it makes sense to wait to tax a gain until the gain is finalized. Because of this feature, higher tax rates on capital have been shown to generate less revenue for the government because, on the margin, investors will choose to delay selling an asset to push the taxes into the future. It’s economically rational to retain an asset longer if the capital gains tax is 40% versus 20% for example. Of course people will still sell assets for a variety of reasons, but a lower tax rates reduces the incentive to continuing owning something for tax reasons. The question then becomes, do we want a ‘fair’ tax rate for wealthy Americans or do we want to maximize tax revenue. Over the last 30 years, US policy has been to keep a lower rate to encourage people to realize gains therefore creating a tax liability. 

Senator Wyden’s proposal attempts to remove the incentive to not sell an asset to avoid paying taxes. Removing this option means the capital gains rate could easily be raised to equal to, or in excess of, the top marginal income tax rate. One major problem I see with a plan like this is how to treat capital losses. It doesn’t make sense to tax capital gains unless you also get a tax benefit for capital losses. Let’s say an investor buys $100,000 in stock that increases in value to $150,000 in one year. Under the Wyden plan, the $50k unrealized gain would be taxed. Now in year 2, the investment falls to $120k in value. The investor should get a tax deduction of $30k because of the unrealized loss. In the current system, that all happens because only the final realized gain/loss is used for tax purposes. This would cause huge swings in government revenue as investors piled on losses in bad years. A real world example that demonstrates how this would work in practice is the former CEO of Lehman Brothers, Dick Fuld. Before the financial crisis and Lehman’s bankruptcy, Fuld held Lehman stock valued over $1 billion. He never paid taxes on any of the gains associated with that position. Then Lehman filed for bankruptcy and his position was worth nothing. Under a system that taxes unrealized gains, Dick Fuld, Wall Street CEO, would have been entitled to a huge refund check from the government after his investment went to zero. He would get a check equal to all the taxes he paid on unrealized gains, probably in excess of $100 million. It would essentially serve as a government guarantee that no rich person could ever go broke. That doesn’t make sense to me.

Another major problem is the treatment of illiquid investments. If a homeowner sees appreciation in their house, do they owe taxes on the capital gain every year? Who values the house every year? If a business owner sees their company grow, even though all the profits are needed to be reinvested in the business, do they owe taxes on the gain? Where will they get the money to pay the taxes? I’m all for talking about ways to ensure that wealthy Americans pay taxes, but this idea has too many flaws to make sense to me. 

Oil increased 5.2% this week to close at $63.29/barrel. The yield on the 10-yr Treasury moved higher, closing at 2.49% from 2.41% last week. The average rate on a 30-yr fixed rate mortgage moved up slightly, to 4.08% from 4.06% a week ago.

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3/29/19 – Stocks Post Best Quarter in a Decade

Stocks finished the first quarter on a positive note. For the week the Dow gained 1.7% while the S&P 500 increased 1.2%. This was the best quarter in over a decade, following the worst quarter (4Q18) in a similar time period. So we sit here, basically flat to six months ago, but having experienced a wild ride along the way. As we head into early April, companies will be reporting 1st quarter earnings, giving us insight into how corporate America is viewing the economy. The Fed has recently lowered its 2019 growth forecast, Europe’s growth appears to be slowing, so it will be interesting to see if companies are seeing/expecting a similar slowdown. 

Lyft ride-sharing service went public today using a similar dual-class structure to Levi’s last week. The IPO was well received and while the stock closed well below the highs, it did trade up on the day. The valuation for Lyft is shocking to me. It’s never made money, it’s not even close to making money, it has significant competition and yet has a market value of approximately $25 billion. It’s 2018 total sales was barely over $2 billion. It will be interesting to see how the market responds to Uber’s IPO when it goes public in the next month or two. At a similar multiple, Uber could command a market value of $125 billion. That’s borderline crazy. For the time being though, investors were happy to buy shares today. Read More

Larry Kudlow, current White House Economic Advisor and long-time supply-side economist publicly called for the Fed to cut rates by 0.50% today. He suggested this cut would be preemptive and said that nothing was changing about his view on the strength of the economy. That would be a very large reduction, especially as a preemptive move. His point was there very little inflation, which I agree with, and global growth is slowing, so why not make rates a little more accommodating. I don’t think we need to cut rates, but I do think we should stop raising them for the rest of the year. The Fed is supposed to be an independent body, yet the Trump administration has consistently pressured the Fed publicly on interest rate policy. Read More

Oil increased 2.2% this week to close at $60.18/barrel. This is the first time oil has topped $60/barrel since early November. The yield on the 10-yr Treasury moved lower, closing at 2.41% from 2.44% last week. The average rate on a 30-yr fixed rate mortgage moved sharply lower, to 4.06% from 4.28% a week ago. If you were considering refinancing or buying a property, these rates looks pretty attractive.

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