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posted on 24 December 2017

The Week Ahead: Tax Cut Winners And Losers

Written by , A Dash of Insight

The economic calendar is light, the week is short, and the A-Teams are taking some time off. It is the formula for punditry gone wild. But what will be the subject, especially if Bitcoin is not moving much?

I suspect questions of two types. The first will focus on the tax cuts, identifying the winning and losing stocks and sectors. The second will update the list of worries for 2018.


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It is a time for pondering, navel-gazing, pontificating and wondering:

What does it all mean?

I plan to focus on the tax cut impacts this week and focus on 2018 worries next week. Readers can help with this by passing on their own top worries. See the Final Thought for more on how you can help.

Last Week Recap

In the last edition of TWA we speculated that passage of the tax cut might provide fresh lets for the rally. That was accurate for a couple of days!

The Story in One Chart

I always start my personal review of the week by looking at a great chart. In Chicago, if you ask a pro what the market is doing he probably says something like “SPU’s are up 6." Futures trading on the S&P 500 is the fastest and most accurate way to summarize market action. Investing.com’s “Futures Overview" is an excellent interactive chart. If you hover over the “N’s" you will see the news callout at that point. Give it a try to see the quick reaction to various news events.

Click for latest interactive chart at Investing.com.

As usual, the weekly chart helps us see the moves, even though the overall volatility remained low.


Personal Note

Mrs. OldProf joins me in extending best holiday wishes to my readers. Knowing that people find these ideas useful means a lot to me. I especially appreciate those who pretend to laugh at my lame humor. Some day I will publish a list of things that I thought were funny!


This week I wrote a short and fun piece aimed at helping people sort out their reading sources. I hope you enjoy it, and find it helpful. You would be surprised at how often I chat with a new client about what they are doing and evaluate their current portfolios. Mike (my associate portfolio manager) and I can nearly always identify their favorite sources.

Click for large image.

Noteworthy

Making a lot of money per employee is an interesting metric. See how well you can do in guessing the top companies.

The News

Each week I break down events into good and bad. For our purposes, “good" has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news - and you should, too!

The economic news continues to be strong.

The Good

  • Personal spending grew 0.6% beating expectations and the prior month gain of 0.2%. New Deal Democrat offers some “not so fast" commentary about the strength of the gains.
  • The PCE core inflation rate increased only 0.1%. This indicator, the Fed’s preferred inflation measure, is increasing slowly enough to permit a measured pace of Fed rate increases.
  • New Home Sales surged to a SAAR of 733K, a year-over-year increase of 26.6%. The prior two months were revised lower, however. Calculated Risk provides the expected helpful interpretation of a complex story.

Click for large image.

Following the housing bubble and bust, the “distressing gap" appeared mostly because of distressed sales. The gap has persisted even though distressed sales are down significantly, since new home builders focused on more expensive homes.

I expect existing home sales to move more sideways, and I expect this gap to slowly close, mostly from an increase in new home sales.

However, this assumes that the builders will offer some smaller, less expensive homes. If not, then the gap will persist.

The Bad

There was a little more bad news last week.

  • Personal income increased by 0.3%. While not a truly “bad" result, it did miss expectations and was less than the gain in spending. Jill Mislinski puts the result in perspective.

Click for large image.

  • Durable goods orders disappointed on both the headline (+1.3% versus 2.1% expected) and the core (-0.1% v. 0.4%).
  • Initial jobless claims increased by 20K. Calculated Risk has analysis and this chart.

Click for large image.

The Ugly

The Nuclear Regulatory Commission is ignoring warnings from industry experts. Among the concerns: One-third of the plants are at risk from flooding. (Crain’s). Let’s hope this is not another in the long string of occasions when “The Simpsons" predicted the future. (A search will reveal articles citing between 11 and 29 occasions).

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

It is a big week for housing data. Starts, permits, existing sales, and new home sales are all released in the same week. Personal income and spending are also important. The PCE price index is the Fed’s preferred measure. And of course, with the FOMC decision behind us, FedSpeak can resume.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

Next Week’s Theme

What can financial media do when there is a short week, little real news, and a shortage of big names for interviews? Punt formation includes bringing in the B-Team. The questions are often things that attract popular interest, but where no one really knows the answer.

  • Is the Bitcoin boom over, or is this a dip to buy?
  • Is the market reaction to the tax cuts a typical “sell on the news" situation?
  • Which companies or market sectors
  • What should we worry about?
  • Is this the top of the stock rally?
  • Do you see any bubbles?

You will note that these are all basically opinion questions where no one has the needed information for a good answer. That won’t stop anyone!

All of these questions will be in play, but the one most deserving of our attention is the effect of the tax cuts. Legislation usually follows a path where the provisions are well-known, and the effects can be estimated. In this case, the late negotiations included compromises and incentives that few understand. I expect a scramble next week among analysts in many different sectors. (I will join in). Everyone will be asking:

What stocks are winners and losers from the tax bill?

There are four key questions:

  1. Was the success of the tax cut anticipated by the market? (See The Fear and Greed Trader’s interpretation of market moves).
  2. Did some sectors advance in anticipation? Banks have certainly been on the move.
  3. What is the early verdict on winners and losers? (Good video - see below - from CNBC’s Steve Liesman, citing early Penn-Wharton data). Would you believe an effective rate of 9% for some businesses?
  4. Are there laggards to consider? The big question for everyone.

As usual, I’ll have more in the Final Thought.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

Recession odds remain low and many economic indicators are improving.

The Featured Sources:

Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Georg Vrba: Business cycle indicator and market timing tools.

Doug Short: Regular updating of an array of indicators. Great charts and analysis. Let’s take another look at the regular update (via Jill Mislinski) of the Big Four indicators most influential in recession dating. The recent strength is so dramatic that I am presenting another update reflecting the personal income results.

We should take note of the continuing growth at a point in the business cycle where many are getting worried.

Insight for Traders

Our discussion of trading ideas has moved to the weekly Stock Exchange post. The coverage is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. This week’s post examines one of the strongest trading strategies - trend following - and discusses the relevance in today’s market. Model performance updates are published, and of course, there are updated ratings lists for Felix and Oscar, this week featuring the Nasdaq 100. Blue Harbinger has taken the lead role on this post, using information from me and from the models. He is doing a great job.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Dr. Brett Steenbarger’s advice about leveraging your greatest strengths. While his analysis focuses on traders and portfolio managers, it is, as usual, very relevant for investors.

Traders with distinctively good returns display distinctive strengths. Their success is the result of leveraging unusually strong personal and cognitive competencies.

This is true of the intuitive pattern recognizer; the analytical quant; and the big picture portfolio manager. They draw upon the best of who they are.

And also…

We draw energy when we exercise our competencies, and that energizes our efforts and propels us through our learning curves. Show me someone who is not passionately learning, and I’ll show you someone whose development is not aligned with their strengths.

Do-it-yourself investors should identify and emphasize their strengths.

Stock Ideas

Eddy Elfenbein has released his buy list for 2018. Each year he sells five stocks out of twenty-five and replaces them with five others. Through great choices and low turnover, he beats the market nearly every year. You can buy the entire list through his ETF (CWS) - low fees and no temptation to fudge. He generously makes the list available to all. I often hold several of his choices, and I always watch the list carefully. You should also look at the five names he sold, some, like Microsoft (MSFT) after big gains and a five-year ride.

Gilead has made some important changes. This interesting and in-depth analysis highlights several of the current issues. The conclusion?

So what are investors to make of Gilead? It is a giant with giant potential. Its handlers have masterfully assured its long-term financial viability. They have been less attentive to niceties of current share prices. Gilead’s harshest critics must acknowledge its solid financial status as it rests nestled in a secure cocoon of cash from past and ongoing HCV revenues.

Perhaps I mistitled subheadings in this post. Perhaps, Gilead is exactly the right stock for the faint of heart. It’s just not the right stock for those who require regular share price validation of their investment thesis nor for those who may need to cash out their investment within some time for certain.

Instead, Gilead offers a solid growing dividend together with stakes in several of the world’s most exciting therapeutic opportunities.

Nickel is especially attractive as the demand for electronic vehicles grows. I like the general idea, and this post is a good education in the fundamentals.

If you are not taking Dr. Brett’s advice about using your own strengths, maybe you should take advantage of the mistakes of others. Barron’s explains the reasoning behind some choices in the relatively new fund based upon behavioral economics (FTHNX). You will learn why these are some of the key holdings:

Bitcoin?

An interesting question from Victor Niederhoffer’s Daily Speculations.

Grain traders know how many cents a certain size order can move the market, and bond traders know the effects of big orders. For those trading Bitcoin, how much will the cash market move on an exchange if one is selling 1 coin, 50 coins, 100 coins, 1000 coins? Is the market thin, how liquid? Is the b/a spread narrow in the futures? Does the b/a spread vary during different times a day? Are any retail business allowed to go short yet? How many BTC’s are for sale (real orders) at any given time? What constitutes a “Big order" in both cash and futures BTC? What time of day offers the most liquidity? Thanks.

Does Morgan Stanley have a model to call the top? Noting the lack of correlation to other assets, they consider the analogy to gold, but also note:

The problem with calling a top in bitcoin might be found in fact its value is largely based on perception and a network effect. Which makes the feat even more noteworthy.

Income Investments

Interested in an LNG partnership with good yield and no K-1? You might dabble in the Floating Storage and Regasification Unit (FSRU) business. Get an education from Double Dividend Stocks.

Colorado Wealth Management picks the top five dividend ETFs for 2018.

Personal Finance

Seeking Alpha Senior Editor Gil Weinreich continues his strong work. Every day he has a topic of interest for financial advisors. It usually hits key points for individual investors as well. This week he had a stimulating post about robotics. The star was a robot that passed a college course!

Abnormal Returns has a different featured topic each day. While all are interesting, the Wednesday feature includes links to a number of personal finance posts. My favorite this week was a warning that those who retire early also die early!

Watch out for

The 12 Sells of Christmas. Kirk Spano plays “Scrooge" with a look at some over-valued stocks.

A closer look at the “blowout" FedEx (FDX) results.

Final Thoughts

Readers sometimes complain that I raise a question with the title and do not answer it in my final thought. The two are quite different problems. It is often possible - and valuable - to identify what to watch for, even if you do not try to predict what will happen.

That is my perspective in TWA. This week is another good example. I have plenty of ideas about winning stocks and sectors. If history is a guide, my themes will prove solid. The reason for this is that I do not jump the gun! If you are trading, you must usually act quickly. If you are finding investment themes, there is time to get it right.

With that in mind, here are a few ideas. I will amplify these as I get more information.

My estimate is that only 1-2% of market gains reflect tax cut effects. There was too much doubt until late last week. There are surprisingly positive impacts for some sectors, with lower tax rates while retaining special incentives. The repatriation effect may be more muted than hoped for. The initial economic effect will be strong. After a year or so it will depend on the impact on business investment. It appears that the higher interest rate effects may (finally) be coming.

Worries

My section on “what worries me and what doesn’t" has been popular. The items that worry others but not me has been especially accurate. This week I am inviting readers to join in. What are your biggest concerns for 2018? I already have a variety of sources, but my readers constitute an educated and knowledgeable group. What interests you is important.

Either put your ideas in the comments or email to me via jmiller at newarc dot com. I will include and address as many as I can. Meanwhile, those concerned about the current risks could take advantage of my free offer.

[If you are concerned about major declines, you might be interested in my paper on risk. Just write for our free information on these topics. While they describe what I am doing, the do-it-yourself investor can apply the same principles. Both the concepts on recessions and how we used it to forecast Dow 20K are available for free from main at newarc dot com].

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