|By Christo Barker, 03/28/2014|
It seems the IRS is going global, a development that has some pundits up in arms about potential stock market impact. The Foreign Account Tax Compliance Act (FATCA) is what I’m referring to. Under FATCA, the IRS is moving toward taxing US citizens’ offshore financial activity, including money held in banks abroad—effectively eliminating “tax havens” for US citizens. US expatriates and foreign banks are up in arms. The law conflicts with local banking laws in other countries, and banks have responded by simply slashing access to banking services for Americans living abroad. But while it creates hassles, barring a big international regulatory blowback, the law doesn’t seem poised to create many ripples for stocks.
FATCA, now four years old, was conjured following a 2009 scandal, which revealed a major Swiss bank was helping well-to-do Americans dodge taxes. The backlash against the scandal peaked in 2010, when Congress passed FATCA as a provision of HR 2847, the Hiring Incentives to Restore Employment Act. An effort to boost US government tax revenue by broadening the base, FATCA also has some grassroots appeal as it carries the label of reducing tax dodging. FATCA was supposedly a means to get fatcats to pay their fair share. (My apologies for the pun.) Foreign banks were also not the most popular group in the immediate aftermath of the Global Financial Crisis.
Initially, FATCA seeks to provide the IRS information about US citizens’ and green card holders’ taxable accounts exceeding $50,000 in market value held at foreign financial institutions. International banks (Foreign Financial Institutions or FFIs) are required to ink a special deal with the IRS, under which they report all US taxpayers’ qualifying accounts and holdings. Account disclosure began January 1, 2014. After June 30, 2014, foreign banks will have to provide details regarding investment account holdings, and by January 1, 2015, FATCA’s full implementation will install a 30% withholding on US sourced income (salary/capital gains/interest/dividends).
|By Fisher Investments Research Staff, 12/10/2013|
In its second release, Q3 US GDP was revised up to a seasonally adjusted annual rate of 3.6%—the fastest growth in more than a year and among the quickest rates in the current expansion to date. However, most economists and pundits greeted the acceleration with a resounding thud. Under the hood, they claim, the data were not so hot. Reason being, the most notable contributor to growth was increasing inventories, adding 1.7 percentage points to the headline number. Some posit this means growth is hollow—after all, inventory change is open to interpretation. It could be due to slowing sales, a potential negative for profits and growth ahead. Or due to inventory build ahead of an expected pick-up in sales this holiday season. If the pessimists are right, one would expect wholesale inventory growth to sharply slow as we enter Q4. Yet Tuesday, the first inventory report of the quarter suggested no such thing: US wholesale inventories grew at their fastest clip in two years.
In October, wholesale inventories grew 1.4% m/m (3.3% y/y) vs. estimates of 0.3%. Both durables and non-durables stockpiles grew (0.4% m/m and 3.0% m/m, respectively.) So what gives?
While inventory growth undoubtedly contributed strongly to GDP in Q3, that never meant inventories were at historically high levels. As Exhibit 1 shows, the inventory-to-sales ratio isn’t overall elevated. Total goods and non-durable goods are at relatively low levels compared to history, and while durable goods inventories are somewhat higher relative to sales, they are not alarmingly high. In short, there is nothing suggesting inventory growth is unsustainable overall relative to the pace of sales. Of course, maybe inventory growth does slow in the period ahead, but it wouldn’t seem to be related to overall overstocked shelves. This is yet another factor illustrating the fact reality may be considerably better than skeptics presume.
Five years ago, on Black Friday 2008, quantitative easing (QE) was born. In its quest to battle the deflationary effects of the financial panic, the Fed launched the “extraordinary” policy of buying long-term assets from banks. In exchange, the Fed credited banks’ reserve accounts, believing the banks would lend off these reserves many times over—a big money supply increase to boost growth.
To date, through multiple rounds of (now infinite) QE, the monetary base (M0) has swelled by nearly $3 trillion. Yet this economic expansion has been the slowest in post-war history.
Exhibit 1: Cumulative GDP Growth
Is the UK housing market overheating, or is it merely the latest example of froth fears that are detached from reality?
Recent home price data and the UK’s Help to Buy scheme’s early expansion already have some UK politicians and business leaders wondering—some going as far as calling for the Bank of England to cap rising home prices. Taking a deeper look, however, I see a different story: Rapid housing price gains have been concentrated in London. Restricting overall UK housing with more legislation likely won’t fix that, and it probably won’t help spread London’s gains to UK housing elsewhere. More importantly, the fact UK housing gains aren’t widespread tells me a nationwide bubble neither exists nor is particularly probable—even with an expanded Help to Buy program.
While UK housing started slowly improving after Help to Buy began in April, the program has only been lightly used in the early going—suggesting the housing recovery is coming from strengthening underlying fundamentals and isn’t purely scheme-driven. In Help to Buy’s first phase, the government promised to lend up to 20% of a home’s value at rock bottom rates (interest free for five years, 1.75% interest after) to buyers with a 5% down payment—providing up to £3.5 billion in total loans. Only first-home buyers (of any income strata) seeking newly built houses valued at £600k or less could participate. The Treasury began a second (earlier-than-expected) iteration in October, in which it guarantees 20% of the total loan to lenders, instead of lending directly to the buyer. The program was also expanded another £12 billion for buyers purchasing any home (new or not).
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|By Nate Cohn, The New York Times, 11/27/2015|
MarketMinder's View: This is an interesting look at the progress—and limitations—of online polling, which seems to be rising as telephone polling is fading. With 87% of Americans connected to the Internet, it does seem polling is likely to end up being conducted online too—and companies big and small have been utilizing innovative methods to improve accuracy. However, substantial challenges remain: potentially biased, unrepresentative sampling and extensive modeling adjusting for a lack of randomness are two. For investors, this is just a small reminder that polls are likely to prove noisy as we approach 2016’s US presidential election. We’d suggest not getting caught up in headlines screaming about candidates’ poll numbers. They may not be indicative of reality, especially this early in the process. For more, see our 9/21/2015 commentary, “POLL-ution.”
|By Clifford Krauss, The New York Times , 11/27/2015|
MarketMinder's View: This article does a fair job documenting gas price fluctuations around the US this holiday season, but it seems a bit bizarrely surprised ongoing tensions in the Middle East haven’t caused prices to rise. That they haven’t shot up, though, is hugely unsurprising: ISIS, Syria and the shooting down of a Russian warplane by Turkish forces don’t materially threaten global oil supply. The world is presently awash in crude oil, and if Iran boosts output by 500,000 barrels per day as expected, supply will only increase. Besides, tensions in the Middle East are a regularity. It takes something much more extreme than the present to materially impact oil prices, particularly given most of the increased supply in recent years comes from non-Middle Eastern producers.
|By Lorcan Roche Kelly, Bloomberg, 11/27/2015|
MarketMinder's View: Early estimates suggest many folks pulled their Black Friday shopping forward to Thanksgiving Thursday, preferring to make their purchases in the comfort of their own home rather than waiting in line and battling crowds. So is “Black Friday” doomed as we know it? Perhaps, though concerns about its demise are greatly exaggerated. For one, Black Friday “deals” have gone from one day, to a weekend, to now a much longer period—retailers are no longer saving perks for the day after Thanksgiving. But more importantly, what consumers do on Black Friday itself is way too myopic. A single day matters less than the greater holiday season, which matters less than the entire year. For more, see our 11/24/2015 commentary, “Black Friday Is No Barometer.”
|By Katie Allen, The Guardian, 11/27/2015|
MarketMinder's View: The second estimate of UK GDP remained unchanged at 0.5% q/q seasonally adjusted growth, its eleventh straight quarterly rise. Growth was driven by domestic demand, as consumer spending rose 0.8% q/q. However, many—including this piece—focused on the negatives, like trade or weak manufacturing. Yet this overlooks some important context. For one, services have been the UK’s primary growth engine during the current expansion. And trade wasn’t weak: Exports and imports grew, it’s just that imports boomed, which suggests overall growth is even stronger than appreciated. On an annualized basis, import growth detracted an astounding 7.1 percentage points from the Q3’s 2.0% annualized headline growth. Booming imports are a good sign for the UK since they highlight healthy demand. That imports detract from headline GDP growth is merely a quirk of GDP’s calculation, likely rooted in its 1930s-era invention.
Market Wrap-Up, Thursday, November 26, 2015
Below is a market summary as of market close Thursday, 11/26/2015:
- Global Equities: MSCI World (+0.4%)
- US Equities: S&P 500, as of 11/25 (-0.0%)
- UK Equities: MSCI UK (+1.3%)
- Best Country: Ireland (+2.0%)
- Worst Country: Singapore (-0.2%)
- Best Sector: Telecommunication Services (+0.7%)
- Worst Sector: Information Technology (+0.1%)
Bond Yields: 10-year US Treasury yields were unchanged at 2.24%. (Data are as of 11/25.)
Editors' Note: Tracking Stock and Bond Indexes
Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.