|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 Victoria Stillwell, Bloomberg, 11/25/2015|
MarketMinder's View: “Bookings for non-military capital goods excluding aircraft rose 1.3 percent, the most in three months, after an upwardly revised 0.4 percent increase in September, data from the Commerce Department showed Wednesday. Orders for all durable goods -- items meant to last at least three years -- climbed 3 percent, almost twice the median estimate in a Bloomberg survey.” The US economy is doing just fine, thank you very much.
|By Randall Forsyth, Barron's, 11/25/2015|
MarketMinder's View: While this article most specifically pinpoints one politician’s words, we feel compelled to note the theory the Chinese yuan is artificially “undervalued” relative to the US dollar is a fully bipartisan misperception. So, chuck the partisan or politician-specific stuff out the window here. The notion China manipulates its currency lower to make its exports more competitive and gain an economic edge over the US is greatly outdated. Since 2010, the yuan has appreciated against the dollar—somewhat significantly. And, as this article correctly notes, China’s government has been intervening to artificially prop it up against the dollar in the last year. We are of the view these currency market gyrations get too many pixels relative to the actual economic impact, but either way, this is a good discussion to read given next year’s election likely means much more political rhetoric over exchange rates to come.
|By Greg Ip, The Wall Street Journal, 11/25/2015|
MarketMinder's View: Here is an interesting, if somewhat overstated, take on the recent House bill that would make some operational changes to the Fed. This focuses mostly on the bill’s requirement the Fed adopt a monetary policy rule to guide its decision making and, if they deviate from it, explain why. Now, strict rule-based policy could be problematic, as this article goes to great lengths to point out. However, the proponents of the bill are accurate in saying this doesn’t do that—it allows the Fed to select which rule, change it and even operate outside of it. It is theoretically possible that this approach could bring the beneficial transparency the Fed has claimed it seeks in recent years, but that isn’t assured. Overall, despite this article’s singular focus, we believe this bill has some positives and negatives outside the rule-based policy requirement. On the plus side, it would require the Fed to perform cost/benefit analyses on new regulations. Sensible! On the minus side—and this is the biggest problem with this bill, in our view—it would slap restrictions on the Fed lending to troubled banks. Central banks exist primarily to quell panics by acting as the lender of last resort, and we are quite wary of politicized efforts to constrain that.
|By Kristen Scholer, The Wall Street Journal, 11/25/2015|
MarketMinder's View: The debate here boils down to whether 2011 (deep correction/sharp rebound/flat year) or 1937 (beginning of a massive bear) is the more appropriate comparison to 2015. Look, 2011 is a loosely fair comparison in the sense 2015’s negativity appears to be a correction—a brief blip in a broader bull market. But this article argues 1937 is more apt, which to us seems very wide of the mark. The whole comparison is based on false Fed tightening fears. It’s true 1937’s crash was caused by the Fed. However, it isn’t like the Fed hiked rates by 0.25 percentage points or something back then. They massively increased reserve requirements, erroneously presuming banks wouldn’t slash lending and raise capital because they had excess reserves already. But they didn’t see that banks were intentionally holding excess reserves because they desired to be more conservative than required in the wake of the 1929 – 1933 downturn. So, when required reserves rose, they raised more. The result was a catastrophic downturn. Today, a single rate hike would come against the backdrop of a still-steep yield curve. There is no history of a single hike derailing stocks and no evidence suggesting the US economy can’t take a hike (or multiple hikes) now. In our view, today bears a much more striking resemblance to 1997: Falling commodities prices, Emerging Markets currency fears, US-led markets, a gridlocked US government, and a growing global economy. We could go on, but we figure you get the picture.
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.