Just 10 Companies Account For 33% Of All Market Gains Since Trump"s Election

Yesterday we laid out the reasons why French bank SocGen unveiled a surprisingly contrarian forecast, according to which the S&P would tumble from its current level over 2,600 to 2,000 in 2018, representing a more than 20% bear market drop...

... the drop catalyzed by rising interest rates pressuring P/E multiples, a late cycle economy nearing recession, equities trading at record valuations, and with everyone short vol begging for a vol short squeeze. Not surprisingly, SocGen"s unspoken advice was to get out now.

And while many of the negative factors highlighted by SocGen had already been discussed here in the past, there were two we warned to bring attention to: the market"s multiple expansion since Trump"s election, and the narrow leadership in the S&P.

As we noted yesterday, contrary to the widely accepted narrative, while the S&P 500 has risen 24% since Trump"s election, only half of this performance has been driven by earnings growth; the other half is from P/E expansion. But why would P/Es rise at a time when the Fed is tightening? As SocGen speculated, assuming that analysts have not factored tax reform into their earnings forecasts, tax reform expectations have been the driver of P/E expansion. There is a problem with this: while the S&P 500 index tax rate is currently 26.6%, assuming that US companies generate 43% of their profits abroad (here) and pay 35% of their US profits on taxes (i.e. with no loopholes for US profits), the average tax rate outside the US would be 15.5%. A decrease in the US tax from 35% to 20% as planned by Trump’s tax reform would thus theoretically boost earnings by 8.5%. The 12-month forward P/E has risen 12% over the last 12 months. In other words, roughly 150% of Trump"s tax cuts have been priced in!

However, another especially interesting observations goes to the leadership of this 24% rally since Trump"s election, which - while hardly a surprise - was largely driven by a handfull of companies, or ten to be precise.

As SocGen calculates, just 10 contributors of the S&P 500’s bull run have accounted for 33% of the S&P 500 performance. Tying to the above, the bank also points out that all of the companies listed below have seen their P/Es expand over the last 12  months, in some cases - like Nvidia, WalMart, Boeing and Amazon - dramatically. In fact, only three companies (Apple and the two banks) have 12-month P/Es that are below the market average (18x). Lastly, keep in mind that except Amazon, all of the companies already pay a  corporate tax rate below the current US federal tax rate (35%), and five companies even pay a tax rate that is below the 20% rate targeted by Trump’s tax reform.

As we asked two days ago when we showed that the bulk of hedge funds gains in 2017 have come from holding this same handful of companies, what happens to hedge fund performance - and the S&P 500 - when, for whatever reason, the tide turns and the winners are the first to be sold?

Another Delay: Senate Won"t Release Tax Bill On Thursday As Mnuchin Admits Corp Tax Cut Delay Likely

Yesterday, the dollar slumped and yields dropped after a WaPo report claimed that the corporate tax cut could - the core piece of GOP tax reform - would be delayed by up to a year, a clear indication that there may be irreconcilable differences in the Senate regarding tax reform. Then, moments ago, Axios confirmed as much, reporting that the Senate "won"t release its version of the GOP tax bill tomorrow", citing a senior GOP aide. On Tuesday Mitch McConnell said that the bill would come out on Thursday. That said, the aide reportedly said "this wasn"t a delay, because the release of the Senate bill was always going to start after the House Ways and Means Committee finished marking up its bill."

As Axios explains, the delaying introduction of the bill is problematic "because it not only gives off the impression that things aren"t going well (whether it"s true or not), but also removes one more day that could have been spent getting the caucus on board with the bill."

Meanwhile, speaking on Bloomberg, Treasury Secretary Mnuchin said that the White House"s preference would be to start the corporate tax rate cut next year, which again implies a material probability of delay.

“Our strong preference is that the corporate tax rate starts next year. The longer we wait, the worse it is for the economy,” Mnuchin said in interview on Bloomberg TV.

Asked whether he rules out delaying corporate tax cuts: “Again, I’d just say, the president’s strong preference -- he feels very strongly that he wants to start this right away. But having said that, we’ll have to look at the entire Senate package -- I assume it’s just a money issue -- as to how they’re moving the different pieces around”

“It’s not a philosophical issue; I’m sure they’d like to start this just as soon as they can”

Some other soundbites courtesy of Bloomberg:

• MNUCHIN: STATE ELECTIONS DIDN"T CHANGE OUR TAX STRATEGY


• MNUCHIN: WE"RE GOING THROUGH HEALTHY PROCESS ON TAXES ON CMTEES


• MNUCHIN: PRESIDENT WOULD LIKE TO KILL HEALTH CARE MANDATE


• MNUCHIN: KILLING HEALTH CARE MANDATE WOULD FREE UP LOT OF MONEY


• MNUCHIN: HOUSE MOVE ON CARRIED INTEREST STEP IN RIGHT DIRECTION


• MNUCHIN: WE"RE SENSITIVE TO NEED OF STATE TAX EXEMPTION


• MNUCHIN: THERE ARE SHORT-TERM CONCERNS ABOUT FX IMPACT ON TRADE


• MNUCHIN: PART OF DOLLAR STRENGTH REFLECTS U.S. ECONOMY


• MNUCHIN: I DON"T THINK YELLEN HAS MADE DECISION ON STAYING

In the final update, CNBC reports that "the Senate tax plan is not expected to include a controversial 20 percent excise tax on imports by multinational companies, according to three people briefed on the issue."

The tax is a critical revenue raiser in the House bill—worth about $155 billion over a decade—and applies to purchases by U.S. subsidiaries of multinational businesses from their foreign counterparts. Among the most vocal opponents of the new fee is the conservative advocacy group Heritage Action, which called it a "backdoor border adjustment tax."

 

The fee covers both intangible goods such as intellectual property as well as consumer parts. But unlike the border adjustment tax—a proposal that Republicans have discarded—the transactions must occur within a single parent company. Business groups such as the Organization for International Investment also fear the tax could disrupt international supply chains and raise costs for multinational companies—and ultimately consumers.

 

"It"s an extraterritorial reach into global supply chains that were never part of the U.S. tax base," OFII President Nancy McLernon said. "It will have a disproportionate impact on international companies that have made a deliberate decision to invest and create jobs in the United States."

Last week, House Ways and Means Committee Chairman Kevin Brady defended the tax as a crucial to ensuring that companies do not shift profits overseas. He said that the border adjustment tax was abandoned months ago and that the excise tax in the current bill bears no resemblance to that proposal.

With so many moving parts and even more conflicting opinions, it will be surprising if a one day delay by the Senate is all it boils down to.

"Are They Really Out To Get Me?"

Authored by Jeff Thomas via InternationalMan.com,

Libertarians and others who seek to be left alone to run their own lives habitually ask themselves the above question regarding their government.

So, what’s the answer? Are they out to get you? Well, unfortunately, the answer isn’t a simple “yes” or “no.” In fact, it’s “yes” and “no.”

The secret to understanding a government’s intentions is that there’s no unified overall objective, sentiment, or approach to dealing with the private sector.

Quite the opposite. With any government, it couldn’t be more fragmented or dysfunctional.

At the very lowest level of any government is the civil service, which is, in any country, a catch-all for all those people who are so lacking in ability and imagination that they’d be unlikely to hold down a job in the private sector. Moreover, their level of motivation is likely to be so low that their dysfunction tends to coincide with extreme inefficiency.

To test this out, one only has to visit the local Department of Motor Vehicles, or a similar agency that does little except charge fees and waste time in order to provide you with a permit, which, were it not required, you could happily do without.

Most anyone, in observing the individual behind the counter, would observe the glassy stare and recognize that, even though this person spends each working day behind this counter and may have been doing so for years, he or she takes virtually no interest in your personal concerns and, if you have questions, tends to find them a nuisance and an interruption in the endless drudgery of issuing paperwork.

Hence the image above. Here we have a pilot in Canada who, when being presented with a computer-driven list of tail letters that were authorized for him to choose from, immediately laughed when he saw the above letters on the list. He then went up to the counter, having circled the ones he chose, and the clerk processed the application brainlessly, without it even registering in his head what the letters suggested.

Later, when the pilot had had the letters emblazoned on his fuselage, it might not have been unlikely that an airport supervisor, seeing them 10 inches high on the side of the plane, raised an objection, at which time the pilot proudly produced his paperwork.

As most anyone in the private sector can attest, as soon as paperwork is presented, the civil servant in question simply says, “Oh,” then nods and lets you go on your way.

But, looking at this more deeply, what we’re witnessing is that that percentage of the population who are (once again) lacking in ability and imagination are easy to programme by the government to become automatons - that even if something strikes them as being somehow incorrect, as long as it has the State stamp of approval, it’s just fine.

And, so, at the lower level of government, we have those who are not “out to get us”; they are merely borderline useless and have ended up with jobs in which that deficiency will not get them fired. They are, therefore, merely “in the way.”

As we go up the chain, however, where those in government are somewhat more ambitious, we find a greater desire to control.

The closer we get to the higher echelons, the more they truly are “out to get you.”

Why should this be? And why should it be that those the higher-ups tend to hate the most are those who are self-motivated, responsible, self-reliant, and imaginative?

Well, unfortunately, the answer is simple. It’s because those are the character traits that they lack. I’m sorry to have to say that in my many years of working directly with politicians and heads of governments, virtually all of them were highly evolved civil-servant types. They had more drive, more guile, and larger egos than the lower-level bureaucrats but were just as parasitical and just as lacking in character traits that would make them productive people.

With these individuals, yes, they are out to get you.

First, if they recognize that you possess the traits that would make you productive, they will be highly jealous and suspicious of you.

Second, they will understand that since you are productive and they are not, they must find a means by which they can use you as a cash cow, to be milked as much as possible and as often as possible.

Their purpose, therefore, is to regulate, control, and tax you in every way possible, and in this they are, quite simply, predators. They may be Tory or Labour, Republican or Democrat, but they are predators nonetheless and, as such, are a genuine threat to both your freedom and your well-being.

Of course, all politicians play the game of party politics, doing all in their power to convince the electorate that they and their party are dramatically different from the opposing party, presenting their own party as “the good guys,” and the opposing party as “the bad guys.”

However, they are, as Judge Andrew Napolitano has repeatedly stated, merely “two wings of the same bird of prey.”

Significantly, as both the bottom level and top level are separated by many other layers of bureaucracy, and as their common character traits are inability, dysfunction, etc., there is no cohesive set of principles upon which a government operates. Its purposes are control and usurpation, and they’re backed by an imbroglio of confused and self-contradictory legislation and an increasingly large body of enforcement agencies.

Although the individuals within these agencies tend to be incompetent and dysfunctional, they do tend to remain loyal to the whole. They may not get along with each other, or work toward a unified set of goals, or even have the same beliefs. They do, however, tend to do as they’re told and blindly support the State, above all else.

Once all the above is understood, the individual may do as this pilot has done. He has grasped the dysfunction and parasitical nature of his government and has used their own computer-generated registration code to express his reaction to “authority.”

More to the point, he has used their laws, their bureaucracy to express it legally.

This is an important point. Each individual, essentially, has three choices.

He can either go along with those lesser beings who seek to control his life,

...or he can rebel and possibly be incarcerated for his efforts,

...or he can become creative and recognize that the laws and regulations of his country are a confused mess, written by incompetent people, and do all he can to assert his independence, legally.

He can and should do everything in his power to operate his life as though he’s not owned by the government of his home country, or any other government, for that matter.

Wherever a government tries to control the ownership of his real estate through taxation, he might seek out a jurisdiction that has no property tax. If they try to tax his income, he might seek out a country that has no income tax. If they try to restrict his migration, he might seek a second citizenship that does not restrict him.

Freedom is not merely a vague historical idea, or an excuse to celebrate with firecrackers once a year; it’s a lifetime pursuit and should be taken on as such. The pilot in question has made an initial stab at it. Hopefully he, along with you, the reader, will make it a central facet of his life’s work.

*  *  *

A second passport is one of the most practical and effective ways to assert your independence. Find out how you can get one in our special report, The Easiest Way to a Second Passport. Click here to download your free PDF copy now.

First India Bans Cash, Now It's Targeting Gold

Authored by Jeff Paul via ActivistPost.com,

In November of last year, India banned certain cash notes in a bold move to force businesses into the banking system to better harvest more taxes from its livestock.

Now, under the guise of “improving transparency” and forming a “common market,” India has begun targeting gold with new taxes, regulation, and incentives for citizens to turn over their undeclared gold to the financial sector.

Roughly 86% of India’s economic activity happened in cash at the time much of it was banned. Presumably that includes the $19-billion-per-year retail gold industry. Again, it appears that India’s government (central bankers) wants a bigger cut of the action and to better track the private assets of citizens.

Bloomberg has been reporting that India’s government is teaming up with crony gold dealers to plan a complete revamp of its gold policy – which is always code for “control, regulate and tax.”

Bloomberg reports:

India, which vies with China as the top consumer of bullion, is working on new policies to improve transparency and help expand its $19 billion gold jewelry industry, according to people with knowledge of the matter.

The plans being worked out by the finance and commerce ministries along with industry groups should be finalized by the end of March, the people said, asking not to be identified because they aren’t authorized to speak publicly….

The start of a spot bullion exchange, to make gold supply more transparent and help enforce purity standards, is under consideration, the people said. An import tax of 10 percent could also be reduced as the government seeks to eliminate smuggling, they said. The plans also include a dedicated bank for the jewelry industry, according to one of the people.

The overhaul of India’s disorganized and fragmented gold jewelry industry is meant to bolster confidence among consumers, where the gifting of gold at weddings and festivals or its purchase as a store of value are deeply held traditions. Ensuring quality standards and allowing supply chains to be easily tracked are ways to enhance trust.

In addition to a 10% import tax on gold, which authorities admit causes smuggling, India recently placed a 3% nationwide goods and services tax on gold that goes into effect on July 1st. Grateful slaves celebrated the event as a “lower than expected rate” and as creating a “common market,” Bloomberg reported when the tax passed:

India fixed the duty at 3 percent over the weekend, lower than the 5 percent expected, Ketan Shroff, joint secretary at the India Bullion and Jewellers Association Ltd., said Monday. The goods and services tax, to be implemented from July 1, will replace more than a dozen domestic levies including excise tax and state tariffs, drawing India for the first time into a common market.

ProTip to wannabe dictators: If you’re a tyrant who wants to centralize power over an industry, first frighten large businesses into your cartel protection racket. Then, eliminate local sovereignty over markets while imposing your own regulations and taxes. But call it “drawing into a common market” and “improving transparency to protect them.” Works every time. The final step is to prosecute non-compliance using men with guns.

The creation of a spot market and special bank for gold jewelers (as rumored above) seems like a function that doesn’t require government at all. Yet if your goal was to track, trace and database your citizens’ undeclared gold assets, it makes perfect sense.

Bloomberg makes clear that the new policies aim to encourage citizens to turn over their “idle gold” to the financial system:

The government is also keen to get the public to recycle its jewelry to reduce the nation’s reliance on imports. After a slow start to its plans to monetize the precious metal held in households and institutions, the government is looking to tweak the scheme and attract more participants, the people said, without giving details. The initiative, launched in November 2015, was aimed at returning an estimated 20,000 metric tons of idle gold to the financial system.

It’s reminiscent, albeit a softer version, of Franklin D. Roosevelt’s Executive Order 6102 “forbidding the Hoarding of gold coin, gold bullion, and gold certificates within the continental United States” which criminalized the possession of monetary gold. Citizens were forced to turn over their gold for a set amount of government currency. We’ll have to wait and see how India “tweaks the scheme.”

Credit Suisse confirmed the latest moves in India are designed to force the gold trade onto the banking system in partnership with the central government to better track and tax the industry.

Credit Suisse Group AG told Bloomberg “the (gold) sector will find it tougher to evade taxes as legal imports go through the banking system, and a full trail will now be established by the new nationwide tax compared with previous duties which were levied at the state level only.”

This echoes what Credit Suisse Group AG analysts Arnab Mitra and Rohit Kadam previously said of the coming changes to the Indian gold industry: “Over the next two to three years, the new tax should gradually force smaller, unregulated players to become tax compliant and take away their price advantage, increasing market share for bigger, organized businesses.

There you have it. The cashless agenda of control laid bare. There shall be no economic activity outside of State control. Cartels that play nice will be rewarded with more market share.

It remains to be seen if an already angry Indian citizenry can be persuaded to gift up their tradition of storing and gifting gold.

Watch Live: Speaker Paul Ryan To Deliver "Major Speech" Calling For Permanent Tax Reform

In what is being hailed as a "major speech," which means just about nothing to ordinary Americans living outside the D.C. bubble, House Speaker Paul Ryan is expected to call for permanent tax reform in 2017 in remarks to be delivered to the National Association of Manufacturers.  According to the Washington Examiner, Ryan will report that the GOP intends to introduce and pass a joint tax bill in the fall of this year.

"We are going to get this done in 2017. We need to get this done in 2017.  We cannot let this once-in-a-generation moment slip."

"Transformational tax reform can be done, and we are moving forward. Full speed ahead."

The @HouseGOP plan for tax reform will create more jobs & increase wages, putting American workers & families first. https://t.co/TgaUyqc4WJ

— Paul Ryan (@SpeakerRyan) June 20, 2017

One component of Ryan"s tax plan, the so-called border adjustment provision, has become very controversial even among his Republican colleagues. It has elicited fierce opposition from retailers and other industries that fear it would result in higher taxes on imported products. In effect, the border adjustment would work by exempting export sales from companies" taxable income, but disallowing the deduction of the cost of imported goods from taxable income.

"While acknowledging that the particular mechanism must be sorted out with the administration, he will argue that we must fix the current incentive for American companies to move abroad, make things overseas, and then sell them back into America — which costs us jobs," his office said. Ryan will also stress that the U.S. needs a more competitive tax system after years of being disadvantaged.

"We are actually unique in the world in the way we discourage capital from coming back to America and how we incentivize off-shoring jobs," he"ll say. "This is not the kind of exceptionalism we should aspire to…We must think differently, so that once again we make things here and export them around the world."

We will also eliminate many of the loopholes used by the wealthy and well-connected, helping to lower the tax rates for American families.

— Paul Ryan (@SpeakerRyan) June 20, 2017

Meanwhile, Republicans will have to pass their tax package via a continuing resolution to take advantage of their simple majority in the Senate, a procedural move that will prevent Democrats from blocking it. Under such a procedure, the tax package cannot add to long-term budget deficits. 

That said, in order to take advantage of the procedure, Republicans in the House and Senate must pass a budget resolution.  And while that may sound simple enough, the Republican party is bitterly split over spending levels for the military and various domestic programs.

Of course, major tax reform has been a key agenda item for Republicans for quite a while and only time will tell whether it is possible or, as John Boehnor would say, just a bunch of Republican "happy talk."

How To Trade The Health-Care Vote

The Trump administration faces a major legislative test today with the health-care vote, and for those attempting to trade the event, Bloomberg"s Cameron Crise notes that risk-takers need to ask themselves two questions...

1) Do I have an edge?

At this point the vote is too close to call. Unless you have someone in DC counting votes alongside the whip, the honest answer is almost certainly “no”

2) Does this vote matter?

On any sort of strategic macro basis, the answer is also probably “no.” Sure, if you manage health-care stocks, today is a big deal. Other than that, the failure or passage of the vote ultimately will say little about the prospects for tax reform, which is the issue of most concern to financial markets.

Health care was always going to be a contentious issue, with both moderates and hard-core conservatives having reservations about the bill (for very different reasons). Tax reform is something that most of the GOP can get behind, on the other hand, even if some of the details have yet to be determined.

Moreover, there is a relatively low expectation among investors that tax reforms will pass this year. An implied delay from a health-care failure should increase the discount factor on tax reform only slightly.

In any event, the results of the vote are likely to come after U.S. markets close, so it seems as if we should prepare for a day of headline-watching that should provide plenty of noise but probably little signal.

Illinois Lawmakers Consider Massive, Regressive Tax Hike On Low-Income Families (a.k.a "Soda Tax")

To our complete lack of surprise, lawmakers in the State of Illinois are considering following in the footsteps of Philadelphia by imposing a 1 cent per ounce "soda tax" on all sugary beverages.

And while it"s being done under the guise of "improving public health," precisely zero people believe that the Nanny State of Illinois cares about the sugar intake of its residents.  Of course, the real motivation behind the so-called "soda taxes" springing up in liberal bastions across the country is the $100"s of million of tax dollars than can be generated to help them grow the Nanny State even bigger.

Lets look at a quick example of how the tax dollars add up.  Lets say, just for fun, that the average person consumes one, 12 ounce, sugary beverage (soda, juice,  etc.) per day.  That would equate to roughly a $45 annual tax per person (12 ounces x 365 days x $0.01 per ounce).  Multiply that by a family of 4 and the annual tax per household is $180 or roughly 30 bps of the median Illinois household income of $60,000. 

And while that doesn"t sound like much, and obviously it was designed that way, the numbers are staggering when you start to consider the statewide revenue potential.  Applying the the $45 per person annual tax from above to Illinois" 13 million people implies that the total revenue potential for state coffers is $585mm.  And, before you ask, while we understand that most infants aren"t drinking a can of Dr. Pepper on the reg (although we are talking about Chicago so who knows), we also guess that most teenagers are drinking more than one sugary drink per day so just go along with our rough math here.

Of course, as the Daily Caller pointed out, Philadelphia residents have been shocked by the impact of the soda tax on their grocery bills.  And even though Mayor Jim Kenney would like for you to believe that local businesses are responsible for the cost of a 12-pack of soda doubling overnight, we suspect most Philly voters are slightly smarter than that.

Consumers are in shock at price hikes on sugary beverages across Philadelphia due to a Soda tax that took effect Jan 1, and now the mayor is blaming increased costs on businesses.

Mayor Jim Kenney, who lead the charge for the passage of the tax, is lashing out at the business community over higher prices, even alleging retailers of attempting to stir resentment for the tax in the community. Kenney is accusing retailers of price gouging, purposefully constructed to undermine the tax and the efforts of the local government. Retailers who are charging the tax as a separate line item or who are putting up signs specifically highlighting the cost of the tax to the consumer, are engaging in an attempt to “mislead” shoppers and are “wrong,” according to Kenney, reports CBS Philly.

The contentious soda tax secured passage in June but consumers in Philadelphia are still flabbergasted by the price increases the tax is sparking. In some cases, shoppers found that they were paying more for the soda tax than the actual product they are purchasing.

Some residents said they are going to start shopping for their beverages out of the city to avoid the onerous tax. The mayor continues to defended the tax, arguing it is the choice of the retailers to pass the added costs onto their customers, deflecting responsibility. Prices are as much as doubling on certain products due to the tax. A 12-pack of Lipton Diet Green Tea at a Save-A-Lot in the city is now priced at $8.03, instead the $4.99 it costed in December.

Meanwhile, as we pointed out back in November (see "Startling Look At How Much Money Food Stamp Recipients Spend On Junk Food"), food stamp recipients spend over $350 million per year on "soft drinks."  So, lets assume conservatively that people pay, on average $1 per 12 oz can of soda.  That would imply that food stamp recipients are consuming 4.2 billion ounces of soda per year which means that $42mm of your federal tax dollars could be going to fund soda taxes in a Nanny State near you in the not too distant future...enjoy that thought over you long weekend.