November 8, 2017

Stocks opened lower this morning. The Dow and SPX are currently off 15 pts and flat, respectively. Real estate and consumer staples—both defensive sectors—are higher in early trading. Tech is picking up at the moment as well. But most everything else is in the red. Financials and energy are down.7%. And I’d point out that both US and European banks have been underperforming for a week or two now. The VIX Index is up a bit but still trading at 10, which is very low. The dollar is flat today against a basket of foreign currencies and most commodities are lower for the second straight session. WTI crude oil is trading down to $55.60/barrel. Copper is down slightly this month, probably just some give-back after a  monster 30% rally from May to October. The 5-year and 10-year Treasury note yields are flat around 1.99% and 2.31%, respectively. So not much excitement in the bond world. 

Federal tax reform seems more do-able now than it did a couple of weeks ago. The House of Representatives introduced a bill last week, and now the Ways and Means Committee will debate amendments. Congressional leaders would like to push it to a vote late this week or perhaps next week. The US Senate is expected to reveal its own tax reform bill on Thursday and word is that it’s largely based on the House bill. The Senate could vote on that next week and that would clear the way for both houses to meet and hammer out a compromise. The Republicans’ goal is to put the bill on President Trump’s desk before the end of the year. 

By the way, no one said lowering taxes would improve the country’s financial situation. According to Bloomberg, the House bill “would increase the federal deficit by $1.5 trillion in 10 years.” So not surprisingly, some Republicans in congress are hinting at holding back tax reform by a year, or alternatively repealing any deductions for state and local taxes. In the other words, Republicans are probably not united at this point. And since the party will surely lose seats in the mid-term elections (if Virginia’s vote last night is any indication), time is limited to score a legislative victory. 

The proposed tax bill would end up eliminating tax-free interest for certain types of municipal bonds. Advanced refunding bonds, issued to refund older munis, are included in this list. In addition, stadium bonds and others called “private activity” bonds would no longer be eligible for tax-free interest. According to Bloomberg, about 1/3 of the total value of all newly issued tax-free bonds this year could be classified as private activity bonds. Therefore, if the bill passes we can expect muni issuance to drop.  

Jack Bogle, CEO of Vanguard, was interviewed on CNBC yesterday. He was asked whether he believes reports that “trillions of dollars” are sitting on the sidelines waiting to be invested in the market. He said he thinks about $300bil cash is on the sidelines. But he added, “If it all gets invested today, how much will be on the sidelines at the close of business? $300bil, it won’t change.” In other words, all shares bought must have a seller on the other end. The market is a closed system. Next, he was asked whether he is concerned about the recent proliferation of exchange-traded funds (ETFs) as trading vehicles vs. investment vehicles. About 30% of US trade volume (by dollars) is attributed to ETFs. Mr. Bogle registered concern that ETFs are now being launched to focus on short-term trading strategies. “People jump in here to create opportunities to sell a product. And that’s not something that does the investor any good. Investors should stick with owning the market and holding it forever, and not being tempted by all these siren songs. Because they come and go.” 

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