Your Taxes Are Likely Going Down (For Now)
Tax 'reform' is here... Your taxes are likely going down (for now)... Not every company will benefit from the new corporate tax code... Subprime turmoil is spreading... Don't forget about the credit markets...
It's almost official...
Tax "reform" is finally here.
This week, Congress passed the most significant changes to the U.S. tax code in more than 30 years on Tuesday. All that remains is for President Trump to sign the bill into law. And while the president may not sign the bill immediately, it's all but certain he will. As the Wall Street Journal reported yesterday...
One of Mr. Trump's top economic advisers, Gary Cohn, said Wednesday morning the timing of the bill's signing depends on the outcome of separate talks in Congress about a government spending measure.
The White House wants to use those talks, which are taking place this week, to waive automatic spending cuts triggered by deficits and the tax plan. If Mr. Trump can't get the waiver, he might delay signing the tax bill, which would be another way to put off the automatic cuts...
"We got it done," Mr. Trump said at a midday cabinet meeting at the White House. He thanked Senate Majority Leader Mitch McConnell (R., Ky.) and House Speaker Paul Ryan (R., Wis.) by name. "We have a tremendous amount of talent" in each chamber, he said.
Why do we write 'reform'?
Because as expected, the bill falls short of the dramatic improvements many had hoped for.
It won't simplify the tax code in any meaningful way. It won't make it any less time-consuming or expensive for most folks to file their annual returns. And it won't significantly ease the tax burden for most Americans over the long term. But it isn't all bad...
According to non-partisan think tank the Tax Policy Center ("TPC"), most Americans should expect to see a modest reduction in their tax bill next year. The TPC reports 143 million will pay lower federal income taxes in 2018, compared with just 8.5 million who will pay more.
Overall, it found taxes will fall for all income groups on average. Folks earning $10,000 or less should expect to keep an extra 0.1% on average, while those earning $500,000 or more will see an extra 4%. Folks in the middle – those who earn between $50,000 and $75,000 per year – should expect to a see an extra 1.5% on average.
Congress' own independent auditor, the Joint Committee on Taxation, reported similar results. It found the average tax rate would fall from 20.7% to 19% under the law, including a drop from 14.8% to 13.5% for those in the middle tax bracket.
Unfortunately, these cuts may not last long...
Under the current bill, these individual tax cuts will expire in 2025. If no change is made before then, today's tax cuts will become tomorrow's tax hikes. Under this scenario, the TPC estimates a majority of Americans – including 69.7% of those in the middle – would pay even higher taxes than what they pay under our current law.
To be fair, Republicans say they won't allow these tax cuts to expire. But if they weren't able to pass a permanent tax cut today – under nearly ideal circumstances – how certain is it they'll be able to extend these cuts in the future?
The news is better for many companies...
The plan will permanently slash the corporate tax rate from 35% today to 21%. It will also repeal the current 20% corporate alternative minimum tax, exempt companies from paying taxes on money earned overseas, and lower the "repatriation tax" on overseas earnings from 35% to between 8%-15.5%.
These changes could drive higher earnings for a huge number of firms – particularly those based in the U.S. – across a range of industries.
But not every company will benefit...
In fact, the plan could create even bigger problems for those carrying large debt loads. As the Journal reported this morning (emphasis added)...
Full deductibility of interest has long made borrowing more attractive for companies when they needed money, instead of raising capital through selling equity...
The tax overhaul would essentially limit the net interest payments a company can deduct to 30% of its EBITDA, or earnings before interest, taxes, depreciation, and amortization. Any amount above that level would be taxable.
So if a company borrowed $1 billion at an interest rate of 5%, and its existing interest payments were already above the 30% threshold, it would have to pay an extra $10.5 million a year in taxes – $50 million in interest, taxed at the new corporate tax rate of 21%.
In other words, heavily indebted companies that are already struggling – like the troubled firms we've been following in Stansberry's Big Trade – could soon see the costs to carry those debts soar even higher. More from the Journal...
J.C. Penney (JCP) which has speculative credit ratings and more than $4 billion in debt, said in its third-quarter Securities and Exchange Commission filing in November that disallowing tax deductions on interest "could have a material adverse effect on our results of operations and liquidity."
Regular Digest readers know weak corporate credits like the aforementioned department-store chain are already unlikely to survive the next credit-default cycle. But despite the bullish headlines, the new tax plan could actually hasten their demise.
Speaking of the next credit-default cycle...
Longtime readers know we've been covering the growing risks in subprime auto lending for years. In fact, Porter and his team were among the first analysts anywhere to warn of these problems back in 2014.
Clearly, many private-equity investors weren't paying attention. We hope they are now. As Bloomberg reported just this morning...
Private-equity firms that plunged headlong into subprime auto lending are discovering just how hard it might be to get out...
In the years after the financial crisis, buyout firms poured billions into auto finance, angling for the big profits that come with offering high-interest loans to buyers with the weakest credit. At rates of 11 percent or more, there was plenty to be made as sales boomed. But now, with new car demand waning, they've found the intense competition – and the lax underwriting standards it fostered – are taking a toll on profits.
Delinquencies on subprime loans made by non-bank lenders are soaring toward crisis levels. Fresh investment has dried up and some of the big banks, long seen as potential suitors, have pulled back from the auto lending business.
In short, these firms are getting squeezed from both sides... Losses are rising on existing loans as borrowers fall further and further behind. Meanwhile, banks are tightening credit in response to rising delinquencies and falling auto sales.
Again, this should come as no surprise to regular readers...
Subprime auto delinquencies have been ticking higher for months. But these problems extend far beyond autos alone... And they're likely to get much worse before they get better. As Porter explained in the November 17 Digest (emphasis added)...
The ongoing debt explosion is finally reaching its peak... Lots of consumer loans are starting to go bad. We first saw default rates creeping up in subprime auto loans (as we warned they would).
Now, credit-card default rates are moving higher, too. Soon, the mirage of student lending is going to completely fall apart. That's when we'll see fireworks across the credit spectrum. But that's not all...
Just as defaults are rising, the Fed has begun to raise rates.
Look at what that's going to do to the U.S. government's funding costs over the next few years, according to projections from the Congressional Budget Office. Interest payments will nearly double, going from 6% to 11% of the federal budget...
These rising costs are going to have a profound effect on the current widespread political belief that "deficits don't matter," just as soaring default rates on consumer lending are going to lead to much tougher lending standards on cars, colleges, and credit cards.
All of that consumption that we've enjoyed on credit for the last decade is going to come back to haunt us. All of us.
Again, this doesn't mean the long bull market will end tomorrow...
But make no mistake, it will end... And one of the largest credit-default cycles in history is sure to follow.
As many private-equity investors are likely realizing today, the same problems that markets have ignored for months – or even years – will suddenly "matter" almost overnight.
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The feedback on the Stansberry Terminal "controversy" continues to roll in. As always, send your notes to feedback@stansberryresearch.com.
"Hello Porter, I am in a unique position as I have been an Alliance member for years (I think since the beginning), I am also a former software engineer (15 years) and currently a financial planner (14 years) that has used the Bloomberg terminal.
"I don't usually write feedback, but I thought I would toss in my two cents. I think that most of your subscribers don't have any idea what is involved in delivering a Bloomberg type terminal (I am sure 99% don't know what a Bloomberg Terminal is), nor do they have the vaguest idea the cost or complexity associated with streaming data from multiple sources. I do – and I not only appreciate, but can appreciate what you are offering to me as an Alliance member. Don't be too disappointed with some of your subscriber's responses – they don't understand the magnitude of the offer.
"Thank you for all your continued innovation – I sincerely appreciate it." – Paid-up Stansberry Alliance member Lynn Habrowski
"Hello Stansberry, I guess that I'm a little awed at having my letter quoted in your Digest. That has never happened to me before. Be that as it may, I am very heartened about your response because it spoke to the essence of my concern.
"You see, I am not, and never will be, a stock 'analyst'. All of this data that you speak of is worthless to me without your WRITERS who analyze this data into succinct and comprehensible, actionable information. And even more than that I need the interesting writers who make the whole process intriguing and enjoyable! It's NOT just about DATA! It's about the insight and recommendations of your ever-amazing writers.
"And PS: I am not ANGRY, but I AM concerned that, over time, your service will morph over to more data access, and less actionable analysis and recommendation. I apologize that I did not make that clear in my first email. Merry Christmas." – Paid-up subscriber Thomas Mitchell
"What does 'basic access' to Stansberry Terminal actually include? I am an Alliance member." – Paid-up Stansberry Alliance member Stephen T.
Brill comment: Porter answered your question in the Monday Digest right here.
"Porter, I wish you the best of luck with your stated desire to get out of the newsletter business-makes a lot of sense to me. Thanks for your honesty about that business. Haven't heard that from anyone else. I also applaud you for the means by which you hope to accomplish your new business strategy, the Stansberry Terminal. I think it would be a great investment for anyone running individual investors' money as well as anyone who's been with you a good while, Alliance member or not...
"I hope as you transition to your new strategy, you think of guys like me who are relative newcomers and have little equity to put toward an Alliance membership. I hate those 'get rich quick/hot stock pitches' and routinely turn them off. I'd be VERY happy with your letters WITHOUT them. I value your research ideas and hope you'll continue to publish them at least long enough to help people like me get through the massive mean reversion that lies not too far ahead." – Paid-up subscriber Mike R.
Brill comment: Don't worry, Mike. As we noted earlier this week, we have no intention to stop publishing any of our research... only the way we sell it. And again, we plan to offer several more affordable tiers of access for folks who aren't yet able to commit to a Stansberry Alliance membership.
"Porter, as an Alliance Member, I demand free lifetime premium access to TradeStops, a lifetime supply of OneBlades (my wife wants you to make a women's version for her legs as well), and a one week a year timeshare on your family farm. Also, throw in freebies from any other business ventures you start in the future. Anything less and I will begin to question your integrity." – Paid-up Stansberry Alliance member Jeff Meekins
Brill comment: Thanks for the laugh, Jeff. We needed it...
Regards,
Justin Brill
Baltimore, Maryland
December 21, 2017